---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

___________

FORM 20-F

[  ]REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 or [x]ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For The Fiscal Year Ended October 31, 2010 Or [  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 or [  ]SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event
requiring this shell report

Commission File No. 0-26005 ___________

MICROMEM TECHNOLOGIES INC.(Exact
name of Registrant as specified in its charter)

Ontario, Canada(Jurisdiction of incorporation or
organization) 777 Bay Street, Suite 1910,Toronto, Ontario M5G
2E4, CanadaTel: (416) 364-6513Fax: (416) 360-4034(Address of principal executive offices)

Joseph Fuda; 416-364-6513, JFuda@micromeminc.com, 777 Bay
St., Suite 1910 Toronto, On M5G 2E4(Name, Telephone, E-Mail and/or
Facsimile number and Address of Company Contact Person)

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

None

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

Common Shares without par value

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close of the period
covered by the annual report:

95,324,511 Common Shares

Indicate by check mark if the registrant is a well-known
seasoned issuer as defined in Rule 405 of the Securities Act:

Yes __   No X

If this report is an annual or transition report, indicate by
check mark if the registration is not required to file a report pursuant to
section 13 or 15 of the Securities Exchange Act of 1934:

Yes __ No X

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 XNo Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerator filer in Rule 12b-2 of the Exchange Act:

|Large Accelerated Filer ___ | Accelerated Filer ____ | Non-Accelerated Filer
X
|--------------------------- | ---------------------- | -----------------------

---

|Indicate by check mark which basis of accounting
      the registrant has used to prepare the financial statements included in
      this filing:
|-------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                 
|U.S. GAAP                                                                                                                                        

If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the Registrant
has elected to follow:

Item 17XItem 18 __

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes __ No X

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TABLE OF CONTENTS

Part I

|         |                                                                  | Page
|-------- | ---------------------------------------------------------------- | ----
|         |                                                                  |     
|Item 1.  | Identity of Directors, Senior
      Management and Advisors      | 4   
|Item 2.  | Offer Statistics and Expected Timetable                          | 4   
|Item 3.  | Key Information                                                  | 4   
|Item 4.  | Information on the Company                                       | 14  
|Item 4A. | Unresolved staff comments                                        | 21  
|Item 5.  | Operating and Financial Review and Prospects                     | 21  
|Item 6.  | Directors, Senior Management
      and Employees                 | 29  
|Item 7.  | Major Shareholders and Related Party
      Transactions          | 34  
|Item 8.  | Financial Information                                            | 34  
|Item 9.  | The Offer and Listing                                            | 35  
|Item 10. | Additional Information                                           | 35  
|Item 11. | Quantitative and Qualitative Disclosures about
      Market Risk | 42  
|Item 12. | Description of Securities Other
      Than Equity Securities     | 43  

Part II

|Item 13.  | Defaults, Dividend Arrearages
      and Delinquencies                              | 43
|--------- | ---------------------------------------------------------------------------------- | --
|Item 14.  | Material Modifications to the Rights of
      Security Holders and Use of Proceeds | 43
|Item 15.  | Controls and Procedures                                                            | 43
|Item 15T. | Controls and Procedures                                                            | 44
|Item 16.  | Not Applicable                                                                     | 44
|Item 16A  | Audit Committee Financial Expert                                                   | 44
|Item 16B  | Code of Ethics                                                                     | 44
|Item 16C  | Principal Accountant Fees and Services                                             | 44
|Item 16D  | Exemptions from the Listing
      Standards for Audit Committees                   | 45
|Item 16E  | Purchases of Equity by the Issuer and
      Affiliated Purchasers                  | 45
|Item 16F  | Changes in Registrants
      Certifying Accountant                                | 45
|Item 16G  | Corporate Governance                                                               | 45

Part III

|Item 17.   | Financial Statements | 45
|---------- | -------------------- | --
|Item 18    | Financial Statements | 45
|Item 19.   | Exhibits             | 45
|Signatures |                      | 47

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PART I

INTRODUCTION

Abbreviations

Throughout this document, Micromem Technologies Inc. and/or its
affiliates are referred to as Micromem, the Company, we, us or our.

Forward Looking and Cautionary Statements

This Form 20-F contains certain forward-looking statements.
These forward-looking statements are based on current expectations, estimates
and projections about the business of our company and the industry in which we
operate, our management's beliefs, and assumptions made by our management. Words
such as expects, anticipates, intends, plans, believes, seeks and
estimates, variations on such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Our actual results could differ materially from
those expressed or forecasted in these forward-looking statements as a result of
certain factors, including those set forth under Item 3-Key Information  Risk
Factors and elsewhere in this Form 20-F.

ITEM
1.           
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not Applicable.

ITEM
2.           
OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM
3.            KEY
INFORMATION

A. Selected Financial Data

The following table sets forth our selected consolidated
financial data in United States dollars as of and for each of the five fiscal
years ended October 31, 2010, 2009, 2008, 2007 and 2006. The selected
consolidated financial data has been derived from our audited consolidated
financial statements. All information contained in the following table should be
read in conjunction with our audited consolidated audited financial statements
and the notes thereto in Item 17-Financial Statements and "Item 5 - Operating
and Financial Review and Prospects, included elsewhere in this Annual Report on
Form 20-F.

Selected balance sheet information (all amounts in
U.S. dollars)

2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Working capital (deficiency)
    
    ($1,459,460
    )
    
    ($650,044
    )
    
    ($338,079
    )
    
    ($1,531,855
    )
    
    ($448,923
    )Capital Assets
    
    16,686
    
    
    24,442
    
    
    26,321
    
    
    -
    
    
    -Total Assets
    
    568,336
    
    
    2,562,479
    
    
    630,467
    
    
    329,232
    
    
    465,440Capital Stock
    
    50,102,699
    
    
    48,494,180
    
    
    44,380,134
    
    
    37,166,397
    
    
    36,693,353Shareholders' equity (deficiency)
    
    (1,019,226
    )
    
    1,522,839
    
    
    (311,758
    )
    
    (1,531,855
    )
    
    (448,923
    )


4

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Selected statement of operations and deficit information(all amounts in U.S. dollars)

2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Interest and other income
    $
    22,886
    
    $
    88,047
    
    $
    11,762
    
    $
    2,586
    
    $
    9,930Research and development expenses
    
    (106,007
    )
    
    13,880
    
    
    1,063,508
    
    
    682,331
    
    
    368,969General and administrative and other
      expenses
    
    4,676,322
    
    
    2,433,537
    
    
    3,323,565
    
    
    1,862,417
    
    
    1,640,581Stock compensation
      expense
    
    95,038
    
    
    1,951,569
    
    
    1,041,414
    
    
    269,216
    
    
    2,058,560Loss before income taxes
    
    (4,665,353
    )
    
    (4,310,939
    )
    
    (5,416,725
    )
    
    (2,811,378
    )
    
    (4,058,180
    )Provision for
      income taxes (recovery)
    
    9,508
    
    
    -
    
    
    -
    
    
    -
    
    
    -Net loss
    
    (4,674,861
    )
    
    (4,310,939
    )
    
    (5,416,725
    )
    
    (2,811,378
    )
    
    (4,058,180
    )Loss per share-basic and diluted
    
    0.05
    
    
    0.05
    
    
    0.07
    
    
    0.04
    
    
    0.06Weighted average number of basic and diluted shares
    
    92,225,645
    
    
    86,400,439
    
    
    78,012,115
    
    
    70,685,153
    
    
    66,709,353Dividends
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -


Reconciliation between Canadian GAAP and U.S. GAAP:

Our consolidated financial statements for the period have been
prepared in accordance with Canadian GAAP which, in our case conforms in all
material respects with U.S. GAAP except for how the Company has accounted for
development expenditures reported in the fiscal years ended October 31, 2009 and
2010 and the allocation of Unit private placement proceeds using the relative
fair value method of accounting for the fiscal years through to October 31,
2008.

Under U.S. GAAP all development expenditures are expensed as
incurred. In 2010, the Company has capitalized $221,521 of development costs
under Canadian GAAP (2009: $2,000,611).

Until October 31, 2008, for all Unit private placement
financings completed, the Company assigned 100% of the proceeds from these
financings to the common shares and a nil value to the attached warrants. In the
fiscal year ended October 31, 2009, the Company changed the estimates that it
used to value the common shares and warrants included in the Unit private
placement financings which it completed in the fiscal year then ended. It
assigned the value to the warrants which formed part of these Unit private
placements calculated in accordance with the Black Scholes option-pricing model.
Under U.S. GAAP, using standards which are analogous, the valuation of the
shares and warrants would be determined using the relative fair value approach.
There is no change in aggregate shareholders equity. A reconciliation between
Canadian and U.S. GAAP has been provided in the footnotes to the 2010 audited
financial statements.

Currency and Exchange Rates

Our financial statements are all expressed in United States
dollars. All other financial data appearing in this Form 20-F are expressed in
United States dollars with the exception of certain limited cases when reference
is made to instruments denominated in Canadian dollars (CDN $).

Transactions that were conducted in Canadian dollars or other
foreign currencies have been converted into United States dollars using the 3
month average rate of exchange per quarter which rate approximates the rate of
exchange prevailing at the date of such transactions. Assets and liabilities
denominated in Canadian dollars or other foreign currencies but expressed in
this Form 20-F in United States dollars have been converted into United States
dollars at the rate of exchange prevailing on the date of the applicable
financial statement.

The following table sets forth, for the periods indicated, the
high, low, end of period and average for period noon buying rates as published
by the Bank of Canada, as expressed in the amount of U.S. Dollars equal to one
Canadian dollar.

2010
    2009
    2008
    2007
    2006High for period
    1.0188
    1.3000
    1.1848
    1.1853
    0.9134Low for period
    1.0136
    1.0292
    0.9671
    0.9499
    0.8349End of period
    1.0202
    1.0456
    1.2165
    0.9499
    0.8907Average for period
    1.0162
    1.1420
    1.0269
    1.1003
    0.8782


5

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The following table sets forth, for each period indicated, the
high and low exchange rates for United States dollars expressed in Canadian
dollars on the last day of each month during such period, based on the Noon
Buying Rate.

November
    
    
    December
    
    
    January
    
    
    February
    
    
    March
    
    
    April2009
    
    
    2009
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2010High
    
    1.0574
    
    
    1.0466
    
    
    1.0653
    
    
    1.0526
    
    
    1.0156
    
    
    1.0116Low
    
    1.0574
    
    
    1.0466
    
    
    1.0650
    
    
    1.0421
    
    
    1.0156
    
    
    1.0116May
    
    
    June
    
    
    July
    
    
    August
    
    
    September
    
    
    October2010
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2010High
    
    1.0462
    
    
    1.0606
    
    
    1.029
    
    
    1.0639
    
    
    1.0298
    
    
    0.0188Low
    
    1.0462
    
    
    1.0606
    
    
    1.029
    
    
    1.0639
    
    
    1.0298
    
    
    1.0136


On February 24, 2011 the noon buying rate for one Canadian
dollar, as quoted by the Bank of Canada, was CDN $1.0161 = U.S. $1.00.

**B.**          
**Capitalization and Indebtedness**

Not Applicable.

**C.**          
**Reasons for the Offer and Use of Proceeds**

Not Applicable.

**D.**          
**Risk Factors**

We and our investors face a number of significant risks, which
are described below.

Risk Factors Related to Our Business

The financial statements of our company have been
prepared on a going concern basis.

We have prepared our financial statements on a going concern
basis which presumes that we will be able to realize our assets and discharge
our liabilities in the normal course of business for the foreseeable future.

We are still in the development stage and have incurred
substantial losses to date. We must raise additional funds for the continued
development, testing and commercial exploitation of our technologies. The
sources of these funds have not yet been identified and there can be no
certainty that sources will be available in the future.

At October 31, 2010 we had $26,039 cash on hand and our current
monthly cash expenses were approximately $200,000. Our working capital
deficiency is $1,459,460 at October 31, 2010. Subsequent to October 31, 2010,
through to the date of the filing of this annual report, we have raised an
additional $503,140 through private placement financings.

Our ability to continue as a going concern is dependent upon
completing the development of our technology for a particular application,
achieving profitable operations, obtaining additional financing and successfully
bringing our technologies to the market. The outcome of these matters cannot be
predicted at this time. Our consolidated financial statements have been prepared
on a going concern basis and do not include any adjustments to the amounts and
classifications of the assets and liabilities that might be necessary should we
be unable to continue in business.

If the going concern assumption was not appropriate for our
financial statements then adjustments would be necessary in the carrying value
of assets and liabilities, the reported expenses and the balance sheet
classifications used.

We currently have no operating revenue.

At October 31, 2010 we have no revenues and there is no
certainty that we will generate revenues in the near future. If we fail to enter
into license agreements or if we do not obtain purchase orders from potential
customers, we will have no revenues. If we enter into such agreements the amount
of the revenues we receive will depend on the terms we are able to get from each
licensee and the ability of each licensee to compete in their particular market.

6

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Our magnetic sensor technology is under development.

We continue to develop prototypes of our magnetic sensor technology in 2010 working with our industrial foundry partners, our technical advisors, and our strategic development partners. We are pursuing joint development agreements with potential
strategic partners with the expectation that we will jointly develop sensor applications for use by these potential strategic partners.

There is no certainty that these current initiatives will result in revenues and cash flow to the Company in the future.

In the event that our magnetic sensor technology is successfully developed we will face competition from larger corporations who also sell sensor technology and who have greater financial resources than the Company.

Our success will be determined by the following factors which have not yet been tested or measured:

- the ability of manufacturers to incorporate the technology into existing manufacturing capabilities without significant retooling and material costs;
- price competitiveness; and
- the differential performance advantages of our memory technology.

After completion of the development of our technology, our ability to compete successfully will depend on elements outside of our control, including the rate at which customers incorporate our technology into their products, the success of such
customers in selling those products, our protection of our intellectual property, the number, nature and success of our competitors and their product introductions and general market and economic conditions. In addition, our success will depend on
our ability to develop, introduce, and license or sell in a timely manner our technology or products incorporating our technology and to compete effectively on the basis of factors such as speed, density, die size and power consumption.

Our MRAM technology is under development.

Our Magnetic Random Access Memory, also referred to herein as MRAM, which is a non-volatile memory technology that uses magnetic, thin film elements on a gallium arsenide substrate to store information, is currently under development and is
therefore not yet proven to be commercially viable.  As such, we are unsure if our development efforts will succeed and, accordingly, significant development work remains to be completed.

In the event our technology is developed, we will face competition when we are ready to sell or license our products. We will be required to introduce our technology into a well-developed market and compete with major corporations who manufacture,
sell and license existing memory products such as DRAM, SRAM, EPROM, EEPROM and Flash memory. The market for memory technologies is dominated by major corporations who have established market segments for their memory technologies and products.
These corporations have significantly greater financial resources which are required to design, develop, manufacture, market, sell and license their products and technologies. Many of these major corporations have worldwide wafer manufacturing and
integrated circuit production facilities.

Our success will be determined by the following factors which have not yet been tested or measured:

- the ability of manufacturers to incorporate the technology into existing manufacturing capabilities without significant retooling and material costs;
- price competitiveness; and
- the differential performance advantages of our memory technology.

After completion of the development of our technology, our ability to compete successfully will depend on elements outside of our control, including the rate at which customers incorporate our technology into their products, the success of such
customers in selling those products, our protection of our intellectual property, the number, nature and success of our competitors and their product introductions and general market and economic conditions. In addition, our success will depend on
our ability to develop, introduce, and license or sell in a timely manner our technology or products incorporating our technology and to compete effectively on the basis of factors such as speed, density, die size and power consumption.

7

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Our competitors are seeking to develop other magnetic based memory technologies.

MRAM as a market segment is both crowded and competitive.  We understand that other companies have research and development efforts under way in connection with non-volatile random access memory, also referred to herein as RAM. Much work is being
done in the MRAM research and development at companies such as NVE, Cypress, Freescale, Phillips, Motorola and others. Other research and development efforts at IBM, Hewlett Packard and Nantero are focused on non-magnetic based non-volatile RAM.
While these companies may be considered our competitors, their focus is on high-density RAM applications.  As we anticipate introducing our product in the less competitive, low-density applications market, we believe our more direct competitors are
Honeywell, Naval Research Laboratories, Ramtron and NVE. All of these companies have substantial resources at their disposal.

We may be materially affected by aggressive competitionas the memory and data storage industry is highly competitive and customers make their decisions based on a number of competitive factors, including functionality, technology,
performance, reliability, system scalability, price, quality, product availability, customer service and brand recognition. We must address each of these factors effectively in order to successfully compete.

Failure to secure continued financing will cause our business to suffer.

Since there is no assurance that revenues will be realized in the near future, we will need additional financing to continue our research and development and to successfully market our technology to potential licensees and strategic partners. There
is no assurance we will be able to continue to do so and failure to raise sufficient funds in the future will affect our ability to develop and market our technology.

Because much of our success and value depends on our ownership and use of intellectual property, our failure to protect our property could adversely affect our future growth and success.

Our success will depend on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our proprietary technology and
processes.  Despite our efforts to do so, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology, develop similar technology independently or design around our patents. Policing unauthorized use of our
products is expensive and difficult, and we cannot be certain that all required steps we have taken will prevent misappropriation or infringement of our intellectual property.

Intellectual property claims against us, no matter how groundless, could cause our business to suffer.

Our future success and competitive position depend in part on our ability to retain exclusive rights to our technology, including any improvements that may be made on that technology from time to time by us or on our behalf.  While our technology is
patented or is subject to pending patent applications in the United States and we know of no challenge that has been made either against our technology or our rights to it, and we have no reason to believe that any such challenge might be made or
that the grounds for any such challenge exist, if any intellectual property litigation were to be commenced against us, no matter how groundless, the result could be a significant expense to us, adversely affecting further development, licensing and
sales, diverting the efforts of our technical and management personnel and, in the event of an adverse outcome, damages and possible restrictions on the further development, licensing and use of our technology.

There is no assurance that any of our pending patent applications will be issued as patents or that any issued patent will not be determined to be invalid at a later date.

We have a history of losses, and we may continue to generate losses in the foreseeable future.

To date, we have been solely a development company. We have not been profitable to date. Unless and until we are able to successfully complete the development of our technology and develop markets for the commercialization of such technology, we may
not be able to generate revenues in future periods and we may not be able to attain profitability.

The development of non-volatile random access memory products is a capital intensive business. Therefore, we expect to incur expenses without corresponding revenues at least until we are able to license our technology to third parties. This may
result in net operating losses, which will increase until we can generate an acceptable level of revenues, which we may never attain.

8

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Further, even if we do achieve operating revenues, there can be no assurance that such revenues will be sufficient to fund continuing operations. Therefore, we cannot predict whether we ever be able to achieve profitability.

The likelihood of the success of our business plan must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding early stage businesses and the
competitive environment in which we operate.

We lack manufacturing capacity and will continue to be dependent on third party manufacturers.

Our success will partially depend upon our ability to secure manufacturing of our technology in large quantities and at competitive prices.  We have no in-house manufacturing capacity and do not anticipate developing such capacity.  To the extent we
are successful in completing the development of our technology we will likely be required to rely upon contract manufacturers to produce our products. We may not be able to enter into manufacturing arrangements on terms that are favorable to us.
Moreover, there is no assurance that any future manufacturers will have the capability to manufacture our products in sufficient quantities to achieve profitability and within the quality, price, and technical standards required by our customers. In
addition, because our technologies use semi-conducting materials other than silicon, there may be a limited number of contract manufacturers capable of producing our products since most are focusing on silicon-based manufacturing. If any future
manufacturers should cease doing business with us or experience delays, shortages of supply or excessive demands on their capacity, we may not be able to obtain adequate quantities of product in a timely manner, or at all. Manufacturing new products
involves integrating complex designs and processes, coordinating with suppliers for parts and components, and managing manufacturing capacities to accommodate forecasted demand.  Failure to obtain sufficient quantities of parts and components, as
well as other manufacturing delays or constraints, could adversely affect the timing of new product introductions. Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales.

We will be dependent upon the success of a limited range of products.

The range of products we intend to commercialize is currently limited to applications of non-volatile random access memory technologies and sensors.  Reliance on a limited range of products could restrict our ability to respond to adverse business
conditions. If we are not successful in developing this specific technology, or if there is not adequate demand for such technology or the market for such technology develops less rapidly than we anticipate, we may not have the capability to shift
our resources to the development of alternative products.  In such case our business would likely be at a significant disadvantage to other competitors in the field. As a result, the limited range of products we intend to develop could limit our
revenues and profitability.

We may not realize income from the licensing of our technologies if our licensees fail to commercialize the products that incorporate these technologies.

In order to generate revenues from our MRAM technology, we will need to enter into licensing arrangements with third parties who can integrate our technology into products that will gain acceptance in the market.  We have not yet entered into any
licensing agreements, and there is no assurance that we will be able to do so on acceptable terms or at all. To the extent we are successful in licensing our technology, in general we will seek upfront payments plus ongoing royalties based on
anticipated commercial sales of the products into which our technology is incorporated. Our ability to realize royalties will thus depend upon the successful manufacture and commercialization of such products, which will be primarily within the
control of the licensee.  There is no assurance that any eventual licensees' products will be technologically viable, nor that such licensees will be successful in marketing and selling such products.  In addition, licensees could decide to delay or
discontinue the commercialization of products for financial or other business reasons. Even if our licensees succeed in developing products that incorporate our technology, in all likelihood a significant amount of research, development and testing
will be required before such products can be introduced to market. Therefore we may not receive royalty income for a substantial period following the commencement of any licensing arrangements. If our licensees are unable to commercialize products
on a timely basis, they may lose market share to competing or alternative technologies. Any failure by the companies to which we license our technologies to successfully develop marketable products would have an adverse affect on our future royalty
payments and financial condition.

Our supply of future products could be dependent upon relationships with key suppliers.

We will be reliant on third parties to supply the raw materials needed to manufacture our future products.  Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over
production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacture caused by problems at suppliers could delay shipment of products, increase our cost of goods sold and result in lost sales.

9

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In order to commercialize our future products, we will need to establish a sales and marketing capability.

At present, we have limited sales and marketing capability since our technology is currently in the development stage and our financial resources are limited.  However, if we are successful in completing our development efforts, we will need to add
marketing and sales expertise in the computer technology business. We must also develop the necessary supporting distribution channels. Although we believe we can build the required infrastructure, we may not be successful in doing so if we cannot
attract personnel or generate sufficient capital to fund these efforts. Failure to establish a sales force and distribution network would have a material adverse effect on our ability to grow our business.

The rights to certain of our patented technologies are shared with a third party.

Our earliest technology included a memory design with the magnetic bit aligned vertically to the substrate, also referred to herein as our VEMRAM technology.  We have abandoned the development of this earliest technology. We acquired ownership of
certain patents and patent applications covering the VEMRAM technology, as well as certain related rights, pursuant to an Asset Purchase Agreement dated as of December 10, 2000 with Estancia Limited, also referred to herein as Estancia. However,
under the terms of the Asset Purchase Agreement we have been required to convey back to Estancia a 40% undivided interest in the VEMRAM patents, as well as the right to participate in gross profits and royalties from the license or sale of such
patents. This participation right requires us to pay to Estancia 32% of (i) the gross profit, less expenses to be agreed by the parties, for each license of the patents sold or otherwise transferred by us and (ii) all royalties received by us as a
result of the license or sale of the patents less reasonable expenses directly related to the obtaining of such royalties.

We will be reliant upon contractual rights to use certain technologies that are material to our business.

Until 2008, certain technologies material to our business have been developed through collaborative arrangements with the University of Toronto.  We entered into a number of successive Research Collaboration Agreements with the University of Toronto
under which research and development programs were led by a University research team. We have provided funding, equipment and background technology to these projects.  Certain Canadian governmental entities are also parties to these agreements and
have provided additional funding.  The University of Toronto has ownership rights to all intellectual property developed under these programs. We have no ownership rights but have the right to obtain exclusive, world-wide and perpetual sub-licenses
from the governmental participants to use such intellectual property; the governmental participants in turn have the right to obtain an exclusive, world-wide license to such technology directly from the University of Toronto.

Our auditors have previously identified material weaknesses in our internal accounting control over financial reporting.

We operate as a development stage company and have historically had only limited accounting personnel and resources with which to address our internal control procedures.

In their Attestation Report dated February 14, 2011, our auditors concluded that there were no material weaknesses in our internal controls over financial reporting. In the 2010 fiscal year we made a concerted effort to address the material weakness
that our auditors had identified in their 2009 Attestation Report dated February 17, 2010 (the “2009 Report”). These efforts included a formalized quarterly review signoff procedure with our Audit Committee and quarterly discussions with
our external auditors. We also assigned one of our staff with full responsibility for the monitoring and testing of our internal accounting controls over financial reporting.

In their 2009 Report, our auditors identified one material weakness in our internal controls over financial reporting. This material weakness and management’s response is described in Item 15 of our 2009 Annual Report on Form 20-F. In the 2009
fiscal year we devoted more internal resources to the measurement and assessment of our internal accounting controls. We appointed one of our senior accounting staff, supervised by our Chief Financial Officer and our Audit Committee, to organize
this initiative and provided certain training to assist that individual with her responsibilities. We designed our testing to assess all perceived higher risk areas and completed our testing of the internal controls and procedures in all of these
areas over a five month period through September 2009.

Although we have implemented compensating controls in our systems and our
procedures which we believe mitigate these risks, all internal control systems
no matter how well designed have inherent limitations. Therefore, even those
systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial
statement preparation and presentation. 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.

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Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives.  In the unforeseen event that lapses in
the internal controls and procedures occur and/or mistakes arise, the Company intends to take the necessary steps to minimize the consequences thereof. If, however, we fail to maintain adequate controls and procedures, we may not meet the demands
that are placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002 and our business could accordingly face repercussions.

We depend on key personnel.

Our senior managers and employees are Salvatore Fuda, who serves as the Chairman of the Board of Directors; Joseph Fuda, who serves as our Chief Executive Officer; Steven Van Fleet, who has primary responsibility for business development and who
serves as President of our wholly-owned subsidiary, MAST Inc., and Dan Amadori, who serves as our Chief Financial Officer. We have engaged the services of several engineering/technical consulting firms, to assist in converting our development
efforts to commercialization.  We have also previously engaged Dreifus Associates Ltd., (“DAL”) a technical and intellectual property consulting firm whose major shareholder, Henry Dreifus, served as a director of Micromem between March
2008 and June 2009. Our success depends on our ability to retain certain of our senior management and key technical personnel and our ability to attract and retain additional highly skilled personnel in the future.

We may be materially affected by global economic and political conditions.

Our ability to generate revenue may be adversely affected by uncertainty in the global economy and could also be affected by unstable global political conditions. Terrorist attacks or acts of war could significantly disrupt our operations and the
operations of our future customers, suppliers, distributors, or resellers. We cannot predict the potential impact on our financial condition or our results of operations should such events occur.

We may be materially affected by rapid technological change and evolving industry standards.

Short product life cycles are inherent in high-technology companies due to rapid technological change and evolving industry standards. Our future financial condition and results of operations depend on our ability to respond effectively to these
changes. We cannot provide any assurance that we will be able to successfully develop, manufacture, and market innovative new products or adapt our current products to new technologies or new industry standards. In addition, our customers may be
reluctant to adopt new technologies and standards or they may prefer competing technologies and standards. Because the technology market changes so rapidly, it is difficult for us to predict the rate adoption of our MRAM technology.

We may be materially affected by risks associated with new product development.

Our new product research and development is complex and requires us to investigate and evaluate multiple alternatives, as well as plan the design and manufacture of those alternatives selected for further development. Our research and development
efforts could be adversely affected by hardware and software design flaws, product development delays, changes in data storage technology, changes in operating systems and changes in industry standards.

The manufacturing of new products involves integrating complex designs and processes, coordinating with suppliers for parts and components and managing manufacturing capacities to accommodate forecasted demand. Our failure to obtain sufficient
quantities of parts and components or other manufacturing delays and constraints could adversely affect our ability to timely introduce new products.

Our operations may be materially affected by the risks associated with the continued developments and protection of our intellectual property.

We cannot provide any assurance that we will be able to continue to develop new intellectual property or that we will continue to have it developed for us.

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We rely on a combination of U.S. patent, copyright, trademark, and trade secret laws to protect our intellectual property rights. We have decided to file patent and trademark registration applications with certain foreign governments but we may not
have appropriate coverage in all jurisdictions where we may sell or license our product in future.

We enter into confidentiality and non-disclosure agreements relating to our intellectual property with our employees and consultants.

Despite all of our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain or use our intellectual property. Monitoring the unauthorized use of our intellectual property is difficult and we
cannot be certain that we will be able to adequately protect our intellectual property in the future.

We may be materially affected if we are unable to attract, retain and motivate key employees.

Our future success depends, in large part, on our ability to attract, retain and motivate key employees. We face significant competition for individuals who possess the skills required to design, develop, manufacture, and market our technologies. An
inability to successfully attract, retain, and motivate these employees in the future could have an adverse effect on our future operating and financial performance.

There are foreign exchange risks associated with our company.

Because we have historically raised funding in U.S. dollars, and a significant portion of our costs are denominated in Canadian dollars, our funding is subject to foreign exchange risks. A decrease in the value of the U.S. dollar relative to the
Canadian dollar could affect our costs and potential future profitability. We do not currently hold forward exchange contracts or other hedging instruments to exchange foreign currencies for U.S. dollars to offset potential currency rate
fluctuations.

Risk Factors Related to Our Common Shares

Our stock is subject to the penny stock regulations, which may discourage brokers from effecting transactions in the stock and adversely affect the stock's market price and liquidity

Our common shares constitute “penny stock” under applicable regulations of the Securities and Exchange Commission.  The penny stock regulations impose significant restrictions on brokers who sell penny stock to persons other than
established customers and institutional accredited investors. Broker-dealers participating in sales of our stock will be subject to the so called “penny stock” regulations covered by Rule 15g-9 under the Exchange Act.  Under the rule,
broker-dealers must furnish to all investors in penny stocks a risk disclosure document required by the rule, make a special suitability determination of the purchaser and have received the purchaser's written agreement to the transaction prior to
the sale. In order to approve a person's account for a transaction in penny stock, the broker or dealer must (i) obtain information concerning the person's financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on the information required by paragraph (i) that the transactions in penny stocks are suitable for the person and that the person has sufficient knowledge and experience in financial matters that the person reasonably may be
expected to be capable of evaluating the risks of transactions in penny stock; and (iii) deliver to the person a written statement setting forth the basis on which the broker or dealer made the determination required by paragraph (ii) in this
section, stating in a highlighted format that it is unlawful for the broker or dealer to effect a transaction in a penny stock unless the broker or dealer has received, prior to the transaction, a written agreement to the transaction from the
person; and stating in a highlighted format immediately preceding the customer signature line that the broker or dealer is required to provide the person with the written statement and the person should not sign and return the written statement to
the broker or dealer if it does not accurately reflect the person's financial situation, investment experience and investment objectives, and obtain from the person a manually signed and dated copy of the written statement. The penny stock
regulations may discourage brokers from effecting transactions in the common shares.  This would decrease market liquidity, adversely affect market price and make it difficult for you to use the common shares as collateral.

The rights of our shareholders may differ from the rights typically afforded to shareholders of a U.S. corporation.

We are incorporated under the Business Corporations Act (Ontario), also referred to herein as the OBCA. The rights of holders of our common shares are governed by the laws of the Province of Ontario, including the OBCA, by the applicable laws of
Canada, and by our Articles of Incorporation and all amendments thereto, also referred to herein as the Articles, and our By-laws. These
rights differ in certain respects from the rights of shareholders in typical U.S. corporations.  The principal differences include without limitation the following:

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Under the OBCA, we have a lien on any common share registered in the name of a shareholder or the shareholder's legal representative for any debt owed by the shareholder to us. Under U.S. state law, corporations generally are not entitled to any
such statutory liens in respect of debts owed by shareholders.

With regard to certain matters, we must obtain approval of our shareholders by way of at least 662/3% of the votes cast at a meeting of shareholders duly called for such purpose being cast in favor of the proposed matter. Such matters include
without limitation: (a) the sale, lease or exchange of all or substantially all of our assets out of the ordinary course of our business; and (b) any amendments to our Articles including, but not limited to, amendments affecting our capital
structure such as the creation of new classes of shares, changing any rights, privileges, restrictions or conditions in respect of our shares, or changing the number of issued or authorized shares, as well as amendments changing the minimum or
maximum number of directors set forth in the Articles. Under U.S. state law, the sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the outstanding
shares, although in some cases approval by a higher percentage of the outstanding shares may be required. In addition, under U.S. state law the vote of a majority of the shares is generally sufficient to amend a company's certificate of
incorporation, including amendments affecting capital structure or the number of directors.  Under certain circumstances the board of directors may also have the ability to change the number of directors under U.S. state law.

Pursuant to our By-laws, two persons present in person or represented by proxy and each entitled to vote thereat shall constitute a quorum for the transaction of business at any meeting of shareholders. Under U.S. state law, a quorum generally
requires the presence in person or by proxy of a specified percentage of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled to vote.

Under rules of the Ontario Securities Commission, a meeting of shareholders must be called for consideration and approval of certain transactions between a corporation and any “related party” (as defined in such rules).  A “related
party” is defined to include, among other parties, directors and senior officers of a corporation, holders of more than 10% of the voting securities of a corporation, persons owning a block of securities that is otherwise sufficient to affect
materially the control of the corporation, and other persons that manage or direct, to a substantial degree, the affairs or operations of the corporation. At such shareholders' meeting, votes cast by any related party who holds common shares and has
an interest in the transaction may not be counted for the purposes of determining whether the minimum number of required votes have been cast in favor of the transaction. Under U.S. state law, a transaction between a corporation and one or more of
its officers or directors can generally be approved either by the shareholders or a by majority of the directors who do not have an interest in the transaction. Corporations that are listed on a U.S. securities exchange or are quoted on Nasdaq may
also be required to have transactions with officers and directors and other related party transactions reviewed by an audit committee comprised of independent directors.

There is no limitation imposed by our Articles or other charter documents on the right of a non-resident to hold or vote our common shares. However, the Investment Canada Act , also referred to herein as the Investment Act, as amended by the World
Trade Organization Agreement Implementation Act, also referred to herein as the WTOA Act, generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture
that is not a “Canadian,” as defined in the Investment Act, unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada. An investment in our common
shares by a non-Canadian would be reviewable under the Investment Act if it were an investment to acquire direct control of Micromem, and the value of our assets were CDN $5.0 million or more. However, an investment in our shares by a national
of a country (other than Canada) that is a member of the World Trade Organization or has a right of permanent residence in such a country (or by a corporation or other entity that is a “WTO Investor-controlled entity” pursuant to
detailed rules set out in the Investment Act) would be reviewable at a higher threshold of CDN $223 million in assets, except for certain economic sectors with respect to which the lower threshold would apply. A non-Canadian, whether a national
of a WTO member or otherwise, would acquire control of Micromem for purposes of the Investment Act if he or she acquired a majority of our common shares. The acquisition of less than a majority, but at least one-third of our common shares, would
also be presumed to be an acquisition of control of Micromem, unless it could be established that Micromem was not controlled in fact by the acquirer through the ownership of voting shares.  The United States is a WTO Member for purposes of the
Investment Act. Certain transactions involving our common shares would be exempt from the Investment Act, including:

- an acquisition of our common shares if the acquisition were made in connection with the person's business as a trader or dealer in securities;

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- an acquisition of control of Micromem in connection with the realization
  of a security interest granted for a loan or other financial assistance and
  not for any purpose related to the provisions of the Investment Act; and
- an acquisition of control of Micromem by reason of an amalgamation,
  merger, consolidation or corporate reorganization, following which the
  ultimate direct or indirect control of Micromem, through the ownership of
  voting interests, remains unchanged. Under U.S. law, except in limited
  circumstances, restrictions generally are not imposed on the ability of non-
  residents to hold a controlling interest in a U.S. corporation.

U.S. shareholders may not be able to enforce civil
liabilities against us.

Micromem is incorporated under the laws of the Province of
Ontario. Additionally, a number of our directors and executive officers are
non-residents of the U.S., and all or a substantial portion of the assets of
such persons are located outside the U.S. As a result, should any investor
commence an action in the U.S. against Micromem or its directors or executive
officers, Micromem or its directors or officers, as the case may be, may be able
to insist that any action against them take place in the jurisdiction of the
Province of Ontario. In addition, if an investor were to obtain a U.S. judgment
against Micromem or its directors or executive officers, there is doubt as to
the enforceability of such U.S. judgment in Canada.

We do not anticipate paying dividends.

We have never paid a dividend on our securities and we do not
anticipate paying dividends in the foreseeable future.

We may need to issue additional securities which may
cause our shareholders to experience dilution.

Our Board of Directors has the authority to issue additional
common shares, without par value, also referred to herein as the common shares,
or other of our securities without the prior consent or vote of our
shareholders. The issuance of additional common shares would dilute the
proportionate equity interest and voting power of our shareholders.

The price of our common shares and volume of our common
shares may be volatile.

Our shareholders may be unable to sell a significant number of
our common shares on the OTC Bulletin Board without a significant reduction in
the market price of the shares.

Furthermore, there can be no assurance that we will be able to
meet the listing requirements of, or achieve listing on, any other stock
exchange. The market price of the common shares may be affected significantly by
factors such as fluctuations in our operating results, announcements of
technological innovations or new products by us or our competitors, action by
governmental agencies against us or the industry in general, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by us or others, the interest of investors, traders and
others in public companies such as ours and general market conditions. In recent
years, the securities markets in the United States and Canada have experienced a
high level of price and volume volatility, and the market price of securities of
many companies, particularly small capitalization companies, have experienced
fluctuations which have not necessarily been related to the operating
performance, underlying asset values or business prospects of such
companies.

ITEM
4.           
INFORMATION ON THE COMPANY

A.            History and Development of Our Company

Micromem is a corporation formed under the laws of the Province
of Ontario, Canada, with principal executive offices at 777 Bay Street, Suite
1910, Toronto, Ontario M5G 2E4 (416.364.6513) . Micromem was incorporated on
October 21, 1985 as Mine Lake Minerals Inc. We subsequently changed our name to
Avanti Capital Corp. on June 23, 1988, to AvantiCorp International Inc. on April
30, 1992 and to Micromem Technologies Inc. on January 11, 1999 in connection
with our acquisition of Pageant Technologies Incorporated, also referred to
herein as Pageant International. Our website address is www.micromeminc.com. The information on our website is
not part of this annual report on Form 20-F. We have included our website
address in this document as an inactive textual reference only.

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Research and Development Efforts

The Board of Directors formed a Technical Advisory Committee in mid 2007 consisting of Larry Blue and Steve Van Fleet, two of its Directors and both of whom have substantial industry experience and careers in related technology.  To round out the
Technical Advisory Committee, the Company recruited Mr. Henry Dreifus of Dreifus Associates Limited (“DAL”) of Orlando, Florida.

The Technical Advisory Committee took the leadership role in the Company's technical developments commencing in September, 2007.  At the time, with ongoing assistance provided by Strategic Solutions, the Company engaged Global Communications
Semiconductor Ltd. (“GCS”) of California to develop initial prototypes in its California-based foundry.

Between September 2007 and February 2008, the Company announced a series of development milestones achieved in the GCS foundry. The Company determined that it would pursue the further development of its magnetic sensor market opportunities in the
immediate term while pursuing the longer term goal of also developing its memory applications.  As discussed below it engaged BAE to complete further development work on its sensor.

In 2009 the Company continued to rely on a number of key advisors including GCS, DAL and BAE.

The following is a commentary on the development of specific projects undertaken since 2008 and the developments through 2010:

BAE:In 2008, BAE expressed initial interest in the Company's sensor technology.  The Company and BAE executed the appropriate confidentiality and material transfer agreements and began discussions with respect to specific project work to be
conducted in BAE's foundries in the United States. In August 2008, the Company entered into a working agreement with BAE whereby the Company agreed to commit up to $1 million of funding to BAE-led development work on its sensor technology. The
end goal of the BAE development work was to identify specific applications where BAE would incorporate the Company's technology into their product offerings to their own large defense and aerospace customers.

During 2009, Micromem and BAE Systems successfully completed the manufacturing of a multi-bit array structure of our memory.  The work was completed in BAE’s U.S. Department of Defense (“DOD”) foundry in Nashua New Hampshire.
Micromem submitted the multi-bit array structure in a reticle design format to BAE which manufactured the memory using their proprietary high mobility epi layer and their standard foundry processes.  The magnetic processing steps required in the
manufacture of our memory was subcontracted to specialty manufacturers. Memory testing was completed by a certified third party company.

Micromem and BAE Systems were successful in creating a fully functioning multi-bit MRAM cell. Our strategy was to license the memory patent portfolio to clients that have specific end user requirements that require low power, high temperature
radiation hardened memory.

Between 2008 – 2010, Micromem spent a total of $797,186 with respect to these foundry services provided by BAE.

The Company initially anticipated having a concentrator unit available from a supplier, NanoOpto, in 2010 which would have allowed the Company to build sensor applications with the required tolerance and performance levels required by BAE and the
Department of Defense in general. NanoOpto discontinued operations during 2010. The Company anticipates that it will develop an alternative solution for the concentrator during 2011, pending the resolution of its working capital constraints. At that
time, it plans to re-approach BAE with the expectation of pursuing current commercial discussions with them.

Given these developments, at October 31, 2010 the Company has recorded an impairment reserve of $797,185 against these costs which were previously capitalized and reports its investment in development costs at nominal value of $1.

Unotron:  The Company announced a contractual agreement in March 2009 with Unotron to develop an application for a washable keyboard utilizing the Company’s sensor technology. The manufacturing agreement was executed in May 2009.

Micromem advanced $200,000 to Unotron at the beginning of this relationship as its initial investment in the project. This investment was structured as a secured debenture with a first charge on the assets of Unotron. The debenture stipulated
quarterly interest at a rate of 10% with a maturity date of September 2010.

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From a development standpoint, the Company has incurred $529,455 of costs associated with the development of prototype products and has delivered these prototypes to Unotron. The Company engaged engineers to assist in this effort and incurred
the cost associated with several trips to the Unotron manufacturing facilities in China, during 2010. The product has been developed and accepted by our client during two visits to Hong Kong by engineers whom Micromem engaged. A short list of
integration issues with the client’s keyboard controller remain outstanding and will be completed when we are in receipt of an order forecast in accordance with the manufacturing agreement.

Under the terms of the manufacturing agreement, Unotron is required to provide an estimated unit and order schedule for delivery of product by Micromem, once the prototypes are delivered. Unotron has not yet provided those estimated orders to
Micromem. Unotron has issued a second product request to Micromem. We will consider this new request when Unotron delivers the order forecasts in accordance with the manufacturing agreement.

In order to obtain final product certification, Micromem is required to produce additional units for delivery to Unotron for such certification testing. It has communicated to Unotron that it is prepared to incur these costs and deliver these final
units to Unotron for certification once it receives estimated order quantities and delivery times that Unotron will require for the sale of these products to its customers.

The Company believes that it has met all of the technical specifications associated with the prototype products and remains committed to fulfilling the terms and conditions of the contractual arrangements executed. Given the delays that the Company
has encountered in finalizing these commercial terms with Unotron, it has recorded an impairment reserve of $529,494 and reports its investment in development costs at nominal value of $1.

The secured debenture that Micromem holds with Unotron matured on September 30, 2010. Since that time the Company has been in regular negotiations with Unotron with respect to the repayment of the debenture. To date, Unotron has made interest
payments through September 30, 2010 but has not finalized a repayment schedule.  Accordingly, at October 31, 2010, the Company has fully reserved the outstanding principal of the debenture.  Subsequent to October 31, 2010 the Company has negotiated
a repayment schedule with Unotron with respect to the repayment of the outstanding principal and interest in 2011 and has received an initial payment of $10,000 on this repayment schedule.

LMTI: In 2009 Micromem and Life Med Technologies Inc.(LMTI) entered into a manufacturing agreement pursuant to which we received a $30 million purchase order. Under the terms of the agreement, Micromem would design, manufacture
prototypes, submit and obtain FDA 510(K) approval and manufacture a medical device that incorporates our magnetic sensor technology. The medical device is designed to provide early detection of abnormalities in womens’ breasts. We believe the
medical device will be cost effective, easy to use and directed at providing a simple home test for early breast cancer indication.

The prototype product has been designed and fully tested. The FDA 510(K) process began in 2010. Micromem has negotiated with a physician in New York City who had experience in running clinical trials in the breast cancer detection area. Our strategy
in 2010, pending FDA approval of the product, was to begin routine manufacturing for LMTI.

During 2010 we met on numerous occasions with the principals of LMTI. LMTI communicated an interpretation of the original contractual agreements with which the Company disagreed. Under the terms of the executed contractual agreements, Micromem has
agreed to incur the development costs with respect to the product prototype, to file the FDA submission in its name and, in this process, will retain all of the rights to the intellectual property that is developed.  Micromem has agreed that upon
LMTI’s fulfillment and payment under the terms of the purchase order, Micromem will transfer the related intellectual property to LMTI.

Our prototype has been developed and tested and is ready for FDA protocol trials.  In addition, all sections of the FDA documentation that can be completed have been submitted to our FDA attorney. The sections of the FDA applications requiring
LMTI’s input have not yet been received nor completed.

We have advised LMTI that we will continue with the development of our product and, when available, will present it to LMTI under the original terms of the purchase order. To date, Micromem has incurred a total of approximately $115,000 of
direct costs associated with this initiative in addition to legal costs relating to our FDA process. Given the developments as described above, Micromem has recorded a reserve of the costs incurred coincident with the filing of its third quarter
financial statements released on September 29, 2010.

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The Company intends to present the product to LMTI under the terms of the original purchase order. If this does not materialize, then the Company will explore alternative market opportunities for this product. At October 31, 2010 the Company reports
its investment in these development costs at nominal value of $1.

NEMT:  In 2009 Micromem and NEMT entered into a manufacturing agreement to develop a magnetic device capable of detecting small changes in the earth’s magnetic signature. NEMT planned to use this for aerial exploration in the Bearing
Sea for oil and gas reserves. The prototype device was designed and built and tested in the field by NEMT.

Our initial strategy was to deliver the final product during 2010 to NEMT; they would use the device to fulfill an exploration contract they were awarded. The technology was being developed under contract with DAL. The
development of this technology has not as yet
been finalized by DAL; finalization is expected pending the settlement of outstanding invoices submitted by DAL. We have incurred a total of $797,794 of development costs with respect to this project.

Our dealings with NEMT continue. We anticipate that these trials will be advanced in 2011 pending the resolution of the Company’s working capital
constraints.

The Company recorded an impairment reserve of $797,793 with respect to the direct costs associated with the NEMT project as of the end of its third quarter as reported on September 29, 2010. At October 31, 2010 the Company reports its investment
in development costs at nominal value of $1.

Oil Sensor: The Company continues to evaluate development opportunities for its oil sensor prototype.

Mining Sensor:The mining sensor that the Company has been developing has served as a precursor to the design of a product that the Company has contracted to develop with an international partner as discussed further below.

There are several additional initiatives that the Company is currently pursuing with the expectation of commercial revenue opportunities in 2011. These include:

- The development of a sensor application for a large international organization that is marketing a healthcare product. The Company anticipates a development contract from these negotiations. The Company has incurred $242,464 of development costs
with respect to this initiative and has reflected a current impairment reserve of $242,463 pending finalization of a contract with this customer.
- Subsequent to October 31, 2010 the Company has finalized the terms of a contract with a major international energy company to develop an application based on the initial mining sensor technology that it has developed. The Company reports
$221,513 as deferred development costs relating to this initiative as of October 31, 2010. In February 2011 Micromem executed the contract and received the initial payment of $75,000 from this customer under the terms of the contract.

Changes to Our Board of Directors and Management

At our Annual Meeting of Shareholders held on Friday, September 24, 2010, Salvatore Fuda, Andrew Brandt, Joseph Fuda, David Sharpless, Steven Van Fleet, Oliver Nepomuceno and Larry Blue were reelected to serve on our Board of Directors. Alex Dey was
elected to serve on our Board of Directors. Messrs. Salvatore Fuda, Joseph Fuda, Dan Amadori and Steven Van Fleet continue to serve as officers of the Company.

B.            Business Overview

We have been engaged in the development of memory technology that has the characteristics of non-volatility, which is the ability to retain information after power has been shut off.  Our technology is based on our ability to use magnetic materials
in combination with a sensor to record the “state of magnetization.” Each magnetic element stores one bit of data based on its ability to alternate between states of magnetic polarization, which states are determined by a sensor. Our
technology represents “1”s and “0”s by the different polarization of magnets.  For example, a magnet oriented north/south is a “1” and a magnet oriented south/north is a “0”.  The magnetic field
strength and direction do not decay when power is switched off, and, therefore, the memory is non-volatile.

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Beginning in 2007 we pursued the further development of our memory and our sensor technology with the support of two U.S.-based foundries, GCS in California and BAE in New Hampshire.  We executed development/manufacturing agreements with Unotron,
NEMT and LMTI – see “Research and Development Efforts” beginning on page 15 of this Annual Report.

Industry Background

The semiconductor memory industry is principally driven by the requirements of the computing industry.  The nature of the memory manufacturing industry is that it is capital intensive, cyclical, rapidly changing and it depends significantly on
patent protection.

The semiconductor industry is intensely competitive.  Both low-density and high-density nonvolatile memory products are manufactured and marketed by major corporations possessing worldwide wafer manufacturing and integrated circuit production
facilities and by specialized product companies.

Our Company's Technology

The various characteristics of the our technology can be better understood by describing the three basic types of memory used in present day computers, Random Access Memory (RAM), Read Only Memory (ROM), and secondary storage devices. The three
types of memory are described below:

Random Access Memory (RAM) is memory that can be both read and written randomly, which means that its storage locations can be accessed in any order. Thus, a computer using RAM can find and go directly to the selected location rather
than performing a sequential search. Semiconductor RAM is usually the primary memory associated with the computer's central processing unit (CPU), the computational unit of the computer responsible for interpreting and executing instructions.
However, RAM is volatile which means that all stored information vanishes once the power supply is removed and must be restored from a secondary storage device each time the power is resumed.

Two typical examples of RAM are Dynamic Random Access Memory and Static Random Access Memory. Dynamic Random Access Memory (DRAM) uses integrated circuits containing capacitors to achieve significant storage capacity and speed. DRAM can be
written and read in the speed range of less than 100 nanoseconds. DRAM has a major drawback in that its capacitors lose their charge over time and therefore information contained in DRAM must be continually refreshed. This means that, on average,
DRAM must stop operations every 16-30 milliseconds and restore all of the data it contains or the data will disappear. During this refresh time, the processor has no access to the information being refreshed. Static Random Access Memory
(SRAM) differs from DRAM in that it stores information in a logic circuit referred to as a flip-flop, rather than in a capacitor. SRAM memory does not need to be refreshed while the power is on, but also loses its information once the power is
turned off.

Read Only Memory (ROM), like RAM, can be read randomly, but cannot be written randomly. Unlike RAM, however, it is non-volatile and therefore does not lose its information when a computer's power is cut off. ROM is typically
employed to store vital program information required during the first moments after a computer is powered on.  It may be used for such purposes as forcing system test routines, directing the processor to input/output devices or for controlling
access to certain computer subsystems such as hard drives. EPROMs (erasable programmable read-only memory) and EEPROMs (electrically erasable read-only memory) are read only memories that can be erased and rewritten, but must be
written “en masse,” rather than at the individual word level. “Flash” memory is a form of EEPROM that is widely used today in such devices as cell phones, modems and personal digital assistants. The drawbacks to Flash memory
are that write times are slower, the number of read/write cycles are limited and there is a requirement for significantly higher power to store data.

Secondary Storage Devices include CDs, which are light and portable and are written and read by a motor driven mechanical drive. They normally have a storage capacity in the low megabyte range and are non-volatile and can be
both written and read.  However, since they are serial (as opposed to parallel) devices, they are considerably slower than RAM.

Our technology combines the use of semi-conducting ferromagnetic metals with a sensor.  When the magnetization of the magnetic material changes direction, the sensor senses the change in direction and records a “0” or “1”. In
this fashion, a bit is created that is non-volatile and based on magnetic properties. We are developing this form of magnetic random access memory for low-density applications, such as RFID, that can benefit from non-volatile data storage.

18

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Competition

We are aware of others conducting research, development and
commercialization in the magnetic non-volatile memory area. These include IBM
Research (San Jose, California), Ovonyx, Inc. (Troy, Michigan), Hewlett-Packard
(Palo Alto, California), Honeywell (Plymouth, Minnesota), Motorola (Phoenix,
Arizona) and Freescale Semiconductor.

Two main centers of MRAM research are at IBM and Infineon. IBM
and Infineon have alternative MRAM technologies based on the giant magneto
resistance principle. This giant magneto resistance principle primarily consists
of two ferromagnetic layers separated by a conductive nonmagnetic interlayer.
The electrical resistance is high in the absence of an external magnetic field.
However, an applied external field forces the initially anti-parallel
magnetization in the coupled films into parallel alignment and the resistance
drops. The high or low resistance determines the data storage state. Magnetic
tunnel junction cells, as they are known, have similar sandwiched structures but
the interlayer is insulating instead of conducting. In contrast to giant magneto
resistance structures, in which the sense current flows parallel to the layers,
the current in magnetic tunnel junction flows perpendicularly to the layers of
the stack.

Even thought we cite these companies as our competitors,
because they develop MRAM technology, it should be noted that our technology is
significantly different with respect to the device architecture and mechanism of
functioning.

Equity Financing Transactions

The Company secured a 30 day bridge loan of $200,000 from an
arms length investor in January 2008. The interest rate on the bridge loan was
4% due in 30 days. As additional consideration, the Company issued 100,000
common share purchase warrants at an exercise price of $0.60 per share. The loan
was repaid in February 2008.

During the 2008 fiscal year, the Company completed a series of
private placement financings with arms length investors pursuant to prospectus
and registration exemptions set forth in applicable securities laws. In total,
the Company received proceeds from the issuance of 4,152,296 common shares,
realizing proceeds totaling $2,980,030.

537,128 Common share purchase warrants with an average price of
$1.14 were attached to the private placements completed during 2008. In all
cases these warrants had a term of 12 months from issue date and then expire if
unexercised 12 months after issue date.

During the fiscal year ending October 31, 2008 investors
exercised a total of 3,421,318 common share purchase warrants to acquire common
shares at a price of $0.40 per warrant and the Company realized proceeds of
$1,368,527.

In 2008, the holders of the 800,000 common share purchase
warrants that were issued pursuant to certain financial advisory services
agreements exercised these warrants on a cashless basis. The stock price was
$2.09 per share on the date of exercise and the exercise price was $0.40 per
warrant. These warrants were "in the money" to the extent of $1,352,000 and the
Company issued a total of 686,886 common shares to fulfill the obligations under
these agreements.

A total of 1,440,000 common stock options were exercised by
directors, officers and consultants in 2008 and the Company realized proceeds of
$1,010,500.

During the 2009 fiscal year, the Company completed a series of
private placement financings with arms length investors pursuant to prospectus
and registration exemptions set forth in applicable securities laws. In total,
the Company received proceeds of $2,958,842 from the issuances of 4,393,535
common shares. In certain of these financings common share purchase warrants
were attached as follows:

| | a) | 1,153,846 warrants at a price of $0.70 per warrant issued
      on February 11, 2009;
| | -- | -------------------------------------------------------------------------------------
| |    |                                                                                      
| | b) | 1,333,333 warrants at a price of $0.75 per warrant issued
      on April 6, 2009;    
| |    |                                                                                      
| | c) | 390,624 warrants issued at a price of $1.20 per warrant
      on May 14, 2009;       
| |    |                                                                                      
| | d) | 39,062 warrants issued at a price of $1.20 per warrant on
      May 14, 2009;        
| |    |                                                                                      
| | e) | 388,980 warrants issued at a price of $1.24 per warrant
      on May 19, 2009; and   
| |    |                                                                                      
| | f) | 500,000 warrants issued at a price of $0.95 per warrant
      on August 25, 2009     

19

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The warrants issued on May 19, 2009 had a term of four months
and expired unexercised. All other warrants issued in 2009 have a twelve month
term from issue date. 39,062 warrants issued on May 14, 2009 were broker
warrants issued to the financial advisor who secured financing for the Company.
A charge to share capital in the amount of $14,297 has been recorded in
accordance with the Black Scholes option-pricing model with respect to these
broker warrants.

In 2009 warrant holders exercised 200,000 common share purchase
warrants and the Company realized proceeds of $234,000.

Cash proceeds realized during the year ended October 31, 2009
by the Company upon the exercise of 1,652,801 options by officers and directors
and staff totaled $992,417.

During the 2010 fiscal year the Company completed a series of
private placement financings with arms length investors pursuant to prospectus
and registration exemptions set forth in applicable securities laws. The Company
received a total of $2,021,051 of subscription proceeds and issued a total of
5,749,201 common shares.

A total of 5,749,201 common share purchase warrants were
attached to the private placement shares at an average exercise price of $0.44
per warrant. The warrants in all cases have a 12 month term from issue date.

Patents and Trademarks

We believe that protection of our intellectual property is
important to our ability to generate revenues from our technology in the future.
We have both issued patents and pending patent applications and also entered
into confidentiality and other agreements with third parties and our employees
to protect our intellectual property and trade secrets. We intend to continue to
actively pursue the protection of our intellectual property. Our management will
determine from time to time the jurisdictions where protection will is
appropriate. This determination will be based on a number of factors including
the state of development of our technology, the importance of a particular
market for our technology, the costs of pursuing patent protection in a
jurisdiction and our financial position at the time.

Our patent portfolio comprises separate series of patents and
patent applications as follows:

| | (a) | our initial patents covering what is referred to as the
      Vemram and Hemram technologies which the Company has not further pursued
      since 2002;                                        
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                 
| | (b) | those covering technologies developed pursued to research
      collaboration agreements with the University of Toronto; and                                                                    
| |     |                                                                                                                                                                                                 
| | (c) | those applications covering the technology developments
      that the Company has furthered since it began working with the US-based
      foundries and BAL in September, 2007.               
| |     |                                                                                                                                                                                                 
| | (d) | those applications covering the technology development
      that the Company has furthered in collaboration with DAL, under contract
      to provide technical design services to the
Company.

The Company has engaged Morgan Lewis as our patent attorneys
since 2005. It has paid Morgan Lewis approximately $1 million in legal fees
since 2005. During 2010, the Company was unable to remain current on the Morgan
Lewis invoices as submitted. At October 31, 2010, the balance owing on services
provided by Morgan Lewis is approximately $115,000. Morgan Lewis has resigned as
a service provider to the Company in October 2010. Subsequent to year-end,
Morgan Lewis has initiated collection proceedings to recover the amounts owing
and the Company continues to negotiate with Morgan Lewis with respect to the
proposed payment terms.

Environmental Matters

We are subject to various environmental protection regulations
imposed by the government in the jurisdiction where we conduct our development
work. We are not aware of any current or pending environmental protection laws
or regulations that would have a material impact on our capital expenditure
requirements or competitive position.

20

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**C.**          
**Organizational Structure**

In November, 2007, the Company incorporated MAST INC. (MAST)
as a Delaware-based wholly-owned subsidiary. MAST has an office in New York City
and is being managed by Steven Van Fleet, its President and a director of
Micromem. MAST is pursuing a number of potential strategic joint development
agreements with industry partners. This process is ongoing.

In October, 2008, the Company incorporated 7070179 Canada Inc.
as a wholly-owned subsidiary. On October 31, 2008, the Company assigned its
rights, title and interest in certain of its intellectual property which it
previously held directly to 707179 Canada Inc. in exchange for common shares of
this wholly-owned subsidiary.

We have a wholly-owned subsidiary, Pageant International, which
was incorporated under the laws of the Turks & Caicos Islands and continued
to Barbados on May 25, 2001. Pageant International has a wholly-owned
subsidiary, Pageant Technologies (USA) Inc., a corporation incorporated in the
State of Utah. Pageant Technologies USA has been inactive since 2002.

We have a wholly-owned subsidiary, Memtech International Inc,
incorporated under the laws of the Bahamas, which in turn has a wholly-owned
subsidiary, Memtech International (USA) Inc., a corporation incorporated in the
State of Delaware. We also have a wholly-owned subsidiary Micromem Holdings
(Barbados) Inc. These subsidiaries have been inactive since inception.

**D.**          
**Property, Plant and Equipment**

We maintain our corporate headquarters in Toronto, Ontario,
Canada. We occupy 3,987 square feet of commercial office space pursuant to a
lease that expired in 2010 and has since been renewed on a month-to-month basis.

The Company made $851 of capital expenditures in 2010, $9,668
of capital expenditures in 2009 and $31,531 of capital expenditures in 2008.

**ITEM
4A.**          
**UNRESOLVED STAFF COMMENTS**

Not applicable.

ITEM
5.           
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

This section of the Form 20-F has been prepared to provide a
more substantive discussion of our business and to assist the reader in
analyzing the audited consolidated financial statements for the year ended
October 31, 2010. This discussion and analysis of financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes in this Annual Report, which are prepared
in accordance with Canadian GAAP and are stated in United States dollars. These
principles are also in conformity in all material respects with U.S. GAAP except
as described in Note 18 to our 2010 audited consolidated financial
statements.

I.          
OVERVIEW

We are a development stage company that currently operates in a
single segment as a developer of non-volatile magnetic memory and sensor
technology. Non-volatile memory implies the ability to retain information after
power has been shut off. Our technology is based on our ability to use magnetic
materials in combination with a sensor to record a state of magnetization as a
mechanism of data storage.

21

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**A.**          
**Operating Results**

The following table sets forth certain selected financial
information of our Company:

Selected statement of operations and deficit information

2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Interest and other income
    $
    22,886
    
    $
    88,047
    
    $
    11,762
    
    $
    2,586
    
    $
    (9,930
    )Loss for the year
    
    4,674,861
    
    
    4,310,939
    
    
    5,416,725
    
    
    2,811,378
    
    
    4,058,180Loss per share-basic and diluted
    
    0.05
    
    
    0.05
    
    
    0.07
    
    
    0.04
    
    
    0.06


Selected balance sheet information

2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Working capital (deficiency)
    $
    (1,459,460
    )
    $
    (650,044
    )
    $
    (338,079
    )
    $
    (1,531,855
    )
    $
    (448,923
    )Property and equipment
    
    16,686
    
    
    24,422
    
    
    26,321
    
    
    -
    
    
    -Total Assets
    
    568,336
    
    
    2,562,479
    
    
    630,467
    
    
    329,232
    
    
    465,440Shareholders
      equity (deficiency)
    
    (1,019,226
    )
    
    1,522,839
    
    
    (311,758
    )
    
    (1,531,855
    )
    
    (448,923
    )


Fiscal 2010 Compared to Fiscal 2009

The Company remains in pre-revenue mode at October 31, 2010. It
reports interest income of $22,886 in 2010 which primarily relates to interested
earned on the secured promissory note outstanding (Fiscal 2009: Revenue of
$88,047 comprised of $11,382 of interest income and $76,665 of recoveries of tax
credits).

The Company brought its income tax filings for all of its
subsidiaries up to date in 2010. It reports a small income tax expense of
approximately $9,500 relating to an inactive subsidiary.

In the third and fourth quarters of the 2010 fiscal year, the
Company booked impairment reserves against the project development costs it had
capitalized commencing in 2009 and continuing in the first and second quarters
of 2010. The impairment reserve of $2,711,392 includes amounts relating to
LifeMed ($114,642), Unotron ($529,424), NEMT ($797,793), BAE ($797,185) and
other projects ($472,348).

In 2010, the Company reports general and administrative costs
of $550,657 compared to $937,146 in 2009. The decrease was in part due to expiry
of the Investor Relations Group (IRG) contract in September 2009. In 2009 the
activity in MAST increased significantly. The major components of the MAST
G&A expenses as reported include market research ($140,000) investor
relations ($112,000) and travel expenses ($66,000). Activity in 2010 was
significantly curtailed and minimal new business development was undertaken. In
2010 the reserve for doubtful accounts includes the impairment reserve on the
Unotron debenture of $200,000 offset by the recovery of approximately $66,000 of
amounts billed to related parties and collected in 2010 after originally
reserved. These charges to related parties are a rebilling of a portion of its
overhead expenses. Given uncertainty of collection the Company will reserve the
amounts that are rebilled as these charges are recorded. The reserves reflected
in 2009 represent such amounts. Insurance related expense increased in 2010 as
the Company increased the extent of its basic coverage. Interest expense in 2010
relates to the interest incurred with respect to the bridge loans it secured in
2010.

Professional, other fees and salaries have been significantly
reduced from $3,240,960 in 2009 to $1,345,406 in 2010, in large part because the
Company did not issue any stock options to officers or directors of the Company.
As in 2009, the Company capitalized legal costs associated with its patent
related filings; accordingly no expense is reported in this category in 2009 or
2010. Other legal expenses relate to ongoing compliance related costs. In 2010,
the Company incurred legal expenses related to the preparation of its FDA filing
material for the LMTI project. In 2009, it incurred legal expenses relating to
the CNSX listing it obtained that year. In 2010 we adjusted the salary rates of
several individuals on payroll. Commencing in 2008, the Company entered into a 3
year contract through 2011 with the President of MAST at an annual remuneration
of $180,000. The bulk of these expenses in 2009 and all of these costs incurred
in 2010 have been allocated to Projects under Development and capitalized.
Payments to DAL in 2009 and 2010 have largely been capitalized as Projects under
Development. The expense in 2010 relates to
the extension of certain options previously granted for an additional year. In 2009 the Company awarded stock options to officers, directors and employees and reported the expense calculated in accordance with the Black Scholes option-pricing model.

22

---

In 2010 we report a recovery of $106,007 of research and development costs compared to $13,880 of expense in 2009. Commencing in 2009, the Company began to capitalize its development costs which were previously reported in this cost category
and until that time were expensed as incurred. In during the 2009 – 2010 fiscal years, the Company incurred $479,000 of costs associated with the concentrator being developed by NanoOpto. These costs were capitalized and when the Company
settled with NanoOpto it recovered $106,000 of these costs and as a result, it reports this as other credits in 2010.

Travel and entertainment is reported at $146,104 in 2010 compared to $223,586 in 2009 primarily because business development activity was curtailed in 2010 due to the Company’s working capital situation, travel-related costs decreased
from the expenses reported in 2009.

Fiscal 2009 Compared to Fiscal 2008

The Company remained in pre-revenue mode as at October 31, 2009. We reported interest income totaling $88,047 in 2009, of which 11,382 was relating to interest income compared to $11,762 in 2008.  The remaining $76,665 (2008: nil)
relates to recoveries under the Scientific Research and Experimental Development tax program. We earned interest income on temporarily available surplus funds in 2009 including $5,000 of interest on the Unotron debenture which we executed in
2009.

In 2009, the Company made important advances with a number of strategic development partners. The notable developments include the Company’s agreements with BAE Limited, Unotron Inc., NEMT Inc. and LifeMed Technologies Inc. Additionally, the
Company developed other initiatives for the development of its sensor technology for several industrial vertical applications, including sensors for the oil and the mining sectors.

Significantly, in 2009, and as a result of these advances, the Company has determined that its continuing activities related to the development of its memory and sensor technology meet the criteria for deferral of development costs. Accordingly, the
associated costs of these activities have been capitalized and are reflected in our balance sheet at October 31, 2009.  The total deferred development costs which have been capitalized are $2,000,611(2008: nil) and include directly related
consulting fees, materials and third party costs. No amortization has been taken to date.

Administration costs increased to $937,148 in 2009 from $604,203 in 2008. The Company engaged the Investor Relations Group (IRG) of New York in September 2008. We initially agreed to monthly payments of $13,500 plus 25,000 common shares
per month. In May 2009, the agreement was renegotiated to payments of $7,500 and 12,500 common shares per month.  The agreement expired in September 2009.  The Company re-billed certain related companies who share office space with it and which
have certain common officers and directors.  At October 31, 2009 the Company has reserved the outstanding accounts receivable less any amounts collected subsequent to year-end with certain of these parties given the uncertainty of collection. In
2009 the activity in MAST increased significantly. The major components of the MAST expense as reported include market research ($140,000) investor relations ($112,000) and travel expenses ($66,000).

We incurred $3,240,960 of professional fees, other fees and salaries in 2009 compared to $3,304.771 in 2008.  The cash component of this amount, excluding the Black Scholes value of stock options granted, was $1,289,391 in 2009 compared
to 2,263,357 in 2008. In 2008 we incurred approximately $125,000 of legal fees pertaining to the termination of Ms. Cynthia Kuper. The cash compensation paid to our Chairman, Mr. Salvatore Fuda, was $129,149 in 2009 versus $416,171 in
2008; no incentive-based compensation was earned under the terms of the employment agreement with Mr. Fuda in 2009.  In 2008 we incurred approximately $80,000 of outside consultant costs relating to the Sarbanes-Oxley Act of 2002
(“SOX”) review of internal accounting controls. In 2009, this review was performed internally. Management bonuses were $50,000 in 2008 and nil in 2009. We incurred $300,000 in fees with respect to services provided by DAL in 2008
versus $77,000 in 2009. Legal expenses with respect to our patent filings and IP portfolio were $151,000 in 2009 versus $253,000 in 2008.

In 2009, the Company capitalized all but $13,880 of the development expenses which it incurred; prior to 2009, all of these expenditures were expensed. The significant research and development expenditures incurred in 2009 included Strategic
Solutions, $184,000; BAE, $428,000; GCS, $305,000; NanoOpto, $405,000; DAL, $351,000; all other $131,000; for a total expenditure of $1,804,000.

In 2008 the Company paid $38,952 in fees to Professor Harry Ruda, our Chief Research Scientist at the University of Toronto, who was on a $5,000 ($CDN)
monthly retainer until it was terminated in June 2008. The Company reported
accounts payable and accrued liabilities of $286,430 (CDN) at October 31, 2007 as
payable to the University of Toronto; this obligation was settled by total
payments in 2008 of $145,000 (CDN) and the issuance of 30,000 common shares
valued at issue date at approximately $60,000. The Company recorded a recovery
on final settlement with the University of Toronto of $76,037.

23

---

Strategic Solutions received a base monthly amount of $45,600
until December 2008 and was paid for additional work completed greater than the
agreed upon base level of contract work. The Company continued to use Strategic
Solutions on a month to month basis in 2009 but has ceased these arrangements in
mid-year.

The payments to BAE are with respect to foundry services
provided in the BAE facilities.

The work performed by GCS relates to the prototype development
work completed in the GCS foundry in 2008 - 2009.

Travel expenses were $223,585 in 2009 versus $398,474 in 2008.
We did not incur any travel expenses relating to our ex-CTO, Strategic Solutions
or DAL in 2009 and made a concerted effort to reduce these costs during the
2009.

The net foreign exchange gain in 2009 was $28,154, compared to
an expense of $52,231 in 2008, attributable to fluctuations in the exchange rate
between the U.S. dollar and the Canadian dollar. In 2009, the U.S. dollar
appreciated against the Canadian dollar whereas in 2008 it depreciated.

We reported a net loss of $4,310,939 in 2009 or $0.05 per share
compared to a net loss of $5,416,725 or $0.07 per share in 2008.

The Company issued a total of 1,345,000 common stock options in
2009 compared to 2,145,000 stock options in 2008.

Unaudited quarterly financial information(all
amounts in United States dollars)

|Quarter ended    |   | Total    |  |   | Net
      Income (Loss) |   |  | Loss
      Per share | 
|---------------- | - | -------- |  | - | ----------------------- | - |  | -------------------- | 
|                 |   | Revenues |  |   |                         |   |  | Basic and diluted    | 
|October 31, 2010 | $ | 7,778    |  | $ | (1,803,883              | ) |  | 0.02                 | 
|July 31, 2010    |   | 5,000    |  |   | (1,937,819              | ) |  | 0.02                 | 
|April 30, 2010   |   | 5,009    |  |   | (526,760                | ) |  | 0.01                 | 
|January 31, 2010 |   | 5,099    |  |   | (406,399                | ) |  | -                    | 
|                 |   |          |  |   |                         |   |  |                      | 
|October 31, 2009 | $ | 81,762   |  | $ | 52,936                  |   |  | -                    | 
|July 31, 2009    |   | 113      |  |   | (1,521,958              | ) |  | 0.02                 | 
|April 30, 2009   |   | 536      |  |   | (1,273,450              | ) |  | 0.02                 | 
|January 31, 2009 |   | 5,637    |  |   | (1,583,629              | ) |  | 0.02                 | 

**B.**          
**Liquidity and Capital Resources**

Liquidity

We are a development stage company. We currently have no cash
flow from operations and will have none until we are in a position to either
license or directly produce and sell products utilizing our technology.

We currently have no lines of credit in place and must obtain
equity financing from investors and from persons who hold outstanding options
and warrants in order to meet our cash flow needs until we can generate
revenues. At October 31, 2010, we had approximately $26,000 cash on hand and our
monthly cash expenses approximate $200,000. Our working capital deficiency at
October 31, 2010 is $1,459,460. At October 31, 2010, the Company is not current with
respect to approximately $516,000 of trade accounts payable. It continues to
work with these trade suppliers to bring these accounts current. Since October 31, 2010, we have raised an
additional $503,140 through Unit private placements.

We have granted to our directors, officers and other employees
a number of options to purchase shares at prices that are at or above market
price on the date of grant. None of the optionees has any obligation to exercise
their options and there can be no guarantee that we will realize any funds from
these options.

24

---

We have issued common share purchase warrants as part of the
Unit private placement financings that we have completed. None of the warrant
holders have any obligation to exercise their warrants which in general, expire
12 months after issuance if unexercised. There can be no guarantee that we will
realize any funds from these outstanding warrants.

Capital Resources

We had no commitments for capital expenditures as of October
31, 2010. In 2010 we spent $851 on capital equipment.

C.           Research and Development

We are a development stage company. Under Canadian GAAP,
research costs are expensed in the period incurred. Development expenses are
expensed as incurred unless they meet the criteria for deferral and amortization
under Canadian GAAP which is the translation of research findings or other
knowledge into a plan for the technology prior to commercial production or
use.

Investment tax credits (ITC) arising from research and
development are recognized when their realization is reasonably assured. The
ITCs are applied against the related costs and expenditures in the year that
they are recognized.

Our research and development activities have been related
primarily to research and development of a magnetic random access memory device
and the development of our magnetic sensor through research collaboration
agreements. Our research and development expense recovery for the year ended
October 31, 2010 was $(106,007); our expenses in 2009 were $13,880. We
capitalized $932,301 of development expenditures in 2010 (2009: $2,000,611). We
booked an impairment reserve of $2,711,392 during the 3rd and
4th quarter of 2010 (2009: nil) and report $221,521 as deferred
development costs on our balance sheet at October 31, 2010.

D.           Trend Information

The digital memory industry and, more broadly, the
semiconductor industry, have historically been characterized by wide
fluctuations in demand for and supply of semiconductors and memory technologies.
Prior experience has shown that restructuring of operations, resulting in
significant restructuring charges, may become necessary if an industry downturn
were to occur.

Our prospects for revenues are dependent upon the successful
completion of our technology development and the incorporation of any technology
that may be developed under or pursuant to our research collaboration
agreements.

E.           Off-Balance Sheet Arrangements

We are not party to any material off-balance sheet
arrangements. In addition, we have no unconsolidated special purpose financing
or partnership entities.

25

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F.            Tabular Disclosure of Contractual Obligations

A             summary of our financial commitments as of October 31, 2010 is as
      below:

|                                   |  |         |  |  | Payments due
      by period |  |  |           | 
|---------------------------------- |  | ------- |  |  | ---------------------------- |  |  | --------- | 
|                                   |  | Total   |  |  | Less than 1 year             |  |  | 1-3 years | 
|                                   |  |         |  |  |                              |  |  |           | 
|Convertible debt
      obligations |  | 606,102 |  |  | 606,102                      |  |  | -         | 
|Capital Lease obligations          |  | -       |  |  | -                            |  |  | -         | 
|Operating lease
      obligations  |  | -       |  |  | -                            |  |  | -         | 
|Purchase obligations               |  | -       |  |  | -                            |  |  | -         | 
|Management
      agreements        |  |         |  |  |                              |  |  |           | 
| Chairman                         |  | -       |  |  | -                            |  |  | -         | 
| CFO                              |  | -       |  |  | -                            |  |  | -         | 
| President                        |  | -       |  |  | -                            |  |  | -         | 
| President MAST
      INC.        |  | 119,000 |  |  | 119,000                      |  |  | -         | 
|                                   |  |         |  |  |                              |  |  |           | 
|All other                          |  |         |  |  |                              |  |  | -         | 
|Total:                             |  | 725,102 |  |  | 725,102                      |  |  | -         | 

Critical Accounting Policies

Our significant accounting policies are set forth in Note 3 to
our consolidated financial statements, which should be read in conjunction with
management's discussion of our critical accounting policies and estimates set
forth below.

Our consolidated financial statements for the period have been
prepared in accordance with Canadian GAAP which, in our case conforms in all
material respects with U.S. GAAP except for the accounting for development
expenditures reported in the fiscal year ended October 31, 2009 and for the
allocation of proceeds received using the relative fair value method of
accounting for Unit private placements for the fiscal years through October 31,
2008.

We are a development stage company. Under Canadian GAAP,
research costs are expensed in the period incurred. Development expenses are
expensed as incurred unless they meet the criteria for deferral and amortization
under Canadian GAAP which is the translation of research findings or other
knowledge into a plan for the technology prior to commercial production or use.
Under U.S. GAAP all development expenditures are expensed as incurred. In 2010,
the Company has capitalized $221,521 of development costs under Canadian GAAP
(2009: $2,000,611).

Until October 31, 2008, for all Unit private placement
financings completed, the Company assigned 100% of the proceeds from these
financings to the common shares and a nil value to the attached warrants. In the
year ended October 31, 2009, the Company changed the estimates that it used to
value the common shares and warrants included in the Unit private placement
financings which it completed in the fiscal year then ended. It assigned the
value to the warrants which formed part of these Unit private placements
calculated in accordance with the Black Scholes option-pricing model. Under U.S.
GAAP, using standards which are analogist, the valuation of the shares and
warrants would be determined using the relative fair value approach. There is no
change in aggregate shareholders equity. A reconciliation between Canadian and
U.S. GAAP has been provided in the footnotes to the 2009 and 2010 audited
financial statements.

Management is required to make estimates and assumptions which
can affect the reported balances. In determining estimates of net recoverable
amounts and net realizable values, or whether there has been a permanent
impairment in value, we rely on assumptions regarding applicable industry
performance and prospects, as well as general business and economic conditions
that prevail and are expected to prevail. Assumptions underlying asset
valuations are limited by the availability of reliable comparable data and the
uncertainty of predictions concerning future events.

26

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Accounts recorded in foreign currency have been converted to
United States dollars as follows: current assets and current liabilities at the
prevailing exchange rates at the end of the year; other assets at historical
rates; revenues and expenses are translated at the 3 month average monthly
exchange rate per quarter which rate approximates the rate of exchange
prevailing at the transaction dates; and gains and losses resulting from the
fluctuation of foreign exchange rates are included in the determination of
income.

Effective November 1, 2004, we have adopted the fair value
method of accounting for employee stock-based compensation costs. The
stock-based compensation expense for options granted during the fiscal years
ending October 31, 2005 - 2009 has been reflected as an expense in the
consolidated statement of operations.

Investment tax credits (ITC) arising from research and
development are recognized when their realization is reasonably assured. The
ITCs are applied against the related costs and expenditures in the year that
they are incurred.

|Commitments                                                  |  |                | 
|------------------------------------------------------------ |  | -------------- | 
|Summary of
      commitments:                                |  | Date executed: | 
|                                                             |  |                | 
|A.
      Research collaboration agreements                   |  |                | 
|(1) Revised Licensed
      Agreement  University of Toronto |  | June 2005      | 
|                                                             |  |                | 
|B. Operating Leases                                          |  | 2007  2010    | 
|                                                             |  |                | 
|C. Consulting and
      Employment Contracts                 |  |                | 
|(1)
      Chairman of the Board of Directors                 |  | May 29, 2005   | 
|(2) President                                                |  | May 18, 2007   | 
|(3)
      President, MAST INC.                               |  | May 18, 2007   | 
|(4) CFO                                                      |  | May 18, 2007   | 
|                                                             |  |                | 
|D. Other Commitments                                         |  |                | 
|                                                             |  |                | 
|(1) Foundry services                                         |  | September 2008 | 
|(2) Technical design services                                |  | July 2009      | 

A.           Research Collaboration Agreements:

1.Revised License Agreement, June 2005. In June 2005, we
signed a new license agreement with the University of Toronto and the Ontario Centres of Excellence whereby: Ontario Centres of Excellence released us and the
University of Toronto from the commercialization obligations set forth in all
prior research collaboration agreements, and we acquired exclusive worldwide
rights to the technology and any technology or patent rights under the agreement
related to the MRAM technology developed at the University of Toronto.

We have agreed to royalties and payments as follows:

In consideration for the rights and licenses granted, we agreed
to pay to the University of Toronto: 4% of Net Sales until such time as the
University of Toronto has received from us an aggregate amount of CDN $500,000;
1% of Net Sales thereafter. If we sublicense any rights granted herein to any
non-affiliate: in combination or association, the University of Toronto shall
receive 10% of any Net Fees and/or Net Royalties that shall be received by us in
respect of any licenses involving both the rights granted herein and such our
intellectual property; for all other sublicenses of the rights granted herein to
a non-affiliate, the University of Toronto shall receive 20% of any Net Fees
and/or Net Royalties that shall be received by us in respect of such
sublicenses; and Net Fees and/or Net Royalties shall be paid to the University
of Toronto until such time as it has received an aggregate amount of CDN
$500,000; thereafter we shall pay half of the amounts set forth above as is
applicable.

At any point after which we have paid the University of Toronto
CDN $500,000, we may at our option buy out the obligation to pay royalties
hereunder by paying to the University of Toronto a single lump sum payment
equaling the greater of CDN $500,000 and an amount equal to the total amount of
royalties paid by us to the University of Toronto in the preceding twenty-four
months. We are entitled to exercise such option by providing written notice to
the University of Toronto along with the required payment, after which time our
obligation to pay royalties shall be waived by the University of Toronto.

27

---

As a condition to entering the license agreement, we have
agreed that we will enter into a further research agreement with a funding
commitment of no less than CDN $500,000 to continue the further research and
development of inventions and our intellectual property. In August 2005, we made
an initial payment of $250,000 and, subsequent to October 31, 2005, we made the
second payment of $250,000 under the terms of this further research agreement.

Operating leases:

We had operating lease commitments which expired in 2010 for
the lease of our corporate headquarters. We have extended our lease on a
month-to-month basis since October 2010.

Consulting and employment contracts:

|1. | On May 29, 2005, we entered into a new employment agreement
      with the Chairman of the Board of Directors. The agreement commenced on
      January 1, 2005 and expires on September 30, 2009. During the year, the
      Company extended the agreement to December 31, 2010. Under the terms of
      the agreement, the Chairman of the Board of Directors has been retained to
      provide certain management services to us. We have agreed to provide
      compensation based on a percentage of the increase of the market
      capitalization on a year-over-year basis commencing as of December 31,
      2005. This compensation is subject to a minimum annual amount of $150,000
      Canadian funds or (approximately $143,877 U.S. funds at current exchange
      rates). At our option, we can pay either cash or issue common shares as
      compensation providing that the cumulative maximum number of shares that
      we can issue under the agreement is 2,000,000 common shares. At October
      31, 2010, $143,877 of cash compensation for the 2010 fiscal year has been
      provided for (2009: $129,149).
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2. | In May, 2008, we entered into employment agreements with:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Other commitments:

|1. | In 2008, the Company entered into an agreement with a supplier which
      provides industrial foundry services whereby the Company has committed to
      pay up to $1 million for production services to be provided through 2009.
      The Company paid $370,000 to this supplier in 2008, and an additional
      $400,000 in 2009. No additional expenditures are currently contemplated.
      In January 2009, the Company received $250,000 of insurance proceeds with
      respect to a shipment of sample prototype boards that were damaged in
      transit from the supplier to a sub-contractor. These proceeds have been
      recorded in the accounts as a reduction of research and development costs
      incurred in 2009.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | In July 2009, the Company executed a purchase order for approximately
      $1 million of services to be provided by a supplier between July 2009 
      April 2010. At October 31, 2010, the Company has paid a net total of
      $373,000 to the supplier. This purchase order was cancelled in October
      2010.                                                                                                                                                                                                                                                                                                                                                                                                                          

Contingencies:

|A. | We have agreed to indemnify our directors and officers and certain of
      our employees in accordance with our By-laws. We maintain insurance
      policies that may provide coverage against certain claims.                                                                                                                                                                                                                                  
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|B. | Certain interests under the Asset Purchase Agreement with Estancia
      Limited reverted to Estancia Limited on March 9, 2004. On this basis, to
      the extent that revenues are generated by us relating directly and
      specifically to the VEMRAM patents, we are obligated to pay Estancia Limited 32% of the gross profit
realized less expenses agreed to by the parties and 32% of any unit royalties
realized less direct expenses.

28

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Translation of Foreign Currencies

Our functional and reporting currency is the United States
dollar. Accounts recorded in foreign currency have been converted to United
States dollars as follows: Monetary assets and liabilities are translated at
exchange rates at the consolidated balance sheet dates; non-monetary assets are
translated using the historical rate of exchange in effect at the translation
dates; Revenues and expenses are translated using the 3 month average rate of
exchange per quarter, which rate approximates the rate of exchange prevailing at
the transaction dates; and gains and losses resulting from the translation are
included in the determination of net loss for the period.

ITEM 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.           Directors and Executive Officers

The Directors and Executive Officers of Micromem as at October
31, 2010 are set forth below:

|Name              | Age | Position                                       
|----------------- | --- | -----------------------------------------------
|                  |     |                                                
|Salvatore Fuda    | 74  | Chairman of the Board of
      Directors       
|Joseph Fuda       | 49  | President, Chief Executive Officer and Director
|Dan Amadori       | 59  | Chief Financial Officer                        
|Steven Van Fleet  | 56  | Director and President of MAST, Inc.           
|Andrew Brandt     | 72  | Director                                       
|David Sharpless   | 59  | Director                                       
|Larry Blue        | 54  | Director                                       
|Oliver Nepomuceno | 41  | Director                                       
|Alex Dey          | 60  | Director                                       

Salvatore Fuda has served as Chairman of the Board of
Directors of Micromem since January 11, 1999 and a Director of Micromem since
1992. He served as President and Chief Executive Officer from June 2000 through
to February 13, 2002. From 1992 to January 11, 1999 he also served as Secretary
of Micromem. He served as President and Chief Executive Officer of Ontex
Resources Limited (TSE) from 1986 to December 1998 and as Chairman of the Board
of Ontex Resources Limited until 2008. He has served as Chairman of the Board of
Directors and as a director of Echo Energy Canada Inc. from 2002 - 2009. He also
serves as Chairman of the Board of Leader Capital Corp. He is the father of
Joseph Fuda.

Joseph Fuda has been President, Chief Executive Officer
and Director since February 13, 2002. Previously he served as Manager of
Strategic Alliances for Micromem since February 2001. Prior thereto, he served
as a consultant to Micromem since November 2000. Prior thereto he served as a
Vice-President and a Director of IPO Capital Corp since April 1999. He was a
director of Leader Capital Corp. until June 2007 and currently also serves as a
director of Echo Energy Canada Inc. and of Echo Power Generational Inc.

Dan Amadorihasserved as Chief Financial Officer
of Micromem since June 2004. He has also served as Chief Financial Officer of
Leader Capital from June 2004  March 2009. He served as a Director and Chair of
the Audit Committee of Ontex Resources between September 2003 and March 2005. He
served as CFO of Echo Power Generation Inc. from June 2004-March 2008. He served
as a director of Hydrive Technologies Inc. from 2004-2008 and a Chair of the
Audit Committee of Hydrive from 2006-2008. He is President of Lamerac Financial
Corp., a financial advisory firm and has held that position since October 1988.
Mr. Amadori is a Chartered Accountant and holds an MBA from the Ivey School of
Business.

Steven Van Fleet currently serves as a technology
consultant to a number of companies. He was the principal of the R&V Group
LLC, an RFID business consulting and technology development company until 1996.
Between 1999-2003 he served as Program Director for the Silent Commerce/Smart
Packaging Initiative at International Paper Company. From January 1999 to
November 1999, he was Program Director for Process and Product Uniformity and
from March 1996 to December 1998 he was the Director for Control Systems
Development at International Paper in Cincinnati, Ohio. He is also presently on
the Board of Overseers for the Massachusetts Institute of Technology Auto ID
Center. Mr. Van Fleet has been a director of Micromem since 2002.

29

---

Andrew Brandt was Chairman of the Board of Directors and
Chief Executive Officer of the Liquor Control Board of Ontario from February
1991 to January 2006. Prior to his appointment to the Liquor Control Board of
Ontario, Mr. Brandt served as Leader of the Ontario Progressive Conservative
Party from 1987 to 1990. He has previously served as the Minister of Industry
and Trade, Minister of Environment and Mayor of Sarnia, Ontario. Mr. Brandt has
served as a director of Micromem since June 2000.

David Sharpless is Vice-Chairman of the Board of
Directors of HKMB Hub International Limited (formerly Hunter, Keilty, Muntz
& Beatty Limited), a Toronto-based property and casualty insurance broker.
He was Chairman of the Board of Directors of Hunter, Keilty, Muntz & Beatty
Limited prior to its purchase in January 2008 by Hub International Limited a
Chicago-based property and casualty insurance broker. He also serves as Chairman
of the Board of Directors of Maverick Inc., a family investment and consulting
corporation. From 2000 to September 2001, he was President of CIT's Vendor
Technology Finance unit. In this capacity, he was responsible for CIT's
international vendor finance business, covering CIT's operations in Canada,
Europe, Latin America, Asia Pacific and Australia. Prior thereto, Mr. Sharpless
was Newcourt Credit Group Inc.'s Deputy Chairman of the Board of Directors and
was responsible for international operations for Newcourt Financial. Mr.
Sharpless is a graduate of Osgoode Hall Law School and is a member of the bar of
Ontario. Mr. Sharpless has served as a director of Micromem since March 2001.

Larry Blueis Vice President and General Manager of
Multek Inc., a subsidiary of Flextronics. Previously he was President of
Hi-G-Tek Inc. a privately-held technology company based in Maryland. Previously
he was the Vice President and General Manager of Symbol Technologies Inc. and
was appointed to the Micromem Board of Directors on November 7, 2005. Previously
Mr. Blue had senior management roles with Hughes Network Systems and with IBM in
Research Triangle Park.

Oliver Nepomucenohas served as a director of Micromem
since June 26, 2006. He is a resident of Switzerland and continues to serve as a
Financial Advisor and as a member of the Board of Directors of Intel Trust, a
private wealth management company located in Switzerland.

Alex Dey isa retired business man and was elected as a
director on September 24, 2010. He was the sole proprietor of Alex Dey,
Chartered Accountants until July 31, 2004.

There are no arrangements or understandings between any
director and any other person pursuant to which the director was selected as a
director or executive officer. Each director holds office until the next annual
meeting of shareholders or until his or her successor is elected or appointed,
unless his or her office is earlier vacated according to the provisions of our
By-laws or the

Business Corporations Act (Ontario).

Other than a father/son relationship between Salvatore Fuda
(father) and Joseph Fuda (son), there is no family relationship between any
director or executive officer and any other director or executive officer.

B.           Compensation

|                      |  | Annual Compensation |  |  | Long-Term Compensation |  |  |       | 
|--------------------- |  | ------------------- |  |  | ---------------------- |  |  | ----- | 
|                      |  |                     |  |  |                        |  |  |       | 
|                      |  |                     |  |  |                        |  |  |       | 
|                      |  |                     |  |  |                        |  |  |       | 
|                      |  |                     |  |  |                        |  |  |       | 
|                      |  |                     |  |  |                        |  |  |       | 
|                      |  |                     |  |  |                        |  |  |       | 
|Name
      and        |  | Fiscal              |  |  | Salary                 |  |  | Bonus | 
|Principal Position    |  | Year                |  |  | (US$)                  |  |  | (US$) | 
|                      |  |                     |  |  |                        |  |  |       | 
|Joseph Fuda           |  | 2009                |  |  | 160,266                |  |  |       | 
|Chief
      Executive |  | 2010                |  |  | 160,000                |  |  | -     | 
|Officer               |  |                     |  |  |                        |  |  |       | 

30

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|Salvatore Fuda,        |  | 2009 |  |  | 129,149 |   |  | - |  |  | - |  |  | 150,000 | 1 |  | - |  |  | - |  |  | - | 
|---------------------- |  | ---- |  |  | ------- | - |  | - |  |  | - |  |  | ------- | - |  | - |  |  | - |  |  | - | 
|Chairman of the        |  | 2010 |  |  | 150,000 |   |  | - |  |  | - |  |  |         |   |  | - |  |  | - |  |  | - | 
|Board of               |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Directors              |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Former Chief           |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Executive Officer      |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|and President          |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|                       |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Andrew Brandt          |  | 2009 |  |  | -       |   |  | - |  |  | - |  |  | 110,000 | 1 |  | - |  |  | - |  |  | - | 
|Director               |  | 2010 |  |  | -       |   |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|David Sharpless        |  | 2009 |  |  | -       |   |  | - |  |  | - |  |  | 110,000 | 1 |  | - |  |  | - |  |  | - | 
|Director               |  | 2010 |  |  | -       |   |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|                       |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Steven
      Van Fleet |  | 2009 |  |  | 181,375 |   |  | - |  |  | - |  |  | 150,000 | 1 |  | - |  |  | - |  |  | - | 
|Director               |  | 2010 |  |  | 180,000 |   |  | - |  |  | - |  |  | 300,000 | 3 |  | - |  |  | - |  |  | - | 
|                       |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Dan Amadori            |  | 2009 |  |  | 154,785 |   |  | - |  |  | - |  |  | 150,000 | 1 |  | - |  |  | - |  |  | - | 
|Chief
      Financial  |  | 2010 |  |  | 150,000 |   |  | - |  |  | - |  |  | 177,199 | 3 |  | - |  |  | - |  |  | - | 
|Officer 6              |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Larry
      Blue       |  | 2009 |  |  | -       |   |  | - |  |  | - |  |  | 110,000 | 1 |  | - |  |  | - |  |  | - | 
|Director               |  | 2010 |  |  | -       |   |  | - |  |  | - |  |  | 100,000 | 3 |  | - |  |  | - |  |  | - | 
|                       |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Henry Dreifus          |  | 2009 |  |  | 351,096 | 2 |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|Director               |  |      |  |  | -       |   |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|                       |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 
|Oliver Nepomuceno      |  | 2009 |  |  | -       |   |  | - |  |  | - |  |  | 100,000 | 1 |  | - |  |  | - |  |  | - | 
|Director               |  | 2010 |  |  | -       |   |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|Alex Dey               |  | 2010 |  |  | -       |   |  | - |  |  | - |  |  | -       |   |  | - |  |  | - |  |  | - | 
|Director               |  |      |  |  |         |   |  |   |  |  |   |  |  |         |   |  |   |  |  |   |  |  |   | 

Notes:

|1. | Each option entitled the holder to purchase one of our common shares
      at a price of $1.00 per share prior to expiry on August 10, 2014.                                               
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                            
|2. | These payments were made to Dreifus Associates Limited (DAL) for
      consulting services provided. Mr. Dreifus did not stand for reelection to
      the Board of Directors in June 2009.
|   |                                                                                                                                                                                            
|3. | During the year ended October 31, 2010 these options were extended for
      a period of 12 months. The exercise price remains unchanged.                                                  

Directors do not receive cash compensation for serving as
directors. Instead they have been awarded stock options over the years. These
options are set at each annual meeting and approved by the shareholders. None of
the non-employee directors have agreements that provide for benefits upon
termination of service.

We have adopted a stock option plan. Options are offered to
directors, executive officers and employees to purchase our common shares at an
exercise price equal to or above the market price for the common shares at the
date that the options are granted.

In 2009, we issued 1,345,000 options to officers, directors and
employees at an exercise price of $1.00 per share expiring in August 2014 if
unexercised. None of these options have as yet been exercised.

In 2010 we did not issue any options to officers, directors or
employees. We extended the term by one year of a total of 2,027,199 options
which were due to expire in 2010.

31

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C.            Board Practices

Our Board of Directors meets on an as required basis during the
fiscal year. In 2010 our Board of Directors met formally on September 24, 2010.

Our Audit Committee met on a quarterly basis during fiscal 2010
for the purpose of approving the quarterly financial statements. In addition,
our Audit Committee receives regular periodic reports from management.

All matters pertaining to our financing, contractual
arrangements and Board of Directors and management compensation are approved by
the Board of Directors. All Board of Directors meeting minutes and directors
resolutions are maintained on an up-to-date basis.

Our Compensation Committee met as required in 2010. Our
Compensation Committee approves management compensation and all stock option
grants for recommendation to the Board of Directors.

Our Disclosure Committee met as required in 2010 to review our
various press release disclosures and to monitor our general practices relating
to our disclosure requirements.

The members of the Board of Directors are appointed to a
one-year term at our annual meeting.

Audit Committee

The Board of Directors has appointed an Audit Committee
consisting of three independent directors. The members of the Audit Committee
are Andrew Brandt, Oliver Nepomuceno and David Sharpless (Chairman) each of whom
shall serve in such capacity until the Board of Directors next annual meeting.
The Audit Committee is responsible for the integrity of our internal accounting
and control systems. The committee receives and reviews our financial statements
and makes recommendations thereon to the Board of Directors prior to its
approval by the full Board of Directors. The Audit Committee communicates
directly with our external auditors in order to discuss audit and related
matters whenever appropriate. In 2010 the Audit Committee met on February 4,
2010, March 26, 2010, June 22, 2010 and September 28, 2010.

Compensation Committee

The Board of Directors has appointed a Compensation Committee.
Our executive compensation is administered by the Compensation Committee which
meets on executive compensation matters as and when required. Our Compensation
Committee includes Andrew Brandt, an outside director as Chairman, Oliver
Nepomuceno and Alex Dey, as outside directors.

Disclosure Committee

The Board of Directors has appointed a Disclosure Committee
whose primary responsibility is to ensure timely and accurate disclosure of all
relevant information in accordance with the various securities regulations. Our
Disclosure Committee includes Larry Blue, an outside director, who serves as
Chairman, David Sharpless, an outside director (and Chair of our Audit
Committee), Steven Van Fleet, Director (and President of our wholly owned
subsidiary, MAST Inc.) and Jason Baun, the Companys Chief Information Officer.

D.             Employees

We have nine employees, four of which serve in a management
capacity and five serve in an administrative capacity. This includes the Chief
Executive Officer and President, the Chief Financial Officer and President of
our wholly-owned subsidiary MAST INC., our Chief Information Officer and five
support staff, all (except for the President of MAST INC.) of whom work from our
executive offices in Toronto, Canada. All research and development is outsourced
to third parties.

We consider our relations with our employees to be
satisfactory. We had seven employees as of October 31, 2010, 2009 and 2008.

32

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E. Share Ownership

|NAME                 |  | SHARES OWED |  |  | OPTIONS HELD |  |   | OPTION   |  |  | EXPIRY DATE |  |  | % OF
      TOTAL1 |  
|-------------------- |  | ----------- |  |  | ------------ |  | - | -------- |  |  | ----------- |  |  | ----------------- | -
|                     |  |             |  |  |              |  |   | EXERCISE |  |  |             |  |  |                   |  
|                     |  |             |  |  |              |  |   | PRICE    |  |  |             |  |  |                   |  
|Joseph Fuda          |  | 191,500     |  |  | 1,450,000    |  | $ | 0.72     |  |  | 05/27/2011  |  |  | 2.65%             |  
|Chief Executive      |  |             |  |  | 900,000      |  | $ | 0.80     |  |  | 07/6/2011   |  |  | (2,791,500        | )
|Officer and Director |  |             |  |  | 100,000      |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 150,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Salvatore Fuda       |  | 1,215,0002  |  |  | 1,000,000    |  | $ | 0.80     |  |  | 07/6/2011   |  |  | 2.24%             |  
|Chairman of the      |  |             |  |  | 150,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  | (2,365,000        | )
|Board of Directors   |  |             |  |  |              |  |   |          |  |  |             |  |  |                   |  
|and Director         |  |             |  |  |              |  |   |          |  |  |             |  |  |                   |  
|Henry Dreifus        |  | __          |  |  | 200,000      |  | $ | 1.50     |  |  | 08/28/2013  |  |  | 0.19%             |  
|Former Director      |  |             |  |  |              |  |   |          |  |  |             |  |  | (200,000          | )
|Andrew Brandt        |  | 110,000     |  |  | 290,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | 0.56%             |  
|Director             |  |             |  |  | 85,000       |  | $ | 1.50     |  |  | 08/28/2013  |  |  | (595,000          | )
|                     |  |             |  |  | 110,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|David Sharpless      |  | 100,000     |  |  | 300,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | 0.64 %            |  
|Director             |  |             |  |  | 75,000       |  | $ | 1.01     |  |  | 03/03/2013  |  |  | (670,000          | )
|                     |  |             |  |  | 85,000       |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 110,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Steven Van Fleet     |  | -           |  |  | 350,000      |  | $ | 0.36     |  |  | 4/15/2012   |  |  | 1.61 %            |  
|Director             |  |             |  |  | 300,000      |  | $ | 0.72     |  |  | 5/27/2011   |  |  | (1,700,000        | )
|                     |  |             |  |  | 300,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  |                   |  
|                     |  |             |  |  | 100,000      |  | $ | 1.01     |  |  | 03/03/2013  |  |  |                   |  
|                     |  |             |  |  | 500,000      |  | $ | 1.50     |  |  | 28/28/2013  |  |  |                   |  
|                     |  |             |  |  | 150,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Dan Amadori          |  | 326,801     |  |  | 177,199      |  | $ | 0.72     |  |  | 5/27/2011   |  |  | 1.10 %            |  
|Chief Financial      |  |             |  |  | 400,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | (1,154,000        | )
|Officer              |  |             |  |  | 100,000      |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 150,000      |  | $ | 1.00     |  |  | 8/25/2014   |  |  |                   |  
|Jason Baun           |  | -           |  |  | 200,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | 0.50%             |  
|Investor Relations   |  |             |  |  | 100,000      |  | $ | 0.60     |  |  | 10/25/2012  |  |  | (395,000          | )
|                     |  |             |  |  | 15,000       |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 80,000       |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Larry Blue           |  | 200,000     |  |  | 100,000      |  | $ | 0.60     |  |  | 11/3/2011   |  |  | 0.83%             |  
|Director             |  |             |  |  | 300,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | (870,000          | )
|                     |  |             |  |  | 75,000       |  | $ | 1.01     |  |  | 03/03/2013  |  |  |                   |  
|                     |  |             |  |  | 85,000       |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 110,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Oliver Nepomuceno    |  | 953,572     |  |  | 300,000      |  | $ | 0.80     |  |  | 7/6/2011    |  |  | 1.43%             |  
|Director             |  |             |  |  | 75,000       |  | $ | 1.01     |  |  | 03/03/2013  |  |  | (1,503,572        | )
|                     |  |             |  |  | 75,000       |  | $ | 1.50     |  |  | 08/28/2013  |  |  |                   |  
|                     |  |             |  |  | 100,000      |  | $ | 1.00     |  |  | 08/25/2014  |  |  |                   |  
|Alex
      Dey       |  | -           |  |  | -            |  |   | -        |  |  | -           |  |  | -                 |  
|Director             |  |             |  |  |              |  |   |          |  |  |             |  |  |                   |  

|1 | Calculated based on shares owned plus options held as a percentage
      total of shares outstanding as of October 31, 2010, plus options held.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                
|2 | These shares are held by a corporation wholly owned by a trust
      established for the benefit of members of Salvatore Fuda's family.        

33

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

A. Major Shareholders

No shareholder holds greater than 5% of the common shares
outstanding. As of the date of this Annual Report approximately 60% (55,835,440)
of the issued, outstanding common shares are held by Canadian investors and
approximately 30% (29,651,423) of the issued and outstanding shares are held by
U.S. investors and approximately 10% (9,837,648) held outside of Canada and the
U.S..

B. Other Related Party Transactions

In June 2008, we entered into a six-month agreement with
Dreifus Associates Limited (DAL) whose major shareholder is Henry Dreifus, was a
Director of the Company until June 2009. DAL provided a wide range of technical
and business development support to the Company. Our monthly cost under the
agreement was approximately $40,000. In addition, we granted Henry Dreifus
350,000 stock options at an exercise price of $1.20 per share in March 2008
coincident with his appointment as a Director. 275,000 of these options vested
at issue date, the balance vests in three equal quarterly installments of 25,000
options commencing in June 2008. These options expired unexercised in August 29,
2009, 45 days after Mr. Dreifus stepped down as a director. In August 2008, we
issued 200,000 stock options to Mr. Dreifus at our exercise price of $1.50 per
share expiring in August 2013 if unexercised. These options vest only when the
Company has achieved certain revenue milestones. DAL continues to provide
services to the Company in 2010 after Mr. Dreifus resigned as a director. In
September 2010 the Company issued 192,307 common shares to settle $50,000 of
balances due to DAL for services rendered. At October 31, 2010 the remaining
balance payable to DAL is approximately $142,000.

Transactions With Related Parties, Directors &
Officers

The Company has paid cash and non-cash compensation to its
officers and directors during the 2010 and 2009 fiscal years as follows:

|                       |  |      |  |   | Cash         |  |   | Non-Cash     | 
|---------------------- |  | ---- |  | - | ------------ |  | - | ------------ | 
|                       |  |      |  |   | Compensation |  |   | Compensation | 
|Chairman               |  | 2009 |  | $ | 129,149      |  | $ | 101,760      | 
|                       |  | 2010 |  |   | 143,877      |  |   | -            | 
|                       |  |      |  |   |              |  |   |              | 
|Officers and Directors |  | 2009 |  | $ | 625,576      |  |   | 407,040      | 
|                       |  | 2010 |  |   | 621,223      |  |   | 95,038       | 

ITEM 8.          FINANCIAL INFORMATION

A.           Consolidated Statements and Other Financial
Information

See Item 17  Financial Statements.

We have never paid a dividend on our securities. We do not
anticipate paying dividends in the foreseeable future.

As of October 31, 2010 and as of February 28, 2010 there are no
legal proceedings outstanding.

B. Significant Changes

Since October 31, 2010 the Company has raised an additional
$503,145 through Unit private placement financings. There has been no other
significant change in our financial position since October 31, 2010.

34

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ITEM 9. THE OFFER AND LISTING

The table below sets forth the high and low sales prices for
common shares in U.S. Dollars as reported for the periods specified. Our fiscal
year ends October 31. Our common shares are traded in Canada on the CNSX under
the symbol MRM.

Our common shares are traded in the United States and are
quoted on the OTC Bulletin Board. The common shares are quoted under the symbol
MMTIF.OTCBB.

Period
    
    High
    
    
    LowLast six months:February 2011
    
    0.22
    
    
    0.18January 2011
    
    0.25
    
    
    0.18December 2010
    
    0.25
    
    
    0.15November 2010
    
    0.34
    
    
    0.1901October 2010
    
    0.35
    
    
    0.1750September 2010
    
    0.28
    
    
    0.19Last eight quarters:Q1 2011
    
    0.32
    
    
    0.15Q4 2010
    
    0.35
    
    
    0.175Q3 2010
    
    0.40
    
    
    0.135Q2 2010
    
    0.55
    
    
    0.4008Q1 2010
    
    0.65
    
    
    0.50Q4 2009
    
    1.25
    
    
    0.67Q3 2009
    
    1.60
    
    
    0.81Q2 2009
    
    1.75
    
    
    0.70Last five years:2010
    
    -
    
    
    -2009
    
    1.75
    
    
    0.512008
    
    2.60
    
    
    0.312007
    
    0.85
    
    
    0.352006
    
    1.33
    
    
    0.43


On February 24, 2010, the last reported sale price for our
common shares on the OTC Bulletin Board was $0.21.

ITEM 10.          
ADDITIONAL INFORMATION

A.          
Share Capital

Our authorized capital consists of an unlimited number of
common shares, of which 95,324,511 shares were issued and outstanding as of
October 31, 2010, and 2,000,000 special, redeemable, voting preference shares,
referred to herein as special shares, none of which were outstanding, as of
October 31, 2010.

Additionally the Company has 10,022,199 stock options
outstanding with a weighted average exercise price of $.89 (2009: 10,022,199
options outstanding with a weighted average exercise price of $.89) and a total
of 6,198,887 outstanding warrants to acquire common shares with a weighted
average exercise price of $.51 (2009: 3,416,865 outstanding warrants with a
weighted average exercise price of $.82).

B.          
Memorandum and Articles of Incorporation

Articles of Incorporation Incorporation Details and Objects of Micromem Technologies
Inc.

Micromem Technologies Inc. was incorporated under the laws of
the Province of Ontario, Canada, on October 21, 1985 as Mine Lake Minerals Inc.
We subsequently changed our name to Avanti Capital Corp. by filing Articles of
Incorporation of Amendment on June 23, 1988 and to AvantiCorp International Inc.
on April 30, 1992 before becoming Micromem Technologies Inc. on January 14, 1999. The Articles of Incorporation of
Incorporation place no restrictions on the nature of the business to be carried
on by Micromem.

35

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Summary of Directors Powers and Authorities

The rights, duties, powers and authorities of our Board of
Directors are set out in the Articles of Incorporation and By-laws and the
statutory provisions of the Business Corporations Act (Ontario). The
following is a selected summary of the Articles of Incorporation, By-laws and
applicable provisions of the Business Corporations Act (Ontario) as they relate
to selected rights, duties, powers and authorities of our Board of Directors.

The Articles of Incorporation provide for a minimum of three
and a maximum of 12 directors. The Business Corporations Act (Ontario)
prescribes that an offering corporation must have a minimum of three directors,
a majority of whom are Canadian residents and at least one third of whom are not
officers or employees of us or our affiliates. The Board of Directors may,
between annual shareholders meetings, appoint one or more additional directors
to serve until the next annual shareholders meeting provided that the number of
directors so added may not exceed by one-third (1/3) the number of directors
required to have been elected at the last annual meeting of shareholders.

The Chairman of the Board of Directors or any one director may
call a meeting upon the provision of forty-eight hours notice to each director
in the manner prescribed in our By-laws. Any such notice shall include the items
of business to be considered at the meeting. A majority of the directors
constitute a quorum provided that half of those directors present are Canadian
residents. Business cannot be transacted without a quorum. A quorum of directors
may vote on any matter of business properly brought before the meeting provided
that where a director is a party to a material contract or proposed material
contract or has a material interest in the matter to be considered, such
director must disclose his or her interest at the earliest possible date,
request the conflict be noted in the minutes of the meeting, and with a few
limited exceptions enumerated in the By-laws, refrain from voting on the matter
in which the director has a material interest. There is no limitation on the
Board of Directors to vote on matters of their remuneration provided such
remuneration is disclosed in the financial statements and annual shareholder
proxy materials.

The Board of Directors has broad borrowing powers and may,
without authorization from the shareholders:

- borrow money on the credit of Micromem;
- issue, re-issue, sell or pledge debt obligations of Micromem;
- subject to restrictions respecting financial assistance prescribed in the
  Business Corporations Act (Ontario), give a guarantee on behalf of Micromem to
  secure the performance of an obligation of any person; and
- mortgage, hypothecate, pledge or otherwise create a security interest in
  all or any property of Micromem, owned or subsequently acquired, to secure any
  obligation of Micromem.

A person is qualified to be or stand for election as a director
provided such person is at least 18 years of age, is not a bankrupt and is not
found to be of unsound mind by a court in Canada or elsewhere. There is no
requirement for a director to hold common shares.

Securities of Micromem

Holders of our common shares will be entitled to receive notice
of, attend and vote at all meetings of the shareholders of Micromem. Each common
share carries one vote at such meetings. In the event of the voluntary or
involuntary liquidation, dissolution or winding-up of Micromem, after payment of
all outstanding debts, the remaining assets of Micromem available for
distribution will be distributed to the holders of our common shares. Dividends
may be declared and paid on our common shares in such amounts and at such times
as the directors shall determine in their discretion in accordance with the
Business Corporations Act (Ontario). There are no pre-emptive rights, conversion
rights, redemption provisions or sinking fund provisions attaching to the common
shares. Common shares are not liable to further calls or to assessment by
Micromem; provided, however, that pursuant to the provisions of the Business
Corporations Act (Ontario), Micromem has a lien on any common share registered
in the name of a shareholder or the shareholder's legal representative for a
debt owed by the shareholder to Micromem.

36

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Holders of special shares are entitled to receive notice of,
attend and vote at all meetings of the shareholders of Micromem. Each special
share carries one vote at such meetings. In the event of the voluntary or
involuntary liquidation, dissolution or winding-up of Micromem, after payment of
all outstanding debts, the holders of the special shares shall be entitled to
receive, before any distribution of any part of the assets of Micromem among the
holders of any other shares, the amount paid up on the special shares. The
special shares are redeemable at the option of Micromem for the amount paid up
on the shares. Dividends may not be declared or paid on the special shares and
transfer of the Special Shares is restricted without the approval of the
Directors of Micromem and the prior written consent of the Ontario Securities
Commission. The number of special shares that may be issued and outstanding at
any time is limited to 500,000. There are no pre-emptive rights, conversion
rights or sinking fund provisions attaching to the special shares. Special
shares are not liable to further calls or to assessment by Micromem; provided,
however, that pursuant to the provisions of the Business Corporations Act
(Ontario), Micromem has a lien on any special shares registered in the name of a
shareholder or the shareholder's legal representative for a debt owed by the
shareholder.

Rights and Privileges of Shareholders

Only the registered holders of our common shares and special
preference shares on the record date are entitled to receive notice of and vote
at annual and special meetings of shareholders. Where the items of business
affect the rights of shareholders other than the holders of common shares, a
special majority of two-thirds of the votes cast by the affected shareholders at
the meeting called for such purpose is required to approve the item of business.
Beneficial holders of common shares and special shares are also entitled to
receive proxy materials in respect of meetings of shareholders in accordance
with Canadian Securities Administrators National Instrument 54-101, provided
that such proxies are limited in scope to instructing the registered shareholder
(usually a brokerage house) on how to vote on behalf of the beneficial
shareholder. There are no restrictions on the number of shares that may be held
by non-residents other than restrictions set out in the Investment Canada
Act (Canada). See "Additional Information - D. Exchange Controls".

There are no provisions in the By-laws regarding public
disclosure of individual shareholdings. Notwithstanding this, applicable
Canadian securities legislation requires certain public disclosure of persons
owning or acquiring common shares in excess of 10% of a corporation's issued and
outstanding share capital.

C.           Material Contracts

|1. | On May 29, 2005, we entered into an employment agreement with Mr.
      Salvatore Fuda, the Chairman of the Board of Directors. The agreement
      commenced on January 1, 2005 and ending on September 30, 2009. In 2009 the
      contract was extended for an additional one year through December 2010.
      Under the terms of the agreement, the Chairman of the Board of Directors
      has been retained to provide certain management services. We have agreed
      to provide compensation based on a percentage of the increase of the
      market capitalization on a year-over-year basis commencing as of December
      31, 2005 subject to a minimum annual compensation amount of $150,000 (CDN)
       approximately $143,877 in U.S. dollars at average exchange rates. At our
      option, we can pay either cash or issue common shares as compensation
      providing that the cumulative maximum number of shares that we can issue
      under the agreement is 2 million common shares. In January 2011, the
      Company extended the contract on a month to month basis at a rate of
      $12,500 Canadian funds per month (approximately $12,500 in US dollars at
      current exchange rates) and has eliminated the incentive based
      compensation component which was reflected in the original contract.                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|2. | In June 2008, we entered into a six-month agreement with Dreifus
      Associates Limited (DAL) whose major shareholder Henry Dreifus, was a
      Company director. DAL has provided a range of technical and business
      development support to the Company. Our monthly cost under the contract
      was approximately $40,000. In addition, we granted Henry Dreifus 350,000
      stock options at an exercise price of $1.20 per share in March 2008
      coincident with his appointment as a Director of the Company. 275,000 of
      these options vested at issue date, the balance vests in 3 equal quarterly
      installments of 25,000 options commencing in June 2008. These options
      expired in August 2009, 45 days after Mr. Dreifus did not stand for
      reelection as a director. In August 2008, we issued 200,000 stock options
      to Henry Dreifus at an exercise price of $1.50 per share expiring in
      August 2013 if unexercised. These options vest only when the Company has
      achieved certain revenue milestones. DAL continues to provide services to
      the Company in 2010 after Mr. Dreifus resigned as a director. In September
      2010 the Company issued 192,307 common shares to settle $50,000 of
      balances due to DAL for services rendered. At October 31, 2010 the
      remaining balance payable to DAL is approximately $115,000.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3. | In May 2008 the Company executed the following employment contracts
      with key officers:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

37

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| | 1. | A two-year agreement through May 2010 with its President, Mr. Joseph
      Fuda, stipulating annual base remuneration of $160,000 ($CDN) per year. In
      addition, 100,000 common stock options were awarded at a exercise price of
      $1.50 per share vesting in 25,000 share installments over four quarters
      commencing in August 2008 and expiring in August 2013 if unexercised. The
      contract was extended on a month-to- month basis in May 2010 stipulating
      the same annual base remuneration amount.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | A two-year agreement through May 2010 with its CFO, Mr. Dan Amadori
      stipulated annual base remuneration at $150,000 (CDN) per year. In
      addition100,000 common stock options were awarded at a exercise price of
      $1.50 per share vesting in 25,000 share installments over four quarters
      commencing in August 2008 and expiring in August 2013 if unexercised. The
      contract was extended on a month-to- month basis in May 2010 stipulating
      the same annual base remuneration amount.           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | A three-year agreement through May 2011 with the President of its
      wholly-owned subsidiary, MAST INC., Mr. Steven Van Fleet, who is also a
      director of the Company. The agreement stipulates annual base remuneration
      of $204,000 per year. In addition, 500,000 common stock options at a price
      of $1.50 per share were awarded vesting in 125,000 share installments over
      four quarters commencing in August 2008 and expiring in August 2013 if
      unexercised.                                 

|4. | In September 2008, the Company entered into a 12 month agreement with
      the Investor Relations Group (IRG) of New York City. Under the terms of
      the contract, the Company pays a monthly amount of $13,500 in cash and
      issues 25,000 common shares to IRG monthly. In May 2009, the Company
      renegotiated the monthly compensation to $7,500 in cash and 2,500 common
      shares for the balance of the agreement. The agreement was not renewed in
      September 2009.                                                                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|5. | In August 2009, the Company executed a promissory note with Unotron
      Inc. The promissory note is in the principal amount of $200,000, bears
      interest at a rate of 10% payable quarterly and is secured by a first lien
      on the assets of Unotron. The promissory note matured on September 30,
      2010 and remains unpaid at February 14, 2011. The Company is currently
      negotiating revised payment terms.                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|6. | Unotron Inc. and Micromem entered into a manufacturing agreement in
      2009 that requires Micromem to develop a magnetic sensor based keyboard
      substrate that is to be integrated into Unotrons waterproof and washable
      keyboards. These keyboards can be placed within a commercial dishwasher to
      prevent diseases from being transmitted on the keyboard. In 2009, Micromem
      designed, manufactured, tested and delivered the initial volume of
      keyboards to Unotron in Hong Kong. See Research and Development Efforts,
      page 16-17 for a discussion of developments during 2010.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|7. | In 2009 Micromem and LifeMed Technologies Inc. entered a manufacturing
      agreement pursuant to which we received a $30 million purchase order.
      Under the terms of the agreement, Micromem would design and manufacture
      prototypes, submit and obtain FDA 510(K) approval and manufacture a
      medical device that incorporates our magnetic sensor technology. The
      medical device is designed to provide early detection of abnormalities in
      womens breasts. See Research and Development Efforts, page 16-17 for a
      discussion of developments during 2010.                         

D.           Exchange Controls

As of the date hereof, we are not aware of any governmental
laws, decrees or regulations in Canada that restrict the export or import of
capital, including, but not limited to, foreign exchange controls, or that
affect the remittance of dividends or other payments to nonresident holders of
our common shares.

We are not aware of any limitations under the laws of Canada or
the Province of Ontario, or in the Articles of Incorporation or any other of our
constituent documents on the right of nonresidents of Canada or persons who are
not Canadian citizens to hold and/or vote common shares.

38

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E.           Taxation

Certain Canadian Income Tax Consequences

This discussion under this heading summarizes the principal
Canadian federal income tax consequences of acquiring, holding and disposing of
common shares for a shareholder who is not a resident of Canada but is a
resident of the United States and who will acquire and hold a common share as
capital property for the purposes of the Income Tax Canada, also referred to as
the Canadian Tax Act. This summary does not apply to a shareholder who carries
on business in Canada through a permanent establishment situated in Canada or
performs independent personal services in Canada through a fixed base in Canada
if the shareholder is effectively connected with such permanent establishment or
fixed base. This summary is based on the provisions of the Canadian Tax Act and
the regulations there under and on an understanding of the administrative
practices of Canada Customs & Revenue Agency, and takes into account all
specific proposals to amend the Canadian Tax Act or regulations made by the
Minister of Finance of Canada as of the date hereof. It has been assumed that
there will be no other relevant amendments of any governing law although no
assurance can be given in this respect. This discussion is general only and is
not a substitute for independent advice from a shareholder's own Canadian and US
tax advisors.

The provisions of the Canadian Tax Act are subject to income
tax treaties to which Canada is a party, including the Canada-United States
Income Tax Convention (1980), as amended.

Dividends on common shares and Other Income

Under the Canadian Tax Act, a non-resident of Canada is
generally subject to Canadian withholding tax at the rate of 25 percent on
dividends paid or deemed to have been paid to him or her by a corporation
resident in Canada. We are responsible for the withholding of tax at the source.
The Canada-United States Income Tax Convention (1980) limits the rate to 15
percent if the shareholder is a resident of the United States and the dividends
are beneficially owned by and paid to such shareholder, and to 5 percent if the
shareholder is also a corporation that beneficially owns at least 10 percent of
the voting stock of the payor corporation.

The amount of a stock dividend (for tax purposes) would
generally be equal to the amount of our paid up or stated capital and increased
by reason of the payment of such dividend. We will furnish additional tax
information to shareholders in the event of such a dividend. Interest paid or
deemed to be paid on our debt securities held by non-Canadian residents may also
be subject to Canadian withholding tax, depending upon the terms and provisions
of such securities and any applicable tax treaty.

The Canada-United States Income Tax Convention (1980) generally
exempts from Canadian income tax dividends paid to a religious, scientific,
literary, educational or charitable organization or to an organization
constituted and operated exclusively to administer a pension, retirement or
employee benefit fund or plan, if the organization is a resident of the United
States and is exempt from income tax under the laws of the United States.

Dispositions of Common Shares

Under the Canadian Tax Act, a non-resident of Canada is subject
to Canadian tax on taxable capital gains, and may deduct allowable capital
losses, realized on a disposition of "taxable Canadian property". common shares
will constitute taxable Canadian property of a shareholder at a particular time
if the shareholder used the shares in carrying on business in Canada, or if at
any time in the five years immediately preceding the disposition 25 percent or
more of the issued shares of any class or series in the capital stock of
Micromem belonged to one or more persons in a group comprising the shareholder
and persons with whom the shareholder did not deal at "arm's length and in
certain other circumstances.

The Canada-United States Income Tax Convention (1980) relieves
United States residents from liability for Canadian tax on capital gains derived
on a disposition of shares unless:

the value of the shares is derived principally from "real
property" in Canada, including the right to explore for or exploit natural
resources and rights to amounts computed by reference to production, the
shareholder was resident in Canada for 120 months during any period of 20
consecutive years preceding, a and at anytime during the 10 years immediately
preceding, the disposition and the shares were owned by them when they ceased to
be resident in Canada, or the shares formed part of the business property of a
"permanent establishment" that the holder has or had in Canada within the 12
months preceding the disposition.

39

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Certain United States Federal Income Tax Consequences

The following is a general summary of certain United States
federal income tax consequences, under current law, generally applicable to a US
Holder (as defined below). This summary does not address all potentially
relevant United States federal income tax matters and it does not address
consequences peculiar to persons subject to special provisions of United States
federal income tax law, such as those described below as excluded from the
definition of a US Holder. United States alternative minimum tax considerations
are not addressed in this summary. In addition, this summary does not cover any
state, local or foreign tax consequences, nor any U.S. federal gift, estate or
generation-skipping transfer tax consequences. (Certain, but not all, foreign
tax consequences are described above under Taxation - Certain Canadian Income
Tax Consequences.)

The following summary is based upon the Internal Revenue Code
of 1986, as amended (the Code), Treasury Regulations, published Internal
Revenue Service (IRS) rulings, published administrative positions of the IRS,
and court decisions that are currently applicable, any of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
This summary does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation which, if enacted, could be
applied (possibly on a retroactive basis) at any time (including, without
limitation, changes in applicable tax rates).

This summary is for general information only and it is not
intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of common shares, and no opinion or representation
with respect to the United States federal income tax consequences to any such
holder or prospective holder is made. Accordingly, holders and prospective
holders of common shares should consult their own tax advisors about the
federal, state, local, and foreign tax consequences of purchasing, owning and
disposing of common shares of the Company.

CIRCULAR 230 DISCLOSURE

ANY TAX STATEMENT MADE HEREIN REGARDING ANY U.S. FEDERAL TAX
IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR
PURPOSES OF AVOIDING ANY PENALTIES. ANY SUCH STATEMENT HEREIN IS WRITTEN IN
CONNECTION WITH THE MARKETING OR PROMOTION OF THE TRANSACTION TO WHICH THE
STATEMENT RELATES. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYERS
PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

US Holders

As used herein, a US Holder means an owner of common shares
who is a citizen or individual resident (as defined under United States tax
laws) of the United States; a corporation or other entity taxable as a
corporation created or organized in or under the laws of the United States or of
any political subdivision thereof; an estate the income of which is taxable in
the United States irrespective of source; or a trust if (a) a court within the
United States is able to exercise primary supervision over the trust's
administration and one or more United States persons have the authority to
control all of the substantial decisions of the trust or (b) the trust was in
existence on August 20, 1996 and has properly elected to continue to be treated
as a United States person. This summary does not address the tax consequences
to, and US Holder does not include, tax-exempt persons or organizations;
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts; financial institutions; insurance companies; real estate
investment trusts; regulated investment companies; entities subject to the U.S.
corporate conversion rules; broker-dealers; U.S. tax expatriates; non-resident
alien individuals or entities; persons or entities that have a functional
currency other than the US dollar; persons who hold common shares as part of a
straddle, hedging or conversion transaction; and persons who acquire their
common shares as compensation for services. This summary is limited to US
Holders who own common shares as capital assets and who hold the common shares
directly (e.g., not through an intermediary entity such as a corporation,
partnership, LLC or trust). This summary does not address the consequences to a
person or entity of the ownership, exercise or disposition of any options,
warrants or other rights to acquire common shares.

Distributions to US Holders Who Own Common Shares

Subject to the discussion below concerning the potential status
of the Company (or any of its subsidiaries that are classified as corporations
for United States federal income tax purposes (Related Entities)) as a
passive foreign investment company (PFIC), the gross amount of any
distribution by the Company (including any Canadian taxes withheld therefrom)
with respect to common shares generally should be included in the gross income
of a US Holder as foreign source dividend income to the extent such distribution is paid out of current or accumulated
earnings and profits of the Company, as determined under United States federal
income tax principles. To the extent that the amount of any distribution exceeds
the Company's current and accumulated earnings and profits in that taxable year,
the distribution is treated as a tax-free return of capital to the extent of the
US Holder's adjusted tax basis in the common shares. Thereafter, to the extent
that such distribution exceeds the US Holder's adjusted tax basis in the common
shares, it is taxed as a capital gain.

40

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Dividends received by non-corporate US Holders may be subject
to United States federal income tax at lower rates (generally 15%) than other
types of ordinary income in taxable years beginning on or before December 31,
2012, if certain conditions are met. These conditions include neither the
Company nor a Related Entity being classified as a PFIC (discussed below), the
Company being a qualified foreign corporation, the US Holder's satisfaction of
a holding period requirement, and the US Holder not treating the distribution as
investment income for purposes of the investment interest deduction rules.

In the case of US Holders that are corporations, distributions
from the Company generally are not eligible for the dividends received
deduction.

Dispositions of Common Shares of the Company

Subject to the discussion below regarding PFICs, gain or loss,
if any, realized by a US Holder on the sale or other disposition of common
shares generally is subject to United States federal income taxation as capital
gain or loss in an amount equal to the difference between the US Holder's
adjusted tax basis in the common shares and the amount realized on the
disposition. Net capital gain (i.e., capital gain in excess of capital loss)
recognized by a non-corporate US Holder upon a sale or other disposition of
common shares that have been held for more than one year is generally subject to
a maximum United States federal income tax rate of 15%, under present law.
Deductions for capital losses are subject to limitations.

US Anti-Deferral Regimes

There are two regimes applicable to foreign corporations under
United States federal income tax law that potentially may apply to the Company -
the controlled foreign corporation (CFC) regime and the PFIC regime.

Generally, a foreign corporation is not a CFC unless more than
fifty percent (by vote or value) of its stock is owned by U.S. Shareholders
(generally, United States persons who have ten percent or more of the votes of
the foreign corporation). This classification generally results in the inclusion
of certain income of the CFC in the U.S. Shareholders' income as a deemed
dividend. If the Company were a CFC, the United States federal tax consequences
summarized herein could be materially and adversely different.

PFIC status is not conditioned on a certain level of ownership
of the foreign corporation by United States persons, however. The Company or any
Related Entity would be considered a PFIC if during any taxable year, 75% or
more of its gross income consists of certain types of passive income, or if
the average value during a taxable year of its passive assets (generally,
assets that generate passive income) is 50% or more of the average value of all
assets held by it. Passive income generally includes items such as dividends,
interest, rents and royalties, although there are various look through rules
that treat dividends from related persons, for example, as non-passive under
certain conditions.

If the Company is classified as a PFIC, a US Holder is subject
to increased United States federal income tax liability in respect of gain
recognized on the disposition of his, her or its common shares or upon the
receipt of certain distributions, unless such person makes a qualified electing
fund election to be taxed currently on his, or her or its pro rata
portion of the Company's income and gain (whether or not such income or gain is
distributed in the form of dividends or otherwise), and the Company provides
certain annual statements which include the information necessary to determine
inclusions and assure compliance with the PFIC rules. As an alternative to the
foregoing rules, a US Holder may make a mark-to-market election to include in
income each year as ordinary income an amount equal to the increase in value of
his, her or its common shares for that year or to claim a deduction for any
decrease in value (but only to the extent of previous mark-to-market gains).

The CFC and PFIC rules are very complex. The Company offers no
opinion or representations as to its status as a CFC or PFIC for the current or
any prior or future tax years. US Holders should consult their own U.S. tax
advisors with respect to the CFC and PFIC issues and their applicability to such
Holders particular situation.

41

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Foreign Tax Credit

A US Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the ownership or disposition of the common
shares may be entitled, at the option of the US Holder, to either a deduction or
a tax credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States Federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayers income subject to tax. This election is made on a year-by-year basis
and applies to all foreign taxes paid by (or withheld from) the US Holder during
that year.

There are significant and complex limitations that apply to the
credit, among which is the general limitation that the credit cannot exceed the
proportionate share of the US Holders United States Federal income tax
liability that the US Holder's foreign source income bears to his or its
worldwide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
In addition, this limitation is calculated separately with respect to specific
baskets of income. Foreign taxes assigned to a particular basket generally
cannot offset United States tax on income assigned to another basket. Unused
foreign tax credits can generally be carried back one year and carried forward
ten years. The availability of the foreign tax credit and the application of
the limitations on the credit are fact specific and US Holders should consult
their own U.S. tax advisors regarding their ability to utilize foreign tax
credits in light of their individual circumstances.

Currency Fluctuations

For United States federal income tax purposes, the amount
received by a US Holder as payment with respect to a distribution on, or
disposition of common shares, if paid in Canadian dollars, is the US dollar
value at the date of the payment, regardless of whether the payment is later
converted into US dollars. In such case, the US Holder may recognize additional
ordinary income or loss as a result of currency fluctuations between the date on
which the payment is made and the date the payment is converted into US dollars.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not Applicable.

H. Documents on Display

We have filed the documents referred to herein and other
information with the SEC, the Ontario Securities Commission and the Alberta
Securities Commission. You may inspect and copy such material at the public
reference facilities maintained by the SEC 100 F Street, N.E., Washington, D.C.
20549. You may also obtain copies of such material from the SEC at prescribed
rates by writing to the Public Reference Section of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.

The SEC maintains an Internet website at www.sec.gov that contains reports, proxy statements,
information statements and other material that are filed through the SEC's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Documents
filed with the Ontario Securities Commission and the Alberta Securities
Commission can be accessed through an Internet website at www.sedar.com that contains reports, proxy statements,
information statements and other material that are filed through the System for
Electronic Document Analysis and Retrieval (SEDAR).

Additional information is also available on our website at
www.micromeminc.com. Such information on our
website is not part of this Form 20-F.

I. Subsidiary Information

Not Applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Not Applicable.

42

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES

Not Applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

Not Applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, referred to herein as the
Exchange Act) as of October 31, 2010. Based on management's evaluation in
2010, our Chief Executive Officer and Chief Financial Officer concluded that, as
of October 31, 2010, our disclosure controls and procedures, were effective in
that they were designed to ensure that information required to be disclosed by
us in our reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in our reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms. Exchange
Act Rule 13a-15(e) also states that disclosure controls and procedures are
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Act is accumulate and communicated to
the issuers management, including its principal executive and principal
financial officers, or person performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.

Managements Annual Report on Internal Control Over
Financial Reporting

Micromems Board of Directors and executive management are
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation and fair presentation of its published consolidated financial
statements.

All internal control systems no matter how well designed have
inherent limitations. Therefore, even those systems determined to be effective
may not prevent or detect misstatements and can provide only reasonable
assurance with respect to financial statement preparation and presentation.
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.

Our Chief Executive Officer and Chief Financial Officer
assessed the effectiveness of Micromems internal control over financial
reporting as of October 31, 2010. In making this assessment, they used the
criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment the Chief Executive Officer and Chief Financial Officer have
concluded that, as of October 31, 2010, our internal control over financial
reporting were effective.

2010 Attestation Report

The Attestation Report dated February 14, 2011 submitted by the
independent accountants cited no material weaknesses in the 2010 fiscal
year.

43

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Changes in Internal Control Over Financial Reporting

No changes in our internal controls over financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred
during the fiscal year ended October 31, 2010 that has materially affected or is
reasonable likely to materially affect, our internal controls over financial
reporting.

Item 15T.          
Controls and Procedures

Not applicable

Item 16.          
(Reserved)

Not Applicable.

Item 16A. Audit Committee Financial Expert

Our Board of Directors has determined that a member of the
Board of Directors, David Sharpless, is an audit committee financial expert and
that he is independent, as defined in the Marketplace Rules of the Nasdaq Stock
Market.

Item 16B. Code of Ethics

We have adopted a Code of Ethics to impose certain policies
relating to ethical conduct on all of our Directors and employees, including our
Chief Executive Officer, Chief Financial Officer, principal accounting officer
and persons performing similar functions. We undertake to provide a copy of our
Code of Ethics to any holder of our securities upon request, without charge.

Item 16C.          
Principal Accountant Fees and Services

The following table presents fees for professional audit
services rendered by our auditors for the audit of our consolidated financial
statements for the years ended October 31, 2010 and 2009, and fees billed for
other services rendered by our auditors including our offerings of securities
and tax services.

2009
    
    
    2010Audit Fees
    $
    80,000
    
    $
    75,000Audit Related Fees (SOX)
    
    35,000
    
    
    25,000Tax Fees
    
    10,000
    
    
    21,000All Other Fees
    
    5,000
    
    
    5,001


Audit Fees

In 2009 we paid a total of $80,000 to Collins Barrow Toronto
LLP for audit services; in 2010 we paid a total of $75,000 to Collins Barrow
Toronto LLP for audit services.

Audit Related Fees

We paid $35,000 of audit related fees to Collins Barrow Toronto
LLP in 2009 relating to our SOX compliance audit. We paid $25,000 of audit
related fees to Collins Barrow Toronto LLP in 2010 relating to our SOX
compliance audit.

44

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Tax Fees

We paid $10,000 of tax-related fees to Collins Barrow Toronto
LLP for services in 2009 and $25,000 of tax-related fees to Chiampou Travis
Besaw & Kershner LLP in 2010.

Pre-approval policies

The Audit Committee assesses and pre-approves all audit and
non-audit services.

Item 16D.          Exemptions from the Listing Standards for Audit
Committees

Not applicable.

Item 16E.          
Purchases of Equity by the Issuer and Affiliated Purchasers.

Not applicable.

Item 16F.          
Change in Registrants Certifying Accountant.

Not applicable.

Item 16G.          
Corporate Governance

Not applicable

Item 17.          
Financial Statements

---

Consolidated Financial Statements of

MICROMEM TECHNOLOGIES INC.

Years ended October 31, 2010 and 2009

---

Independent Auditors Report

To the Shareholders of Micromem Technologies Inc.:

We have completed an integrated audit of Micromem Technologies
Inc.s 2010 and 2009 consolidated financial statements and of its internal
control over financial reporting as at October 31, 2010. Our opinions, based on
our audits, are presented below.

Consolidated financial statements

We have audited the consolidated balance sheets of Micromem
Technologies Inc. as at October 31, 2010 and 2009, and the related consolidated
statements of operations and deficit, statement of shareholders equity and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits of the Companys financial statements
in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Boards (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements 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.

The consolidated financial statements as at and for the year
ended October 31, 2008 were audited by other auditors who expressed opinions
without reservation on those consolidated financial statements in their report
dated February 16, 2009.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the
Company as at October 31, 2010 and October 31, 2009 and the results of its
operations and its cash flows for each of the years then ended in accordance
with Canadian generally accepted accounting principles.

Internal control over financial reporting

We have also audited Micromem Technologies Inc.s internal
control over financial reporting as at October 31, 2010, based on criteria
established in Internal Control - Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company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 effectiveness of the Companys internal control over
financial reporting based on our audit.

1

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Internal control over financial reporting(Contd)

We conducted our audit of internal control over financial
reporting 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. An audit of internal control over financial reporting includes
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 consider 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 (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) 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 (iii) 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, the Company maintained, in all material
respects, effective internal control over financial reporting as at October 31,
2010 based on criteria established in Internal Control  Integrated Framework
issued by the COSO.

Very truly yours,

/s/ Collins Barrow Toronto LLP

Collins Barrow Toronto LLPChartered Accountants
Licensed Public Accountants

Toronto, Ontario February 14, 2011



2

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Comments by Auditors for Readers on Canada  U.S. Reporting
Differences

In the United States, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion paragraph) when
the financial statements are affected by conditions and events that cast
substantial doubt on the Companys ability to continue as a going concern, such
as those described in Note 2 to the consolidated financial statements. Our
report to the shareholders dated February 14, 2011 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such events
and conditions in the auditors report when these are adequately disclosed in
the financial statements.

Collins Barrow Toronto LLPChartered Accountants
Licensed Public Accountants

Toronto, Ontario February 14, 2011

3

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MICROMEM TECHNOLOGIES INC.(A DEVELOPMENT
STAGE COMPANY)

|CONSOLIDATED BALANCE SHEETS                                   |   |                  |   |   |                  |  
|------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | -
|(Expressed in United States dollars)                          |   |                  |   |   |                  |  
|                                                              |   |                  |   |   |                  |  
|As at                                                         |   | October 31, 2010 |   |   | October 31, 2009 |  
|                                                              |   |                  |   |   |                  |  
|Assets                                                        |   |                  |   |   |                  |  
|Current assets:                                               |   |                  |   |   |                  |  
|Cash and cash equivalents (Note 20)                           | $ | 26,039           |   | $ | 106,110          |  
|Deposits and other
      receivables                          |   | 97,063           |   |   | 83,486           |  
|Promissory note
      receivable (Note 7)                     |   | 5,000            |   |   | 200,000          |  
|                                                              |   | 128,102          |   |   | 389,596          |  
|                                                              |   |                  |   |   |                  |  
|Property and equipment, net (Note 8)                          |   | 16,686           |   |   | 24,422           |  
|Deferred development costs
      (Note 9)                     |   | 221,521          |   |   | 2,000,611        |  
|Patents, net (Note 10)                                        |   | 202,027          |   |   | 147,850          |  
|                                                              | $ | 568,336          |   | $ | 2,562,479        |  
|                                                              |   |                  |   |   |                  |  
|Liabilities and Shareholders'
      Equity (Deficiency)       |   |                  |   |   |                  |  
|Current liabilities:                                          |   |                  |   |   |                  |  
|Bridge loans (Note 11e)                                       |   | 512,548          |   |   | -                |  
|Accounts payable and accrued liabilities                      |   | 1,075,014        |   |   | 1,039,640        |  
|                                                              |   | 1,587,562        |   |   | 1,039,640        |  
|Shareholders' Equity (Deficiency)                             |   |                  |   |   |                  |  
|Share capital: (Note 11)                                      |   |                  |   |   |                  |  
|Authorized:                                                   |   |                  |   |   |                  |  
|2,000,000 special
      preference shares, redeemable, voting |   |                  |   |   |                  |  
|Unlimited common shares without par
      value               |   |                  |   |   |                  |  
|Issued
      and outstanding:                                 |   |                  |   |   |                  |  
|95,324,511 common shares (2009:
      89,383,003)             |   | 50,102,699       |   |   | 48,494,180       |  
|Equity component of bridge loans (Note 11)                    |   | 5,784            |   |   | -                |  
|Contributed
      surplus (Note 12)                           |   | 24,664,404       |   |   | 24,145,911       |  
|Deficit accumulated
      during the development stage        |   | (75,792,113      | ) |   | (71,117,252      | )
|                                                              |   | (1,019,226       | ) |   | 1,522,839        |  
|                                                              | $ | 568,336          |   | $ | 2,562,479        |  

Going Concern (Note 2)Related Party Transactions (Note 14)
Commitments (Note 15) Contingencies (Note 16) Subsequent Events
(Note 20)

"Joseph Fuda" (Signed)Joseph Fuda, Director

"David Sharpless" (Signed)David Sharpless,
Director

See accompanying notes.

4

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MICROMEM TECHNOLOGIES INC.(A DEVELOPMENT
STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS AND
DEFICIT(Expressed in United States dollars)

For the year ended October 31, 2010 (with comparative data)

|                                                                          |   |               |   |  |               |   |  |               |   |   | Period from         |  
|------------------------------------------------------------------------- | - | ------------- | - |  | ------------- | - |  | ------------- | - | - | ------------------- | -
|                                                                          |   |               |   |  |               |   |  |               |   |   | September 3, 1997   |  
|                                                                          |   | Oct. 31, 2010 |   |  | Oct. 31, 2009 |   |  | Oct. 31, 2008 |   |   | to October 31, 2010 |  
|                                                                          |   | (12 mos       | ) |  | (12 mos       | ) |  | (12 mos       | ) |   |                     |  
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Costs and expenses
      (income):                                        |   |               |   |  |               |   |  |               |   |   |                     |  
|Administration                                                            | $ | 349,324       |   |  | 937,146       |   |  | 604,203       |   | $ | 4,852,515           |  
|Professional, other
      fees and salaries (Note 11 and 14)              |   | 1,345,406     |   |  | 3,240,960     |   |  | 3,304,771     |   |   | 46,312,665          |  
|Research and development (recovery)
      (Note 9)                        |   | (106,007      | ) |  | 13,880        |   |  | 1,063,508     |   |   | 8,779,513           |  
|Travel and
      entertainment                                            |   | 146,104       |   |  | 223,586       |   |  | 398,474       |   |   | 2,342,290           |  
|Amortization of property and equipment
      (Note 8)                     |   | 8,586         |   |  | 11,567        |   |  | 5,210         |   |   | 369,829             |  
|Foreign exchange loss
      (gain)                                        |   | 32,101        |   |  | (28,153       | ) |  | 52,321        |   |   | 135,748             |  
|Writedown of deferred development costs
      (Note 9)                    |   | 2,711,392     |   |  | -             |   |  | -             |   |   | 2,234,260           |  
|Write-down of royalty
      rights                                        |   | -             |   |  | -             |   |  | -             |   |   | 10,000,000          |  
|Allowance for promissory note
      receivable                            |   | 201,333       |   |  |               |   |  |               |   |   | 201,333             |  
|Other expenses                                                            |   | -             |   |  | -             |   |  | -             |   |   | 732,941             |  
|Loss before undernoted                                                    |   | 4,688,239     |   |  | 4,398,986     |   |  | 5,428,487     |   |   | 75,961,094          |  
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Interest and other income                                                 |   | (22,886       | ) |  | (88,047       | ) |  | (11,762       | ) |   | (675,298            | )
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Loss before income taxes                                                  |   | (4,665,353    | ) |  | (4,310,939    | ) |  | (5,416,725    | ) |   | (75,285,796         | )
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Income taxes (Note 13)                                                    |   | 9,508         |   |  | -             |   |  | -             |   |   | 29,185              |  
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Net loss for the year                                                     |   | (4,674,861    | ) |  | (4,310,939    | ) |  | (5,416,725    | ) |   | (75,314,981         | )
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Deficit accumulated during the development stage, beginning
      of year |   | (71,117,252   | ) |  | (66,806,313   | ) |  | (61,389,588   | ) |   | -                   |  
|Deficit accumulated during the development
      stage, end of year       | $ | (75,792,113   | ) |  | (71,117,252   | ) |  | 66,806,313    |   | $ | (75,314,981         | )
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Loss per
      share - basic and diluted                                  |   | (0.05         | ) |  | (0.05         | ) |  | (0.07         | ) |   | (1.33               | )
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|                                                                          |   |               |   |  |               |   |  |               |   |   |                     |  
|Weighted average number of shares                                         |   | 92,225,645    |   |  | 86,400,439    |   |  | 78,012,115    |   |   | 56,484,611          |  

See accompanying notes.

5

---

MICROMEM TECHNOLOGIES INC.(A DEVELOPMENT
STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in
United States dollars)

For the year ended October 31, 2010 (with comparative data)

|                                                                                             |   | Oct. 31, 2010 |   |   | Oct. 31, 2009 |   |   | Oct. 31, 2008 |  
|-------------------------------------------------------------------------------------------- | - | ------------- | - | - | ------------- | - | - | ------------- | -
|                                                                                             |   | (12 mos       | ) |   | (12 mos       | ) |   | (12 mos       | )
|                                                                                             |   |               |   |   |               |   |   |               |  
|Cash flows from operating
      activities:                                                  |   |               |   |   |               |   |   |               |  
|Net loss for the year                                                                        | $ | (4,674,861    | ) | $ | (4,310,939    | ) | $ | (5,416,725    | )
|Adjustments to reconcile
      loss for the period to net cash used in operating activities: |   |               |   |   |               |   |   |               |  
|Amortization of patents and trademarks                                                       |   | -             |   |   |               |   |   |               |  
|Amortization of property and equipment                                                       |   | 8,586         |   |   | 11,567        |   |   | 5,210         |  
|Accretion expense                                                                            |   | 5,415         |   |   | -             |   |   | -             |  
|Stock option expense                                                                         |   | 95,038        |   |   | 1,951,569     |   |   | 1,041,414     |  
|Increase in deposits and other receivables                                                   |   | (19,910       | ) |   | (154,575      | ) |   | (44,254       | )
|Increase (decrease) in accounts payable and accrued
      liabilities                        |   | 170,874       |   |   | 97,415        |   |   | (673,809      | )
|Writedown of deferred development costs                                                      |   | 2,711,392     |   |   | -             |   |   | -             |  
|Shares issued to supplier                                                                    |   |               |   |   | 173,125       |   |   | -             |  
|Write-down of royalty rights                                                                 |   | -             |   |   | -             |   |   | -             |  
|Write-down of patents and trademarks                                                         |   | -             |   |   | -             |   |   | -             |  
|Share compensation expense                                                                   |   | -             |   |   | -             |   |   | -             |  
|Other adjustments                                                                            |   | -             |   |   | -             |   |   | -             |  
|Gain
      on settlement of debt                                                             |   | (114,000      | ) |   |               |   |   |               |  
|Allowance
      for promissory note receivable (Note 7)                                      |   | 201,333       |   |   |               |   |   |               |  
|Net cash
      used in operating activities                                                  |   | (1,616,133    | ) |   | (2,231,838    | ) |   | (5,088,164    | )
|                                                                                             |   |               |   |   |               |   |   |               |  
|Cash flows from investing activities:                                                        |   |               |   |   |               |   |   |               |  
|Purchase of
      property and equipment                                                     |   | (851          | ) |   | (9,668        | ) |   | (31,531       | )
|Patents and trademarks                                                                       |   | (78,891       | ) |   | (147,850      | ) |   | -             |  
|Deferred
      development costs                                                             |   | (878,852      | ) |   | (2,000,611    | ) |   | -             |  
|Other                                                                                        |   |               |   |   | -             |   |   | -             |  
|Royalty rights                                                                               |   | -             |   |   | -             |   |   | -             |  
|Net cash
      used in investing activities                                                  |   | (958,594      | ) |   | (2,158,129    | ) |   | (31,531       | )
|                                                                                             |   |               |   |   |               |   |   |               |  
|                                                                                             |   |               |   |   |               |   |   |               |  
|Cash flows from financing
      activities:                                                  |   |               |   |   |               |   |   |               |  
|Issue of common shares                                                                       |   | 1,981,741     |   |   | 4,020,842     |   |   | 5,350,355     |  
|Bridge
      loans                                                                           |   | 512,915       |   |   | -             |   |   | -             |  
|Other                                                                                        |   | -             |   |   | -             |   |   | -             |  
|Net cash provided by financing activities                                                    |   | 2,494,656     |   |   | 4,020,842     |   |   | 5,350,355     |  
|                                                                                             |   |               |   |   |               |   |   |               |  
|Increase (decrease) in cash and cash
      equivalents                                       |   | (80,071       | ) |   | (369,125      | ) |   | 230,660       |  
|                                                                                             |   |               |   |   |               |   |   |               |  
|Cash and cash equivalents, beginning of year                                                 |   | 106,110       |   |   | 475,235       |   |   | 244,575       |  
|                                                                                             |   |               |   |   |               |   |   |               |  
|Cash and cash equivalents, end of year                                                       | $ | 26,039        |   | $ | 106,110       |   | $ | 475,235       |  
|                                                                                             |   |               |   |   |               |   |   |               |  
|Supplemental cash flow information:                                                          |   |               |   |   |               |   |   |               |  
|Interest paid                                                                                |   | -             |   |   | -             |   |   | -             |  
|Income taxes paid                                                                            |   | -             |   |   | -             |   |   | -             |  

See accompanying notes.

6

---

MICROMEM TECHNOLOGIES INC.(A DEVELOPMENT
STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY)
(Expressed in United States dollars)

|For the
      year ended October 31, 2010 (with comparative data)      |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|---------------------------------------------------------------------- |  | ---------- |  | - | ------------- |  | - | ------------ | - | - | ------------ | - | - | -------------- |  | - | ----------- | -
|                                                                       |  | Number of  |  |   | Share Capital |  |   | Contributed  |   |   | Deferred     |   |   | Equity         |  |   | Deficit     |  
|                                                                       |  | Shares     |  |   |               |  |   | Surplus      |   |   | Share        |   |   | component      |  |   | Accumulated |  
|                                                                       |  |            |  |   |               |  |   |              |   |   | Compensation |   |   | of Bridge loan |  |   | During      |  
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   | Development |  
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   | stage       |  
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Micromem share capital, October 31,
      1998                         |  | 3,490,643  |  | $ | -             |  | $ | -            |   | $ | -            |   | $ | -              |  | $ | -           |  
|Exercise of directors stock options                                   |  | 490,000    |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Pageant share capital, October 31,
      1998                          |  | -          |  |   | 1             |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Net loss for the year                                                  |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (500,992    | )
|Common shares of Pageant, December
      4, 1998                       |  | -          |  |   | 4,999         |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Assigned
      fair value of net assets                                |  | 32,000,000 |  |   | 549,140       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Micromem share capital, September
      11, 1999                       |  | 35,980,643 |  |   | 554,140       |  |   | -            |   |   | -            |   |   | -              |  |   | (500,992    | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Exercise of common share purchase
      warrants for cash              |  | 120,676    |  |   | 164,053       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Private placement of common shares for cash, May 17,
      1999        |  | 350,000    |  |   | 1,050,000     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Shareholder loan forgiven                                              |  | -          |  |   | -             |  |   | 544,891      |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of stock options for cash                                     |  | 100,000    |  |   | 300,000       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Net loss for the year                                                  |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (5,207,787  | )
|Balance, October 31, 1999                                              |  | 36,551,319 |  |   | 2,068,193     |  |   | 544,891      |   |   | -            |   |   | -              |  |   | (5,708,779  | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Exercise of common share purchase warrants for cash                    |  | 182,087    |  |   | 274,717       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of stock options for cash                                     |  | 100,000    |  |   | 300,000       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Deferred share compensation                                            |  | -          |  |   | -             |  |   | 2,711,881    |   |   | (453,219     | ) |   | -              |  |   | -           |  
|Private placement of common shares
      for cash, February 10, 2000   |  | 2,000,000  |  |   | 5,000,000     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Common shares issued pursuant to compensation
      agreements, March  |  | 901,110    |  |   | 4,206,447     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Stock options issued to
      directors/consultants                    |  | -          |  |   | -             |  |   | 9,681,257    |   |   | -            |   |   | -              |  |   | -           |  
|Net loss
      for the year                                            |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (16,940,613 | )
|Balance, October 31, 2000                                              |  | 39,734,516 |  |   | 11,849,357    |  |   | 12,938,029   |   |   | (453,219     | ) |   | -              |  |   | (22,649,392 | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Exercise of common share purchase
      warrants for cash              |  | 362,450    |  |   | 554,655       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Common shares issued under rights offering November
      20, 2000     |  | 304,674    |  |   | 1,119,058     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of stock options for cash                                     |  | 800,000    |  |   | 2,400,000     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Deferred share compensation                                            |  | -          |  |   | -             |  |   | (453,219     | ) |   | 453,219      |   |   | -              |  |   | -           |  
|Stock-based compensation                                               |  | -          |  |   | -             |  |   | 34,000       |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of directors stock options for cash,
      January 17, 2001  |  | 714,686    |  |   | 71,469        |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Common shares issued pursuant to
      compensatory stock options, at  |  | -          |  |   | 1,581,242     |  |   | (1,581,242   | ) |   | -            |   |   | -              |  |   | -           |  
|Adjustment-share compensation expenses                                 |  | -          |  |   | -             |  |   | (677,420     | ) |   | -            |   |   | -              |  |   | -           |  
|Common shares issued pursuant to
      compensation agreement, January |  | 11,192     |  |   | 66,461        |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Private placement of common shares for cash, March
      21, 2001      |  | 2,000,000  |  |   | 4,000,000     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Common shares issued under asset
      purchase agreement to Estancia  |  | 2,007,831  |  |   | 8,000,000     |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Compensation shares due but not issued                                 |  | -          |  |   | -             |  |   | 1,431,545    |   |   | -            |   |   | -              |  |   | -           |  
|Stock options issued to
      directors/consultants                    |  | -          |  |   | -             |  |   | 4,627,752    |   |   | -            |   |   | -              |  |   | -           |  
|Net loss
      for the year                                            |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (9,187,377  | )
|Balance, October 31, 2001                                              |  | 45,935,349 |  |   | 29,642,242    |  |   | 16,319,445   |   |   | -            |   |   | -              |  |   | (31,836,769 | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Stock options issued to
      directors/consultants                    |  | -          |  |   | -             |  |   | 1,832,500    |   |   | -            |   |   | -              |  |   | -           |  
|Shares issued pursuant to compensatory agreement,
      March 26, 2002 |  | 765,588    |  |   | 1,431,545     |  |   | (1,431,545   | ) |   | -            |   |   | -              |  |   | -           |  
|Net loss for the year                                                  |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   |                |  |   | (14,565,515 | )
|Balance, October 31, 2002                                              |  | 46,700,937 |  |   | 31,073,787    |  |   | 16,720,400   |   |   | -            |   |   | -              |  |   | (46,402,284 | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Private placement of common shares for cash, August
      13, 2003     |  | 2,031,250  |  |   | 162,500       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Net loss for the year                                                  |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (1,767,965  | )
|Stock
      options issued to directors/consultants                    |  |            |  |   |               |  |   | 318,000      |   |   |              |   |   | -              |  |   |             |  
|Balance, October 31, 2003                                              |  | 48,732,187 |  |   | 31,236,287    |  |   | 17,038,400   |   |   | -            |   |   | -              |  |   | (48,170,249 | )
|                                                                       |  |            |  |   |               |  |   |              |   |   |              |   |   |                |  |   |             |  
|Private placement                                                      |  | 800,000    |  |   | 73,000        |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of common share warrants                                      |  | 3,231,250  |  |   | 264,500       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Exercise of options for cash                                           |  | 5,300,000  |  |   | 530,000       |  |   | -            |   |   | -            |   |   | -              |  |   | -           |  
|Stock options issued to consultant                                     |  | -          |  |   | -             |  |   | 1,379,970    |   |   | -            |   |   | -              |  |   | -           |  
|Net loss for the year                                                  |  | -          |  |   | -             |  |   | -            |   |   | -            |   |   | -              |  |   | (2,314,298  | )
|Balance at October 31, 2004                                            |  | 58,063,437 |  | $ | 32,103,787 $  |  |   | 18,418,370 $ |   |   | -            |   | $ | -              |  | $ | (50,484,547 | )

7

---

MICROMEM TECHNOLOGIES INC.(A DEVELOPMENT
STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY)
(Expressed in United States dollars)

|For the
      year ended October 31, 2010 (with comparative data)   |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|------------------------------------------------------------------- |  | ---------- |  |  | ------------- | - |  | ----------- | - |  | ------------ |  |  | -------------- |  |  | ----------- | -
|                                                                    |  | Number of  |  |  | Share Capital |   |  | Contributed |   |  | Deferred     |  |  | Equity         |  |  | Deficit     |  
|                                                                    |  | Shares     |  |  |               |   |  | Surplus     |   |  | Share        |  |  | component      |  |  | Accumulated |  
|                                                                    |  |            |  |  |               |   |  |             |   |  | Compensation |  |  | of Bridge loan |  |  | During      |  
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  | Development |  
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  | stage       |  
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Balance at October 31, 2004                                         |  | 58,063,437 |  |  | 32,103,787    |   |  | 18,418,370  |   |  | -            |  |  | -              |  |  | (50,484,547 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Exercise of common share purchase
      warrants for cash           |  | 2,431,250  |  |  | 206,500       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Private placement of common shares for cash                         |  | 2,342,334  |  |  | 1,472,500     |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of stock options                                           |  | 1,820,000  |  |  | 553,600       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Settlement of accounts payable for common shares                    |  | 62,428     |  |  | 43,700        |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to
      consultants/employees                 |  | -          |  |  | -             |   |  | 1,721,742   |   |  | -            |  |  | -              |  |  | -           |  
|Legal expenses relating to private placements                       |  | -          |  |  | (75,000       | ) |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (4,035,483  | )
|Transfer to
      contributed surplus (restatement)                 |  | -          |  |  | (264,000      | ) |  | 264,000     |   |  | -            |  |  | -              |  |  | -           |  
|Balance at October 31, 2005                                         |  | 64,719,449 |  |  | 34,041,087    |   |  | 20,404,112  |   |  | -            |  |  | -              |  |  | (54,520,030 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Exercise of stock options                                           |  | 3,550,000  |  |  | 1,064,980     |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to consultants/employees                       |  | -          |  |  | -             |   |  | 2,058,560   |   |  | -            |  |  | -              |  |  | -           |  
|Private placement of common shares
      for cash                   |  | 150,000    |  |  | 75,000        |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of common share purchase warrants for cash                 |  | 771,850    |  |  | 485,548       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (4,058,180  | )
|Transfer to
      contributed surplus (restatement)                 |  | -          |  |  | 1,026,738     |   |  | (1,026,738  | ) |  | -            |  |  | -              |  |  | -           |  
|Balance at October 31, 2006                                         |  | 69,191,299 |  |  | 36,693,353    |   |  | 21,435,934  |   |  | -            |  |  | -              |  |  | (58,578,210 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Exercise of stock options                                           |  | 1,700,000  |  |  | 552,000       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Transfer from contributed surplus                                   |  | -          |  |  | 340,122       |   |  | (340,122    | ) |  | -            |  |  | -              |  |  | -           |  
|Price adjustment on outstanding
      warrants                      |  | -          |  |  | (1,326,308    | ) |  | 1,326,308   |   |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to consultants/employees                       |  | -          |  |  | -             |   |  | 86,787      |   |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to Directors                                   |  | -          |  |  | -             |   |  | 96,945      |   |  | -            |  |  | -              |  |  | -           |  
|Warrants issued to consultants                                      |  | -          |  |  | -             |   |  | 85,484      |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of common share purchase
      warrants for cash           |  | 477,500    |  |  | 191,000       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Private placement of common shares for cash                         |  | 1,577,368  |  |  | 716,230       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (2,811,378  | )
|Balance at October 31, 2007                                         |  | 72,946,167 |  |  | 37,166,397    |   |  | 22,691,336  |   |  | -            |  |  | -              |  |  | (61,389,588 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Warrants issued to consultants                                      |  | -          |  |  | -             |   |  | 23,814      |   |  | -            |  |  | -              |  |  | -           |  
|Private placement of common shares
      for cash                   |  | 4,152,296  |  |  | 2,980,031     |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of stock options                                           |  | 1,440,000  |  |  | 1,010,500     |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of common share purchase
      warrants for cash           |  | 3,671,318  |  |  | 1,493,527     |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Transfer from contributed surplus for stock options
      exercised |  | -          |  |  | 537,494       |   |  | (537,494    | ) |  | -            |  |  | -              |  |  | -           |  
|Transfer from contributed surplus
      for warrants exercised      |  | -          |  |  | 1,411,792     |   |  | (1,411,792  | ) |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to directors/consultants                       |  | -          |  |  | -             |   |  | 1,017,600   |   |  | -            |  |  | -              |  |  | -           |  
|Settlement of accounts payable for
      common shares.             |  | 30,000     |  |  | 59,100        |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Cashless exercise of warrants for common shares                     |  | 646,886    |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Warrants issued for private
      placement                         |  | -          |  |  | (330,957      | ) |  | 330,957     |   |  | -            |  |  | -              |  |  | -           |  
|Common shares for services                                          |  | 50,000     |  |  | 52,250        |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (5,416,725  | )
|Balance at October 31, 2008                                         |  | 82,936,667 |  |  | 44,380,134    |   |  | 22,114,421  |   |  | -            |  |  | -              |  |  | (66,806,313 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Private placement of units for cash                                 |  | 4,393,535  |  |  | 2,305,215     |   |  | 653,627     |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of stock options                                           |  | 1,652,801  |  |  | 992,417       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Transfer from contributed surplus for stock options
      exercised |  | -          |  |  | 573,706       |   |  | (573,706    | ) |  | -            |  |  | -              |  |  | -           |  
|Common shares for services                                          |  | 200,000    |  |  | 173,125       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Financing cost paid                                                 |  | -          |  |  | (164,417      | ) |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Stock options issued to
      directors/consultants                 |  | -          |  |  | -             |   |  | 1,951,569   |   |  | -            |  |  | -              |  |  | -           |  
|Exercise of common share purchase warrants for cash                 |  | 200,000    |  |  | 234,000       |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (4,310,939  | )
|Balance at October 31, 2009                                         |  | 89,383,003 |  |  | 48,494,180    |   |  | 24,145,911  |   |  | -            |  |  | -              |  |  | (71,117,252 | )
|                                                                    |  |            |  |  |               |   |  |             |   |  |              |  |  |                |  |  |             |  
|Private placement of units for cash                                 |  | 5,749,201  |  |  | 1,599,658     |   |  | 421,393     |   |  | -            |  |  | -              |  |  | -           |  
|Common shares for services                                          |  | 192,307    |  |  | 50,000        |   |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Financing cost paid                                                 |  | -          |  |  | (39,310       | ) |  | -           |   |  | -            |  |  | -              |  |  | -           |  
|Stock options extended to
      directors/consultants               |  | -          |  |  | -             |   |  | 95,038      |   |  | -            |  |  | -              |  |  | -           |  
|Warrants issued to loan holder                                      |  | -          |  |  | -             |   |  |             |   |  | -            |  |  | -              |  |  | -           |  
|Warrants extended                                                   |  | -          |  |  | (1,829        | ) |  | 1,829       |   |  | -            |  |  | -              |  |  | -           |  
|Equity portion of bridge loan                                       |  | -          |  |  | -             |   |  | 233         |   |  | -            |  |  | 5,784          |  |  | -           |  
|Net loss                                                            |  | -          |  |  | -             |   |  | -           |   |  | -            |  |  | -              |  |  | (4,674,861  | )
|Balance at
      October 31, 2010                                   |  | 95,324,511 |  |  | 50,102,699    |   |  | 24,664,404  |   |  | -            |  |  | 5,784          |  |  | (75,792,113 | )

See accompanying notes.

8

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | NATURE OF BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Micromem Technologies Inc. (Micromem or the Company)
      is a corporation incorporated under the laws of the Province of Ontario,
      Canada. By Articles of Amendment dated January 14, 1999, the Company
      changed its name from Avanticorp International Inc. to Micromem
      Technologies Inc. On January 11, 1999, the Company acquired all of the
      outstanding shares of Pageant Technologies Inc. (Pageant), a company
      subsisting under the laws of Barbados. This acquisition was recorded as a
      reverse takeover under Canadian generally accepted accounting principles
      (Canadian GAAP) which, except as outlined in Note 18, conforms with
      United States generally accepted accounting principles (U.S. GAAP).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company currently operates as a developer of
      non-volatile magnetic memory technology and has developed magnetic sensor
      technology applications. The Company has not generated revenue through
      October 31, 2010 and is devoting substantially all of its efforts to the
      development of its technologies. Accordingly, for financial reporting
      purposes, the Company is a development stage enterprise.                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2. | GOING CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | These consolidated financial statements have been
      prepared on the going concern basis, which presumes that the Company
      will be able to realize its assets and discharge its liabilities in the
      normal course of business for the foreseeable future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Certain principal conditions and events are prevalent
      which indicate that there is doubt about the Companys ability to continue
      as a going concern for a reasonable period of time in future. The Company
      has incurred substantial recurring losses to date; it reports a working
      capital deficiency and a shareholders deficiency at October 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company will focus its development effort on an
      existing project in order to develop a commercial application for this
      project and will continue to raise financing for operations as outlined in
      Notes 11 and 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | It will be necessary for the Company to raise additional
      funds for the continued development, testing and commercial exploitation
      of its technologies. To date the Company has raised financing through
      successive unit private placements, through the exercise of common share
      stock options and through the exercise of common share purchase warrants.
      It has also secured periodic term loans.                                                                                                                                                                                                                                                                                                                                        

9

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | GOING CONCERN (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In the ensuing fiscal year, the Company anticipates that
      (i) it will realize initial revenues from commercialization efforts with
      current strategic development partners, (ii) it will monitor the timing of
      incurring additional expenses in keeping with its ongoing working capital
      position, and (iii) it will continue to secure financing in the same
      manner in which it has raised financing to date.                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The consolidated financial statements have been prepared
      on a going concern basis and do not include any adjustments to the amounts
      and classifications of the assets and liabilities that might be necessary
      should the Company be unable to continue in business. If the going
      concern assumption were not appropriate for these consolidated financial
      statements then adjustments would be necessary to the carrying value of
      assets and liabilities, the reported expenses and the balance sheet
      classifications used.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | These consolidated financial statements have been
      prepared in accordance with Canadian GAAP and are stated in United States
      dollars. These principles are also in conformity in all material respects
      with U.S. GAAP (except as disclosed in Note 18). The most significant
      accounting policies are as follows:                                                                                                                                                                                                                                

| | a. | Principles of Consolidation:                                                                                         
| | -- | ---------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                      
| |    | These consolidated financial statements include the
      accounts of the Company and its wholly- owned subsidiaries:

| | i.  | Memtech International Inc., Memtech International
      (U.S.A.) Inc., Pageant Technologies Inc. and Pageant Technologies (U.S.A.)
      Inc. and Micromem Holdings (Barbados) Inc. all of which are inactive
      companies.                                                                                                                  
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                 
| | ii. | On November 10, 2007 the Company incorporated Micromem
      Applied Sensors Technology, Inc. (MAST) as a wholly-owned subsidiary
      domiciled in Delaware. MAST has the primary responsibility for the further
      development of the Companys technologies in conjunction with various
      potential strategic development partners.

10

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Contd)

| | iii. | On October 30, 2008, the Company incorporated 7070179 Canada Inc. as a
      wholly- owned subsidiary. On October 31, 2008, the Company assigned its
      rights, title and interests in certain patents which it previously held
      directly to 7070179 Canada Inc. in exchange for common shares of this
      subsidiary.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    | All intercompany investments, balances and transactions have been
      eliminated upon consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | b. | Use of Estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The preparation of consolidated financial statements in conformity
      with Canadian GAAP requires management to make estimates and assumptions
      that affect the reported amounts of assets and liabilities, the disclosure
      of contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of income and expenses
      during the reporting period. Actual results could differ from those
      estimates.                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Significant estimates made by the Company include the allowance for
      doubtful accounts receivable, the value of the promissory note receivable,
      the expected life of property and equipment, the valuation of patents, the
      valuation of deferred development costs incurred, bridge loans, the
      valuation of accrued liabilities and the computation of fair values of
      stock options and warrants using the Black Scholes option-pricing model.                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | c. | Financial Instruments  Recognition, Measurement, Disclosure and
      Presentation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Section 3855 establishes standards for recognizing and measuring
      financial assets, financial liabilities and non-financial derivatives. All
      financial assets and financial liabilities, including derivatives, are
      initially measured in the balance sheet at fair value, except for loans
      and receivables, investments held-to maturity and other financial
      liabilities, which are measured at amortized cost. Measurement in
      subsequent periods depends on whether the financial instrument had been
      classified as held-for trading, available-for-sale, held-to- maturity,
      loans and receivables, or other liabilities.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Held-for-trading financial investments are measured at fair value and
      all gains and losses are included in net income in the period in which
      they arise. Available-for-sale financial instruments are measured at fair
      value with revaluation gains and losses included in other comprehensive
      income until the assets are removed from the balance sheet.                                                                                                                                                                                                                                                                                        

11

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

3.

SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Contd)

| |    | As a result of the adoption of these standards, the
      Company classifies cash and cash equivalents as held-for-trading.
      Held-for-trading financial assets are measured at fair value with
      unrealized gains and losses recognized in the Consolidated Statement of
      Operations. Accounts receivable and promissory note receivable are
      initially measured at fair value and subsequently measured at amortized
      cost using the effective interest rate method. Accounts payable and
      accrued liabilities and bridge loans are initially measured at fair value
      and subsequently measured at amortized cost using the effective interest
      rate method.                                                                                                                  
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | d. | Comprehensive Income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Section 1530 requires the presentation of comprehensive
      income, which consists of net income and other comprehensive income
      ("OCI"). Comprehensive income is defined as the change in equity from
      transactions and other events from non-owner sources. OCI refers to items
      recognized in comprehensive income but that are excluded from net income
      calculated in accordance with generally accepted accounting principles.
      The Company does not currently have any other comprehensive income and
      accordingly, a statement of comprehensive income has not been presented.                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | e. | Foreign Currency Translation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The functional and reporting currency of the Company is
      the United States dollar. The Companys wholly-owned foreign subsidiaries
      are integrated foreign operations and, therefore, the Company uses the
      temporal method whereby monetary assets and liabilities are translated
      into United States dollars at the rate of exchange in effect at the
      consolidated balance sheet dates and non-monetary assets and liabilities
      are translated at historical rates. Income and expenses are translated
      using the three month average rate of exchange per quarter, which rate
      approximates the rate of exchange prevailing at the transaction dates.
      Gains or losses resulting from translation are included in the
      determination of net loss for the period.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | f. | Cash and Cash Equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Cash and cash equivalents consist of all bank accounts
      and all highly liquid investments with original maturities of three months
      or less at the date of purchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

12

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

3.

SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Contd)

| | g. | Short-Term Investment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Short-term investment consists of a secured,
      interest-bearing promissory note with a maturity date, of September 30,
      2010 which has been fully reserved due to uncertainty of collection (Note
      7).                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | h. | Loan Impairment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Impaired loans are accounted for at their face amount net
      of the allowance for loan impairment. When a loan is deemed to be
      impaired, its carrying amount is reduced to its estimated realizable
      amount which is measured by discounting the expected future cash flows at
      the effective interest rate inherent in the loans. The amount initially
      recognized as an impairment loan, together with any subsequent change, is
      charged to the allowance as an adjustment. A write-off of the loan will
      occur when the loan is believed to have no reasonable expectation of
      collectability.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | i. | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Inventory is valued at the lower of cost and net
      realizable value, where cost is determined on a first in, first out basis.
      Net realizable value for parts and materials is replacement cost. The cost
      of finished goods and work in progress includes parts, materials, labour
      and an allocation of direct overhead expenses.                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company has determined that, at October 31, 2010 and
      2009, the prototype units that it is developing do not constitute saleable
      inventory and, accordingly, no inventory balances are reported.                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | j. | Long-lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Long-lived assets consist of property and equipment,
      patents and trademarks, royalty rights and deferred development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company initially records the value of the long-lived
      assets acquired at cost. Such assets are reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying value may
      not be recoverable. In such circumstances, an impairment loss is
      calculated as equal to the excess of the carrying value of the assets over
      their fair value.                                                                                                                                                                                                                                  

13

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

3.

SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Contd)

| | k. | Property and Equipment:                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                       
| |    | Property and equipment are recorded at cost and are
      amortized over their estimated useful lives at the following annual rates
      and methods:

| | Computers        | 30% declining balance basis
| | ---------------- | ---------------------------
| | Office equipment | 30% declining balance basis

| | l. | Research and Development Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Research costs are expensed in the period incurred.
      Development costs are expensed as incurred unless they meet the criteria
      for deferral. Commencing in 2009, the Company determined that its
      continuing activities related to the development of its memory and sensor
      technology met the deferral criteria and, accordingly, these costs have
      been capitalized and are tested annually for recoverability. Development
      costs will be amortized on an appropriate basis at the time the Company
      enters commercial production.                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Investment tax credits (ITCs) arising from research and
      development are recognized when their realization is reasonably assured.
      The ITCs are applied against the related costs and expenditures in the
      year that they are incurred.                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | m. | Patents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Patents are recorded at cost and are amortized on a
      straight line basis over their estimated useful lives of 5 years.
      Effective November 1, 2009, the Company revised the estimated useful life
      of patents from 10 years to 5 years. The impact of the change in estimate
      to the 2011, 2012 and 2013 financial statements is an increase in the
      amortization of $20,238, $20,238, and $20,238 respectively. Patents are
      recorded net of accumulated amortization with amortization expense
      capitalized with development cost since the patents are directly related
      to development.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | n. | Unit Private Placements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Until October 31, 2008, the Company had adopted the
      residual value approach in accounting for the value assigned to the common
      shares and the warrants which it has made available in a number of Unit
      private placement financings. Under this residual value approach, the
      Company assigned 100% of the proceeds from the Unit private placement to
      the common shares and a nil value to the attached warrants.                                                                                                                                                                                    

14

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in
United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

3.

SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Contd)

| |    | In the year ended October 31, 2009 the Company changed
      the estimates that it used to value the common shares and the warrants
      included in the Unit private placement financings which it completed in
      the fiscal year then ended. It assigned a value to the warrants which form
      part of these Unit private placements, using the relative fair value
      approach, calculated in accordance with the Black Scholes option pricing
      model.                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | o. | Stock-based Compensation and Other Stock-based Payments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company applies the fair value based method of
      accounting for all stock-based payments to employees and non-employees and
      all direct awards of stocks. Accordingly, stock-based payments are
      measured at the fair value of the consideration received or the fair value
      of the equity instruments issued or liabilities incurred, whichever is
      more reliably measurable. Stock-based compensation is charged to
      operations over the vesting period and the offset is credited to
      contributed surplus.                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Consideration received upon the exercise of stock options
      and warrants is credited to share capital and the related contributed
      surplus is transferred to share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The fair value of stock options and warrants is
      determined by the Black Scholes option- pricing model with assumptions for
      risk free interest rates, dividend yields, volatility factors of the
      expected market price of the Companys common shares and an expected life
      of the option or warrant issued. The fair value of direct awards of stock
      is determined by the quoted market price of the Companys stock.                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | p. | Income Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company accounts for income taxes by the asset and
      liability method. Under the asset and liability method, future tax assets
      and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying
      amounts of existing assets and liabilities and their respective tax bases.
      Future tax assets and liabilities are measured using substantively enacted
      tax rates and laws that are expected to apply when the asset is realized
      or the liability settled. To the extent that it is estimated that a future
      income tax asset will not be realized, a valuation allowance is provided.

15

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4. | CHANGE IN ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Fair value and liquidity risk disclosure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Effective November 1, 2009, the Canadian Institute of
      Chartered Accountants (CICA) issued an amendment to Handbook Section
      3862 to provide improvements to fair value and liquidity risk disclosures.
      The amendment applies to the Company's fiscal year ending October 31 2010.
      This adoption resulted in additional disclosure as provided
  below.                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The following summarizes the methods and assumptions used
      in estimating the fair value of the Company's financial instruments where
      measurement is required. The fair value of financial instruments
      approximated their carrying amounts due to the relatively short period to
      maturity. Fair value amounts represent point-in-time estimates and may not
      reflect fair value in the future. The measurements are subjective in
      nature, involve uncertainties and are a matter of significant judgment.
      The methods and assumptions used to develop fair value measurements, for
      those financial instruments where fair value is recognized in the balance
      sheet, have been prioritized into three levels of the fair value hierarchy
      as follows:
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Level 1: Values based on unadjusted quoted prices in
      active markets that are accessible at the measurement date for identical
      assets or liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Level 2: Values based on quoted prices in markets that
      are not active or model inputs that are observable either directly or
      indirectly for substantially the full term of the asset or liability.
      Level 3: Values based on prices or valuation techniques that require
      inputs that are both unobservable and significant to the overall fair
      value measurement.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company's financial instruments measured at fair
      value on the balance sheet consist of cash and cash equivalents. Cash and
      cash equivalents and cash equivalents are measured at level 1 of the fair
      value hierarchy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

16

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|5. | RECENT CANADIAN ACCOUNTING PRONOUNCEMENTS NOT YET
      ADOPTED
|-- | ---------------------------------------------------------------
|   |                                                                
|   | a.                                                             
|   |                                                                
|   |                                                                
|   |                                                                
|   |                                                                
|   |                                                                
|   | b.                                                             
|   |                                                                
|   |                                                                

17

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|6. | CAPITAL RISK MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Companys objective when managing capital is to
      maintain its ability to continue as a going concern in order to provide
      returns for shareholders and benefits for other stakeholders. The Company
      includes equity, comprised of issued capital stock, contributed surplus
      and deficit, in the definition of capital. The Companys primary objective
      with respect to its capital management is to ensure that it has sufficient
      cash resources to further develop and market its technologies and to
      maintain its ongoing operations. To secure the additional capital
      necessary to pursue these plans, the Company may attempt to raise
      additional funds through the issuance of equity and warrants or by
      securing strategic partners. The Company is not subject to externally
      imposed capital requirements and there has been no change with respect to
      the overall capital risk management strategy during the twelve months
      ended October 31, 2010.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|7. | PROMISSORY NOTE RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In April 2009, the Company advanced $200,000 to a private
      company incorporated in New Jersey and a strategic development partner of
      the Company. On August 1, 2009, the Company and the private company
      executed a promissory note with respect to the $200,000 advance
      stipulating the following terms and conditions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | As at February 14, 2011 the promissory note has not been
      repaid; interest payments have been paid through September 30, 2010. The
      Company is negotiating new repayment terms with the borrower and has
      reviewed its security position. At October 31, 2010, the Company has made
      a provision for the outstanding principal amount of $200,000 pending
      resolution of these collection efforts. The provision for the loan has
      been recorded in administration expense (Note 20).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

18

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|8. | PROPERTY AND EQUIPMENT
|-- | ----------------------

| |           |   |        |  |   | 2010         |  |   |          | 
| | --------- | - | ------ |  | - | ------------ |  | - | -------- | 
| |           |   |        |  |   | Accumulated  |  |   | Net Book | 
| |           |   | Cost   |  |   | Amortization |  |   | Value    | 
| | Computer  | $ | 40,733 |  | $ | 24,047       |  | $ | 16,686   | 
| | Equipment |   | 25,989 |  |   | 25,989       |  |   | -        | 
| |           |   |        |  |   |              |  |   |          | 
| | Total     | $ | 66,722 |  | $ | 50,036       |  | $ | 16,686   | 

| |           |   |        |  |   | 2009         |  |   |          | 
| | --------- | - | ------ |  | - | ------------ |  | - | -------- | 
| |           |   |        |  |   | Accumulated  |  |   | Net Book | 
| |           |   | Cost   |  |   | Amortization |  |   | Value    | 
| | Computer  | $ | 39,882 |  | $ | 15,460       |  | $ | 24,422   | 
| | Equipment |   | 25,989 |  |   | 25,989       |  |   | -        | 
| |           |   |        |  |   |              |  |   |          | 
| | Total     | $ | 65,871 |  | $ | 41,449       |  | $ | 24,422   | 

In 2009, the Company removed from its
accounts a total of $50,616 of fully amortized assets which had been reflected
in its accounts since 2004. These assets have been disposed of at nil value.

19

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|9. | DEFERRED DEVELOPMENT COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In the year ended October 31, 2010, the Company
      capitalized costs in the amount of $932,302 (2009: $2,000,611) relating to
      the development of its memory and sensor technology for future
      commercialization. Development costs include directly related consulting
      fees, materials and third party costs. During 2010, the Company evaluated
      the recoverability of these capitalized costs and has reflected an
      impairment reserve of $2,711,392 against future realization of these
      costs. Included in research expenses is a gain on settlement of debt in
      the amount of $114,000.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The breakdown of development costs that have been
      capitalized is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| | Projects  |   | 10/31/09  |  |   | Additions |  |   | Impairment |   |   | 10/31/10 | 
| | --------- | - | --------- |  | - | --------- |  | - | ---------- | - | - | -------- | 
| |           |   |           |  |   |           |  |   | Reserve    |   |   |          | 
| |           |   |           |  |   |           |  |   |            |   |   |          | 
| | Project A | $ | 337,237   |  | $ | 192,258   |  | $ | (529,494   | ) | $ | 1        | 
| | Project B |   | 38,683    |  |   | 75,960    |  |   | (114,642   | ) |   | 1        | 
| | Project C |   | 587,349   |  |   | 210,445   |  |   | (797,793   | ) |   | 1        | 
| | Project D |   | 750,367   |  |   | 46,819    |  |   | (797,185   | ) |   | 1        | 
| | Project E |   | 131,033   |  |   | 90,480    |  |   |            |   |   | 221,513  | 
| | Project F |   | 155,942   |  |   | 23,452    |  |   | (179,393   | ) |   | 1        | 
| | Project G |   |           |  |   | 19,035    |  |   | (19,034    | ) |   | 1        | 
| | Project H |   |           |  |   | 242,464   |  |   | (242,463   | ) |   | 1        | 
| | Project I |   |           |  |   | 31,389    |  |   | (31,388    | ) |   | 1        | 
| |           |   |           |  |   |           |  |   |            |   |   |          | 
| |           | $ | 2,000,611 |  | $ | 932,302   |  | $ | 2,711,392  |   | $ | 221,521  | 

20

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|10. | PATENTS                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                  
|    | The Company continues to pursue, protect and expand its
      patents registered in Canada, the United States and in foreign
      jurisdictions:

| |         |   |         |  |   | 2010         |  |   |          | 
| | ------- | - | ------- |  | - | ------------ |  | - | -------- | 
| |         |   |         |  |   | Accumulated  |  |   | Net Book | 
| |         |   | Cost    |  |   | Amortization |  |   | Value    | 
| |         |   |         |  |   |              |  |   |          | 
| | Patents | $ | 230,294 |  | $ | 28,267       |  | $ | 202,027  | 
| |         |   |         |  |   |              |  |   |          | 
| |         |   |         |  |   | 2009         |  |   |          | 
| |         |   |         |  |   | Accumulated  |  |   | Net Book | 
| |         |   | Cost    |  |   | Amortization |  |   | Value    | 
| |         |   |         |  |   |              |  |   |          | 
| | Patents | $ | 151,641 |  | $ | 3,791        |  | $ | 147,850  | 

|11. | SHARE CAPITAL
|--- | -------------
|    |              
|    | a.           
|    |              
|    |              
|    |              
|    |              
|    |              
|    |              

21

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------
|    |                       
|    | b.                    
|    |                       
|    |                       
|    |                       
|    |                       

| |                                        | Options | Weighted Average
| | -------------------------------------- | ------- | ----------------
| |                                        | (000)   | exercise price  
| | Outstanding, October 31, 2007          | 10,325  | .55             
| | Granted                                | 2,145   | 1.39            
| | Expired                                | (100)   | .72             
| | Exercised                              | (1,440) | .70             
| | Outstanding, October 31, 2008          | 10,930  | .85             
| | Granted                                | 1,345   | 1.00            
| | Expired                                | (600)   | 1.14            
| | Exercised                              | (1,653) | .60             
| | Outstanding, October 31, 2009 and 2010 | 10,022  | .89             

During the year ended October 31,
2010, no stock options were issued nor exercised. During the fiscal year ended
October 31, 2010 the Company extended by one year 100,000 options which had
expired in November 2009; the exercise price remained unchanged at 60 cents per
share. In May 2010 the Company extended by one year the maturity date on
1,927,199 options that had expired in June 2010. The exercise price on these
options was unchanged at 72 cents per share. The Company recorded a total
expense of $95,038 with respect to the extension of these options, calculated in
accordance with the Black Scholes option-pricing model with the following
assumptions:

Expected dividends
    -Volatility factor
    59%-71%Risk free interest rate
    .6%Weighted average expected life
    1 year


22

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                            
|    | No cash proceeds were realized during the year ended
      October 31, 2010 by the Company as the result of options exercised by
      officers and directors and staff (2009: 1,652,801 options exercised for
      proceeds of $992,417).
|    |                                                                                                                                                                                                                                            
|    | No new options were issued in 2010, the following options
      were granted in the 2008 and 2009 fiscal
years:                                                                                                                            

| | Date        |  | Number    |     |  | Strike          |  |  | Term          |  |  | Recipient(s)                   | 
| | ----------- |  | --------- | --- |  | --------------- |  |  | ------------- |  |  | ------------------------------ | 
| |             |  |           |     |  | price           |  |  |               |  |  |                                | 
| |             |  |           |     |  | per
      share |  |  |               |  |  |                                | 
| | March 2008  |  | 325,000   |     |  | 1.01            |  |  | 5 years       |  |  | Directors                      | 
| | March 2008  |  | 20,000    |     |  | 1.12            |  |  | 5 years       |  |  | Consultants                    | 
| | March 2008  |  | 350,000   | (1) |  | 1.20            |  |  | 5 years       |  |  | New Director                   | 
| | August 2008 |  | 1,400,000 | (2) |  | 1.50            |  |  | 5 years       |  |  | Director, officers, employees  | 
| | April 2008  |  | 50,000    |     |  | 2.31            |  |  | 1 year        |  |  | Consultants                    | 
| | Total       |  | 2,145,000 |     |  |                 |  |  |               |  |  |                                | 
| |             |  |           |     |  |                 |  |  |               |  |  |                                | 
| | August 2009 |  | 1,345,000 |     |  | 1.00            |  |  | 5
      years |  |  | Directors, officers, employees | 
| | Total       |  | 1,345,000 |     |  |                 |  |  |               |  |  |                                | 

| | (1) | A total of 100,000 of the 350,000 stock options which
      were issued in March 2008 at a strike price of $1.20 per share included
      vesting provisions on a quarterly basis commencing in March 2008. The
      remaining 250,000 options were fully vested as of the issue date. These
      stock options were issued to a then director of the Company. In 2009, that
      director stepped down as a director and these stock options expired
      unexercised in August 2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | A total of 200,000 of these options included vesting
      provisions only when certain performance milestones were achieved by the
      Company. These milestones were not achieved as of October 31, 2010 and no
      vesting of these 200,000 occurred to that date. The remaining 1.2 million
      options included vesting provisions on a quarterly basis commencing in
      August 2008.                                                                                       

23

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)                                                                                                                                              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                     
|    | The fair value of all options granted was estimated as of
      the date of grant using the Black Scholes option-pricing model with the
      following assumptions:

| |                                |  | 2009    |  |  | 2008     | 
| | ------------------------------ |  | ------- |  |  | -------- | 
| | Expected dividends             |  | -       |  |  | -        | 
| | Volatility factor              |  | 85%     |  |  | 86%-106% | 
| | Risk free interest rate        |  | 2.54%   |  |  | 2%-5%    | 
| | Weighted average expected life |  | 5 years |  |  | 5 years  | 

The current stock compensation expense
as reflected in the financial statements is summarized as:

| | Quarter Ending |  | 2008      |  |  | 2009      |  |  | 2010   | 
| | -------------- |  | --------- |  |  | --------- |  |  | ------ | 
| |                |  |           |  |  |           |  |  |        | 
| | January 31     |  | 23,814    |  |  | 355,117   |  |  | -      | 
| | April 30       |  | 637,254   |  |  | 342,000   |  |  | 30,385 | 
| | July 31        |  | 25,229    |  |  | 342,000   |  |  | 64,653 | 
| | October 31     |  | 355,117   |  |  | 912,452   |  |  | -      | 
| |                |  |           |  |  |           |  |  |        | 
| |                |  | 1,041,414 |  |  | 1,951,569 |  |  | 95,038 | 

The following table summarizes
information about stock options outstanding as at October 31, 2010:

Options Outstanding
    
    
    Options exercisableWeighted
    Weightedaverage
    Average
    
    WeightedActual exercise
    Number
    remaining
    exercise
    Number
    Averageprice
    outstanding
    contractual life
    price
    Exercisable
    exercise price(in years)0.72
    1,927,199
    0.6 years
    0.72
    1,927,199
    0.720.60
    315,000
    1.9
      years
    0.60
    315,000
    0.600.80
    4,290,000
    .7 years
    0.80
    4,290,000
    0.801.01
    325,000
    2.3
      years
    1.01
    325,000
    1.011.12
    20,000
    2.4 years
    1.12
    20,000
    1.121.50
    1,400,000
    2.8
      years
    1.50
    1,200,000
    1.500.63
    50,000
    .1 years
    0.63
    50,000
    0.630.36
    350,000
    1.5
      years
    0.36
    350,000
    0.361.00
    1,345,000
    3.8 years
    1.00
    1,345,000
    1.00TOTAL
    10,022,199
    
    0.89
    9,822,199
    0.89


24

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------
|    |                       
|    | c.                    
|    |                       
|    |                       
|    |                       
|    | d.                    
|    |                       
|    |                       
|    |                       
|    |                       
|    |                       
|    |                       
|    |                       
|    |                       

| | a) | 1,153,846 warrants at a price of $0.70 per warrant issued
      on February 11, 2009.
| | -- | -------------------------------------------------------------------------------------
| |    |                                                                                      
| | b) | 1,333,333 warrants at a price of $0.75 per warrant issued
      on April 6, 2009.    
| |    |                                                                                      
| | c) | 390,624 warrants issued at a price of $1.20 per warrant
      on May 14, 2009.       

25

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------

| | d) | 39,062 warrants issued at a price of $1.20 per warrant on
      May 14, 2009.    
| | -- | ---------------------------------------------------------------------------------
| |    |                                                                                  
| | e) | 388,980 warrants issued at a price of $1.24 per warrant
      on May 19, 2009.   
| |    |                                                                                  
| | f) | 500,000 warrants issued at a price of $0.95 per warrant
      on August 25, 2009.

| |     | The 39,062 warrants issued on May 14thare
      broker warrants issued with respect to this financing arranged for the
      Company. A charge to share capital in the amount of $14,297 has been
      recorded in the accounts in accordance with the Black Scholes
      option-pricing model with respect to these broker warrants.                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | 388,980 warrants issued on May 19, 2009 had a term of
      four months and expired unexercised. All remaining warrants expired 12
      months from the date of issue. A total of 429,686 warrants were extended
      for 12 months before the original expiry date. The Company recorded a
      reclassification entry of $1,829 between contributed surplus and share
      capital to reflect this extension, calculated in accordance with the Black
      Scholes option-pricing model. The remaining options expired
      unexercised.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | iv. | In 2010 the Company completed a series of private
      placement financings with investors pursuant to prospectus and
      registration exemptions set forth in applicable securities laws. The
      Company received gross subscription proceeds of $2,021,051 and issued a
      total of 5,749,201 common shares.                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | 5,749,201 common share purchase warrants with a weighted
      average price of $0.46 were attached to the private placements completed
      during 2010. All warrants issued in 2010 have a 12 month term from issue
      date.                                                                                                                                                                                                                                                                                                              

| | e. | Bridge Loans:
| | -- | -------------
| |    |              
| |    | i.           

26

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------

| | ii.  | On March 31, 2010 the Company secured a 180 day
      convertible bridge loan from an arms length investor in the amount of CDN
      $250,000. The interest rate on the loan was established at 4% per month
      (effective interest rate  48%). The principal and interest of the loan is
      convertible at $0.55 per share at the holder option. The Company provided
      12,500 common share purchase warrants to acquire common shares at a strike
      price of $0.50 per share. As a result, net proceeds of $220 was allocated
      to warrants. Subsequent to year end, this loan was extended to June
      17th, 2011. The Company provided 20,000 common share purchase
      warrants at a strike price of CDN $0.20 as part of the renegotiation (Note
      20).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | iii. | On August 30, 2010 the Company secured a 180 day
      convertible bridge loan from an arms length investor in the amount of CDN
      $200,000. The interest rate on the loan was established at 2% per month
      (effective interest rate  25%). The principal and interest of the loan is
      convertible at $0.40 per share at the holders option. The Company
      provided 7,500 common share purchase warrants to acquire common shares at
      a strike price of $0.40 per share. As a result, net proceeds of $14 was
      allocated to warrants.                                                                                                                                                                                                                      

The current outstanding bridge loans
are summarized as below:

| |                                                 |   | Loan 1  |   |   | Loan 2  |   |   | Total   |  
| | ----------------------------------------------- | - | ------- | - | - | ------- | - | - | ------- | -
| |                                                 |   |         |   |   |         |   |   | Loan    |  
| | Principal                                       | $ | 249,176 |   | $ | 188,600 |   | $ | 437,776 |  
| | Interest Accrued                                |   | 67,686  |   |   | 7,689   |   |   | 75,375  |  
| | Accretion Expense                               |   | 4,986   |   |   | 429     |   |   | 5,415   |  
| | Equity portion of bridge loan - conversion      |   | (4,766  | ) |   | (1,018  | ) |   | (5,784  | )
| | Equity portion of bridge loan  future warrants |   | (220    | ) |   | (14     | ) |   | (234    | )
| |                                                 |   |         |   |   |         |   |   |         |  
| | Carrying Value at October 31, 2010              | $ | 316,862 |   | $ | 195,686 |   | $ | 512,548 |  

27

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------

| | iv. | The fair value of the warrants issued with respect to the
      bridge loan was estimated using the Black Scholes option-pricing model
      with the following assumptions:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                |  | 2007      |  |  | 2008      |  |  | 2010      | 
| | ------------------------------ |  | --------- |  |  | --------- |  |  | --------- | 
| |                                |  | Loan      |  |  | Loan      |  |  | Loan      | 
| | Expected dividends             |  | -         |  |  | -         |  |  | -         | 
| | Volatility factor              |  | 51% - 97% |  |  | 51% - 97% |  |  | 47%  54% | 
| | Risk-free interest rate        |  | 4.25%     |  |  | 4.25%     |  |  | .6%-1.06% | 
| | Weighted average expected life |  | 1 year    |  |  | 1 year    |  |  | 6 months  | 

| | f. | Warrants:                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                
| |    | A summary of the outstanding common share purchase warrants
      as of the Companys fiscal year-ends and the changes during the periods
      are as follows:

| |                                                   |  |            |   |   | Weighted       |  |   |           | 
| | ------------------------------------------------- |  | ---------- | - | - | -------------- |  | - | --------- | 
| |                                                   |  |            |   |   | average        |  |   | Proceeds  | 
| |                                                   |  | Warrants   |   |   | exercise price |  |   | Realized  | 
| | Balance outstanding at October 31, 2007           |  | 4,471,318  |   | $ | 0.40           |  |   |           | 
| | Exercised in
      2008                
      (i) |  | (3,421,318 | ) | $ | 0.40           |  | $ | 1,368,527 | 
| | (ii)                                              |  | (800,000   | ) | $ | 0.40           |  |   | nil       | 
| | (iii)                                             |  | (250,000   | ) | $ | 0.50           |  | $ | 125,000   | 
| | Issued with respect to                            |  |            |   |   |                |  |   |           | 
| | 2008 Unit private placement (iv)                  |  | 537,128    |   | $ | 1.14           |  |   |           | 
| | Issued with respect to bridge loan (v)            |  | 100,000    |   | $ | 0.50           |  |   |           | 
| | Balance outstanding at October 31, 2008           |  | 637,128    |   | $ | 1.04           |  |   |           | 
| | Exercised (v)                                     |  | (200,000   | ) | $ | 1.17           |  | $ | 234,000   | 
| | Expired (vi)                                      |  | (826,108   | ) | $ | 1.10           |  |   |           | 
| | Granted(vii)                                      |  | 3,805,845  |   | $ | 0.86           |  |   |           | 
| | Balance outstanding at October 31, 2009           |  | 3,416,865  |   | $ | 0.82           |  |   |           | 
| | Exercised                                         |  | -          |   |   | -              |  |   | -         | 
| | Expired                                           |  | (2,987,181 | ) | $ | 0.76           |  |   | -         | 
| | Granted                                           |  | 5,769,201  |   | $ | 0.46           |  |   | -         | 
| | Balance at October
      31, 2010                 |  | 6,198,885  |   | $ | 0.51           |  |   | -         | 

28

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------

| | (i)  | These warrants were initially issued in 2004-2005 as part
      of Unit private placement financings which the Company completed at that
      time. The Company ultimately extended the expiry dates of these warrants
      to June 2008 and revised the strike price in each case to $0.40 per
      warrant. When these warrants were exercised the original charge recorded
      to share capital and the offset to contributed surplus reflecting these
      extensions and price adjustments was then reversed. These charges were
      calculated in accordance with the Black Scholes option pricing
    model.          
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (ii) | The Company entered into a financial advisory services
      agreement in June 2005 and issued 800,000 common share purchase warrants
      as consideration. The strike price of the warrants was ultimately
      established as $0.40 per warrant with an expiry date of June 2008. The
      agreement provided for the cashless exercise of these warrants. In May
      2008 these warrants were exercised. The price of the Companys common
      shares upon the date of exercise was $2.09 per share and the Company
      issued 646,886 common shares for nil proceeds to discharge the 800,000
      warrants exercised.

| | (iii) | These warrants were issued in connection with
      the bridge loan financing described above in Note 11(f)(i). When these
      warrants were exercised the charge originally recorded to contributed
      surplus was reversed to share capital.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                    
| | (iv)  | These warrants were issued with respect to the
      private placements referred to above in Note 11 (e) (i).                                                                                                                                      
| |       |                                                                                                                                                                                                                                                    
| | (v)   | These warrants were issued as above in Note 11
      (f) (ii)).                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                    
| | (vi)  | (These warrants are the warrants issued in 2008
      and in 2009 which were unexercised at their maturity date and expired.                                                                                                                       
| |       |                                                                                                                                                                                                                                                    
| | (vii) | Warrants issued as per Note 11 (e) (iv).                                                                                                                                                                                                           

| | g. | Settlement of Accounts Payable:                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                           
| |    | In June 2008 the Company settled certain accounts payable
      outstanding with an arms length research contractor. It provided cash
      consideration of $125,000 and 30,000 common shares valued at $59,100 to
      fully settle the balance due to the contractor.

29

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|11. | SHARE CAPITAL (Contd)
|--- | ----------------------

In September 2010 the Company settled
certain accounts payable outstanding with a supplier by issuing 192,307 common
shares valued at $50,000.

| | h. | Shares Issued Under Service Contract                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In September 2008 the Company entered into a 12 month
      contract with an arms length contractor. Under the terms of the contract
      the Company committed to a monthly cash payment of $13,500. As additional
      consideration the Company agreed to issue 25,000 common shares per month
      for a total of 300,000 common shares over the term of the contract. The
      Company renegotiated the contract effective in May 2009 thereby reducing
      the required monthly cash payment to $7,500 and the monthly common share
      issuance to 12,500 shares. In total, the Company issued 250,000 common
      shares under the terms of the contract and recorded a non-cash expense of
      $225,375 reflecting the respective market price of the shares at the issue
      dates. The contract was not renewed in September
2009.

|12. | CONTRIBUTED SURPLUS
|--- | -------------------

| | Balance at October 31, 2007                                         | $ | 22,691,336 |  
| | ------------------------------------------------------------------- | - | ---------- | -
| | Stock compensation expense relating to stock options issued         |   | 1,017,600  |  
| | Stock options exercised                                             |   | (537,494   | )
| | Common share purchase warrants issued                               |   | 354,771    |  
| | Common share purchase warrants exercised                            |   | (1,411,792 | )
| | Balance at October 31, 2008                                         | $ | 22,114,421 |  
| | Stock compensation expense relating to
      stock options issued   |   | 1,951,569  |  
| | Stock options exercised                                             |   | (573,706   | )
| | Common share purchase warrants issued                               |   | 653,627    |  
| | Balance at October 31, 2009                                         | $ | 24,145,911 |  
| | Common share purchase warrants issued                               |   | 423,455    |  
| | Stock compensation
      expense relating to stock options extended |   | 95,038     |  
| | Balance at October 31, 2010                                         | $ | 24,664,404 |  

30

---

MICROMEM TECHNOLOGIES INC. (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)

|October 31, 2010 and 2009
|-------------------------
|                         

|12. | CONTRIBUTED SURPLUS (Contd)                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                  
|    | The Company recorded this charge to contributed surplus
      with an offset to share capital reflecting the repricing of the warrants
      relating to the 2004-2005 Unit private placements described
  above.
|    |                                                                                                                                                                                                                  
|    | The Company has calculated the charges to contributed
      surplus as presented above using the Black Scholes option pricing
      model.                                                                       
|    |                                                                                                                                                                                                                  
|    | The components of contributed surplus as reported at
      October 31stinclude:                                                                                                                                  

2010
    
    
    2009
    
    
    2008a.
    
    Amount relating to loan
      forgiveness at inception of the Company
    
    $
    544,891
    
    $
    544,891
    
    $
    544,891b.
    
    Stock options compensation related
    
    
    22,602,176
    
    
    22,507,138
    
    
    21,129,275c.
    
    Common share purchase warrants
    
    
    1,517,337
    
    
    1,093,882
    
    
    440,255$
    24,664,404
    
    $
    24,145,911
    
    $
    22,114,421


|13. | INCOME TAXES
|--- | ------------
|    |             
|    | a.          

| |      |   | Canada     |  |   | Other Foreign |  |   | Total      | 
| | ---- | - | ---------- |  | - | ------------- |  | - | ---------- | 
| | 2014 |   | 999,538    |  |   | -             |  |   | 999,538    | 
| | 2015 |   | 3,147,879  |  |   | -             |  |   | 3,147,879  | 
| | 2026 |   | 2,354,966  |  |   | -             |  |   | 2,354,966  | 
| | 2027 |   | 1,980,341  |  |   | -             |  |   | 1,980,341  | 
| | 2028 |   | 10,272     |  |   | 48,000        |  |   | 58,272     | 
| | 2029 |   | 2,681,028  |  |   | 1,740,251     |  |   | 4,421,279  | 
| | 2030 |   | 1,961,617  |  |   | 772,973       |  |   | 2,734,590  | 
| |      |   |            |  |   |               |  |   |            | 
| |      | $ | 13,135,641 |  | $ | 2,561,224     |  | $ | 15,696,865 | 

In addition the Company has available
capital loss carry forwards of approximately $1.6 million to reduce future
taxable capital gains, the benefit of which has not been recognized in these
consolidated financial statements. These losses carry forward indefinitely.

31

---