##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-5449
 
 COMARCO, INC.
 (Exact name of registrant as specified in its charter)
 California
(State or Other Jurisdiction 
of Incorporation or Organization)
    
    95-2088894
(I.R.S. Employer
Identification No.)25541 Commercentre Drive, Lake Forest, CA
(Address of Principal Executive Offices)
    
    92630
(Zip Code)
 Registrants telephone number, including area code:
(949) 599-7400
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on which RegisteredCommon Stock, $0.10 par value
    
    The NASDAQ Stock Market LLC
(NASDAQ Global Market)
 Securities registered pursuant to Section 12(g) of the Act:
None
 
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



COMARCO, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2010
  
 TABLE OF CONTENTS
 PagePART I
    
    
    1ITEM 1. BUSINESS
    
    
    1ITEM 1A. RISK FACTORS
    
    
    8ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    15ITEM 2. PROPERTIES
    
    
    15ITEM 3. LEGAL PROCEEDINGS
    
    
    16ITEM 4. [RESERVED]
    
    
    16PART II
    
    
    17ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    17ITEM 6. SELECTED FINANCIAL DATA
    
    
    17ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    18ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    30ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    31ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    53ITEM 9A. CONTROLS AND PROCEDURES
    
    
    53ITEM 9B. OTHER INFORMATION
    
    
    54PART III
    
    
    57ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
    
    
    57ITEM 11. EXECUTIVE COMPENSATION
    
    
    57ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    57ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    57ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    57PART IV
    
    
    58ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    58EX-10.12EX-10.13EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1




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PART I
 FORWARD-LOOKING STATEMENTS
    
 ITEM 1. BUSINESS
 General
 ® ® ®
 ®
   1




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Product Recall
  Background & Problem Driving the Recall
   Recall Process
   Financial Impact
  2




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Discontinued Operations
 Call Box
   Wireless Test Solutions
    Our Business
  Products
 ® ®
 3




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Marketing, Sales, and Distribution
  
    
    Retail;
    
    OEM-branded accessories, and
    
    OEM in-the-box.
 Retail
    OEM-branded accessories
    4




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OEM in-the-box
  Competition
 ® ®
  
    
    Differentiate our offerings through innovation and development of new or enhanced
products;
    
    Successfully meet stringent design specifications in a timely manner;
    
    Manufacture and deliver on time, cost effective products in volume; and
    
    Price our products competitively.
 Key Customers
  ®
 International Operations
  5




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Research and Development
   
    
    We collaborate closely with our customers and partners to design and manufacture new
products or modify existing products to specifications required by our customers;
    
    We design and manufacture enhancements and improvements to our existing products in
response to our customers requests or feedback; and
    
    We independently design and build new products in anticipation of the development of
a variety of mobile electronic devices.
 Manufacturing and Suppliers
   Patents and Intellectual Property
 ® ® ®
   6




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##### Table of Contents



Industry Practices Impacting Working Capital
    Employees
   7




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ITEM 1A. RISK FACTORS
 We have a history of losses, and we cannot be certain that we will achieve or sustain
profitability; we may need additional capital in the future to fund our businesses, which we may
not be able to obtain on acceptable terms.
   We will have to reduce our costs for our ChargeSource® products and achieve higher sales volumes
for our business to become profitable, and if we fail to achieve cost reductions and higher sales
volumes for our products, we may not achieve or sustain profitability and our results of operations
and prospects would be adversely impacted.
   
    
    Successful development and release for manufacture of certain AC, DC, and AC/DC
standalone power adapter products designed to address the requirements of our retail
and OEM channels;
    
    Securing additional OEM partners; and
    
    Market and customer acceptance of our new products, some of which were introduced to
the market late in fiscal year 2010 and others which we expect will follow during
fiscal year 2011.
 ®
 8




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In the first quarter of fiscal 2011, the US Consumer Product Safety Commission in cooperation with
us, announced a voluntary recall of one of our power adapters. In addition, we may experience
quality or safety defects in our products in the future that could cause us to institute additional
product recalls, require us to provide replacement products and harm our reputation.
    A significant portion of our revenue is derived from two customers and we are dependent upon our
relationships with them and upon their performance. Any loss of, reduction, cancellation, or delay
in purchases by these customers would negatively impact our revenue, business, prospects, and
operating results.
 ®
  9




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If we fail to accurately forecast customer demand, we may have excess or insufficient product
inventory, which may increase our operating costs and harm our business.
    Our business and operational results are subject to the seasonal demand fluctuations of the
consumer product and retail industries, as well as general economic and retail uncertainty.
   Our customers may cancel their orders, change production quantities or delay production, any of
which would reduce our sales and adversely affect our operating results.
  
    
    Changes in the specific products or quantities our customers order; and
    
    Electronic component long lead times and advance financial commitments for
components required to complete actual/anticipated customer orders.
  10




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Failure to adjust our operations in response to changing market conditions or failure to accurately
estimate demand for our products could adversely affect our operating results.
 ®
 The products we make are complex and have short life cycles. If we are unable to rapidly and
successfully develop and introduce new products, some of our products may become obsolete and our
operating results could suffer.
  
    
    Properly identify customer needs and technological trends;
    
    Timely develop new technologies and applications;
    
    Price our products and services competitively;
    
    Timely manufacture and deliver our products in sufficient volume, and
    
    Differentiate our products from those of our competitors.
  The consumer electronics industry is highly competitive, and our profitability will be adversely
affected if we are not able to compete effectively.
  11




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The average selling prices of our products will likely decrease over their sales cycles, especially
upon the introduction of new products, which may negatively affect our revenue and operating
results.
  Economic, political, and other risks associated with our international sales and operations could
adversely affect our results of operations.
 ®
 We rely on a limited number of contract manufacturers and suppliers and any delays, disruptions or
quality control problems in the manufacturing operations of such manufacturers and suppliers or any
disruptions in our relationships with our contract manufacturers and suppliers could adversely
impact our ability to sell our products, harm our reputation, impair our customer relations and
adversely affect our business, results of operations and prospects.
 ® ®
  12




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Third parties may claim that we are infringing their intellectual property, and we could suffer
significant litigation, settlement or licensing costs and expenses or be prevented from selling
certain products.
   Third parties may infringe our intellectual property rights, and we may be required to spend
significant resources enforcing these rights or otherwise suffer competitive injury.
   If we suffer the loss of our corporate headquarters or the loss of one of our contract
manufacturers facilities due to catastrophe, our operations would be adversely affected.
  ®
 We depend upon the services of key personnel, and may not be able to attract and retain additional
key personnel.
  13




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Our quarterly operating results are subject to significant fluctuations and, if our operating
results decline or are worse than expected, our stock price could fall.
  
    
    The size and timing of customer orders and shipments;
    
    The degree and rate of growth in the markets in which we compete and the
accompanying demand for our products;
    
    Limitations in our ability to forecast our manufacturing needs;
    
    Our ability to introduce, and the timing of our introductions of, new or enhanced
products;
    
    Product failures and recalls, product quality control problems and associated
in-field service support costs;
    
    Warranty expenses;
    
    Availability and cost of components;
    
    Changes in average sales prices, and
    
    Normal market sales seasonality.
  Our Restated Articles of Incorporation and our Amended and Restated Bylaws and at least one
agreement to which we are a party contain provisions which may discourage attempts by others to
acquire or merge with us, which could reduce the market value of our common stock.
  
    
    the authorization of our board of directors to issue preferred stock with such
rights and preferences as may be determined by the board of directors, without the
approval of our shareholders;
    
    the prohibition of action by the written consent of the shareholders;
    
    the establishment of advance notice requirements for director nominations and other
proposals by shareholders for consideration at shareholder meetings;
    
    the requirement that the holders of at least two-thirds of the outstanding common
stock entitled to vote at a meeting are required to approve certain business
combinations with interested stockholders; and
    
    the requirement that the holders of at least two-thirds of the outstanding common
stock entitled to vote at a meeting are required to approve certain changes to specific
provisions of our Articles of Incorporation (including those provisions described
above).
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Our stock price has been and will likely remain highly volatile.
  
    
    Our quarterly operating results;
    
    Changes in the consumer electronics industries;
    
    Changes in the economic outlook of the particular markets in which we sell our
products and services;
    
    The gain or loss of significant customers;
    
    Reductions in demand or expectations of future demand by our customers;
    
    Changes in stock market analyst recommendations regarding us, our competitors, or
our customers;
    
    The timing and announcements of technological innovations or new products by our
competitors or by us, and
    
    Other events affecting other companies that investors deem comparable to us.
  The trading volume of our common stock often has been limited and may depress the price for our
common stock.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  15




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ITEM 3.
    
    LEGAL PROCEEDINGS
 iGo, Inc. (formerly Mobility Electronics, Inc.) vs. Comarco Wireless Technologies, Inc.,
Case No. 5:07cv00084, U.S. District Court for the Eastern District of Texas (transferred to Arizona
District Court and assigned Case No. 2:08-cv-01224-JWS).
  Mark Chapman (Chapman) vs. Comarco Wireless Technologies, Inc., Case No. 73-166-03168-09 02
FEZA-C, American Arbitration Association.
  
 ITEM 4.
    
    [RESERVED]
 16




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market Information
 ®
 High
    
    LowYear ended January 31, 2010:First Quarter
    
    $
    2.03
    
    
    $
    0.70Second Quarter
    
    
    2.30
    
    
    
    1.66Third Quarter
    
    
    3.15
    
    
    
    1.66Fourth Quarter
    
    
    3.29
    
    
    
    2.41Year ended January 31, 2009:First Quarter
    
    $
    5.45
    
    
    $
    3.20Second Quarter
    
    
    4.42
    
    
    
    2.93Third Quarter
    
    
    3.49
    
    
    
    1.13Fourth Quarter
    
    
    1.49
    
    
    
    0.80
 Holders
  Dividends
  
 ITEM 6.  SELECTED FINANCIAL DATA
  17




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ITEM 7.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
 ® ®
 ®
 Industry and Company Trends and Uncertainties
 ® ® ® ® ® ®
 ®
  
    
    On April 30, 2010, the United States Consumer Product Safety Commission (CPSC)
announced the Recall concerning approximately 500,000 units of our ChargeSource 90-watt
universal AC power adapter sold to our distributer, Targus Group International, Inc.
(Targus) from June 2009 through March 2010. We estimate that approximately 400,000
of the affected units are in the hands of
 18




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consumers and the remaining affected units are currently in the distribution channel.
We have established a recall website and hotline to enable
consumers to determine if they have a unit subject to the Recall. We have established a
process to replace and repair the affected units. Due to the Recall, we accrued a $4.0
million charge to cost of revenue in the fourth quarter of fiscal 2010 as an estimate of
the cost to replace the affected units and $0.6 million related to selling, general and
administrative costs expected to be incurred related to the Recall. Actual amounts may
differ materially from our current estimates based on many factors, including the number
of qualifying 90-watt universal power adapters returned to Comarco by Targus and their
customers, primarily consumer electronics retailers and end-user consumers in connection
with the Recall.
Also, the estimate is based on Comarcos assessment of Targus and Comarcos
respective obligations regarding returned product.  Targus and Comarco have not reached
full agreement with respect to such matters and adverse developments with respect to
such matters could materially increase the costs of the Recall to Comarco.
 Comarcos revenue for the quarter ended April 30, 2010, from the sale of its legacy or
Bronx product significantly declined from prior periods.  As Comarco continues to
transition from Bronx sales to sales of its new Slim and Light or Manhattan product,
Comarco anticipates that future revenue from the Bronx product will be modest.
 In an abundance of caution, during the later part of the first quarter of fiscal 2011,
Comarco ceased production and shipping of its Manhattan product to allow it time to
verify that the product did not contain defects similar to the one which caused the Recall.
Comarco has successfully completed its verification process and is again manufacturing
and shipping Manhattan units. As a result of the temporary cessation of manufacturing
and shipping of Manhattan products and the significant decline in Bronx sales which
occurred during the first quarter of fiscal 2011, Comarcos sales to Targus for the quarter
ended April 30, 2010 were adversely affected.
 As a result of the Recall, many important factors, risks and uncertainties may cause us
to incur costs in excess of the reserves we established as a result of the Recall, and
in addition, may negatively impact our business and results of operations, including,
but not limited to: the assumptions underlying our estimates concerning the costs and
expenses that we expect to incur as a result of the Recall may turn out to be incorrect
and we may incur costs and expenses beyond such estimates; the possibility that costs
and expenses may result from litigation, arbitration or other adverse proceedings
related to the Recall; the risk that demand or orders for our products may be adversely
impacted by the Recall; the risk that our key customers may cancel orders, change order
quantities or delay order delivery dates as a result of the Recall or otherwise;
reputational harm which may result from the Recall; the fact that we rely on a limited
number of contract manufacturers and component suppliers and delays or disruptions in
their production of our products or in the components that go into such products would
adversely impact our results of operations and financial condition; and other factors,
including factors outside of our control.
 
    
    On June 30, 2009, we announced that we were selected by Dell Inc. to provide an
innovative 90 watt DC adapter for use in automobiles and airplanes. We currently
expect to start shipping this product during the second quarter of fiscal 2011.
    
    On March 16, 2009, we entered into the Targus Agreement
with Targus. We began shipments to Targus
under this agreement during the second quarter of fiscal 2010. The product
offerings for Targus include the following:
 
    
    A programmable AC adapter that connects easily to a standard
wall plug and includes up to 10 SmartTips® and a DC cable that supports
charging two devices simultaneously.
    
    A programmable AC adapter that includes both input and output
cables (AC or AC/DC) and up to 10 SmartTips®.
 During fiscal 2010, sales to Targus accounted for 71% of our revenue and we expect that
Targus will continue to represent a large percentage of our future revenue. Any adverse
change in our relationship with Targus would adversely impact our revenues and our
results of operations.
    
    In late January 2008, we began volume production of a small form factor 90-watt
AC/DC standalone power adapter designed to the stringent specifications of Lenovo, a
leading notebook computer OEM. This innovative product is currently being marketed and
sold as an OEM-branded aftermarket accessory. During the third quarter of fiscal 2010,
we began shipments to Lenovo of our newest generation of our Slim and Light product.
    
    Revenue for fiscal 2010 increased significantly to $26.4 million compared to $13.5
million for fiscal 2009. The increase is attributable to shipments to Targus under the
Targus Agreement.
 
    
    The fiscal 2009 level of sales was insufficient to fully absorb our fixed supply
chain overhead, resulting in negative gross margins and we did not generate positive
gross margins on the sale of our ChargeSource® products until the second quarter of
fiscal 2010, when our sales levels increased and
 19




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fully absorbed our fixed supply chain overhead. Our future is highly dependent on our
ability to sell our products at a profit and our ultimate return to overall
profitability. The Company remains focused on efforts to drive further increases in
sales in order to absorb our fixed operating costs and to become profitable. Our ability
to drive increased sales is dependent upon a number of factors, including, among others:
 
    
    Our ability to timely deliver existing, new and enhanced
products meeting our customers required specifications in sufficient
quantities to satisfy demand of our customers including, but not limited to,
the development and release for manufacture of certain AC and AC/DC standalone
power adapter products designed to address the requirements of our retail and
OEM accessories channels;
    
    Securing additional OEM partners; and
    
    Market and customer acceptance of our new products that began
shipping in the third quarter of fiscal 2010.
 
    
    Our ChargeSource® products are based on proprietary patented construction technology
that enables the production of slim and light power sources for many rechargeable
mobile devices from standard wall outlets, as well as power outlets in airplanes, cars,
and other modes of transportation.
    
    Our ability to timely obtain sufficient quantities of products meeting our
customers required specifications from our third party contract manufacturers and our
ability to reduce our unit costs for such products. Reducing our product costs is
important to our continuing efforts to improve our margins and we are continually in
negotiations with our contract manufacturers in this regard.
    
    We are focused on preserving our cash balances by monitoring expenses, identifying
costs savings, and investing only in those development programs and products that we
believe will most likely contribute to our profitability.
 Critical Accounting Policies
  Revenue Recognition
  Stock-based Compensation
  20




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Accounts Receivable
   Valuation of Inventory
  Income Taxes
   21




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Valuation of Long-Lived Assets
  Warranty Costs
 ®
  Results of OperationsContinuing Operations
  Years Ended January 31,2010
    
    
    2009(In thousands)
    
    
    
    
    
    
    2010 over% of
    
    
    
    
    
    
    % of
    
    
    2009Revenue
    
    
    
    
    
    
    Revenue
    
    
    % ChangeRevenue
    
    $
    26,425
    
    
    
    100
    %
    
    $
    13,521
    
    
    
    100
    %
    
    
    95
    %Operating loss
    
    $
    (8,956
    )
    
    
    
    
    
    $
    (13,187
    )Net loss from continuing operations
    
    $
    (8,200
    )
    
    
    
    
    
    $
    (9,699
    )
 22




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Years Ended January 31,
    
    
    2010 over2010
    
    
    2009
    
    
    2009(In thousands)
    
    
    
    
    
    
    % ChangeRevenue:North America
    
    $
    18,361
    
    
    
    
    
    
    $
    473
    
    
    
    
    
    
    
    3,782
    %Europe
    
    
    330
    
    
    
    
    
    
    
    2,050
    
    
    
    
    
    
    
    (84
    %)Asia  Pacific
    
    
    7,734
    
    
    
    
    
    
    
    10,998
    
    
    
    
    
    
    
    (30
    %)$
    26,425
    
    
    
    
    
    
    $
    13,521
    
    
    
    
    
    
    
    95
    %
 Years Ended January 31,
    
    
    2010 over2010
    
    
    2009
    
    
    2009(In thousands)
    
    
    
    
    
    
    % ChangeRevenue:Lenovo
    
    $
    7,418
    
    
    
    
    
    
    $
    11,033
    
    
    
    
    
    
    
    (33
    %)Trust
    
    
    123
    
    
    
    
    
    
    
    1,211
    
    
    
    
    
    
    
    (90
    %)Kensington
    
    
    80
    
    
    
    
    
    
    
    981
    
    
    
    
    
    
    
    (92
    %)Tumi
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    (100
    %)Targus
    
    
    18,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    $
    26,425
    
    
    
    
    
    
    $
    13,521
    
    
    
    
    
    
    
    95
    %
 Revenue
  Cost of Revenue and Gross Margin
 Years Ended January 31,2010
    
    2009(In thousands)
    
    
    
    
    
    2010 over% of
    
    
    
    
    
    % of
    
    2009Total
    
    
    
    
    
    Total
    
    % ChangeCost of Revenue:Product costs
    
    $
    19,664
    
    
    
    78
    %
    
    $
    12,119
    
    
    
    80
    %
    
    
    62
    %Accrued product recall costs
    
    
    3,954
    
    
    
    16
    %
    
    
    
    
    
    
    
    
    
    
    Under-absorption of fixed supply
chain overhead
    
    
    872
    
    
    
    4
    %
    
    
    1,241
    
    
    
    8
    %
    
    
    (30
    %)Inventory reserve and scrap charges
    
    
    351
    
    
    
    1
    %
    
    
    1,507
    
    
    
    10
    %
    
    
    (77
    %)Freight, expedite, and other charges
    
    
    249
    
    
    
    1
    %
    
    
    222
    
    
    
    2
    %
    
    
    12
    %$
    25,090
    
    
    
    100
    %
    
    $
    15,089
    
    
    
    100
    %
    
    
    66
    %
 23




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2010 overYears Ended January 31,
    
    2009 ppt2010
    
    2009
    
    % ChangeCombined gross margin
    
    
    
    
    5%
    
    
    
    
    
    
    
    (12%)
    
    
    
    
    
    17
 ®
   Operating Costs and Expenses
 Years Ended January 31,2010
    
    2009(In thousands)
    
    2010 over% of
    
    
    
    
    
    % of
    
    2009Revenue
    
    
    
    
    
    Revenue
    
    % ChangeOperating expenses:Selling, general, and
administrative expenses,
excluding corporate overhead
    
    $
    2,150
    
    
    
    8
    %
    
    $
    2,988
    
    
    
    22
    %
    
    
    (28
    %)Corporate overhead
    
    
    4,426
    
    
    
    17
    %
    
    
    5,788
    
    
    
    43
    %
    
    
    (24
    %)Engineering and support expenses
    
    
    3,715
    
    
    
    14
    %
    
    
    2,843
    
    
    
    21
    %
    
    
    31
    %$
    10,291
    
    
    
    39
    %
    
    $
    11,619
    
    
    
    86
    %
    
    
    (11
    %)
   24




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Other Income (Loss), Net
  Income Tax Benefit
    25




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Discontinued Operations, net of income taxes
 Income from Discontinued Operations  Call Box
(in thousands except change)
 Years Ended January 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    % ChangeRevenues
    
    $
    
    
    
    $
    3,680
    
    
    
    (100
    %)Income (loss) from discontinued operations:Gain on sale, net of income taxes of $0 and
$192
    
    $
    
    
    
    $
    298
    
    
    
    (100
    %)Income (loss) from discontinued operations,
before taxes
    
    
    (25
    )
    
    
    1,148
    
    
    
    (102
    %)Income tax (expense) benefit
    
    
    10
    
    
    
    (450
    )
    
    
    (102
    %)Total income (loss) from discontinued operations
    
    $
    (15
    )
    
    $
    996
    
    
    
    (102
    %)
 ®
  Income from Discontinued Operations  Wireless Test Solutions  (in thousands except change)
 Years Ended January 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    % ChangeRevenues
    
    $
    
    
    
    $
    13,628
    
    
    
    (100
    %)Income from discontinued operations:Gain on sale, net of income taxes of
$495 and $2,309
    
    $
    781
    
    
    $
    3,582
    
    
    
    (78
    %)Income from discontinued
operations, before taxes
    
    
    20
    
    
    
    1,079
    
    
    
    (98
    %)Income tax expense
    
    
    (8
    )
    
    
    (423
    )
    
    
    (98
    %)Total income from discontinued operations
    
    $
    793
    
    
    $
    4,238
    
    
    
    (81
    %)
   26




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##### Table of Contents



Liquidity and Capital Resources
  Years Ended January 31,2010
    
    2009(In thousands)Cash provided by (used in):Operating activities
    
    $
    (4,480
    )
    
    $
    (2,984
    )Investing activities
    
    
    (494
    )
    
    
    117Financing activities
    
    
    957
    
    
    
    
 Operating Activities
     Cash Flows from Investing Activities
 ®
 ®
 27




---



##### Table of Contents



Cash Flows from Financing Activities; Credit Facility
      Liquidity Requirements for the Next 12 Months
  
    
    In the event that any of our significant customers are unable to perform due to
their inability to take delivery of the ordered products and/or pay for such products
in a timely manner, we would be required to establish alternative distribution
channels. Such significant change would negatively impact our revenue, operating
results, and cash flows.
    
    Should the actual Recall costs incurred exceed the amounts that have been accrued in
the fourth quarter of fiscal 2010, our operating results and cash
flows would be negatively impacted.
    
    Should one or more of our contract manufacturers of our ChargeSource® products
become unable to manufacture our products at the level currently anticipated, our
operating results and cash flows would be negatively impacted.
  28




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##### Table of Contents



Contractual Obligations
  Payments due by PeriodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanLong Term Debt Obligations
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years
    
    
    TotalOperating lease obligations
    
    $
    386
    
    
    $
    221
    
    
    $
    
    
    
    $
    
    
    
    $
    607Less: sublease income
    
    
    (184
    )
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    (291
    )Purchase obligations
    
    
    11,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,958$
    12,160
    
    
    $
    114
    
    
    $
    
    
    
    $
    
    
    
    $
    12,274
    Recent Accounting Pronouncements
   29




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    30




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 COMARCO, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    32Financial Statements:Consolidated Balance Sheets, January 31, 2010 and 2009
    
    
    33Consolidated Statements of Operations, Years Ended January 31, 2010 and 2009
    
    
    34Consolidated Statements of Stockholders Equity, Years Ended January 31, 2010 and 2009
    
    
    35Consolidated Statements of Cash Flows, Years Ended January 31, 2010 and 2009
    
    
    36Notes to Consolidated Financial Statements
    
    
    37Schedule II  Valuation and Qualifying Accounts, Years Ended January 31, 2010 and 2009
    
    
    62
  31




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 32




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 January 31,2010
    
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,127
    
    
    $
    14,144Accounts receivable, net of reserves of $136 and $14
    
    
    11,489
    
    
    
    3,974Inventory, net of reserves of $1,650 and $1,488
    
    
    935
    
    
    
    1,232Other current assets
    
    
    280
    
    
    
    862Total current assets
    
    
    22,831
    
    
    
    20,212Property and equipment, net
    
    
    1,072
    
    
    
    1,279Restricted cash
    
    
    
    
    
    
    77Total assets
    
    $
    23,903
    
    
    $
    21,568LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,134
    
    
    $
    1,501Accrued liabilities
    
    
    12,212
    
    
    
    3,178Line of credit
    
    
    1,000
    
    
    
    Total current liabilities
    
    
    14,346
    
    
    
    4,679Tax liability
    
    
    33
    
    
    
    86Deferred rent, net of current portion
    
    
    63
    
    
    
    182Total liabilities
    
    
    14,442
    
    
    
    4,947Commitments, Contingencies, and Subsequent EventsStockholders Equity:Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued or outstanding at
January 31, 2010 and 2009, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,326,569 shares issued and outstanding
at January 31, 2010 and 2009, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    14,967
    
    
    
    14,705Retained earnings (accumulated deficit)
    
    
    (6,239
    )
    
    
    1,183Total stockholders equity
    
    
    9,461
    
    
    
    16,621Total liabilities and stockholders equity
    
    $
    23,903
    
    
    $
    21,568
  33




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Years Ended January 31,2010
    
    
    2009Revenue
    
    $
    26,425
    
    
    $
    13,521Cost of revenue
    
    
    25,090
    
    
    
    15,089Gross profit (loss)
    
    
    1,335
    
    
    
    (1,568
    )Selling, general, and administrative expenses
    
    
    6,576
    
    
    
    8,776Engineering and support expenses
    
    
    3,715
    
    
    
    2,84310,291
    
    
    
    11,619Operating loss
    
    
    (8,956
    )
    
    
    (13,187
    )Other income (loss), net
    
    
    (1
    )
    
    
    113Loss from continuing operations before income taxes
    
    
    (8,957
    )
    
    
    (13,074
    )Income tax benefit
    
    
    757
    
    
    
    3,375Net loss from continuing operations
    
    
    (8,200
    )
    
    
    (9,699
    )Income from discontinued operations, net of income taxes
    
    
    778
    
    
    
    5,234Net loss
    
    $
    (7,422
    )
    
    $
    (4,465
    )Basic and diluted income (loss) per share:Net loss from continuing operations
    
    $
    (1.12
    )
    
    $
    (1.32
    )Net income from discontinued operations
    
    
    0.11
    
    
    
    0.71$
    (1.01
    )
    
    $
    (0.61
    )Weighted average common shares outstanding:Basic
    
    
    7,327
    
    
    
    7,327Diluted
    
    
    7,327
    
    
    
    7,327Common shares outstanding
    
    
    7,327
    
    
    
    7,327
  34




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
 RetainedAdditional
    
    
    EarningsCommon
    
    
    Paid-in
    
    
    (AccumulatedStock
    
    
    Capital
    
    
    Deficit)
    
    
    TotalBalance at February 1, 2008,
7,326,569 shares
    
    $
    733
    
    
    $
    14,434
    
    
    $
    5,648
    
    
    $
    20,815Net loss
    
    
    
    
    
    
    
    
    
    
    (4,465
    )
    
    
    (4,465
    )Stock based compensation expense
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    271Balance at January 31, 2009,
7,326,569 shares
    
    $
    733
    
    
    $
    14,705
    
    
    $
    1,183
    
    
    $
    16,621Net loss
    
    
    
    
    
    
    
    
    
    
    (7,422
    )
    
    
    (7,422
    )Stock based compensation expense
    
    
    
    
    
    
    262
    
    
    
    
    
    
    
    262Balance at January 31, 2010,
7,326,569 shares
    
    $
    733
    
    
    $
    14,967
    
    
    $
    (6,239
    )
    
    $
    9,461
  35




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Years Ended January 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from continuing operations
    
    $
    (8,200
    )
    
    $
    (9,699
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    772
    
    
    
    978Loss on sale/retirement of property and equipment
    
    
    6
    
    
    
    24Loan origination fees
    
    
    43
    
    
    
    Stock based compensation expense
    
    
    262
    
    
    
    240Provision for doubtful accounts receivable
    
    
    150
    
    
    
    14Provision for obsolete inventory
    
    
    162
    
    
    
    1,469Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,665
    )
    
    
    (2,413
    )Inventory
    
    
    135
    
    
    
    (2,262
    )Other assets
    
    
    582
    
    
    
    (9
    )Accounts payable
    
    
    (367
    )
    
    
    850Tax liability
    
    
    (53
    )
    
    
    Deferred rent, net of current portion
    
    
    (119
    )
    
    
    (391
    )Accrued liabilities
    
    
    9,034
    
    
    
    (648
    )Net cash used in continuing operating activities
    
    
    (5,258
    )
    
    
    (11,847
    )Net cash provided by discontinued operating activities
    
    
    778
    
    
    
    8,863Net cash used in operating activities
    
    
    (4,480
    )
    
    
    (2,984
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of property and equipment
    
    
    
    
    
    
    40Purchases of property and equipment
    
    
    (571
    )
    
    
    (492
    )Decrease in restricted cash
    
    
    77
    
    
    
    173Net cash used in continuing investing activities
    
    
    (494
    )
    
    
    (279
    )Net cash provided by discontinued investing activities
    
    
    
    
    
    
    396Net cash provided by (used in) investing activities
    
    
    (494
    )
    
    
    117CASH FLOWS FROM FINANCING ACTIVITIES:Line of credit
    
    
    1,000
    
    
    
    Loan origination fees
    
    
    (43
    )
    
    
    Net cash provided by financing activities
    
    
    957
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (4,017
    )
    
    
    (2,867
    )Cash and cash equivalents, beginning of year
    
    
    14,144
    
    
    
    17,011Cash and cash equivalents, end of year
    
    $
    10,127
    
    
    $
    14,144Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    31
    
    
    $
    Cash paid for income taxes, net of refunds
    
    $
    
    
    
    $
    19
  36




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization
 ® ®
 2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Future operations, Liquidity and Capital Resources
 ® ® ®
  Use of Estimates
   37




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Revenue Recognition
  Cash and Cash Equivalents
  Inventory
  Property and Equipment
  Research and Development Costs
  Long-Lived Assets
  38




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Income Taxes
      Warranty Costs
 ®
  39




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Concentrations of Credit Risk
  Earnings (Loss) Per Common Share
  Stock-Based Compensation
     Years EndedJanuary 31,2010
    
    
    2009Total stock-based compensation expense
    
    $
    262,000
    
    
    $
    271,000Less: amounts reflected in discontinued operations
    
    
    
    
    
    
    (31,000
    )Stock-based compensation expense from continuing operations
    
    
    262,000
    
    
    
    240,000Impact on basic and diluted earnings per share
    
    $
    (0.04
    )
    
    $
    (0.03
    )
 40




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Year EndedJanuary 31, 2009Weighted average risk-free interest rate
    
    
    3.0
    %Expected life (in years)
    
    
    6.2Expected stock volatility
    
    
    49
    %Dividend yield
    
    NoneExpected forfeitures
    
    
    10.6
    %
 Fair Value of Financial Instruments
  Reclassifications
  Recently Adopted Accounting Pronouncements:
   41




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3. Discontinued Operations
 Call Box
     Years Ended January 31,2010
    
    
    2009Revenues
    
    $
    
    
    
    $
    3,680Income
(loss) from discontinued operations:Gain on sale, net of taxes of $0 and $192
    
    $
    
    
    
    $
    298Income (loss) from discontinued operations, before taxes
    
    
    (25
    )
    
    
    1,148Income tax (expense) benefit
    
    
    10
    
    
    
    (450
    )Total income (loss) from discontinued operations
    
    $
    (15
    )
    
    $
    996
 ®
 Wireless Test Solutions (WTS)
   42




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Years Ended January 31,2010
    
    
    2009Revenues
    
    $
    
    
    
    $
    13,628Income from discontinued operations:Gain on sale, net of taxes of $495 and $2,309
    
    $
    781
    
    
    $
    3,582Income from discontinued operations, before taxes
    
    
    20
    
    
    
    1,079Income tax expense
    
    
    (8
    )
    
    
    (423
    )Total income from discontinued operations
    
    $
    793
    
    
    $
    4,238
 4. Customer and Supplier Concentrations
  Years Ended January 31,2010
    
    
    2009Total revenue
    
    $
    26,425
    
    
    
    100
    %
    
    $
    13,521
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    18,801
    
    
    
    71
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    7,418
    
    
    
    28
    %
    
    
    11,033
    
    
    
    82
    %$
    26,219
    
    
    
    99
    %
    
    $
    11,033
    
    
    
    82
    %
   Years Ended January 31,2010
    
    
    2009Revenue:North America
    
    
    18,361
    
    
    
    473Europe
    
    
    330
    
    
    
    2,050Asia  Pacific
    
    
    7,734
    
    
    
    10,998$
    26,425
    
    
    $
    13,521
  January 31,2010
    
    
    2009Total gross accounts receivable
    
    $
    11,625
    
    
    
    100
    %
    
    $
    3,988
    
    
    
    100
    %Customer concentration:Lenovo Information Products Co., Ltd.
    
    $
    2,730
    
    
    
    24
    %
    
    $
    3,366
    
    
    
    84
    %Targus Group International, Inc.
    
    
    7,917
    
    
    
    68
    %
    
    
    
    
    
    
    Trust International BV
    
    
    123
    
    
    
    1
    %
    
    
    606
    
    
    
    15
    %$
    10,770
    
    
    
    93
    %
    
    $
    3,972
    
    
    
    99
    %
 43




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   5. Accounts Receivable
  January 31,2010
    
    
    2009Trade accounts receivable
    
    $
    11,625
    
    
    $
    3,988Less: Allowances for doubtful accounts
    
    
    (136
    )
    
    
    (14
    )$
    11,489
    
    
    $
    3,974
 6. Inventory
  January 31,2010
    
    
    2009Raw materials
    
    $
    574
    
    
    $
    290Finished goods
    
    
    361
    
    
    
    942$
    935
    
    
    $
    1,232
  7. Property and Equipment
  January 31,2010
    
    
    2009Office furnishings and fixtures
    
    $
    1,301
    
    
    $
    1,309Equipment
    
    
    4,762
    
    
    
    4,838Purchased software
    
    
    80
    
    
    
    1396,143
    
    
    
    6,286Less: Accumulated depreciation and amortization
    
    
    (5,071
    )
    
    
    (5,007
    )$
    1,072
    
    
    $
    1,279
   44




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   8. Accrued Liabilities
  January 31,2010
    
    
    2009Accrued payroll and related expenses
    
    $
    408
    
    
    $
    417Uninvoiced materials and services received
    
    
    5,384
    
    
    
    510Accrued legal and professional fees
    
    
    224
    
    
    
    526Amounts payable to Ascom
    
    
    
    
    
    
    903Current portion of deferred rent
    
    
    117
    
    
    
    109Accrued travel expenses
    
    
    30
    
    
    
    21Accrued warranty
    
    
    4,759
    
    
    
    86Amounts payable to contract manufacturer
    
    
    874
    
    
    
    290Other
    
    
    416
    
    
    
    316$
    12,212
    
    
    $
    3,178
  9. Warranty Arrangements
  January 31,2010
    
    
    2009Beginning balance
    
    $
    86
    
    
    $
    46Accrual for product safety recall costs
    
    
    4,615
    
    
    
    Accruals for warranties issued during the period
    
    
    272
    
    
    
    146Utilization
    
    
    (214
    )
    
    
    (106
    )$
    4,759
    
    
    $
    86
 10. Loan Agreement
   45




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  11. Income Taxes
  Years Ended January 31,2010
    
    
    2009Federal:Current
    
    $
    (205
    )
    
    $
    Deferred
    
    
    
    
    
    
    State:Current
    
    
    (59
    )
    
    
    Deferred
    
    
    
    
    
    
    Foreign:Current
    
    
    
    
    
    
    $
    (264
    )
    
    $
    
  Years Ended January 31,2010
    
    
    2009Percent
    
    
    
    
    
    
    PercentAmount
    
    
    Pretax Income
    
    
    Amount
    
    
    Pretax IncomeLoss from continuing operations before
income taxes and discontinued
operations
    
    $
    (8,957
    )
    
    
    100
    %
    
    $
    (13,074
    )
    
    
    100
    %Computed expected income tax benefit
on loss from continuing operations
before income taxes
    
    $
    (3,045
    )
    
    
    (34.0
    %)
    
    $
    (4,445
    )
    
    
    (34.0
    %)State tax, net of federal benefit
    
    
    (394
    )
    
    
    (4.4
    )
    
    
    (562
    )
    
    
    (4.3
    )Research and MIC credits
    
    
    (129
    )
    
    
    (1.4
    )
    
    
    (376
    )
    
    
    (2.9
    )Change in valuation allowance
    
    
    3,939
    
    
    
    44.0
    
    
    
    1,107
    
    
    
    8.5Permanent differences
    
    
    18
    
    
    
    0.2
    
    
    
    89
    
    
    
    0.7Benefit of five year carryback claim
    
    
    (205
    )
    
    
    (2.3
    )
    
    
    
    
    
    
    Adjustment to unrecognized tax benefits
    
    
    (53
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    Return to provision adjustments
    
    
    (906
    )
    
    
    (10.1
    )
    
    
    
    
    
    
    Additional tax gain on sale of WTS
    
    
    
    
    
    
    
    
    
    
    685
    
    
    
    5.2Other, net
    
    
    18
    
    
    
    0.2
    
    
    
    127
    
    
    
    1.0Income tax benefit
    
    $
    (757
    )
    
    
    (8.5
    )%
    
    $
    (3,375
    )
    
    
    (25.8
    %)
  January 31,2010
    
    
    2009Tax benefit from continuing operations
    
    $
    (757
    )
    
    $
    (3,375
    )Tax expense from discontinued operations
    
    
    493
    
    
    
    3,375$
    (264
    )
    
    $
    
 47




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  January 31,2010
    
    
    2009Deferred tax assets:Accounts receivable
    
    $
    55
    
    
    $
    8Inventory
    
    
    677
    
    
    
    630Property and equipment, principally due to differing
depreciation methods
    
    
    391
    
    
    
    290Employee benefits, principally due to accrual for financial
reporting purposes
    
    
    145
    
    
    
    130Accrued liabilities for financial reporting purposes
    
    
    113
    
    
    
    167Net research and manufacturer investment credit carryforwards
    
    
    2,006
    
    
    
    1,946Net operating losses
    
    
    6,489
    
    
    
    4,719AMT credit carryforwards
    
    
    295
    
    
    
    295Deferred rent
    
    
    48
    
    
    
    56Stock Based compensation
    
    
    635
    
    
    
    534Warranty accrual
    
    
    1,831
    
    
    
    34Other
    
    
    78
    
    
    
    15Total gross deferred tax assets
    
    
    12,763
    
    
    
    8,824Less: valuation allowance
    
    
    (12,763
    )
    
    
    (8,824
    )Net deferred tax assets
    
    $
    
    
    
    $
    
    UnrecognizedTax BenefitsBalance at February 1, 2009
    
    $
    592Additions based on tax positions related to the current year
    
    
    Reductions due to lapses of statute of limitations
    
    
    Reductions for tax positions of prior years
    
    
    (53
    )Balance at January 31, 2010
    
    $
    539
  47




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   12. Stock Compensation
     Outstanding AwardsWeighted-
    
    
    AggregateNumber of
    
    
    Average
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    (In thousands)Balance, February 1, 2008
    
    
    842,000
    
    
    $
    11.59
    
    
    $
    Awards granted
    
    
    813,500
    
    
    
    1.29Awards canceled or expired
    
    
    (471,500
    )
    
    
    12.02Awards exercised
    
    
    
    
    
    
    Balance, January 31, 2009
    
    
    1,184,000
    
    
    $
    4.34
    
    
    $
    Awards granted
    
    
    69,204
    
    
    
    2.89Awards canceled or expired
    
    
    (95,500
    )
    
    
    9.23Awards exercised
    
    
    
    
    
    
    Balance, January 31, 2010
    
    
    1,157,704
    
    
    $
    3.85
    
    
    $
    1,197
 48




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Awards Outstanding
    
    
    Awards ExercisableWeighted-AverageRange of
    
    Number
    
    
    Remaining
    
    Weighted-Average
    
    
    Number
    
    
    Weighted-AverageExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$    1.09 to 4.90
    
    
    867,704
    
    
    
    8.1
    
    
    $
    1.35
    
    
    
    140,076
    
    
    $
    1.496.19 to 9.89
    
    
    166,000
    
    
    
    4.8
    
    
    
    7.77
    
    
    
    158,500
    
    
    
    7.8410.43 to 11.60
    
    
    60,000
    
    
    
    5.2
    
    
    
    10.72
    
    
    
    52,500
    
    
    
    10.7615.07
    
    
    10,000
    
    
    
    1.4
    
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.0720.04 to 23.67
    
    
    54,000
    
    
    
    0.3
    
    
    
    22.16
    
    
    
    54,000
    
    
    
    22.161.09 to 23.67
    
    
    1,157,704
    
    
    
    7.0
    years
    
    
    3.85
    
    
    
    415,076
    
    
    
    8.10
  13. Earnings (Loss) Per Share
  Years Ended January 31,2010
    
    
    2009Basic & Diluted:Loss from continuing operations
    
    $
    (8,200
    )
    
    $
    (9,699
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share from continuing operations
    
    $
    (1.12
    )
    
    $
    (1.32
    )Income from discontinued operations
    
    $
    778
    
    
    $
    5,234Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327Basic and diluted earnings per share from discontinued operations
    
    $
    0.11
    
    
    $
    0.71Net loss
    
    $
    (7,422
    )
    
    $
    (4,465
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share
    
    $
    (1.01
    )
    
    $
    (0.61
    )
 14. Employee Benefit Plans
  49




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  15. Commitments and Contingencies
  OperatingLeasesFiscal Year:2011
    
    
    3862012
    
    
    221Total minimum lease payments
    
    $
    607
    Purchase Commitments with Suppliers
  Executive Severance Commitments
  Letter of Credit
  50




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Legal Contingencies
     16. Subsequent Events
   51




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   52




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control over Financial Reporting
   53




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ITEM 9B. OTHER INFORMATION
       54




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55




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56




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PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  57




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    1.
    Financial Statements (See Item 8)
 2.
    
    Financial Statement Schedule:
    3.
    
    Exhibits
 Plan of Disposition
 2.1
    
    Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless
Technologies, Inc., Case Systems, Inc., and Sebastian Gutierrez, dated
as of July 10, 2008. The Asset Purchase Agreement is incorporated
herein by reference from Exhibit 2.01 to the Companys report on Form
8-K filed with the Securities and Exchange Commission on July 16,
2008.2.2
    
    Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless
Technologies, Inc., Ascom Holding AG, and Ascom Inc., dated as of
September 26, 2008. The Asset Purchase Agreement is incorporated
herein by reference from Exhibit 2.1 to the Companys report on Form
8-K filed with the Securities and Exchange Commission on September 29,
2008.Articles of Incorporation; Bylaws3.1
    
    Articles of Incorporation. The Articles of Incorporation are
incorporated herein by reference from Exhibit 3.1 to the Companys
report on Form 10-Q filed with the Securities and Exchange Commission
on December 12, 2000.3.2
    
    By-Laws. The Restated By-Laws are incorporated herein by reference
from Exhibit 3.2 to the Companys report on Form 10-Q filed with the
Securities and Exchange Commission on September 14, 2009.3.3
    
    Certificate of Determination of Series A Participating Preferred
Stock. The Certificate of Determination is incorporated herein by
reference from Exhibit 99.1 to the Companys Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on February
6, 2003.Material Contracts10.1
    
    Director Stock Option Plan dated July 1, 1987 is incorporated by
reference from the Companys report on Form 10-K for the year ended
January 31, 1988. *
 58




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##### Table of Contents



10.2
    
    1995 Employee Stock Option Plan is incorporated by reference from
Exhibit 4.1 to the Companys Registration Statement on Form S-8
(File No. 33-63219) filed with the Securities and Exchange
Commission on October 5, 1995. *10.3
    
    2005 Equity Incentive Plan, as amended, is incorporated by reference
from Exhibit 4.3 to the Companys Registration Statement on Form S-8
filed with the Securities and Exchange Commission on December 31,
2008. *10.4
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Thomas W. Lanni is incorporated herein by
reference from Exhibit 10.9 to the Companys report on Form 8-K
filed with the Securities and Exchange Commission on June 15, 2007.
*10.5
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Fredrik L. Torstensson is incorporated
herein by reference from Exhibit 10.9 to the Companys report on
Form 8-K filed with the Securities and Exchange Commission on June
15, 2007. *10.6
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Mark Chapman is incorporated herein by
reference from Exhibit 10.9 to the Companys report on Form 8-K
filed with the Securities and Exchange Commission on June 15, 2007.
*10.7
    
    Severance Compensation Agreement, dated August 28, 2007, between the
Company and Alisha Charlton is incorporated herein by reference from
Exhibit 10.14 to the Companys report on Form 10-K filed with the
Securities and Exchange Commission on April 30, 2008. *10.8
    
    Escrow Agreement, dated January 6, 2009, by and among Comarco, Inc.,
Comarco Wireless Technologies, Inc., Ascom Holding AG, Ascom Inc.,
and U.S. Bank National Association is incorporated herein by
reference from Exhibit 99.1 to the Companys report on Form 8-K
filed with the Securities and Exchange Commission on January 12,
2009.10.9
    
    Loan and Security Agreement, dated as of February 12, 2009, by and
among Comarco, Inc., Comarco Wireless Technologies, Inc., and
Silicon Valley Bank is incorporated herein by reference from Exhibit
10.1 to the Companys report on Form 8-K filed with the Securities
and Exchange Commission on February 18, 2009.10.10
    
    First Amendment to the Loan and Security Agreement, dated as of
February 9, 2010, by and among Comarco, Inc., Comarco Wireless
Technologies, Inc., and Silicon Valley Bank is incorporated herein
by reference from Exhibit 10.1 to the Companys report on Form 8-K
filed with the Securities and Exchange Commission on February 16,
2010.10.11
    
    Strategic Product Development and Supply Agreement, dated as of
March 16, 2009, by and among Comarco, Inc. and Targus Group
International, Inc. is incorporated herein by reference from Exhibit
10.1 to the Companys report on Form 8-K filed with the Securities
and Exchange Commission on March 20, 2009. **10.12
    
    Executed Employment Agreement dated May 1, 2010 between the Company
and Samuel M. Inman, III. *10.13
    
    Executive Employment Agreement dated May 1, 2010 between the Company
and Winston E. Hickman. *10.14
    
    Compromise Settlement Agreement and Release, dated as of July 12,
2003, among Comarco, Inc., Comarco Wireless Technologies, Inc., iGo,
Inc. (formerly Mobility Electronics, Inc.) and the other parties
identified therein is incorporated by reference from Exhibit 10.3 to
the Companys report on Form 10-Q filed with the Securities and
Exchange Commission on June 15, 2009.
 59




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##### Table of Contents



10.15
    
    Non-Employee Director Compensation Policy is incorporated by
reference from Exhibit 10.16 to the Companys report on Form 10-Q
filed with the Securities and Exchange Commission on December 11,
2009.*10.16
    
    Executive Incentive Bonus Plan is incorporated by reference from
Exhibit 10.1 to the Companys report on Form 8-K filed with the
Securities and Exchange Commission on March 25, 2010.*Other Exhibits21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm  BDO Seidman, LLP31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 200299.1
    
    Supplement to Registrants Registration Statements on Form S-8
 
 *
    
    Management contract or executive compensation plan or arrangement.**
    
    Confidential Treatment has been requested with respect to certain provisions of this
agreement. Omitted portions have been filed separately with the SEC. 60




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COMARCO, INC. AND SUBSIDIARIES
SIGNATURES
  COMARCO, INC./s/ SAMUEL M. INMAN, IIISamuel M. Inman, IIIPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ SAMUEL M. INMAN, III
    
    President and Chief Executive Officer
    
    May 3, 2010Samuel M. Inman, III
    
    (Principal Executive Officer), Director/s/ WINSTON E. HICKMAN
    
    Chief Financial Officer (Principal
    
    May 3, 2010Winston E. Hickman
    
    Financial and Accounting Officer)/s/ ROBERT J. MAJTELES
    
    Chairman of the Board,Director
    
    May 3, 2010Robert J. Majteles/s/ RICHARD T. LEBUHN
    
    Director
    
    May 3, 2010Richard T. LeBuhn/s/ GERALD D. GRIFFIN
    
    Director
    
    May 3, 2010Gerald D. Griffin/s/ JEFFREY R. HULTMAN
    
    Director
    
    May 3, 2010Jeffrey R. Hultman
 61




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COMARCO, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
Years Ended January 31, 2010 and 2009
(In thousands)
 Charged toBalance at
    
    Cost andBeginning of
    
    Expense
    
    
    
    
    
    Other Changes
    
    Balance atYear
    
    (Recovery)
    
    Deductions
    
    Add (Deduct)
    
    End of YearAllowance for doubtful
accounts and provision for
unbilled receivables (deducted
from accounts receivable):Year ended January 31, 2010
    
    $
    14
    
    
    $
    122
    
    
    $
    
    
    
    $
    
    
    
    $
    136Year ended January 31, 2009
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    14Allowance for deferred tax assets:Year ended January 31, 2010
    
    $
    8,824
    
    
    $
    
    
    
    $
    
    
    
    $
    3,939
    
    
    $
    12,763Year ended January 31, 2009
    
    $
    7,717
    
    
    $
    
    
    
    $
    
    
    
    $
    1,107
    
    
    $
    8,824
 62




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit
    
    Description2.1
    
    Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless
Technologies, Inc., Case Systems, Inc., and Sebastian Gutierrez,
dated as of July 10, 2008. The Asset Purchase Agreement is
incorporated herein by reference from Exhibit 2.01 to the Companys
report on Form 8-K filed with the Securities and Exchange Commission
on July 16, 2008.2.2
    
    Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless
Technologies, Inc., Ascom Holding AG, and Ascom Inc., dated as of
September 26, 2008. The Asset Purchase Agreement is incorporated
herein by reference from Exhibit 2.1 to the Companys report on Form
8-K filed with the Securities and Exchange Commission on September
29, 2008.3.1
    
    Articles of Incorporation. The Articles of Incorporation are
incorporated herein by reference from Exhibit 3.1 to the Companys
report on Form 10-Q filed with the Securities and Exchange Commission
on December 12, 2000.3.2
    
    By-Laws. The Restated By-Laws are incorporated herein by reference
from Exhibit 3.2 to the Companys report on Form 10-Q filed with the
Securities and Exchange Commission on September 14, 2009.3.3
    
    Certificate of Determination of Series A Participating Preferred
Stock. The Certificate of Determination is incorporated herein by
reference from Exhibit 99.1 to the Companys Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on
February 6, 2003.10.1
    
    Director Stock Option Plan dated July 1, 1987 is incorporated by
reference from the Companys report on Form 10-K for the year ended
January 31, 1988. *10.2
    
    1995 Employee Stock Option Plan is incorporated by reference from
Exhibit 4.1 to the Companys Registration Statement on Form S-8 (File
No. 33-63219) filed with the Securities and Exchange Commission on
October 5, 1995. *10.3
    
    2005 Equity Incentive Plan, as amended, is incorporated by reference
from Exhibit 4.3 to the Companys Registration Statement on Form S-8
filed with the Securities and Exchange Commission on December 31,
2008. *10.4
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Thomas W. Lanni is incorporated herein by
reference from Exhibit 10.9 to the Companys report on Form 8-K filed
with the Securities and Exchange Commission on June 15, 2007. *10.5
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Fredrik L. Torstensson is incorporated herein
by reference from Exhibit 10.9 to the Companys report on Form 8-K
filed with the Securities and Exchange Commission on June 15, 2007. *10.6
    
    Amended and Restated Severance Agreement, dated June 11, 2007,
between the Company and Mark Chapman is incorporated herein by
reference from Exhibit 10.9 to the Companys report on Form 8-K filed
with the Securities and Exchange Commission on June 15, 2007. *10.7
    
    Severance Compensation Agreement, dated August 28, 2007, between the
Company and Alisha Charlton is incorporated herein by reference from
Exhibit 10.14 to the Companys report on Form 10-K filed with the
Securities and Exchange Commission on April 30, 2008. *10.8
    
    Escrow Agreement, dated January 6, 2009, by and among Comarco, Inc.,
Comarco Wireless Technologies, Inc., Ascom Holding AG, Ascom Inc.,
and U.S. Bank National Association is incorporated herein by
reference from Exhibit 99.1 to the Companys report on Form 8-K filed
with the Securities and Exchange Commission on January 12, 2009.
 63




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##### Table of Contents



Exhibit
    
    Description10.9
    
    Loan and Security Agreement, dated as of February 12, 2009, by and among Comarco, Inc.,
Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by
reference from Exhibit 10.1 to the Companys report on Form 8-K filed with the Securities and
Exchange Commission on February 18, 2009.10.10
    
    First Amendment to the Loan and
Security Agreement, dated as of February 9, 2010, by and
among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is
incorporated herein by reference from Exhibit 10.1 to the Companys report on Form 8-K filed
with the Securities and Exchange Commission on February 16, 2010.10.11
    
    Strategic Product Development and Supply Agreement, dated as of March 16, 2009, by and among
Comarco, Inc. and Targus Group International, Inc. is incorporated herein by reference from
Exhibit 10.1 to the Companys report on Form 8-K filed with the Securities and Exchange
Commission on March 20, 2009. *10.12
    
    Executed Employment Agreement dated May 1, 2010 between the Company and Samuel M. Inman, III.
*10.13
    
    Executive Employment Agreement dated May 1, 2010 between the Company and Winston E. Hickman. *10.14
    
    Compromise Settlement Agreement and Release, dated as of July 12, 2003, among Comarco, Inc.,
Comarco Wireless Technologies, Inc., iGo, Inc. (formerly Mobility Electronics, Inc.) and the
other parties identified therein is incorporated by reference from Exhibit 10.3 to the
Companys report on Form 10-Q filed with the Securities and Exchange Commission on June 15,
2009.10.15
    
    Non-Employee Director Compensation Policy is incorporated by reference from Exhibit 10.16 to
the Companys report on Form 10-Q filed with the Securities and Exchange Commission on
December 11, 2009.*10.16
    
    Executive Incentive Bonus Plan is incorporated by reference from Exhibit 10.1 to the
Companys report on Form 8-K filed with the Securities and Exchange Commission on March 25,
2010.*21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm  BDO Seidman, LLP31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 200299.1
    
    Supplement to Registrants Registration Statements on Form S-8
 
 *
    
    Management contract or executive compensation plan or arrangement.**
    
    Confidential Treatment has been requested with respect to certain provisions of this
agreement. Omitted portions have been filed separately with the SEC. 64