##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2011
 OR
 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 000-05449
 
 COMARCO, INC.
 (Exact name of registrant as specified in its charter)
 California
    
    95-2088894(State or Other Jurisdiction
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)25541 Commercentre Drive, Lake Forest, CA
    
    92630(Address of Principal Executive Offices)
    
    (Zip Code)
 
 Registrants telephone number, including area code:
(949) 599-7400
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
 
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filero
(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, 2011
 TABLE OF CONTENTS
 PagePART I
    
    
    1ITEM 1. BUSINESS
    
    
    1ITEM 1A. RISK FACTORS
    
    
    9ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    19ITEM 2. PROPERTIES
    
    
    19ITEM 3. LEGAL PROCEEDINGS
    
    
    19ITEM 4. [REMOVED AND RESERVED]
    
    
    20PART II
    
    
    21ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    21ITEM 6. SELECTED FINANCIAL DATA
    
    
    22ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    22ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    33ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    34ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
    
    
    56ITEM 9A. CONTROLS AND PROCEDURES
    
    
    57ITEM 9B. OTHER INFORMATION
    
    
    58PART III
    
    
    59ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
    
    
    59ITEM 11. EXECUTIVE COMPENSATION
    
    
    60ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    60ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
    
    
    61ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    61PART IV
    
    
    62ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    62EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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PART I
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
 ITEM 1.
    
    BUSINESS
 General
 ® ® ®
  http://www.sec.gov
 1




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Our Business
  Products
 ® ® ® ®
  Marketing, Sales, and Distribution
  
    
    Retail; and
 
    
    OEM-branded accessories.
  Retail
     2




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OEM-branded accessories
     OEM in-the-box
  Product Recall
  Recall Background
   3




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Recall Process
   Financial Impact
    Competition
 ® ®
 4




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
    
    Differentiate our offerings through innovation and development of new or enhanced
products;
    
    Successfully meet stringent design specifications in a timely manner;
    
    Develop meaningful and lasting relationships with OEMs;
    
    Manufacture and deliver on time, cost effective products in volume;
    
    Price our products competitively; and
    
    Provide adequate customer service and support for our products.
 Key Customers
    International Operations
  Research and Development
   5




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
    
    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.
    
    We generally do not directly pass research and development costs on to our
customers.
 Manufacturing and Suppliers
   Patents, Trademarks and Other Intellectual Property
 ® ® ®
    6




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Environmental Laws
  Government Regulation
  Industry Practices Impacting Working Capital
    Employees
 
 7




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Discontinued Operations
 Call Box
  Wireless Test Solutions
   8




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ITEM 1A.
    
    RISK FACTORS
 Investing in our common stock involves a high degree of risk. You should carefully
consider the following risk factors, as well as the other information contained in this annual
report, before deciding whether to invest in shares of our common stock. If any of the following
risks actually occur, our business, financial condition, operating results and prospects would
suffer. In that case, the trading price of our common stock would likely decline and you might lose
all or part of your investment in our common stock. The risks described below are not the only ones
we face. Additional risks that we currently do not know about or that we currently believe to be
immaterial may also impair our operations and business results.
 Our management and our independent registered public accounting firm have questioned our ability to
continue as a going concern as a result of our recurring losses from operations, declining working
capital and uncertainties surrounding our ability to borrow under our credit facility.
  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 do so, we may not achieve or sustain
profitability and our results of operations and prospects would be adversely impacted.
   
    
    Securing additional purchase orders from Targus or replacing their historical sales
volumes with sales to other customers;
 
    
    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; and
    
    Increasing sales to existing OEM partners such as Lenovo and securing additional OEM
partners.
 9




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®
 We experienced a recall of one our power adapters in the first quarter of fiscal 2011, and in the
future we may experience additional quality or safety defects in our products that could cause us
to institute additional product recalls or require us to provide replacement products.
     A significant portion of our revenue is derived from two customers and we are dependent upon our
relationships with them and upon their performance.
  10




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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.
   11




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Recent changes in our management may lead to instability and may negatively affect our business.
  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.
  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 and if we are unable to rapidly and
successfully develop and introduce new products, some of our products may become obsolete.
  
    
    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 to meet consumer
demand, and
    
    Differentiate our products from those of our competitors.
 12




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The consumer electronics industry is highly competitive, and our profitability will be adversely
affected if we are not able to compete effectively.
  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.
 ®
 13




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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.
  14




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If our products fail to comply with domestic and international government regulations, or if these
regulations result in a barrier to our business, our revenue could be negatively impacted.
  15




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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.
  We cannot be certain of the availability of credit under our revolving credit facility.
  We have identified a material weakness in our internal controls over financial reporting that could
cause investors to lose confidence in the reliability of our consolidated financial statements and
result in a decrease in the value of our securities.
    16




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Our Restated Articles of Incorporation and our Amended and Restated Bylaws 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).
 17




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We are party to an agreement that may require us to pay $5 million in the event of an acquisition
or merger, which could reduce the market value of our common stock.
  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, including our ability to continue to
conduct business with Targus and Lenovo and our ability to expand our relationship with
Dell;
 
    
    Reductions in demand or expectations of future demand by our customers;
 
    
    Changes in stock market analyst recommendations regarding 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.
  There is currently a limited trading market for our common stock, which may limit our stockholders
ability to sell shares of our common stock and may depress the price of our common stock.
 ,
 We may be subject to penny stock regulations and restrictions, which could make it difficult for
stockholders to sell their shares of our stock.
  18




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The Financial Industry Regulatory Authority, or FINRA, sales practice requirements may also limit a
stockholders ability to buy and sell our stock.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
 Chicony Power Technology Co., LTD., (Chicony) vs. Comarco, Inc., Case No.
30-2011-00470249, Superior Court of California County of Orange  Central Justice Center.
 Mark Chapman (Chapman) vs. Comarco Wireless Technologies, Inc., Case No. 73-166-03168-09 02
FEZA-C, American Arbitration Association
 19




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ITEM 4. [REMOVED AND RESERVED]
 20




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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, 2011:First Quarter
    
    $
    3.24
    
    
    $
    2.47Second Quarter
    
    
    3.00
    
    
    
    2.10Third Quarter
    
    
    2.50
    
    
    
    2.10Fourth Quarter
    
    
    2.03
    
    
    
    0.34Year ended January 31, 2010:First Quarter
    
    $
    2.03
    
    
    $
    0.70Second Quarter
    
    
    2.30
    
    
    
    1.66Third Quarter
    
    
    3.15
    
    
    
    1.66Fourth Quarter
    
    
    3.29
    
    
    
    2.41
 Holders
  Dividends
  Repurchases
  Securities Authorized For Issuance Under Equity Compensation Plans
  21




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ITEM 6.
    
    SELECTED FINANCIAL DATA
 Years Ended January 31,2011
    
    
    2010
    
    
    2009(In thousands, except per share data)Revenue
    
    $
    28,949
    
    
    $
    26,425
    
    
    $
    13,521Cost of Revenue
    
    
    26,012
    
    
    
    25,090
    
    
    
    15,089Gross profit (loss)
    
    
    2,937
    
    
    
    1,335
    
    
    
    (1,568
    )Selling, general and administrative expenses
    
    
    5,128
    
    
    
    6,576
    
    
    
    8,776Engineering and support expenses
    
    
    3,151
    
    
    
    3,715
    
    
    
    2,8438,279
    
    
    
    10,291
    
    
    
    11,619Operating loss
    
    
    (5,342
    )
    
    
    (8,956
    )
    
    
    (13,187
    )Other income (loss), net
    
    
    (106
    )
    
    
    (1
    )
    
    
    113Loss from continuing operations before income taxes
    
    
    (5,448
    )
    
    
    (8,957
    )
    
    
    (13,074
    )Income tax benefit
    
    
    75
    
    
    
    757
    
    
    
    3,375Loss from continuing operations
    
    
    (5,373
    )
    
    
    (8,200
    )
    
    
    (9,699
    )Net income (loss) from discontinued operations,
net of income taxes
    
    
    (601
    )
    
    
    778
    
    
    
    5,234Net loss
    
    $
    (5,974
    )
    
    $
    (7,422
    )
    
    $
    (4,465
    )Basic and diluted income (loss) per share:Loss from continuing operations
    
    $
    (0.73
    )
    
    $
    (1.12
    )
    
    $
    (1.32
    )Income (loss) from discontinued operations
    
    
    (0.08
    )
    
    
    0.11
    
    
    
    0.71Net loss per share
    
    $
    (0.81
    )
    
    $
    (1.01
    )
    
    $
    (0.61
    )
 As of January 31,2011
    
    
    2010
    
    
    2009(In thousands)Working capital
    
    $
    3,399
    
    
    $
    8,485
    
    
    $
    15,533Total assets
    
    
    12,761
    
    
    
    23,903
    
    
    
    21,568Borrowing under line of credit
    
    
    1,000
    
    
    
    1,000
    
    
    
    Long-term debt
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    3,819
    
    
    
    9,461
    
    
    
    16,621
 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
 ® ®
  22




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®
 Company Trends and Uncertainties
 ® ® ® ® ® ®
 ®
  
    
    On January 25, 2011 the Company received written notification from Targus Group
International, Inc. (Targus) of its non-renewal of the Strategic Product Development
and Supply Agreement (the Targus Agreement). Although Targus confirmed its desire to
continue a business relationship with Comarco in its written notification, the nature
of our future business relationship remains unclear. At this time, future sales to
Targus are uncertain. Approximately 67 percent of our revenue for fiscal 2011 was from
sales to Targus.
 
    
    On April 30, 2010, the United States Consumer Product Safety Commission (CPSC)
announced a product safety recall (the Recall) concerning approximately 500,000 units
of our ChargeSource 90-watt universal AC power adapter sold to our distributer, Targus,
from June 2009 through March 2010. Currently, approximately 155,000 total units have
been returned from the distribution channel and approximately 4,000 units have been
returned from consumers. 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
$0.3 million and $4.0 million charge to cost of revenue in the fourth quarter of fiscal
2011 and fiscal 2010, respectively, as an estimate of the cost to replace the affected
units and $0.6 million charge to selling, general and administrative costs in the
fourth quarter of fiscal 2010 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.
As of the filing date of this report, Targus and Comarco have not reached full
agreement with respect to such matters and, in the event that agreement is not reached
on certain matters, it could result in a material increase in the costs of the Recall
to Comarco. As a result, the actual amounts incurred by Comarco as a result of the
Recall may differ materially from the amount of reserves Comarco established as a
result of the Recall. However, the Company believes that it has accrued for
substantially all of its material financial obligations with respect to the Recall.
 23




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
    
    In an abundance of caution, during the latter part of the first quarter of fiscal
2011, Comarco ceased production 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 successfully completed its verification process and resumed manufacturing and
volume shipping Manhattan units late in the first quarter.
 
    
    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 began shipping
this product in the latter part of May 2010 and revenue from sales to Dell totaled
$0.9 million during fiscal 2011.
 
    
    Revenue for fiscal 2011 increased to $28.9 million compared to $26.4 million for
fiscal 2010. The increase is primarily attributable to increased shipments to Targus
through the first half of fiscal 2011. Approximately 67 percent of our revenue for
fiscal 2011 was from sales to Targus, down from 71 percent during fiscal 2010.
 Following the Recall, we began volume shipping our Manhattan ChargeSource® products to
Targus, under the Targus Agreement. Sales of our Manhattan product to Targus accounted
for revenue of $5.3 million, $10.0 million and $3.1 million for our first, second and
third fiscal quarters of fiscal 2011, respectively. We shipped minimal quantities of our
Manhattan product during the fourth quarter of fiscal 2011. Additionally, since the
notification we received from Targus of the non-renewal of the Targus Agreement, we have
received no further purchase orders and future sales to Targus are uncertain.
 
    
    Late in the third quarter of fiscal 2011, we took action to significantly reduce
expenses. These actions included a significant reduction in both personnel expenses and
other expenses across all departments.
 
    
    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.
 
    
    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
  24




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Accounts Receivable
   Valuation of Inventory
  Income Taxes
   25




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Valuation of Long-Lived Assets
  Warranty Costs
 ®
  Results of OperationsContinuing Operations
  Years Ended January 31,2011
    
    
    2010(In thousands)
    
    
    
    
    
    
    2011 over 2010% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    % ChangeRevenue
    
    $
    28,949
    
    
    
    100
    %
    
    $
    26,425
    
    
    
    100
    %
    
    
    10
    %Operating loss
    
    $
    (5,342
    )
    
    
    
    
    
    $
    (8,956
    )Net loss from continuing operations
    
    $
    (5,373
    )
    
    
    
    
    
    $
    (8,200
    )
 26




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Years Ended January 31,
    
    
    2011 over2011
    
    
    2010
    
    
    2010(In thousands)
    
    
    % ChangeRevenue:North America.
    
    $
    19,634
    
    
    $
    18,361
    
    
    
    7
    %Europe
    
    
    98
    
    
    
    330
    
    
    
    (70
    %)Asia  Pacific
    
    
    9,217
    
    
    
    7,734
    
    
    
    19
    %$
    28,949
    
    
    $
    26,425
    
    
    
    10
    %
 Years Ended January 31,
    
    
    2011 over2011
    
    
    2010
    
    
    2010(In thousands)
    
    
    % ChangeRevenue:Dell
    
    $
    861
    
    
    $
    
    
    
    
    Lenovo
    
    
    8,536
    
    
    
    7,418
    
    
    
    15
    %Targus
    
    
    19,338
    
    
    
    18,801
    
    
    
    3
    %Other
    
    
    214
    
    
    
    206
    
    
    
    4
    %$
    28,949
    
    
    $
    26,425
    
    
    
    10
    %
 Revenue
  Cost of Revenue and Gross Margin
 Years Ended January 31,2011
    
    
    2010(In thousands)
    
    
    
    
    
    
    2011 over% of
    
    
    
    
    
    
    % of
    
    
    2010Total
    
    
    
    
    
    
    Total
    
    
    % ChangeCost of Revenue:Product costs
    
    $
    20,973
    
    
    
    81
    %
    
    $
    18,158
    
    
    
    73
    %
    
    
    16
    %Accrued product recall costs
    
    
    310
    
    
    
    1
    %
    
    
    3,954
    
    
    
    16
    %
    
    
    (92
    %)Supply chain overhead
    
    
    2,984
    
    
    
    12
    %
    
    
    2,302
    
    
    
    9
    %
    
    
    30
    %Inventory reserve and scrap
charges
    
    
    594
    
    
    
    2
    %
    
    
    351
    
    
    
    1
    %
    
    
    69
    %Freight, expedite, and
other charges
    
    
    1,151
    
    
    
    4
    %
    
    
    325
    
    
    
    1
    %
    
    
    254
    %$
    26,012
    
    
    
    100
    %
    
    $
    25,090
    
    
    
    100
    %
    
    
    4
    %
 2011 overYears Ended January 31,
    
    
    2010 ppt2011
    
    
    2010
    
    
    ChangeCombined gross margin
    
    
    10
    %
    
    
    5
    %
    
    
    5
  27




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®
     Operating Costs and Expenses
 Years Ended January 31,2011
    
    
    2010
    
    
    2011 over(In thousands)
    
    
    
    
    
    
    2010% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    % ChangeOperating expenses:Selling, general, and administrative
expenses, excluding corporate
overhead
    
    $
    1,355
    
    
    
    5
    %
    
    $
    2,150
    
    
    
    8
    %
    
    
    (37
    %)Corporate overhead
    
    
    3,773
    
    
    
    13
    %
    
    
    4,426
    
    
    
    17
    %
    
    
    (15
    %)Engineering and support expenses
    
    
    3,151
    
    
    
    11
    %
    
    
    3,715
    
    
    
    14
    %
    
    
    (15
    %)$
    8,279
    
    
    
    29
    %
    
    $
    10,291
    
    
    
    39
    %
    
    
    (20
    %)
  28




---



##### Table of Contents



Other Income (Loss), Net
  Income Tax Benefit
    Discontinued Operations, net of income taxes
 Income from Discontinued Operations  Call Box
(in thousands except change)
  29




---



##### Table of Contents



Income from Discontinued Operations  Wireless Test Solutions
(in thousands except change)
 Years Ended January 31,2011
    
    
    2010Revenues
    
    $
    
    
    
    $
    Income from discontinued operations:Gain on sale, net of income taxes of $0 and $495
    
    $
    
    
    
    $
    781Income (loss) from discontinued operations,
before taxes
    
    
    (601
    )
    
    
    20Income tax expense
    
    
    
    
    
    
    (8
    )Total income (loss) from discontinued operations
    
    $
    (601
    )
    
    $
    793
    Liquidity and Capital Resources
  Years Ended January 31,2011
    
    
    2010(In thousands)Cash provided by (used in):Operating activities
    
    $
    (3,212
    )
    
    $
    (4,480
    )Investing activities
    
    
    (465
    )
    
    
    (494
    )Financing activities
    
    
    (69
    )
    
    
    957
 Cash Flows from Operating Activities
   30




---



##### Table of Contents



Cash Flows from Investing Activities
 ®
 ®
 Cash Flows from Financing Activities; Credit Facility
     31




---



##### Table of Contents



Liquidity Requirements for the Next 12 Months
   
    
    Our future business relationship with Targus, if any.
 
    
    Our ability to reduce inventory commitments in response to reduced Targus sales.
 
    
    Our ability to borrow against our credit facility based on our compliance with
certain financial covenants or as a result of a changes in our borrowing base due to
fluctuations in our eligible receivables.
 
    
    Whether we incur costs and expenses as a result of the Recall in excess of the
reserves we established for the Recall, including as a result of reaching an agreement
with Targus concerning the respective obligations of the parties regarding returned
products.
 
    
    The outcome of litigation with our contract manufacturer of the Bronx
product, the subject product under the Recall.
 
    
    The ability of our contract manufacturers of our ChargeSource® products to
manufacture our products at the level currently anticipated, and the ability of our
ChargeSource® products to meet any required specifications.
 
    
    The timing of the development, delivery or release of our
ChargeSource®
products.
  32




---



##### 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
    
    $
    221
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    221Less: sublease income
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )Purchase obligations
    
    
    8,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078$
    8,192
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,192
    Recent Accounting Pronouncements
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  33




---



##### 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
    
    
    35Financial Statements:Consolidated Balance Sheets, January 31, 2011 and 2010
    
    
    36Consolidated Statements of Operations, Years Ended January 31, 2011 and 2010
    
    
    37Consolidated Statements of Stockholders Equity, Years Ended January 31, 2011 and 2010
    
    
    38Consolidated Statements of Cash Flows, Years Ended January 31, 2011 and 2010
    
    
    39Notes to Consolidated Financial Statements
    
    
    40Schedule II  Valuation and Qualifying Accounts, Years Ended January 31, 2011 and 2010
    
    
    66
  34




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      /s/ BDO USA, LLP 
 35




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 January 31,2011
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,381
    
    
    $
    10,127Accounts receivable due from customers, net of reserves
of $53 and $122
    
    
    3,550
    
    
    
    10,655Accounts receivable due from suppliers, net of reserves
of $67 and $14
    
    
    724
    
    
    
    834Inventory, net of reserves of $1,581 and $1,650
    
    
    1,521
    
    
    
    935Other current assets
    
    
    165
    
    
    
    280Total current assets
    
    
    12,341
    
    
    
    22,831Property and equipment, net
    
    
    420
    
    
    
    1,072Total assets
    
    $
    12,761
    
    
    $
    23,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    5,180
    
    
    $
    1,134Accrued liabilities
    
    
    2,762
    
    
    
    12,212Line of credit
    
    
    1,000
    
    
    
    1,000Total current liabilities
    
    
    8,942
    
    
    
    14,346Tax liability
    
    
    
    
    
    
    33Deferred rent, net of current portion
    
    
    
    
    
    
    63Total liabilities
    
    
    8,942
    
    
    
    14,442Commitments, Contingencies, and Subsequent EventsStockholders Equity:Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued or outstanding at January
31, 2011 and 2010, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,343,869 and 7,326,569 shares issued and
outstanding at January 31, 2011 and 2010, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    15,299
    
    
    
    14,967Accumulated deficit
    
    
    (12,213
    )
    
    
    (6,239
    )Total stockholders equity
    
    
    3,819
    
    
    
    9,461Total liabilities and stockholders equity
    
    $
    12,761
    
    
    $
    23,903
 36




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Years Ended January 31,2011
    
    
    2010Revenue
    
    $
    28,949
    
    
    $
    26,425Cost of revenue
    
    
    26,012
    
    
    
    25,090Gross profit
    
    
    2,937
    
    
    
    1,335Selling, general, and administrative expenses
    
    
    5,128
    
    
    
    6,576Engineering and support expenses
    
    
    3,151
    
    
    
    3,7158,279
    
    
    
    10,291Operating loss
    
    
    (5,342
    )
    
    
    (8,956
    )Other loss, net
    
    
    (106
    )
    
    
    (1
    )Loss from continuing operations before income taxes
    
    
    (5,448
    )
    
    
    (8,957
    )Income tax benefit
    
    
    75
    
    
    
    757Net loss from continuing operations
    
    
    (5,373
    )
    
    
    (8,200
    )Income (loss) from discontinued operations, net of income taxes
    
    
    (601
    )
    
    
    778Net loss
    
    $
    (5,974
    )
    
    $
    (7,422
    )Basic and diluted income (loss) per share:Net loss from continuing operations
    
    $
    (0.73
    )
    
    $
    (1.12
    )Net income (loss) from discontinued operations
    
    
    (0.08
    )
    
    
    0.11$
    (0.81
    )
    
    $
    (1.01
    )Weighted average common shares outstanding:Basic
    
    
    7,332
    
    
    
    7,327Diluted
    
    
    7,332
    
    
    
    7,327Common shares outstanding
    
    
    7,344
    
    
    
    7,327
 37




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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, 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
    )
    
    $
    9,461Net loss
    
    
    
    
    
    
    
    
    
    
    (5,974
    )
    
    
    (5,974
    )Stock based compensation expense
    
    
    
    
    
    
    332
    
    
    
    
    
    
    
    332Balance at January 31, 2011,
7,343,869 shares
    
    $
    733
    
    
    $
    15,299
    
    
    $
    (12,213
    )
    
    $
    3,819
 38




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Years Ended January 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (5,974
    )
    
    $
    (7,422
    )Loss (income) from discontinued operations
    
    
    601
    
    
    
    (778
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation
and amortization
    
    
    1,096
    
    
    
    772Loss on sale/retirement of property and equipment
    
    
    21
    
    
    
    6Loan origination fees
    
    
    69
    
    
    
    43Stock based compensation expense
    
    
    332
    
    
    
    262Provision for doubtful accounts receivable
    
    
    (17
    )
    
    
    150Provision for obsolete inventory
    
    
    (68
    )
    
    
    162Changes in operating assets and liabilities:Accounts receivable due from customers
    
    
    7,175
    
    
    
    (6,844
    )Accounts receivable due from suppliers
    
    
    57
    
    
    
    (821
    )Inventory
    
    
    (518
    )
    
    
    135Other assets
    
    
    115
    
    
    
    582Accounts payable
    
    
    4,046
    
    
    
    (367
    )Tax liability
    
    
    (33
    )
    
    
    (53
    )Deferred rent, net of current portion
    
    
    (63
    )
    
    
    (119
    )Accrued liabilities
    
    
    (9,450
    )
    
    
    9,034Net cash used in continuing operating activities
    
    
    (2,611
    )
    
    
    (5,258
    )Net cash provided by (used in) discontinued operating activities
    
    
    (601
    )
    
    
    778Net cash used in operating activities
    
    
    (3,212
    )
    
    
    (4,480
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (465
    )
    
    
    (571
    )Decrease in restricted cash
    
    
    
    
    
    
    77Net cash used in continuing investing activities
    
    
    (465
    )
    
    
    (494
    )CASH FLOWS FROM FINANCING ACTIVITIES:Line of credit
    
    
    
    
    
    
    1,000Loan origination fees
    
    
    (69
    )
    
    
    (43
    )Net cash provided by financing activities
    
    
    (69
    )
    
    
    957Net decrease in cash and cash equivalents
    
    
    (3,746
    )
    
    
    (4,017
    )Cash and cash equivalents, beginning of year
    
    
    10,127
    
    
    
    14,144Cash and cash equivalents, end of year
    
    $
    6,381
    
    
    $
    10,127Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    56
    
    
    $
    31
 39




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##### Table of Contents



1. Organization
 ® ®
 2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Future Operations, Liquidity and Capital Resources
 ® ®
   40




---



##### Table of Contents



Use of Estimates
    Revenue Recognition
  41




---



##### Table of Contents



Cash and Cash Equivalents
  Accounts Receivable due from Suppliers
  Inventory
  Property and Equipment
    Research and Development Costs
  Income Taxes
  42




---



##### Table of Contents



Warranty Costs
 ®
  Concentrations of Credit Risk
  43




---



##### Table of Contents



Earnings (Loss) Per Common Share
  Stock-Based Compensation
     Years EndedJanuary 31,2011
    
    
    2010Stock-based compensation expense
    
    $
    332,000
    
    
    $
    262,000Impact on basic and diluted earnings per share
    
    $
    (0.05
    )
    
    $
    (0.04
    )
   44




---



##### Table of Contents



Year EndedJanuary 31, 2011Weighted average risk-free interest rate
    
    
    1.0
    %Expected life (in years)
    
    
    3.1Expected stock volatility
    
    
    62
    %Dividend yield
    
    NoneExpected forfeitures
    
    
    10.6
    %
 Fair Value of Financial Instruments
  Reclassifications
  Recently Adopted Accounting Pronouncements:
  3. Discontinued Operations
 Call Box
   Wireless Test Solutions (WTS)
   45




---



##### Table of Contents



Years Ended January 31,2011
    
    
    2010Revenues
    
    $
    
    
    
    $
    Income from discontinued operations:Gain (loss) on sale, net of taxes of $0 and $495.
    
    $
    (601
    )
    
    $
    781Income from discontinued operations, before taxes
    
    
    
    
    
    
    20Income tax expense
    
    
    
    
    
    
    (8
    )Total income (loss) from discontinued operations
    
    $
    (601
    )
    
    $
    793
 4. Customer and Supplier Concentrations
  Years Ended January 31,2011
    
    
    2010Total revenue
    
    $
    28,949
    
    
    
    100
    %
    
    $
    26,425
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    19,338
    
    
    
    67
    %
    
    $
    18,801
    
    
    
    71
    %Lenovo Information Products Co., Ltd.
    
    
    8,536
    
    
    
    29
    %
    
    
    7,418
    
    
    
    28
    %$
    27,874
    
    
    
    96
    %
    
    $
    26,219
    
    
    
    99
    %
   Years Ended January 31,2011
    
    
    2010Revenue:North America
    
    
    19,634
    
    
    
    18,361Europe
    
    
    98
    
    
    
    330Asia  Pacific
    
    
    9,217
    
    
    
    7,734$
    28,949
    
    
    $
    26,425
 46




---



##### Table of Contents



January 31,2011
    
    
    2010Total gross accounts receivable due
from customers
    
    $
    3,603
    
    
    
    100
    %
    
    $
    10,777
    
    
    
    100
    %Customer concentration:Dell Inc. and affiliates
    
    $
    434
    
    
    
    12
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    2,683
    
    
    
    74
    %
    
    
    2,730
    
    
    
    25
    %Targus Group International, Inc.
    
    
    471
    
    
    
    13
    %
    
    
    7,917
    
    
    
    73
    %$
    3,588
    
    
    
    99
    %
    
    $
    10,647
    
    
    
    98
    %
   5. Accounts Receivable Due From Customers
  January 31,2011
    
    
    2010Trade accounts receivable
    
    $
    3,603
    
    
    $
    10,777Less: Allowances for doubtful accounts
    
    
    (53
    )
    
    
    (122
    )$
    3,550
    
    
    $
    10,655
 6. Inventory
  January 31,2011
    
    
    2010Raw materials.
    
    $
    875
    
    
    $
    574Finished goods
    
    
    646
    
    
    
    361$
    1,521
    
    
    $
    935
  47




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##### Table of Contents



7. Property and Equipment
  January 31,2011
    
    
    2010Office furnishings and fixtures
    
    $
    1,308
    
    
    $
    1,301Equipment
    
    
    4,361
    
    
    
    4,762Purchased software
    
    
    85
    
    
    
    805,754
    
    
    
    6,143Less: Accumulated depreciation and amortization
    
    
    (5,334
    )
    
    
    (5,071
    )$
    420
    
    
    $
    1,072
     8. Accrued Liabilities
  January 31,2011
    
    
    2010Accrued payroll and related expenses
    
    $
    226
    
    
    $
    408Uninvoiced materials and services received
    
    
    1,708
    
    
    
    5,384Accrued legal and professional fees
    
    
    184
    
    
    
    224Current portion of deferred rent
    
    
    62
    
    
    
    117Accrued warranty
    
    
    310
    
    
    
    4,759Amounts payable to contract manufacturer
    
    
    50
    
    
    
    874Other
    
    
    222
    
    
    
    446$
    2,762
    
    
    $
    12,212
 9. Warranty Arrangements
  48




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##### Table of Contents



January 31,2011
    
    
    2010Beginning balance
    
    $
    4,759
    
    
    $
    86Accrual for product safety recall costs
    
    
    310
    
    
    
    4,615Utilization of recall costs
    
    
    (4,830
    )
    
    
    Accruals for warranties issued during the period
    
    
    370
    
    
    
    272Utilization
    
    
    (299
    )
    
    
    (214
    )$
    310
    
    
    $
    4,759
 10. Loan Agreement
     11. Income Taxes
  Years Ended January 31,2011
    
    
    2010Federal:Current
    
    $
    (40
    )
    
    $
    (205
    )Deferred
    
    
    
    
    
    
    State:Current
    
    
    (35
    )
    
    
    (59
    )Deferred
    
    
    
    
    
    
    Foreign:Current
    
    
    
    
    
    
    $
    (75
    )
    
    $
    (264
    )
 49




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##### Table of Contents



Years Ended January 31,2011
    
    
    2010Percent
    
    
    
    
    
    PercentAmount
    
    
    Pretax Income
    
    
    Amount
    
    
    Pretax IncomeLoss from continuing operations before
income taxes and discontinued
operations
    
    $
    (5,448
    )
    
    
    100
    %
    
    $
    (8,957
    )
    
    
    100
    %Computed expected income tax benefit
on loss from continuing operations
before income taxes
    
    $
    (1,852
    )
    
    
    (34.0
    %)
    
    $
    (3,045
    )
    
    
    (34.0
    %)State tax, net of federal benefit
    
    
    (198
    )
    
    
    (3.6
    )
    
    
    (394
    )
    
    
    (4.4
    )Research and MIC credits
    
    
    (201
    )
    
    
    (3.7
    )
    
    
    (129
    )
    
    
    (1.4
    )Change in valuation allowance
    
    
    2,358
    
    
    
    43.3
    
    
    
    3,939
    
    
    
    44.0Permanent differences
    
    
    9
    
    
    
    0.2
    
    
    
    18
    
    
    
    0.2Benefit of five year carryback claim
    
    
    (10
    )
    
    
    (0.2
    )
    
    
    (205
    )
    
    
    (2.3
    )Adjustment to unrecognized tax benefits
    
    
    (33
    )
    
    
    (0.6
    )
    
    
    (53
    )
    
    
    (0.6
    )Return to provision adjustments
    
    
    75
    
    
    
    1.4
    
    
    
    (906
    )
    
    
    (10.1
    )Other, net
    
    
    (223
    )
    
    
    (4.1
    )
    
    
    18
    
    
    
    0.2Income tax benefit
    
    $
    (75
    )
    
    
    (1.4
    )%
    
    $
    (757
    )
    
    
    (8.5
    )%
  January 31,2011
    
    
    2010Tax benefit from continuing operations
    
    $
    (75
    )
    
    $
    (757
    )Tax expense from discontinued operations
    
    
    
    
    
    
    493$
    (75
    )
    
    $
    (264
    )
 50




---



##### Table of Contents



January 31,2011
    
    
    2010Deferred tax assets:Accounts receivable
    
    $
    49
    
    
    
    55Inventory
    
    
    671
    
    
    
    677Property and equipment, principally due to differing
depreciation methods
    
    
    457
    
    
    
    391Employee benefits, principally due to accrual for financial
reporting purposes
    
    
    71
    
    
    
    145Accrued liabilities for financial reporting purposes
    
    
    173
    
    
    
    113Net research and manufacturer investment credit carryforwards
    
    
    2,193
    
    
    
    2,006Net operating losses
    
    
    10,436
    
    
    
    6,489AMT credit carryforwards
    
    
    126
    
    
    
    295Deferred rent
    
    
    41
    
    
    
    48Stock Based compensation
    
    
    744
    
    
    
    635Warranty accrual
    
    
    149
    
    
    
    1,831Other
    
    
    11
    
    
    
    78Total gross deferred tax assets
    
    
    15,121
    
    
    
    12,763Less: valuation allowance
    
    
    (15,121
    )
    
    
    (12,763
    )Net deferred tax assets
    
    $
    
    
    
    $
    
    Unrecognized TaxBenefitsBalance at February 1, 2010
    
    $
    539Additions based on tax positions related to the current year
    
    
    Reductions due to lapses of statute of limitations
    
    
    Reductions for tax positions of prior years
    
    
    (33
    )Balance at January 31, 2011
    
    $
    506
   51




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##### Table of Contents



12. Stock Compensation
     Outstanding AwardsAggregate IntrinsicNumber of
    
    
    Weighted-Average
    
    
    Value (InShares
    
    
    Exercise Price
    
    
    thousands)Balance, February 1, 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
    
    
    $
    1,197Awards granted
    
    
    90,000
    
    
    
    2.32Awards canceled or expired
    
    
    (108,976
    )
    
    
    13.50Awards exercised
    
    
    (17,300
    )
    
    
    2.39Balance, January 31, 2011
    
    
    1,121,428
    
    
    $
    2.80
    
    
    $
    
   Awards OutstandingWeighted-Average
    
    
    
    
    
    
    Awards ExercisableRange of
    
    Number
    
    
    Remaining
    
    
    Weighted-Average
    
    
    Number
    
    
    Weighted-AverageExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$1.09 to 4.90
    
    
    907,428
    
    
    
    6.8
    
    
    $
    1.37
    
    
    
    270,282
    
    
    $
    1.536.19 to 9.89
    
    
    144,000
    
    
    
    3.7
    
    
    
    7.63
    
    
    
    140,250
    
    
    
    7.6710.43 to 11.60
    
    
    60,000
    
    
    
    4.2
    
    
    
    10.72
    
    
    
    60,000
    
    
    
    10.7215.07
    
    
    10,000
    
    
    
    0.4
    
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.071.09 to 15.07
    
    
    1,121,428
    
    
    6.2 years
    
    
    
    2.80
    
    
    
    480,532
    
    
    
    4.75
 52




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##### Table of Contents



13. Earnings (Loss) Per Share
  Years Ended January 31,2011
    
    
    2010Basic & Diluted:Loss from continuing operations
    
    $
    (5,373
    )
    
    $
    (8,200
    )Weighted average shares outstanding
    
    
    7,332
    
    
    
    7,327Basic and diluted loss per share from continuing operations
    
    $
    (0.73
    )
    
    $
    (1.12
    )Income (loss) from discontinued operations
    
    $
    (601
    )
    
    $
    778Weighted average shares outstanding
    
    
    7,332
    
    
    
    7,327Basic and diluted earnings (loss) per share from discontinued operations
    
    $
    (0.08
    )
    
    $
    0.11Net loss
    
    $
    (5,974
    )
    
    $
    (7,422
    )Weighted average shares outstanding
    
    
    7,332
    
    
    
    7,327Basic and diluted loss per share
    
    $
    (0.81
    )
    
    $
    (1.01
    )
 14. Employee Benefit Plans
   15. Commitments and Contingencies
  Operating LeasesFiscal Year:2012
    
    
    221Total minimum lease payments
    
    $
    221
  53




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##### Table of Contents



Purchase Commitments with Suppliers
  Executive Severance Commitments
  Letter of Credit
  Legal Contingencies
   54




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##### Table of Contents



16. Subsequent Events
 Third Amendment to Loan Agreement
    Termination of President and Chief Executive Officer
  Resignation of Vice President and Chief Financial Officer
  Appointment of Interim Chief Executive Officer
 .
 Appointment of Chief Accounting Officer
  55




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 Resignation of Independent Registered Public Accounting Firm
     Engagement of New Independent Registered Public Accounting Firm
   56




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##### Table of Contents



ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
     57




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##### Table of Contents



Managements Remediation Initiatives
     Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
  58




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##### Table of Contents



PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 Executive Officers
  Name and Age
    
    Current TitleFredrik Torstennson, 41
    
    Interim President & CEO (principal executive officer);
Vice President of Sales & MarketingThomas W. Lanni, 58
    
    Vice President & Chief Technology OfficerDonald L. McKeefery, 49
    
    Vice President  Manufacturing & OperationsAlisha K. Charlton, 41
    
    Chief Accounting Officer (principal financial officer
and principal accounting officer)
 Fredrik Torstensson
 Thomas W. Lanni.
 Donald L. McKeefery.
 Alisha K. Charlton.
 59




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##### Table of Contents



ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 Securities Authorized for Issuance Under Equity Compensation Plans
  Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuanceSecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnand rights
    
    
    and rights
    
    
    (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,121,428
    
    
    $
    2.80
    
    
    
    96,772Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    0
    
    
    
    01,121,428
    
    
    $
    2.80
    
    
    
    96,772
  60




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##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  61




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    
    1.
    
    
    Financial Statements (See Item 8 of this report)2.
    
    
    Financial Statement Schedule:
    3.
    
    ExhibitsPlan 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 to Exhibit 2.01
to the Companys current 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 to Exhibit 2.1 to the
Companys current report on Form 8-K filed with the Securities and Exchange Commission
on September 29, 2008.Articles of Incorporation; Bylaws3.1
    
    Restated Articles of Incorporation. The Restated Articles of Incorporation are
incorporated herein by reference to Exhibit 3.1 to the Companys quarterly report on
Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.3.2
    
    Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended
through April 5, 2011, are incorporated herein by reference to Exhibit 3.02 to the
Companys current report on Form 8-K filed with the Securities and Exchange Commission
on April 6, 2011.3.3
    
    Certificate of Determination of Series A Participating Preferred Stock. The
Certificate of Determination is incorporated herein by reference to Exhibit 99.1 to the
Companys registration statement on Form 8-A (Filing No. 000-05449) 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 annual report on Form 10-K for the year ended January 31, 1988. *10.2
    
    1995 Employee Stock Option Plan is incorporated by reference to 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. *
 62




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##### Table of Contents



10.3
    
    2005 Equity Incentive Plan, as amended, is incorporated by reference to Exhibit
4.3 to the Companys registration statement on Form S-8 (File No. 33-156518) 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 to Exhibit 10.9 to the
Companys current 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 to Exhibit 10.9
to the Companys current 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 to Exhibit 10.9 to the
Companys current 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 to Exhibit 10.14 to the
Companys annual 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 to Exhibit 99.1 to the Companys
current 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 to Exhibit 10.1 to the Companys current 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 to Exhibit 10.1 to the Companys
current report on Form 8-K filed with the Securities and Exchange Commission on
February 16, 2010.10.11
    
    Second Amendment to the Loan and Security Agreement, dated as of August 13,
2010, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon
Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Companys
current report on Form 8-K filed with the Securities and Exchange Commission on August
18, 2010.10.12
    
    Third Amendment to the Loan and Security Agreement, dated as of February 9,
2011, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon
Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Companys
current report on Form 8-K filed with the Securities and Exchange Commission on
February 14, 2011.10.13
    
    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 to Exhibit 10.1 to the Companys current report on Form 8-K filed
with the Securities and Exchange Commission on March 20, 2009. **10.14
    
    Executed Employment Agreement dated May 1, 2010 between the Company and Samuel
M. Inman, III is incorporated by reference to Exhibit 10.12 of the Companys annual
report on Form 10-K filed with the Securities and Exchange Commission
on May 3, 2010. *
 63




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##### Table of Contents



10.15
    
    Executive Employment Agreement dated May 1, 2010 between the Company and
Winston E. Hickman is incorporated by reference to Exhibit 10.13 of the Companys
annual report on Form 10-K filed with the Securities and Exchange Commission on May 3,
2010. *10.16
    
    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 to Exhibit 10.3 to the Companys quarterly report on Form 10-Q filed with the
Securities and Exchange Commission on June 15, 2009.10.17
    
    Non-Employee Director Compensation Policy is incorporated by reference to
Exhibit 10.16 to the Companys quarterly report on Form 10-Q filed with the Securities
and Exchange Commission on December 11, 2009. *10.18
    
    Executive Incentive Bonus Plan is incorporated by reference to Exhibit 10.1 to
the Companys current report on Form 8-K filed with the Securities and Exchange
Commission on March 25, 2010. *
 Other Exhibits
 21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm  BDO USA, LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
 
 
    
    Filed herewith.*
    
    These exhibits are identified as management contracts or compensatory plans or arrangements
of the registrant pursuant to Item 15 of Form 10-K.**
    
    Confidential Treatment has been requested with respect to certain provisions of this
agreement.Omitted portions have been filed separately with the SEC. 64




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##### Table of Contents



SIGNATURES
  COMARCO, INC./s/ FREDRIK TORSTENSSONFredrik TorstenssonInterim President and Chief Executive Officer POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ FREDRIK TORSTENSSON

Fredrik Torstensson
    
    Interim President and Chief
Executive Officer (Principal
Executive Officer)
    
    April 29, 2011/s/ ALISHA K.CHARLTON

Alisha K. Charlton
    
    Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting
Officer)
    
    April 29, 2011/s/ MICHAEL R. LEVIN

Michael R. Levin
    
    Chairman of the Board,
Director
    
    April 29, 2011/s/ RICHARD T. LEBUHN

Richard T. LeBuhn
    
    Director
    
    April 29, 2011/s/ WAYNE CADWALLADER

Wayne Cadwallader
    
    Director
    
    April 29, 2011/s/ JEFFREY R. HULTMAN

Jeffrey R. Hultman
    
    Director
    
    April 29, 2011/s/ PAUL BOROWIEC

Paul Borowiec
    
    Director
    
    April 29, 2011
 65




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
 Years Ended January 31, 2011 and 2010
 (In thousands)
 Balance at
    
    
    Charged to Cost and
    
    
    
    
    
    
    Other Changes Add
    
    
    Balance atBeginning of Year
    
    
    Expense (Recovery)
    
    
    Deductions
    
    
    (Deduct)
    
    
    End of YearAllowance for doubtful
accounts and provision for
unbilled receivables (deducted
from accounts receivable):Year ended January 31, 2011
    
    $
    136
    
    
    $
    17
    
    
    $
    (34
    )
    
    $
    
    
    
    $
    119Year ended January 31, 2010
    
    $
    14
    
    
    $
    122
    
    
    $
    
    
    
    $
    
    
    
    $
    136Allowance for deferred tax assets:Year ended January 31, 2011
    
    $
    12,763
    
    
    $
    
    
    
    $
    
    
    
    $
    2,358
    
    
    $
    15,121Year ended January 31, 2010
    
    $
    8,824
    
    
    $
    
    
    
    $
    
    
    
    $
    3,939
    
    
    $
    12,763
 66




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit Description
 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 to Exhibit 2.01 to the Companys current 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 to Exhibit 2.1 to the Companys current report on Form 8-K
filed with the Securities and Exchange Commission on September 29, 2008.3.1
    
    Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated
herein by reference to Exhibit 3.1 to the Companys quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on December 12, 2000.3.2
    
    Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through April 5,
2011, are incorporated herein by reference to Exhibit 3.02 to the Companys current report on
Form 8-K filed with the Securities and Exchange Commission on April 6, 2011.3.3
    
    Certificate of Determination of Series A Participating Preferred Stock. The Certificate of
Determination is incorporated herein by reference to Exhibit 99.1 to the Companys
registration statement on Form 8-A (Filing No. 000-05449) 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 to the Companys
annual report on Form 10-K for the year ended January 31, 1988. *10.2
    
    1995 Employee Stock Option Plan is incorporated by reference to 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 to Exhibit 4.3 to the
Companys registration statement on Form S-8 (File No. 33-156518) 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 to Exhibit 10.9 to the Companys current 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 to Exhibit 10.9 to the Companys
current 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 to Exhibit 10.9 to the Companys current 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 to Exhibit 10.14 to the Companys annual 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
 67




---



##### Table of Contents



reference to Exhibit 99.1 to the Companys current 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 to Exhibit 10.1 to the Companys current 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 to Exhibit 10.1 to the Companys current report on Form 8-K
filed with the Securities and Exchange Commission on February 16, 2010.10.11
    
    Second Amendment to the Loan and Security Agreement, dated as of August 13, 2010, by and
among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is
incorporated herein by reference to Exhibit 10.1 to the Companys current report on Form 8-K
filed with the Securities and Exchange Commission on August 18, 2010.10.12
    
    Third Amendment to the Loan and Security Agreement, dated as of February 9, 2011, by and
among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is
incorporated herein by reference to Exhibit 10.1 to the Companys current report on Form 8-K
filed with the Securities and Exchange Commission on February 14, 2011.10.13
    
    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 to
Exhibit 10.1 to the Companys current report on Form 8-K filed with the Securities and
Exchange Commission on March 20, 2009. *10.14
    
    Executed Employment Agreement dated May 1, 2010 between the Company and Samuel M. Inman, III
is incorporated by reference to Exhibit 10.12 of the Companys annual report on Form 10-K
filed with the Securities and Exchange Commission on May 3, 2010. *10.15
    
    Executive Employment Agreement dated May 1, 2010 between the Company and Winston E. Hickman
is incorporated by reference to Exhibit 10.13 of the Companys annual report on Form 10-K
filed with the Securities and Exchange Commission on May 3, 2010. *10.16
    
    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 to Exhibit 10.3 to the Companys
quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 15,
2009.10.17
    
    Non-Employee Director Compensation Policy is incorporated by reference to Exhibit 10.16 to
the Companys quarterly report on Form 10-Q filed with the Securities and Exchange Commission
on December 11, 2009. *10.18
    
    Executive Incentive Bonus Plan is incorporated by reference to Exhibit 10.1 to the Companys
current 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 USA, LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
 68




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##### Table of Contents



32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
    
    Filed herewith.*
    
    These exhibits are identified as management contracts or compensatory plans or arrangements
of the Registrant pursuant to Item 15 of Form 10-K.**
    
    Confidential Treatment has been requested with respect to certain provisions of this
agreement.Omitted portions have been filed separately with the SEC. 69