##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended JULY 31, 2009
 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.
  
 California
    
    95-2088894(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
     þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



COMARCO, INC. AND SUBSIDIARIES
 QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2009
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Condensed Consolidated Balance Sheets as of July 31, 2009 and January 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended
July 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    17ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 4. CONTROLS AND PROCEDURES
    
    
    27PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    28ITEM 1A. RISK FACTORS
    
    
    29ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    29ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    29ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    29ITEM 5. OTHER INFORMATION
    
    
    30ITEM 6. EXHIBITS
    
    
    30SIGNATURES
    
    
    31EX-3.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)
(In thousands, except share amounts)
 July 31,
    
    
    January 31,2009
    
    

2009 (A)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,509
    
    
    $
    14,144Accounts receivable, net of reserves of $3 and $14
    
    
    7,630
    
    
    
    3,974Inventory, net of reserves of $1,505 and $1,488
    
    
    590
    
    
    
    1,232Other current assets
    
    
    382
    
    
    
    862Total current assets
    
    
    20,111
    
    
    
    20,212Property and equipment, net
    
    
    1,115
    
    
    
    1,279Restricted cash
    
    
    
    
    
    
    77Total assets
    
    $
    21,226
    
    
    $
    21,568LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    4,422
    
    
    $
    1,501Accrued liabilities
    
    
    2,346
    
    
    
    3,178Line of credit
    
    
    1,000
    
    
    
    Total current liabilities
    
    
    7,768
    
    
    
    4,679Tax liability: FIN 48
    
    
    86
    
    
    
    86Deferred rent, net of current portion
    
    
    124
    
    
    
    182Total liabilities
    
    
    7,978
    
    
    
    4,947Commitments and ContingenciesStockholders Equity:Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at July 31, 2009 and
January 31, 2009, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,326,671 shares issued and outstanding at July
31, 2009 and January 31, 2009, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    14,835
    
    
    
    14,705Retained earnings (accumulated deficit)
    
    
    (2,320
    )
    
    
    1,183Total stockholders equity
    
    
    13,248
    
    
    
    16,621Total liabilities and stockholders equity
    
    $
    21,226
    
    
    $
    21,568
 
 (A)
    
    Derived from the audited consolidated financial statements as of January 31,
2009.  3




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    7,580
    
    
    $
    3,158
    
    
    $
    9,602
    
    
    $
    6,979Cost of revenue
    
    
    5,664
    
    
    
    3,337
    
    
    
    7,999
    
    
    
    7,166Gross profit (loss)
    
    
    1,916
    
    
    
    (179
    )
    
    
    1,603
    
    
    
    (187
    )Selling, general, and administrative expenses
    
    
    1,597
    
    
    
    2,193
    
    
    
    3,283
    
    
    
    5,695Engineering and support expenses
    
    
    972
    
    
    
    761
    
    
    
    1,842
    
    
    
    1,3772,569
    
    
    
    2,954
    
    
    
    5,125
    
    
    
    7,072Operating loss
    
    
    (653
    )
    
    
    (3,133
    )
    
    
    (3,522
    )
    
    
    (7,259
    )Other income, net
    
    
    18
    
    
    
    28
    
    
    
    7
    
    
    
    81Loss from continuing operations before
income taxes
    
    
    (635
    )
    
    
    (3,105
    )
    
    
    (3,515
    )
    
    
    (7,178
    )Income tax benefit
    
    
    
    
    
    
    571
    
    
    
    
    
    
    
    1,518Net loss from continuing operations
    
    
    (635
    )
    
    
    (2,534
    )
    
    
    (3,515
    )
    
    
    (5,660
    )Income (loss) from discontinued operations,
net of income taxes
    
    
    (27
    )
    
    
    885
    
    
    
    12
    
    
    
    2,354Net loss
    
    $
    (662
    )
    
    $
    (1,649
    )
    
    $
    (3,503
    )
    
    $
    (3,306
    )Basic and diluted income (loss) per share:Net loss from continuing operations
    
    $
    (0.09
    )
    
    $
    (0.35
    )
    
    $
    (0.48
    )
    
    $
    (0.77
    )Net income from discontinued operations
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.32$
    (0.09
    )
    
    $
    (0.23
    )
    
    $
    (0.48
    )
    
    $
    (0.45
    )Weighted average common shares outstanding:Basic
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Diluted
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Common shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
  4




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)
 Six Months EndedJuly 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from continuing operations
    
    $
    (3,515
    )
    
    $
    (5,660
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    389
    
    
    
    526Loss on sale/retirement of property and equipment
    
    
    6
    
    
    
    16Loan origination fees
    
    
    43
    
    
    
    Stock based compensation expense
    
    
    130
    
    
    
    176Recovery from doubtful accounts receivable
    
    
    (11
    )
    
    
    Provision for obsolete inventory
    
    
    17
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,645
    )
    
    
    (1,732
    )Inventory
    
    
    625
    
    
    
    (1,609
    )Other assets
    
    
    480
    
    
    
    (90
    )Accounts payable
    
    
    2,921
    
    
    
    660Deferred rent
    
    
    (58
    )
    
    
    (102
    )Accrued liabilities
    
    
    (832
    )
    
    
    (825
    )Net cash used in continuing operating activities
    
    
    (3,450
    )
    
    
    (8,640
    )Net cash provided by discontinued operating activities
    
    
    12
    
    
    
    6,422Net cash used in operating activities
    
    
    (3,438
    )
    
    
    (2,218
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (231
    )
    
    
    (358
    )Decrease in restricted cash
    
    
    77
    
    
    
    Net cash used in continuing investing activities
    
    
    (154
    )
    
    
    (358
    )Net cash used in discontinued investing activities
    
    
    
    
    
    
    (477
    )Net cash used in investing activities
    
    
    (154
    )
    
    
    (835
    )CASH 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
    
    
    (2,635
    )
    
    
    (3,053
    )Cash and cash equivalents, beginning of period
    
    
    14,144
    
    
    
    17,011Cash and cash equivalents, end of period
    
    $
    11,509
    
    
    $
    13,958Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    2
    
    
    $
    Cash paid for income taxes, net of refunds
    
    $
    14
    
    
    $
    17
  5




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Organization
 ® ®
 2. Summary of Significant Accounting Policies
 Future operations, Liquidity and Capital Resources:
 ® ® ®
  Basis of Presentation:
  Cash and Cash Equivalents
  6




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Principles of Consolidation:
  Revenue Recognition
  Use of Estimates:
   Reclassifications:
  Fair Value of Financial Instruments:
  3. Discontinued Operations
 Call Box
  7




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    
    
    
    $
    1,260
    
    
    $
    
    
    
    $
    3,680Income (loss) from discontinued operations:Gain on sale, net of taxes of $150,000
    
    $
    
    
    
    $
    232
    
    
    $
    
    
    
    $
    232Income (loss) from discontinued
operations, before taxes
    
    
    (21
    )
    
    
    375
    
    
    
    (25
    )
    
    
    1,149Income tax expense
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (450
    )Total income (loss) from discontinued
operations
    
    $
    (21
    )
    
    $
    460
    
    
    $
    (25
    )
    
    $
    931
   Wireless Test Solutions
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    
    
    
    $
    4,456
    
    
    $
    
    
    
    $
    10,548Income (loss) from discontinued operations:Gain on sale, net of taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued
operations, before taxes
    
    
    (6
    )
    
    
    700
    
    
    
    37
    
    
    
    2,341Income tax expense
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    (918
    )Total income (loss) from discontinued
operations
    
    $
    (6
    )
    
    $
    425
    
    
    $
    37
    
    
    $
    1,423
 8




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  4. Stock-Based Compensation
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Total compensation expense relating
to SFAS 123R
    
    $
    64
    
    
    $
    90
    
    
    $
    130
    
    
    $
    192Less: Amounts reflected in
discontinued operations
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (16
    )Compensation expense relating to
SFAS 123R from continuing
operations
    
    $
    64
    
    
    $
    82
    
    
    $
    130
    
    
    $
    176Impact on diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
   9




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Six MonthsEndedJuly 31, 2008Weighted average risk-free interest rate
    
    
    3.0
    %Expected life (in years)
    
    
    5.9Expected stock volatility
    
    
    38.1
    %Dividend yield
    
    NoneExpected forfeitures
    
    
    8.2
    %
     Outstanding OptionsWeighted-AverageNumber of Shares
    
    Exercise PriceBalance, January 31, 2009
    
    
    1,184,000
    
    
    $
    4.34Options granted
    
    
    
    
    
    
    Options canceled or expired
    
    
    (80,500
    )
    
    
    10.04Options exercised
    
    
    
    
    
    
    Balance, July 31, 2009
    
    
    1,103,500
    
    
    $
    3.92
  10




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Options Outstanding
    
    Options ExercisableWeighted-Avg.Range of
    
    Number
    
    Remaining
    
    Weighted-Avg.
    
    Number
    
    Weighted-Avg.Exercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$1.09 to 4.90
    
    
    813,500
    
    
    
    9.26
    
    
    $
    1.29
    
    
    
    11,250
    
    
    $
    4.576.19 to 9.89
    
    
    166,000
    
    
    
    5.33
    
    
    
    7.77
    
    
    
    150,250
    
    
    
    7.8010.43 to 11.60
    
    
    60,000
    
    
    
    5.71
    
    
    
    10.72
    
    
    
    52,500
    
    
    
    10.7615.07
    
    
    10,000
    
    
    
    1.92
    
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.0720.04 to 23.67
    
    
    54,000
    
    
    
    0.80
    
    
    
    22.16
    
    
    
    54,000
    
    
    
    22.161,103,500
    
    
    7.99 years
    
    
    3.92
    
    
    
    278,000
    
    
    
    11.28
  5. Recent Accounting Pronouncements
   6. Stockholders Equity
  7. Earnings (Loss) Per Share
  11




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##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic and diluted:Net loss from continuing operations
    
    $
    (635
    )
    
    $
    (2,534
    )
    
    $
    (3,515
    )
    
    $
    (5,660
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share from
continuing operations
    
    $
    (0.09
    )
    
    $
    (0.35
    )
    
    $
    (0.48
    )
    
    $
    (0.77
    )Net income (loss) from discontinued operations
    
    $
    (27
    )
    
    $
    885
    
    
    $
    12
    
    
    $
    2,354Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted earnings per share from
discontinued operations
    
    $
    
    
    
    $
    0.12
    
    
    $
    
    
    
    $
    0.32Net loss
    
    $
    (662
    )
    
    $
    (1,649
    )
    
    $
    (3,503
    )
    
    $
    (3,306
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share
    
    $
    (0.09
    )
    
    $
    (0.23
    )
    
    $
    (0.48
    )
    
    $
    (0.45
    )
 8. Customer and Supplier Concentrations
  Three Months Ended July 31,2009
    
    
    2008(In thousands)Total revenue
    
    $
    7,580
    
    
    
    100
    %
    
    $
    3,158
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    5,764
    
    
    
    76
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    1,757
    
    
    
    23
    %
    
    
    2,703
    
    
    
    86
    %Kensington Technology Group
    
    
    59
    
    
    
    1
    %
    
    
    363
    
    
    
    11
    %$
    7,580
    
    
    
    100
    %
    
    $
    3,066
    
    
    
    97
    %
 12




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Six Months Ended July 31,2009
    
    
    2008(In thousands)Total revenue
    
    $
    9,602
    
    
    
    100
    %
    
    $
    6,979
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    5,764
    
    
    
    60
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    3,763
    
    
    
    39
    %
    
    
    5,925
    
    
    
    85
    %Kensington Technology Group
    
    
    71
    
    
    
    
    
    
    
    822
    
    
    
    12
    %$
    9,598
    
    
    
    99
    %
    
    $
    6,747
    
    
    
    97
    %
   July 31, 2009
    
    
    January 31, 2009Total gross accounts receivable
    
    $
    7,633
    
    
    
    100
    %
    
    $
    3,988
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    
    5,764
    
    
    
    75
    %
    
    
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    1,752
    
    
    
    23
    %
    
    
    3,366
    
    
    
    84
    %Trust International BV
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    15
    %$
    7,516
    
    
    
    98
    %
    
    $
    3,972
    
    
    
    99
    %
   9. Inventory
  July 31,
    
    
    January 31,2009
    
    
    2009Raw materials
    
    $
    274
    
    
    $
    290Finished goods
    
    
    316
    
    
    
    942$
    590
    
    
    $
    1,232
 13




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  10. Warranty Arrangements
  Six Months EndedJuly 31,2009
    
    
    2008Beginning balance
    
    $
    86
    
    
    $
    46Accruals for warranties issued during the period
    
    
    93
    
    
    
    70Utilization
    
    
    (56
    )
    
    
    (41
    )$
    123
    
    
    $
    75
 11. Loan Agreement
   12. Commitments and Contingencies
 Purchase Commitments with Suppliers
  14




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Executive Severance Commitments
  Letter of Credit
  Legal Contingencies
    15




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   16




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 The following discussion and analysis should be read in conjunction with our unaudited
interim condensed consolidated financial statements and the related notes and other financial
information appearing elsewhere in this quarterly report on Form 10-Q .
 Forward-Looking Statements
   ®
  17




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##### Table of Contents



Basis of Presentation
  Executive Summary
 ® ®
 ® ® ®
  
    
    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. The product is
expected to ship early next calendar year.
    
    On March 16, 2009, we entered into an exclusive Retail Strategic Product Development
and Supply Agreement (the Targus Agreement) with Targus Group International, Inc., a
Delaware corporation (Targus). The product offerings for Targus include the
following:
 
    
    A programmable AC adapter that connects easily to a standard
wall plug and includes a DC cable that supports charging two devices
simultaneously. We expect this adapter will be packaged with up to 10
SmartTips®.
    
    A programmable AC adapter that includes both input and output
cables (AC or AC/DC) and will be packaged with up to 10 SmartTips®.
 We began shipments to Targus under this Targus Agreement during June 2009.
    
    Revenue for the second quarter of fiscal 2010 increased to $7.6 million compared to
$3.2 million for the second quarter of fiscal 2009. The increase is primarily
attributable to shipments made to Targus under the Targus Agreement discussed above.
Revenue for the six months ended July 31, 2009 increased $2.6 million or 38 percent,
compared to the comparable period of the prior fiscal year, and is also primarily
attributable to sales to Targus.
 18




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##### Table of Contents




    
    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. We are in the initial test production
runs of our new product for Lenovo and we currently anticipate selling this new product
in the second half of the current fiscal year.
    
    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 fully absorbed our fixed supply chain
overhead. Our future is highly dependent on our ability to sell our products at a
profit and out 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 expected to
be available by the end 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 currently 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
   19




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##### Table of Contents



Results of Operations  Continuing Operations
 Revenue
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % ChangeThree
    
    
    Six2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsRevenue
    
    $
    7,580
    
    
    $
    3,158
    
    
    $
    9,602
    
    
    $
    6,979
    
    
    
    140
    %
    
    
    38
    %Operating loss
    
    $
    (653
    )
    
    $
    (3,133
    )
    
    $
    (3,522
    )
    
    $
    (7,259
    )Net loss from
continuing
operations
    
    $
    (635
    )
    
    $
    (2,534
    )
    
    $
    (3,515
    )
    
    $
    (5,660
    )
 Revenue by Region
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % ChangeThree
    
    
    Six2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsRevenue:North America
    
    $
    5,779
    
    
    $
    315
    
    
    $
    5,820
    
    
    $
    391
    
    
    
    1,735
    %
    
    
    1,388
    %Europe
    
    
    69
    
    
    
    153
    
    
    
    78
    
    
    
    683
    
    
    
    (55
    %)
    
    
    (89
    %)Asia
    
    
    1,732
    
    
    
    2,690
    
    
    
    3,704
    
    
    
    5,905
    
    
    
    (36
    %)
    
    
    (37
    %)$
    7,580
    
    
    $
    3,158
    
    
    $
    9,602
    
    
    $
    6,979
 Revenue by Customer
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % ChangeThree
    
    
    Six2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    Months% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofRevenue
    
    
    
    
    
    
    Revenue
    
    
    
    
    
    
    Revenue
    
    
    
    
    
    
    RevenueRevenue:Kensington
    
    $
    59
    
    
    
    1
    %
    
    $
    363
    
    
    
    11
    %
    
    $
    71
    
    
    
    1
    %
    
    $
    822
    
    
    
    12
    %
    
    
    (84
    %)
    
    
    (91
    %)Lenovo
    
    
    1,757
    
    
    
    23
    %
    
    
    2,703
    
    
    
    86
    %
    
    
    3,763
    
    
    
    39
    %
    
    
    5,925
    
    
    
    85
    %
    
    
    (35
    %)
    
    
    (36
    %)Targus
    
    
    5,764
    
    
    
    76
    %
    
    
    
    
    
    
    
    
    
    
    5,764
    
    
    
    60
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %Other
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    3
    %
    
    
    4
    
    
    
    
    
    
    
    232
    
    
    
    3
    %
    
    
    (100
    %)
    
    
    (98
    %)$
    7,580
    
    
    
    100
    %
    
    $
    3,158
    
    
    
    100
    %
    
    $
    9,602
    
    
    
    100
    %
    
    $
    6,979
    
    
    
    100
    %
    
    
    140
    %
    
    
    38
    %
  20




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##### Table of Contents



Cost of Revenue and Gross Margin
 (in thousands except
margin and change)
 Three Months Ended
    
    Six Months Ended
    
    Year over YearJuly 31,
    
    July 31,
    
    % ChangeThree
    
    Six2009
    
    2008
    
    2009
    
    2008
    
    Months
    
    Months% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalCost of revenue:Product Cost
    
    $
    5,527
    
    
    
    98
    %
    
    $
    2,892
    
    
    
    87
    %
    
    $
    7,258
    
    
    
    91
    %
    
    $
    6,299
    
    
    
    88
    %
    
    
    91
    %
    
    
    15
    %Under-absorption of fixed supply chain overhead
    
    
    51
    
    
    
    1
    %
    
    
    352
    
    
    
    10
    %
    
    
    544
    
    
    
    7
    %
    
    
    737
    
    
    
    10
    %
    
    
    (86
    %)
    
    
    (26
    %)Inventory reserve and scrap charges
    
    
    83
    
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %Freight, expedite, and other charges
    
    
    3
    
    
    
    
    
    
    
    93
    
    
    
    3
    %
    
    
    3
    
    
    
    
    
    
    
    130
    
    
    
    2
    %
    
    
    (97
    %)
    
    
    (98
    %)$
    5,664
    
    
    
    100
    %
    
    $
    3,337
    
    
    
    100
    %
    
    $
    7,999
    
    
    
    100
    %
    
    $
    7,166
    
    
    
    100
    %
    
    
    70
    %
    
    
    12
    %
 Three Months Ended
    
    Six Months Ended
    
    Year over YearJuly 31,
    
    July 31,
    
    ppt ChangeThree
    
    Six2009
    
    2008
    
    2009
    
    2008
    
    Months
    
    MonthsGross margin (loss)
    
    
    25
    %
    
    
    (6
    %)
    
    
    17
    %
    
    
    (3
    %)
    
    
    31
    
    
    
    20
 ®
 Operating Costs and Expenses
(in thousands except change)
 Three Months Ended
    
    Six Months Ended
    
    Year over Year %July 31,
    
    July 31,
    
    ChangeThree
    
    Six2009
    
    2008
    
    2009
    
    2008
    
    Months
    
    Months% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofRevenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    RevenueOperating expenses:SG&A expenses, excluding corporate overhead
    
    $
    511
    
    
    
    7
    %
    
    $
    832
    
    
    
    26
    %
    
    $
    1,325
    
    
    
    14
    %
    
    $
    2,114
    
    
    
    30
    %
    
    
    (39
    %)
    
    
    (37
    %)Corporate overhead
    
    
    1,086
    
    
    
    14
    %
    
    
    1,361
    
    
    
    43
    %
    
    
    1,958
    
    
    
    20
    %
    
    
    3,581
    
    
    
    51
    %
    
    
    (20
    %)
    
    
    (45
    %)Engineering and support expenses
    
    
    972
    
    
    
    13
    %
    
    
    761
    
    
    
    24
    %
    
    
    1,842
    
    
    
    19
    %
    
    
    1,377
    
    
    
    20
    %
    
    
    28
    %
    
    
    34
    %$
    2,569
    
    
    
    34
    %
    
    $
    2,954
    
    
    
    93
    %
    
    $
    5,125
    
    
    
    53
    %
    
    $
    7,072
    
    
    
    101
    %
    
    
    (13
    %)
    
    
    (28
    %)
 21




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##### Table of Contents



Other Income, net
  Income Tax Expense
   22




---



##### Table of Contents



Discontinued Operations  Call Box
 Income (loss) from Discontinued Operations
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % ChangeThree
    
    
    Six2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsGain on sale, net of income taxes of $150,000
    
    $
    
    
    
    $
    232
    
    
    $
    
    
    
    $
    232
    
    
    
    (100
    %)
    
    
    (100
    %)Income (loss) from discontinued operations, before taxes
    
    
    (21
    )
    
    
    375
    
    
    
    (25
    )
    
    
    1,149
    
    
    
    (106
    %)
    
    
    (102
    %)Income tax expense
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (450
    )
    
    
    (100
    %)
    
    
    (100
    %)Income (loss) from discontinued operations
    
    $
    (21
    )
    
    $
    460
    
    
    $
    (25
    )
    
    $
    931
    
    
    
    (105
    %)
    
    
    (103
    %)
   Discontinued Operations  Wireless Test Solutions
 Income(loss) from Discontinued Operations
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % ChangeThree
    
    
    Six2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsGain on sale, net of income taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations, before taxes
    
    
    (6
    )
    
    
    700
    
    
    
    37
    
    
    
    2,341
    
    
    
    (100
    %)
    
    
    (98
    %)Income tax expense
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    (918
    )
    
    
    100
    %
    
    
    100
    %Income (loss) from discontinued operations
    
    $
    (6
    )
    
    $
    425
    
    
    $
    37
    
    
    $
    1,423
    
    
    
    (101
    %)
    
    
    (97
    %)
  23




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##### Table of Contents



Liquidity and Capital Resources
  Six Months Ended July 31,2009
    
    2008(in thousands)Cash provided by (used in):Operating activities
    
    $
    (3,438
    )
    
    $
    (2,218
    )Investing activities
    
    
    (154
    )
    
    
    (835
    )Financing activities
    
    
    957
    
    
    
    
 Operating Activities
   Investing Activities
  ®
 Financing Activities
    24




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##### Table of Contents




    
    In the event that any of our significant customers cancel or delay a significant
amount of orders or 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 contract manufacturers of our ChargeSource® products become unable to
manufacture our products at the level currently anticipated, should our ChargeSource®
products fail to meet any required specifications, or should we encounter any
unexpected problems, difficulties or delays in the production of our ChargeSource®
products, our operating results and cash flows would be negatively impacted.
    
    The delay in development, delivery or release of our ChargeSource® products could
negatively impact our revenue, operating results and cash flows.
  25




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    26




---



##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  (1)
    
    pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the issuer;(2)
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are being made
only in accordance with authorizations of management and directors of the issuer; and(3)
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuers assets that could have a
material effect on the financial statements.
  27




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 iGo, Inc. (formerly Mobility Electronics, Inc.) (iGo) vs. Comarco Wireless
Technologies, Inc., Case No. 5:07cv00084, U.S. District Court for the Eastern District of Texas.
    28




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  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.
 ® ®
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 1.
    
    The Annual Meeting of Shareholders of Comarco was held on August 20, 2009 (the
Annual Meeting). The holders of Comarcos stock were entitled to elect five directors
to serve until the
 29




---



##### Table of Contents



next annual meeting of shareholders and until each such persons
respective successor is duly elected and qualified. The following table sets forth the
names of the five persons elected at the Annual Meeting to serve as directors until
2010 and the number of votes cast for or withheld with respect to each such person.
 For
    
    WithheldJeffrey R. Hultman
    
    
    4,413,587
    
    
    
    2,588,422Samuel M. Inman, III
    
    
    6,221,323
    
    
    
    780,686Gerald D. Griffin
    
    
    5,996,413
    
    
    
    1,005,596Richard T. LeBuhn
    
    
    6,672,144
    
    
    
    329,865Robert J. Majteles
    
    
    6,190,725
    
    
    
    811,284
 2.
    
    At the Annual Meeting the shareholders also voted on and approved the
ratification of the appointment of BDO Seidman, LLP as Comarcos independent registered
public accounting firm for the fiscal year ending January 31, 2010. The vote for the
proposal was as follows:
 For
    
    Against
    
    Abstentions6,238,600
    
    670,996
    
    92,913
 
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 3.1
    
    Articles of Incorporation of Comarco, Inc., as amended (incorporated by
reference to Exhibit 3.1 to our quarterly report on Form 10-Q, filed on
December 15, 2000)3.2
    
    Amended and Restated By-Laws of Comarco, Inc.3.3
    
    Certificate of Determination of Series A Participating Preferred Stock
(incorporated by reference to Exhibit 99.2 to our registration statement on Form
8-A, filed on February 6, 2003)31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 30




---



##### Table of Contents



SIGNATURES
  COMARCO, INC.Date: September 14, 2009
    /s/ Samuel M. Inman, IIISamuel M. Inman, IIIPresident and Chief Executive OfficerDate: September 14, 2009
    /s/ Winston E. HickmanWinston E. HickmanVice President and Chief Financial Officer 31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description3.1
    
    Articles of Incorporation of Comarco, Inc., as amended (incorporated by reference to
Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on December 15, 2000)3.2
    
    Amended and Restated Bylaws of Comarco, Inc.3.3
    
    Certificate of Determination of Series A Participating Preferred Stock (incorporated by
reference to Exhibit 99.2 to our Registration Statement on Form 8-A, filed on February 6,
2003)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 32