##### 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
 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
(State or other jurisdiction 
of incorporation or organization)
    
    95-2088894
(I.R.S. Employer
Identification No.)
 
 
 
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a Smaller reporting company)
    
    Smaller reporting company þ
  o þ




---



##### 



COMARCO, INC. AND SUBSIDIARIES
 QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2009
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS (Unaudited)Condensed Consolidated Balance Sheets as of October 31, 2009 and January 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended October 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
October 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
    
    
    27ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    28PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    29ITEM 1A.
    
    RISK FACTORS
    
    
    30ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    30ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    30ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    30ITEM 5.
    
    OTHER INFORMATION
    
    
    31ITEM 6.
    
    EXHIBITS
    
    
    31SIGNATURES
    
    
    32EX-10.16EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### 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)
 October 31,
    
    
    January 31,2009
    
    
    2009(A)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,744
    
    
    $
    14,144Accounts receivable, net of reserves of $14 and $14
    
    
    8,153
    
    
    
    3,974Inventory, net of reserves of $1,460 and $1,488
    
    
    468
    
    
    
    1,232Other current assets
    
    
    330
    
    
    
    862Total current assets
    
    
    19,695
    
    
    
    20,212Property and equipment, net
    
    
    1,206
    
    
    
    1,279Restricted cash
    
    
    
    
    
    
    77Total assets
    
    $
    20,901
    
    
    $
    21,568LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,590
    
    
    $
    1,501Accrued liabilities
    
    
    4,294
    
    
    
    3,178Line of credit
    
    
    1,000
    
    
    
    Total current liabilities
    
    
    7,884
    
    
    
    4,679Tax liability
    
    
    33
    
    
    
    86Deferred rent, net of current portion
    
    
    94
    
    
    
    182Total liabilities
    
    
    8,011
    
    
    
    4,947Commitments and ContingenciesStockholders Equity:Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at October 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
October 31, 2009 and January 31, 2009, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    14,903
    
    
    
    14,705Retained earnings (accumulated deficit)
    
    
    (2,746
    )
    
    
    1,183Total stockholders equity
    
    
    12,890
    
    
    
    16,621Total liabilities and stockholders equity
    
    $
    20,901
    
    
    $
    21,568
 
 (A)
    
    Derived from the audited consolidated financial statements as of January 31, 2009.  3




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    7,550
    
    
    $
    3,236
    
    
    $
    17,152
    
    
    $
    10,215Cost of revenue
    
    
    5,762
    
    
    
    3,237
    
    
    
    13,761
    
    
    
    10,403Gross profit (loss)
    
    
    1,788
    
    
    
    (1
    )
    
    
    3,391
    
    
    
    (188
    )Selling, general, and administrative expenses
    
    
    1,243
    
    
    
    1,402
    
    
    
    4,525
    
    
    
    7,097Engineering and support expenses
    
    
    1,017
    
    
    
    730
    
    
    
    2,860
    
    
    
    2,1072,260
    
    
    
    2,132
    
    
    
    7,385
    
    
    
    9,204Operating loss
    
    
    (472
    )
    
    
    (2,133
    )
    
    
    (3,994
    )
    
    
    (9,392
    )Other income (expense), net
    
    
    (5
    )
    
    
    24
    
    
    
    3
    
    
    
    105Loss from continuing operations before
income taxes
    
    
    (477
    )
    
    
    (2,109
    )
    
    
    (3,991
    )
    
    
    (9,287
    )Income tax benefit (expense)
    
    
    59
    
    
    
    (882
    )
    
    
    59
    
    
    
    636Net loss from continuing operations
    
    
    (418
    )
    
    
    (2,991
    )
    
    
    (3,932
    )
    
    
    (8,651
    )Income (loss) from discontinued operations,
net of income taxes
    
    
    (9
    )
    
    
    (1,368
    )
    
    
    3
    
    
    
    986Net loss
    
    $
    (427
    )
    
    $
    (4,359
    )
    
    $
    (3,929
    )
    
    $
    (7,665
    )Basic and diluted income (loss) per share:Net loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.41
    )
    
    $
    (0.54
    )
    
    $
    (1.18
    )Net income (loss) from discontinued
operations
    
    
    
    
    
    
    (0.18
    )
    
    
    
    
    
    
    0.13$
    (0.06
    )
    
    $
    (0.59
    )
    
    $
    (0.54
    )
    
    $
    (1.05
    )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




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Nine Months EndedOctober 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from continuing operations
    
    $
    (3,932
    )
    
    $
    (8,651
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    582
    
    
    
    887Loss on sale/retirement of property and equipment
    
    
    6
    
    
    
    16Loan origination fees
    
    
    43
    
    
    
    Stock based compensation expense
    
    
    198
    
    
    
    184Provision for obsolete inventory
    
    
    (28
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,179
    )
    
    
    (1,641
    )Inventory
    
    
    792
    
    
    
    (2,268
    )Other assets
    
    
    532
    
    
    
    (56
    )Accounts payable
    
    
    1,089
    
    
    
    440Accrued liabilities
    
    
    1,116
    
    
    
    (259
    )Deferred rent
    
    
    (88
    )
    
    
    (154
    )Tax liability
    
    
    (53
    )
    
    
    Net cash used in continuing operating activities
    
    
    (3,922
    )
    
    
    (11,502
    )Net cash provided by discontinued operating activities
    
    
    3
    
    
    
    3,426Net cash used in operating activities
    
    
    (3,919
    )
    
    
    (8,076
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (515
    )
    
    
    (554
    )Decrease in restricted cash
    
    
    77
    
    
    
    Net cash used in continuing investing activities
    
    
    (438
    )
    
    
    (554
    )Net cash used in discontinued investing activities
    
    
    
    
    
    
    (774
    )Net cash used in investing activities
    
    
    (438
    )
    
    
    (1,328
    )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
    
    
    (3,400
    )
    
    
    (9,404
    )Cash and cash equivalents, beginning of period
    
    
    14,144
    
    
    
    17,011Cash and cash equivalents, end of period
    
    $
    10,744
    
    
    $
    7,607Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    17
    
    
    $
    Cash paid for income taxes, net of refunds
    
    $
    
    
    
    $
    18
  5




---



##### 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:
  6




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Cash and Cash Equivalents
  Principles of Consolidation:
  Revenue Recognition
  Use of Estimates:
   Reclassifications:
  Fair Value of Financial Instruments:
  Recently Adopted Accounting Pronouncements:
  7




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  3. Discontinued Operations
 Call Box
    Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,680Income (loss) from discontinued operations:Gain on sale, net of taxes of $32,000 and
$182,000
    
    $
    
    
    
    $
    50
    
    
    $
    
    
    
    $
    282Income (loss) from discontinued
operations, before taxes
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    1,149Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )Total income (loss) from discontinued
operations
    
    $
    
    
    
    $
    50
    
    
    $
    (25
    )
    
    $
    981
   8




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Wireless Test Solutions
    Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    11,548Income (loss) from discontinued operations:Gain on sale, net of taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued
operations, before taxes
    
    
    (9
    )
    
    
    (2,332
    )
    
    
    28
    
    
    
    9Income tax benefit (expense)
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    (4
    )Total income (loss) from discontinued
operations
    
    $
    (9
    )
    
    $
    (1,418
    )
    
    $
    28
    
    
    $
    5
   4. Stock-Based Compensation
   9




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Total compensation expense relating
to ASC 718
    
    $
    68
    
    
    $
    16
    
    
    $
    198
    
    
    $
    208Less: Amounts reflected in
discontinued operations
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (24
    )Compensation expense relating to
ASC 718 from continuing operations
    
    $
    68
    
    
    $
    8
    
    
    $
    198
    
    
    $
    184Impact on diluted earnings per share
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.03
   Nine MonthsEndedOctober 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%
   10




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    Outstanding AwardsWeighted-AverageNumber of Shares
    
    
    Exercise PriceBalance, January 31, 2009
    
    
    1,184,000
    
    
    $
    4.34Awards granted
    
    
    69,204
    
    
    
    2.89Awards canceled or expired
    
    
    (80,500
    )
    
    
    10.04Awards exercised
    
    
    
    
    
    
    Balance, October 31, 2009
    
    
    1,172,704
    
    
    $
    3.86
  Awards Outstanding
    
    
    Awards 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
    
    
    882,704
    
    
    8.30
    
    $
    1.41
    
    
    
    11,250
    
    
    $
    4.576.19 to 9.89
    
    
    166,000
    
    
    5.08
    
    
    7.77
    
    
    
    150,250
    
    
    
    7.8010.43 to 11.60
    
    
    60,000
    
    
    5.46
    
    
    10.72
    
    
    
    52,500
    
    
    
    10.7615.07
    
    
    10,000
    
    
    1.67
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.0720.04 to 23.67
    
    
    54,000
    
    
    0.55
    
    
    22.16
    
    
    
    54,000
    
    
    
    22.161,172,704
    
    
    7.29 years
    
    
    3.86
    
    
    
    278,000
    
    
    
    11.28
  5. Stockholders Equity
  11




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  6. Earnings (Loss) Per Share
    Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic and diluted:Net loss from continuing operations
    
    $
    (418
    )
    
    $
    (2,991
    )
    
    $
    (3,932
    )
    
    $
    (8,651
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share from
continuing operations
    
    $
    (0.06
    )
    
    $
    (0.41
    )
    
    $
    (0.54
    )
    
    $
    (1.18
    )Net income (loss) from discontinued operations
    
    $
    (9
    )
    
    $
    (1,368
    )
    
    $
    3
    
    
    $
    986Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted earnings (loss) per share
from discontinued operations
    
    $
    
    
    
    $
    (0.18
    )
    
    $
    
    
    
    $
    0.13Net loss
    
    $
    (427
    )
    
    $
    (4,359
    )
    
    $
    (3,929
    )
    
    $
    (7,665
    )Weighted average shares outstanding
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327
    
    
    
    7,327Basic and diluted loss per share
    
    $
    (0.06
    )
    
    $
    (0.59
    )
    
    $
    (0.54
    )
    
    $
    (1.05
    )
 12




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 7. Customer and Supplier Concentrations
  Three Months Ended October 31,2009
    
    
    2008(In thousands)Total revenue
    
    $
    7,550
    
    
    
    100
    %
    
    $
    3,236
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    6,471
    
    
    
    86
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd
    
    
    956
    
    
    
    13
    %
    
    
    2,521
    
    
    
    78
    %Trust International BV
    
    
    123
    
    
    
    1
    %
    
    
    521
    
    
    
    16
    %$
    7,550
    
    
    
    100
    %
    
    $
    3,042
    
    
    
    94
    %
 Nine Months Ended October 31,2009
    
    
    2008(In thousands)Total revenue
    
    $
    17,152
    
    
    
    100
    %
    
    $
    10,215
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    12,235
    
    
    
    71
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd
    
    
    4,719
    
    
    
    28
    %
    
    
    8,447
    
    
    
    83
    %$
    16,954
    
    
    
    99
    %
    
    $
    8,447
    
    
    
    83
    %
   October 31, 2009
    
    
    January 31, 2009Total gross accounts receivable
    
    $
    8,167
    
    
    
    100
    %
    
    $
    3,988
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    
    6,306
    
    
    
    77
    %
    
    
    
    
    
    
    Lenovo Information Products Co., Ltd
    
    
    1,230
    
    
    
    15
    %
    
    
    3,366
    
    
    
    84
    %Trust International BV
    
    
    123
    
    
    
    2
    %
    
    
    606
    
    
    
    15
    %$
    7,659
    
    
    
    94
    %
    
    $
    3,972
    
    
    
    99
    %
  13




---



##### Table of Contents



COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  8. Inventory
  October 31,
    
    
    January 31,2009
    
    
    2009Raw materials
    
    $
    373
    
    
    $
    290Finished goods
    
    
    95
    
    
    
    942$
    468
    
    
    $
    1,232
  9. Warranty Arrangements
  Nine Months EndedOctober 31,2009
    
    
    2008Beginning balance
    
    $
    86
    
    
    $
    46Accruals for warranties issued during the period
    
    
    172
    
    
    
    106Utilization
    
    
    (90
    )
    
    
    (70
    )$
    168
    
    
    $
    82
 10. Loan Agreement
   14




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### 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




---



##### 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 Strategic Product Development and
Supply Agreement (the Targus Agreement) with 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. 18




---



##### Table of Contents




    
    Revenue for the third quarter of fiscal 2010 increased to $7.6 million compared to
$3.2 million for the third quarter of fiscal 2009. The increase is primarily
attributable to shipments made to Targus under the Targus Agreement discussed above.
Revenue for the nine months ended October 31, 2009 increased $6.9 million or 68
percent, compared to the comparable period of the prior fiscal year, and is also
primarily attributable to sales to Targus.
    
    In late January 2008, we began volume production of a small form factor 90-watt
AC/DC standalone power adapter designed to the stringent specifications of Lenovo, a
leading notebook computer OEM. This innovative product is currently being marketed and
sold as an OEM-branded aftermarket accessory. During the third quarter of the current
fiscal year, we began shipments to Lenovo of our newest generation of our slim and
light product.
    
    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 our ultimate return to overall profitability. The Company remains focused
on efforts to drive further increases in sales in order to absorb our fixed operating
costs and to become profitable. Our ability to drive increased sales is dependent upon
a number of factors, including, among others:
 
    
    Our ability to timely deliver existing, new and enhanced
products meeting our customers required specifications in sufficient
quantities to satisfy demand of our customers including, but not limited to,
the development and release for manufacture of certain AC and AC/DC standalone
power adapter products designed to address the requirements of our retail and
OEM accessories channels;
    
    Securing additional OEM partners; and
    
    Market and customer acceptance of our new products that began
shipping in the third quarter of fiscal 2010.
 
    
    Our ChargeSource® products are based on proprietary patented construction technology
that enables the production of slim and light power sources for many rechargeable
mobile devices from standard wall outlets, as well as power outlets in airplanes, cars,
and other modes of transportation.
    
    Our ability to timely obtain sufficient quantities of products meeting our
customers required specifications from our third party contract manufacturers and our
ability to reduce our unit costs for such products. Reducing our product costs is
important to our continuing efforts to improve our margins and we are 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




---



##### Table of Contents



Results of Operations  Continuing Operations
 Revenue
 (in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % ChangeThree
    
    
    Nine2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsRevenue
    
    $
    7,550
    
    
    $
    3,236
    
    
    $
    17,152
    
    
    $
    10,215
    
    
    
    133
    %
    
    
    68
    %Operating loss
    
    $
    (472
    )
    
    $
    (2,133
    )
    
    $
    (3,994
    )
    
    $
    (9,392
    )Net loss from
continuing operations
    
    $
    (418
    )
    
    $
    (2,991
    )
    
    $
    (3,932
    )
    
    $
    (8,651
    )
 Revenue by Region
 (in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % ChangeThree
    
    
    Nine2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Months
    
    
    MonthsRevenue:North America
    
    $
    6,198
    
    
    $
    74
    
    
    $
    12,018
    
    
    $
    466
    
    
    
    8,276
    %
    
    
    2,479
    %Europe
    
    
    172
    
    
    
    647
    
    
    
    250
    
    
    
    1,329
    
    
    
    (73
    %)
    
    
    (81
    %)Asia
    
    
    1,180
    
    
    
    2,515
    
    
    
    4,884
    
    
    
    8,420
    
    
    
    (53
    %)
    
    
    (42
    %)$
    7,550
    
    
    $
    3,236
    
    
    $
    17,152
    
    
    $
    10,215
 Revenue by Customer
 (in thousands except change)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,
    
    
    Year over Year2009
    
    
    2008
    
    
    2009

    
    2008
    
    
    % Change% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    Three
    
    
    NineRevenue
    
    
    
    
    
    
    Revenue
    
    
    
    
    
    
    Revenue
    
    
    
    
    
    
    Revenue
    
    
    Months
    
    
    MonthsRevenue:Kensington
    
    $
    
    
    
    
    
    
    
    $
    125
    
    
    
    4
    %
    
    $
    72
    
    
    
    
    
    
    $
    946
    
    
    
    9
    %
    
    
    (100
    %)
    
    
    (92
    %)Lenovo
    
    
    956
    
    
    
    13
    %
    
    
    2,521
    
    
    
    78
    %
    
    
    4,719
    
    
    
    28
    %
    
    
    8,447
    
    
    
    83
    %
    
    
    (62
    %)
    
    
    (44
    %)Targus
    
    
    6,471
    
    
    
    86
    %
    
    
    
    
    
    
    
    
    
    
    12,235
    
    
    
    71
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %Trust
    
    
    123
    
    
    
    1
    %
    
    
    521
    
    
    
    16
    %
    
    
    123
    
    
    
    1
    %
    
    
    530
    
    
    
    5
    %
    
    
    (76
    %)
    
    
    (77
    %)Other
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    2
    %
    
    
    3
    
    
    
    
    
    
    
    292
    
    
    
    3
    %
    
    
    (100
    %)
    
    
    (99
    %)$
    7,550
    
    
    
    100
    %
    
    $
    3,236
    
    
    
    100
    %
    
    $
    17,152
    
    
    
    100
    %
    
    $
    10,215
    
    
    
    100
    %
    
    
    133
    %
    
    
    68
    %
  20




---



##### Table of Contents



Cost of Revenue and Gross Margin

(in thousands except
margin and change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % ChangeNine2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Months% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of TotalCost of revenue:Product Cost
    
    $
    5,686
    
    
    
    98
    %
    
    $
    2,967
    
    
    
    92
    %
    
    $
    12,943
    
    
    
    94
    %
    
    $
    9,265
    
    
    
    89
    %
    
    
    92
    %
    
    
    40
    %Under-absorption of
fixed supply chain
overhead
    
    
    32
    
    
    
    1
    %
    
    
    227
    
    
    
    7
    %
    
    
    576
    
    
    
    4
    %
    
    
    964
    
    
    
    9
    %
    
    
    (86
    %)
    
    
    (40
    %)Inventory reserve
and scrap charges
    
    
    (45
    )
    
    
    (1
    %)
    
    
    54
    
    
    
    1
    %
    
    
    150
    
    
    
    1
    %
    
    
    54
    
    
    
    1
    %
    
    
    (183
    %)
    
    
    178
    %Freight, expedite,
and other charges
    
    
    89
    
    
    
    2
    %
    
    
    (11
    )
    
    
    
    
    
    
    92
    
    
    
    1
    %
    
    
    120
    
    
    
    1
    %
    
    
    909
    %
    
    
    (23
    %)$
    5,762
    
    
    
    100
    %
    
    $
    3,237
    
    
    
    100
    %
    
    $
    13,761
    
    
    
    100
    %
    
    $
    10,403
    
    
    
    100
    %
    
    
    78
    %
    
    
    32
    %
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    ppt Change2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Nine MonthsGross margin (loss)
    
    
    24
    %
    
    
    0
    %
    
    
    20
    %
    
    
    (2
    %)
    
    
    24
    
    
    
    22
 ®
  21




---



##### Table of Contents



Operating Costs and Expenses

(in thousands except change)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Year over Year % Change% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    Three Months
    
    
    Nine MonthsOperating expenses:SG&A expenses,
excluding
corporate
overhead
    
    $
    362
    
    
    
    5
    %
    
    $
    443
    
    
    
    14
    %
    
    $
    1,687
    
    
    
    10
    %
    
    $
    2,557
    
    
    
    25
    %
    
    
    (18
    %)
    
    
    (34
    %)Corporate overhead
    
    
    881
    
    
    
    12
    %
    
    
    959
    
    
    
    30
    %
    
    
    2,838
    
    
    
    17
    %
    
    
    4,540
    
    
    
    44
    %
    
    
    (8
    %)
    
    
    (38
    %)Engineering and
support expenses
    
    
    1,017
    
    
    
    13
    %
    
    
    730
    
    
    
    22
    %
    
    
    2,860
    
    
    
    16
    %
    
    
    2,107
    
    
    
    21
    %
    
    
    39
    %
    
    
    36
    %$
    2,260
    
    
    
    30
    %
    
    $
    2,132
    
    
    
    66
    %
    
    $
    7,385
    
    
    
    43
    %
    
    $
    9,204
    
    
    
    90
    %
    
    
    (6
    %)
    
    
    (20
    %)
    Other Income, net
  22




---



##### Table of Contents



Income Tax Expense
   Discontinued Operations  Call Box  Income (loss) from Discontinued Operations
 (in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % ChangeNine2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    MonthsGain on sale,
net of income taxes
of $32,000
and $182,000
    
    $
    
    
    
    $
    50
    
    
    $
    
    
    
    $
    282
    
    
    
    (100
    %)
    
    
    (100
    %)Income (loss) from
discontinued
operations, before
taxes
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    1,149
    
    
    
    
    
    
    
    (102
    %)Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )
    
    
    
    
    
    
    (100
    %)Income (loss) from
discontinued
operations
    
    $
    
    
    
    $
    50
    
    
    $
    (25
    )
    
    $
    981
    
    
    
    (100
    %)
    
    
    (103
    %)
   23




---



##### Table of Contents



Discontinued Operations  Wireless Test Solutions   Income(loss) from Discontinued Operations


(in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % Change2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    

Nine
MonthsGain on sale, net of
income taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Income (loss) from
discontinued operations,
before taxes
    
    
    (9
    )
    
    
    (2,332
    )
    
    
    28
    
    
    
    9
    
    
    
    (100
    %)
    
    
    (211
    %)Income tax benefit (expense)
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    (4
    )
    
    
    (100
    %)
    
    
    100
    %Income (loss) from
discontinued operations
    
    $
    (9
    )
    
    $
    (1,418
    )
    
    $
    28
    
    
    $
    5
    
    
    
    (99
    %)
    
    
    460
    %
  Liquidity and Capital Resources
  Nine Months Ended October 31,2009
    
    
    2008(in thousands)Cash provided by (used in):Operating activities
    
    $
    (3,919
    )
    
    $
    (8,076
    )Investing activities
    
    
    (438
    )
    
    
    (1,328
    )Financing activities
    
    
    957
    
    
    
    
 Operating Activities
   24




---



##### Table of Contents



Investing Activities
  ®
 Financing Activities
     
    
    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.
    
    If the contract manufacturers of our ChargeSource® products were to 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




---



##### Table of Contents



26




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    27




---



##### 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.
  28




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
   29




---



##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNone.
 
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIESNone.
 
 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 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
 30




---



##### Table of Contents



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 Bylaws of Comarco, Inc. (incorporated by
reference to Exhibit 3.2 to our quarterly Report of Form 10-Q, filed on
September 14, 2009)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)10.16*
    
    Non-Employee Director Compensation Policy31.1
    
    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
 
 *
    
    Management contract or compensation agreement 31




---



##### Table of Contents



SIGNATURES
  COMARCO, INC.Date: December 11, 2009
    /s/ Samuel M. Inman, IIISamuel M. Inman, IIIPresident and Chief Executive OfficerDate: December 11, 2009
    /s/ Winston E. HickmanWinston E. HickmanVice President and Chief Financial Officer 32




---



##### 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. (incorporated by reference to Exhibit 3.2 to our
Quarterly Report on Form 10-Q, filed on September 14, 2009)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)10.16*
    
    Non-Employee Director Compensation Policy31.1
    
    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
 
 *
    
    Management contract or compensation agreement 33