##### 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, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-5449
 COMARCO, INC.
  
 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




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##### 



COMARCO, INC. AND SUBSIDIARIES
 QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2010
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Condensed Consolidated Balance Sheets as of July 31, 2010 and January 31, 2010
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended
July 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS
    
    
    16ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4. CONTROLS AND PROCEDURES
    
    
    26PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    27ITEM 1A. RISK FACTORS
    
    
    28ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    29ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    29ITEM 4. REMOVED AND RESERVED
    
    
    29ITEM 5. OTHER INFORMATION
    
    
    29ITEM 6. EXHIBITS
    
    
    29SIGNATURES
    
    
    31EX-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 31,2010
    
    
    2010(A)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,493
    
    
    $
    10,127Accounts receivable due from customers, net of reserves of
$1 and $122
    
    
    14,133
    
    
    
    10,655Accounts receivable due from suppliers, net of reserves
of $31 and $14
    
    
    1,155
    
    
    
    834Inventory, net of reserves of $1,498 and $1,650
    
    
    1,266
    
    
    
    935Other current assets
    
    
    426
    
    
    
    280Total current assets
    
    
    22,473
    
    
    
    22,831Property and equipment, net
    
    
    932
    
    
    
    1,072Total assets
    
    $
    23,405
    
    
    $
    23,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    4,410
    
    
    $
    1,134Accrued liabilities
    
    
    9,666
    
    
    
    12,212Line of credit
    
    
    1,000
    
    
    
    1,000Total current liabilities
    
    
    15,076
    
    
    
    14,346Tax liability
    
    
    33
    
    
    
    33Deferred rent, net of current portion
    
    
    
    
    
    
    63Total liabilities
    
    
    15,109
    
    
    
    14,442Commitments, Contingencies and Subsequent EventsStockholders Equity:Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at July 31, 2010 and
January 31, 2010, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,326,569 shares issued and outstanding at July
31, 2010 and January 31, 2010, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    15,110
    
    
    
    14,967Accumulated deficit
    
    
    (7,547
    )
    
    
    (6,239
    )Total stockholders equity
    
    
    8,296
    
    
    
    9,461Total liabilities and stockholders equity
    
    $
    23,405
    
    
    $
    23,903
 
 (A)
    
    Derived from the audited consolidated financial statements as of January
31, 2010.  3




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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    12,783
    
    
    $
    7,580
    
    
    $
    20,297
    
    
    $
    9,602Cost of revenue
    
    
    10,645
    
    
    
    5,664
    
    
    
    16,557
    
    
    
    7,999Gross profit
    
    
    2,138
    
    
    
    1,916
    
    
    
    3,740
    
    
    
    1,603Selling, general, and administrative expenses
    
    
    1,210
    
    
    
    1,493
    
    
    
    2,617
    
    
    
    2,777Engineering and support expenses
    
    
    886
    
    
    
    1,076
    
    
    
    1,788
    
    
    
    2,3482,096
    
    
    
    2,569
    
    
    
    4,405
    
    
    
    5,125Operating income (loss)
    
    
    42
    
    
    
    (653
    )
    
    
    (665
    )
    
    
    (3,522
    )Other income (loss), net
    
    
    (23
    )
    
    
    18
    
    
    
    (42
    )
    
    
    7Income (loss) from continuing operations
before income taxes
    
    
    19
    
    
    
    (635
    )
    
    
    (707
    )
    
    
    (3,515
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) from continuing operations
    
    
    19
    
    
    
    (635
    )
    
    
    (707
    )
    
    
    (3,515
    )Income (loss) from discontinued operations,
net of income taxes
    
    
    (594
    )
    
    
    (27
    )
    
    
    (601
    )
    
    
    12Net loss
    
    $
    (575
    )
    
    $
    (662
    )
    
    $
    (1,308
    )
    
    $
    (3,503
    )Basic and diluted loss per share:Net loss from continuing operations
    
    $
    
    
    
    $
    (0.09
    )
    
    $
    (0.10
    )
    
    $
    (0.48
    )Net loss from discontinued operations
    
    
    (0.08
    )
    
    
    
    
    
    
    (0.08
    )
    
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.18
    )
    
    $
    (0.48
    )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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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Six Months EndedJuly 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from continuing operations
    
    $
    (707
    )
    
    $
    (3,515
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    380
    
    
    
    389Loss on sale/retirement of property and equipment
    
    
    
    
    
    
    6Loan origination fees
    
    
    56
    
    
    
    43Stock based compensation expense
    
    
    143
    
    
    
    130Recovery from doubtful accounts receivable
    
    
    (104
    )
    
    
    (11
    )Provision for obsolete inventory
    
    
    (152
    )
    
    
    17Changes in operating assets and liabilities:Accounts receivable due from customers
    
    
    (3,357
    )
    
    
    (3,554
    )Accounts receivable due from suppliers
    
    
    (338
    )
    
    
    (91
    )Inventory
    
    
    (179
    )
    
    
    625Other assets
    
    
    (146
    )
    
    
    480Accounts payable
    
    
    3,276
    
    
    
    2,921Deferred rent
    
    
    (63
    )
    
    
    (58
    )Accrued liabilities
    
    
    (2,546
    )
    
    
    (832
    )Net cash used in continuing operating activities
    
    
    (3,737
    )
    
    
    (3,450
    )Net cash (used in) provided by discontinued operating activities
    
    
    (601
    )
    
    
    12Net cash used in operating activities
    
    
    (4,338
    )
    
    
    (3,438
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (240
    )
    
    
    (231
    )Decrease in restricted cash
    
    
    
    
    
    
    77Net cash used in investing activities
    
    
    (240
    )
    
    
    (154
    )CASH FLOWS FROM FINANCING ACTIVITIES:Line of credit
    
    
    
    
    
    
    1,000Loan origination fees
    
    
    (56
    )
    
    
    (43
    )Net cash (used in) provided by financing activities
    
    
    (56
    )
    
    
    957Net decrease in cash and cash equivalents
    
    
    (4,634
    )
    
    
    (2,635
    )Cash and cash equivalents, beginning of period
    
    
    10,127
    
    
    
    14,144Cash and cash equivalents, end of period
    
    $
    5,493
    
    
    $
    11,509Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    28
    
    
    $
    2Cash paid for income taxes, net of refunds
    
    $
    
    
    
    $
    14
  5




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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




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




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  3. Discontinued Operations
 Call Box
  Wireless Test Solutions
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued operations:Gain on sale, net of taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued
operations, before taxes
    
    
    (594
    )
    
    
    (6
    )
    
    
    (601
    )
    
    
    37Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total income (loss) from discontinued
operations
    
    $
    (594
    )
    
    $
    (6
    )
    
    $
    (601
    )
    
    $
    37
   8




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 4. Stock-Based Compensation
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Total compensation expense
    
    $
    88
    
    
    $
    64
    
    
    $
    143
    
    
    $
    130Less: Amounts reflected in discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense from continuing
operations
    
    $
    88
    
    
    $
    64
    
    
    $
    143
    
    
    $
    130Impact on basic and diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
   9




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Weighted average risk-free interest rate
    
    
    0.98
    %Expected life (in years)
    
    
    3.2Expected stock volatility
    
    
    62.2
    %Dividend yield
    
    NoneExpected forfeitures
    
    
    10.6
    %
     Outstanding AwardsWeighted-AverageNumber of Shares
    
    
    Exercise PriceBalance, January 31, 2010
    
    
    1,157,704
    
    
    $
    3.85Awards granted
    
    
    90,000
    
    
    
    2.32Awards canceled or expired
    
    
    (54,000
    )
    
    
    22.16Awards exercised
    
    
    
    
    
    
    Balance, July 31, 2010
    
    
    1,193,704
    
    
    $
    2.90
  10




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 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
    
    
    957,704
    
    
    
    6.90
    
    
    $
    1.44
    
    
    
    134,025
    
    
    $
    1.576.19 to 9.89
    
    
    166,000
    
    
    
    4.33
    
    
    
    7.77
    
    
    
    162,250
    
    
    
    7.8010.43 to 11.60
    
    
    60,000
    
    
    
    4.71
    
    
    
    10.72
    
    
    
    60,000
    
    
    
    10.7215.07
    
    
    10,000
    
    
    
    0.92
    
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.071,193,704
    
    
    6.38
    years
    
    
    2.90
    
    
    
    366,275
    
    
    
    6.20
  5. Recent Accounting Pronouncements
  6. Earnings (Loss) Per Share
   7. Customer and Supplier Concentrations
  Three Months Ended July 31,2010
    
    
    2009(In thousands)Total revenue
    
    $
    12,783
    
    
    
    100
    %
    
    $
    7,580
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    10,016
    
    
    
    79
    %
    
    $
    5,764
    
    
    
    76
    %Lenovo Information Products Co., Ltd
    
    
    2,446
    
    
    
    19
    %
    
    
    1,757
    
    
    
    23
    %$
    12,462
    
    
    
    98
    %
    
    $
    7,521
    
    
    
    99
    %
 11




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Six Months Ended July 31,2010
    
    
    2009(In thousands)Total revenue
    
    $
    20,297
    
    
    
    100
    %
    
    $
    9,602
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    15,654
    
    
    
    77
    %
    
    $
    5,764
    
    
    
    60
    %Lenovo Information Products Co., Ltd
    
    
    4,251
    
    
    
    21
    %
    
    
    3,763
    
    
    
    39
    %$
    19,905
    
    
    
    98
    %
    
    $
    9,527
    
    
    
    99
    %
   July 31, 2010
    
    
    January 31, 2010Total gross accounts receivable due
from customers
    
    $
    14,134
    
    
    
    100
    %
    
    $
    10,777
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    
    11,248
    
    
    
    80
    %
    
    
    7,917
    
    
    
    73
    %Lenovo Information Products Co., Ltd
    
    
    2,553
    
    
    
    18
    %
    
    
    2,730
    
    
    
    25
    %$
    13,801
    
    
    
    98
    %
    
    $
    10,647
    
    
    
    98
    %
    12




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 8. Inventory
  July 31,
    
    
    January 31,2010
    
    

2010Raw materials
    
    $
    394
    
    
    $
    574Finished goods
    
    
    872
    
    
    
    361$
    1,266
    
    
    $
    935
  9. Warranty Arrangements
  As of And For theSix Months EndedJuly 31,2010
    
    
    2009Beginning balance
    
    $
    4,759
    
    
    $
    86Accruals for warranties issued during the period
    
    
    203
    
    
    
    93Utilization
    
    
    (3,513
    )
    
    
    (56
    )$
    1,449
    
    
    $
    123
  10. Loan Agreement
  13




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    11. Commitments and Contingencies
 Purchase Commitments with Suppliers
  Executive Severance Commitments
  14




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




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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
   ®
  16




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Basis of Presentation
  Executive Summary
 ® ®
  
    
    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
Group International, Inc. (Targus) from June 2009 through March 2010. Currently, we
estimate that approximately 150,000 total units will be returned from the distribution
channel and approximately 5,000 units will be 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 $4.0 million charge to cost of
revenue in the fourth quarter of fiscal 2010 as an estimate of the cost to replace the
affected units and $0.6 million related to selling, general and administrative costs
expected to be incurred related to the Recall. Actual amounts may differ materially
from our current estimates based on many factors, including the number of qualifying
90-watt universal power adapters returned to Comarco by Targus and their customers,
primarily consumer electronics retailers and end-user consumers in connection with the
Recall. Also, the estimate is based on Comarcos assessment of Targus and Comarcos
respective obligations regarding returned product. As of the filing date of this
report, Targus and Comarco have not reached full agreement with respect to such matters
and the resolution of such matters could materially increase the costs of the Recall to
Comarco. If the actual costs of the Recall exceed the Companys estimates for the
costs of the Recall, the Companys operations and financial condition would be
materially adversely affected.
    
    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.As a result of the Recall, many important factors, risks and uncertainties may cause us
to incur costs in excess of the reserves we established as a result of the Recall, and
in addition, may negatively impact our business and results of operations, including,
but not limited to: the assumptions underlying our estimates concerning the costs and
expenses that we expect to incur as a result of the Recall may turn out to be incorrect
and we may incur costs and expenses beyond or which exceed such estimates; the
 17




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possibility that costs and expenses may result from litigation, arbitration or other
adverse proceedings related to the Recall; the risk that demand or orders for our
products may be adversely impacted by the Recall; the risk that our key customers may
cancel orders, change order quantities or delay order delivery dates as a result of the
Recall or otherwise; reputational harm which may result from the Recall; the fact that
we rely on a limited number of contract manufacturers and component suppliers and delays
or disruptions in their production of our products or in the components that go into
such products would adversely impact our results of operations and financial condition;
and other factors, including factors outside of our control.
 
    
    On June 30, 2009, we announced that we were selected by Dell Inc. to provide an
innovative 90 watt DC adapter for use in automobiles and airplanes. We began shipping
this product in the latter part of May 2010.
    
    Revenue for the second quarter of fiscal 2011 increased to $12.8 million compared to
$7.6 million for the second quarter of fiscal 2010. The increase is attributable to
shipments to Targus under the Strategic Product Development and Supply Agreement (the
Targus Agreement). Approximately 79 percent of our revenue during the second quarter
of fiscal 2011 was from sales to Targus and we expect that Targus will continue to
represent a large percentage of our future revenue. The fiscal 2011 sales to Targus
primarily consist of the new Manhattan retail product compared to the legacy Bronx
product sold in fiscal 2010. Any adverse change in our relationship with Targus, as a
result of the Recall or for any other reason, or any significant reduction,
cancellation or delay in purchases by Targus or our other key customers, would
adversely impact our revenues, business and results of operations.
    
    We have a history of net losses and our future is dependent upon our ability to
achieve, and sustain, overall profitability. To accomplish this, we must improve gross
margins while continuing our efforts to improve sales of our ChargeSource® products.
Further, we continually negotiate with our contract manufacturers and key component
suppliers in our efforts to reduce unit costs. Although certain cost reductions have
been achieved, we continue to vigilantly compare component prices and availability
among approved vendors in our efforts to achieve profitability objectives, as the
pricing, availability and sourcing of components remain challenging as can be the case
with many technology products. If we fail to achieve cost reductions and higher sales
volumes for our products, we may not achieve or sustain profitability and our results
of operations and prospects would be adversely impacted.
 Critical Accounting Policies
   18




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Results of Operations  Continuing Operations
 Revenue
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Six MonthsRevenue
    
    $
    12,783
    
    
    $
    7,580
    
    
    $
    20,297
    
    
    $
    9,602
    
    
    
    69
    %
    
    
    111
    %Operating income (loss)
    
    $
    42
    
    
    $
    (653
    )
    
    $
    (665
    )
    
    $
    (3,522
    )Net income (loss) from
continuing operations
    
    $
    19
    
    
    $
    (635
    )
    
    $
    (707
    )
    
    $
    (3,515
    )
 Revenue by Region
(in thousands except change)
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    % Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Six MonthsRevenue:North America
    
    $
    10,331
    
    
    $
    5,779
    
    
    $
    15,929
    
    
    $
    5,820
    
    
    
    79
    %
    
    
    174
    %Europe
    
    
    19
    
    
    
    69
    
    
    
    73
    
    
    
    78
    
    
    
    (73
    %)
    
    
    (6
    %)Asia
    
    
    2,433
    
    
    
    1,732
    
    
    
    4,295
    
    
    
    3,704
    
    
    
    41
    %
    
    
    16
    %$
    12,783
    
    
    $
    7,580
    
    
    $
    20,297
    
    
    $
    9,602
 Revenue by Customer
(in thousands except change)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    % Change% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    

    Three Months
    
    

    Six MonthsRevenue:Lenovo
    
    
    2,446
    
    
    
    19
    %
    
    
    1,757
    
    
    
    23
    %
    
    
    4,251
    
    
    
    21
    %
    
    
    3,763
    
    
    
    39
    %
    
    
    39
    %
    
    
    13
    %Targus
    
    
    10,016
    
    
    
    79
    %
    
    
    5,764
    
    
    
    76
    %
    
    
    15,654
    
    
    
    77
    %
    
    
    5,764
    
    
    
    60
    %
    
    
    74
    %
    
    
    172
    %Other
    
    
    321
    
    
    
    2
    %
    
    
    59
    
    
    
    1
    %
    
    
    392
    
    
    
    2
    %
    
    
    75
    
    
    
    1
    %
    
    
    444
    %
    
    
    423
    %$
    12,783
    
    
    
    100
    %
    
    $
    7,580
    
    
    
    100
    %
    
    $
    20,297
    
    
    
    100
    %
    
    $
    9,602
    
    
    
    100
    %
    
    
    69
    %
    
    
    111
    %
  19




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##### Table of Contents



Cost of Revenue and Gross Margin
(in thousands except
margin and change)
 Three Months EndedJuly 31,
    

    
    Six Months EndedJuly 31,
    
    
Year over Year2010
    

    
    2009
    
    
2010
    
    
2009
    
    
% Change% of Total
    
    
    
    
    


    % of Total
    

    
    
    
    


% of Total
    
    
    
    
    
% of Total
    

    
Three Months
    
    
Six MonthsCost of revenue:Product cost
    
    $
    9,001
    
    
    
    85
    %
    
    $
    5,019
    
    
    
    89
    %
    
    $
    14,003
    
    
    
    85
    %
    
    $
    6,639
    
    
    
    83
    %
    
    
    79
    %
    
    
    111
    %Fixed supply
chain overhead
    
    
    943
    
    
    
    9
    %
    
    
    559
    
    
    
    10
    %
    
    
    1,739
    
    
    
    10
    %
    
    
    1,163
    
    
    
    15
    %
    
    
    69
    %
    
    
    50
    %Inventory reserve
and scrap charges
    
    
    109
    
    
    
    1
    %
    
    
    83
    
    
    
    1
    %
    
    
    109
    
    
    
    1
    %
    
    
    194
    
    
    
    2
    %
    
    
    31
    %
    
    
    (44
    %)Freight,
expedite, and
other charges
    
    
    592
    
    
    
    5
    %
    
    
    3
    
    
    
    
    
    
    
    706
    
    
    
    4
    %
    
    
    3
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %$
    10,645
    
    
    
    100
    %
    
    $
    5,664
    
    
    
    100
    %
    
    $
    16,557
    
    
    
    100
    %
    
    $
    7,999
    
    
    
    100
    %
    
    
    88
    %
    
    
    107
    %
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year over YearJuly 31,
    
    
    July 31,
    
    
    ppt Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Six MonthsGross margin
    
    
    17
    %
    
    
    25
    %
    
    
    18
    %
    
    
    17
    %
    
    
    (8
    )
    
    
    1
  20




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##### Table of Contents



Operating Costs and Expenses
(in thousands except change)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    % Change% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    

    Three Months
    
    

    Six MonthsOperating expenses:SG&A expenses,
excluding
corporate
overhead
    
    $
    258
    
    
    
    2
    %
    
    $
    407
    
    
    
    6
    %
    
    $
    662
    
    
    
    3
    %
    
    $
    819
    
    
    
    8
    %
    
    
    (37
    %)
    
    
    (19
    %)Corporate overhead
    
    
    952
    
    
    
    7
    %
    
    
    1,086
    
    
    
    14
    %
    
    
    1,955
    
    
    
    10
    %
    
    
    1,958
    
    
    
    20
    %
    
    
    (12
    %)
    
    
    Engineering and
support expenses
    
    
    886
    
    
    
    7
    %
    
    
    1,076
    
    
    
    14
    %
    
    
    1,788
    
    
    
    9
    %
    
    
    2,348
    
    
    
    25
    %
    
    
    (18
    %)
    
    
    (24
    %)$
    2,096
    
    
    
    16
    %
    
    $
    2,569
    
    
    
    34
    %
    
    $
    4,405
    
    
    
    22
    %
    
    $
    5,125
    
    
    
    53
    %
    
    
    (18
    %)
    
    
    (14
    %)
    Other Income (loss), net
  Income Tax Benefit
  21




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##### Table of Contents



Discontinued Operations  Call Box
  Discontinued Operations  Wireless Test Solutions (WTS)
 Income (loss) from Discontinued Operations
(in thousands)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Gain on sale, net
of income taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from
discontinued
operations, before
taxes
    
    
    (594
    )
    
    
    (6
    )
    
    
    (601
    )
    
    
    37Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from
discontinued
operations
    
    $
    (594
    )
    
    $
    (6
    )
    
    $
    (601
    )
    
    $
    37
  22




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##### Table of Contents



Liquidity and Capital Resources
  Six Months Ended July 31,2010
    
    
    2009(in thousands)Cash provided by (used in):Operating activities
    
    $
    (4,338
    )
    
    $
    (3,438
    )Investing activities
    
    
    (240
    )
    
    
    (154
    )Financing activities
    
    
    (56
    )
    
    
    957
 Operating Activities
   Investing Activities
 ®
  Financing Activities
     23




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##### Table of Contents




    
    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 a full
agreement with Targus concerning the respective obligations of the parties regarding
returned product.
    
    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.
  24




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    25




---



##### 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.
  26




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Mark Chapman (Chapman) vs. Comarco Wireless Technologies, Inc., Case No.
73-166-03168-09 02 FEZA-C, American Arbitration Association.
  27




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##### Table of Contents



ITEM 1A. RISK FACTORS
  We do not currently comply with the minimum stockholders equity requirements for continued listing
on The NASDAQ Global Market and there is no assurance that our shares will remain listed on such
market or other active trading market in the future. A delisting of our stock from The NASDAQ
Global Market or any other active trading market could adversely affect the price and liquidity of
our securities in the secondary market.
   During the first half of fiscal 2011, our quick ratio fell below the levels required in the Loan
Agreement and there can be no assurances that we will be able to comply with the covenants in the
Loan Agreement in the future or obtain any necessary waivers, forbearance agreements or amendments,
in the future.
   28




---



##### Table of Contents



ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNone.
 
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIESNone.
 
 ITEM 4.
    
    (REMOVED AND RESERVED)
 
 ITEM 5.
    
    OTHER INFORMATIONNone.
 
 ITEM 6.
    
    EXHIBITS3.1
    
    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)10.1
    
    Forbearance to Loan and Security Agreement dated as of June 11,
2010 by and among Comarco, Inc., Comarco Wireless Technologies, Inc. and
Silicon Valley Bank (incorporated by reference to Exhibit 10.3 to our Form
10-Q, filed on June 14, 2010)10.2
    
    Forbearance to Loan and Security Agreement dated as of July 15,
2010 by and among Comarco, Inc., Comarco Wireless Technologies, Inc. and
Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K, filed on July 21, 2010)10.3
    
    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 (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed on August 18, 2010)10.4*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Samuel M. Inman, III (incorporated by reference to Exhibit 10.12 to
our Annual Report on Form 10-K, filed May 3, 2010)
 29




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##### Table of Contents



10.5*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Winston E. Hickman (incorporated by reference to Exhibit 10.13 to
our Annual Report on Form 10-K, filed May 3, 2010)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
 
 *
    
    Management contract or executive compensation plan or arrangement. 30




---



##### Table of Contents



SIGNATURES
  COMARCO, INC.Date: September 7, 2010
    /s/ Samuel M. Inman, IIISamuel M. Inman, IIIPresident and Chief Executive OfficerDate: September 7, 2010
    /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. (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)10.1
    
    Forbearance to Loan and Security Agreement dated as of June 11,
2010 by and among Comarco, Inc., Comarco Wireless Technologies, Inc. and
Silicon Valley Bank (incorporated by reference to Exhibit 10.3 to our Form
10-Q, filed on June 14, 2010)10.2
    
    Forbearance to Loan and Security Agreement dated as of July 15,
2010 by and among Comarco, Inc., Comarco Wireless Technologies, Inc. and
Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K, filed on July 21, 2010)10.3
    
    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 (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed on August 18, 2010)10.4*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Samuel M. Inman, III (incorporated by reference to Exhibit 10.12 to
our Annual Report on Form 10-K, filed May 3, 2010)10.5*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Winston E. Hickman (incorporated by reference to Exhibit 10.13 to
our Annual Report on Form 10-K, filed May 3, 2010)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
 
 *
    
    Management contract or executive compensation plan or arrangement. 32