Comarco (CMRO) 10-Q 2010 Q1 Quarterly report

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

APRIL 30, 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.

(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction
of incorporation or organization) 95-2088894
(I.R.S. Employer
Identification No.)

25541 Commercentre Drive, Lake Forest, California 92630
(Address of principal executive offices and zip code)

(949) 599-7400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ       Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso       Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso      Noþ

The registrant had 7,326,671 shares of common stock outstanding as of June 3, 2009.

COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 30, 2009

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 2009 and January 31, 2009	3
Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2009 and 2008	4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2009 and 2008	5
Notes to Condensed Consolidated Financial Statements	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4. CONTROLS AND PROCEDURES	24
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	25
ITEM 1A. RISK FACTORS	25
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	26
ITEM 5. OTHER INFORMATION	26
ITEM 6. EXHIBITS	26
SIGNATURES	28
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

	April 30,			January 31,
	2009			2009(A)
ASSETS
Current Assets:
Cash and cash equivalents	$	12,517		$	14,144
Accounts receivable, net of reserves of $14 and $14		2,074			3,974
Inventory, net of reserves of $1,505 and $1,488		688			1,232
Other current assets		585			862
Total current assets		15,864			20,212
Property and equipment, net		1,132			1,279
Restricted cash		77			77
Total assets	$	17,073		$	21,568
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,046		$	1,501
Deferred revenue		64			77
Accrued liabilities		1,872			3,092
Total current liabilities		2,982			4,670
Tax liability: FIN 48		86			86
Deferred rent, net of current portion		153			182
Deferred revenue, net of current portion		6			9
Total liabilities	$	3,227		$	4,947
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at April 30, 2009 and January 31, 2009		—			—
Common stock, $0.10 par value, 50,625,000 shares authorized; 7,326,671 and 7,326,671 shares issued and outstanding at April 30, 2009 and January 31, 2009, respectively		733			733
Additional paid-in capital		14,771			14,705
Retained earnings (accumulated deficit)		(1,658	)		1,183
Total stockholders’ equity		13,846			16,621
Total liabilities and stockholders’ equity	$	17,073		$	21,568

^(A) Derived from the audited consolidated financial statements as of January 31, 2009.

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended
	April 30,
	2009			2008
Revenue	$	2,022		$	3,820
Cost of revenue		2,336			3,846
Gross loss		(314	)		(26	)
Selling, general, and administrative expenses		1,686			3,502
Engineering and support expenses		870			615
		2,556			4,117
Operating loss		(2,870	)		(4,143	)
Other income (expense), net		(10	)		53
Loss from continuing operations before income taxes		(2,880	)		(4,090	)
Income tax benefit		—			954
Net loss from continuing operations		(2,880	)		(3,136	)
Income from discontinued operations, net of income taxes		39			1,479
Net loss	$	(2,841	)	$	(1,657	)
Basic and diluted income (loss) per share:
Net loss from continuing operations	$	(0.39	)	$	(0.43	)
Net income from discontinued operations		—			0.20
	$	(0.39	)	$	(0.23	)
Weighted average common shares outstanding:
Basic		7,327			7,327
Diluted		7,327			7,327
Common shares outstanding		7,327			7,327

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Three Months Ended
	April 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(2,880	)	$	(3,136	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		199			173
Loss on sale/retirement of property and equipment		6			17
Stock based compensation expense		66			94
Loan origination fees		43			—
Provision for obsolete inventory		16			23
Changes in operating assets and liabilities:
Accounts receivable		1,900			(2,547	)
Inventory		528			(210	)
Other assets		277			(242	)
Accounts payable		(455	)		125
Deferred revenue		(16	)		23
Deferred rent		(29	)		(51	)
Accrued liabilities		(1,220	)		1,420
Net cash used in continuing operating activities		(1,565	)		(4,311	)
Net cash provided by (used in) discontinued operating activities		39			(2,093	)
Net cash used in operating activities		(1,526	)		(6,404	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(58	)		(195	)
Net cash used in continuing investing activities		(58	)		(195	)
Net cash used in discontinued investing activities		—			(344	)
Net cash used in investing activities		(58	)		(539	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan origination fees		(43	)		—
Net cash used in financing activities		(43	)		—
Net decrease in cash and cash equivalents		(1,627	)		(6,943	)
Cash and cash equivalents, beginning of period		14,144			17,011
Cash and cash equivalents, end of period	$	12,517		$	10,068
Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$	—
Cash paid for income taxes	$	14		$	14

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization

     Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “Comarco,” or the “Company”), is a leading designer of external mobile power adapters used to power and charge notebook computers, mobile phones, BlackBerry^® smartphones, iPods^®, and many other portable, rechargeable handheld devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”), which was incorporated in the State of Delaware in September 1993. Comarco, Inc. is a California corporation.

2. Summary of Significant Accounting Policies

Future operations, Liquidity and Capital Resources:

     The Company has experienced substantial pre-tax losses from operations for the first fiscal quarter of fiscal 2010 and 2009 totaling $2.9 million and $4.1 million, respectively. Further, the Company has not generated a positive gross margin on the sale of its ChargeSource^® products during fiscal 2009 or the first quarter of fiscal 2010. The Company’s future is highly dependent on its ability to sell its products at a profit and its ultimate return to overall profitability. To accomplish this, the Company must increase the sales volumes of its current and newly designed ChargeSource^® products to appropriately absorb fixed administrative and contract manufacturing overhead. The Company believes that it has begun to address this concern with its recently executed Strategic Product Development and Supply Agreement with Targus Group International, Inc., pursuant to which the Company began shipment of ChargeSource^® products to Targus during the second quarter of fiscal 2010. Further, the Company must successfully reduce its unit costs with its third party contract manufacturers, for which negotiations are currently in process. The inability of the Company to successfully achieve these objectives will have a material adverse effect on the Company’s operations and financial condition.

     The Company had working capital totaling approximately $12.9 million at April 30, 2009. Management of the Company believes that the Company’s available capital resources, including the Company’s existing credit facility, will be sufficient to meet the Company’s expected working capital and capital expenditure requirements as the Company’s business is currently conducted for at least the next 12 months. As the Company executes on its current strategy, however, it may require further debt and/or equity capital to fund its working capital needs. The current U.S. capital markets are illiquid and the availability of funds is sparse. The inability to access these funds when needed could have a material adverse effect on the Company’s operations and financial condition.

Basis of Presentation:

     The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended January 31, 2009. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three months ended April 30, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2010.

Cash and Cash Equivalents

     All highly liquid investments with remaining maturity dates of three months or less when acquired are classified as cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown in the condensed consolidated financial statements. Cash and cash equivalents are generally maintained in uninsured accounts,

6

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

typically Eurodollar deposits with daily liquidity, which are subject to investment risk including possible loss of principal invested.

Principles of Consolidation:

     The unaudited interim condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits and losses have been eliminated.

Use of Estimates:

     The preparation of unaudited interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the period reported. Actual results could materially differ from those estimates.

     Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation of long-lived assets, allowance for doubtful accounts, reserves for inventory obsolescence, warranties, valuation allowances for deferred tax assets, and determination of stock based compensation.

Reclassifications:

     Certain prior period balances have been reclassified to conform to the current period presentation.

3. Stock-Based Compensation

     The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.

     The Company accounts for stock-based compensation under Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using a Lattice Binomial model for options with performance-based vesting tied to the Company’s stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation models require the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

7

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

     The compensation expense recognized relating to SFAS 123R is summarized in the table below (in thousands, except per share amounts):

	Three Months Ended
	April 30,
	2009		2008
Total compensation expense relating to SFAS 123R	$	66	$	103
Less: Amounts reflected in discontinued operations		—		(9	)
Compensation expense relating to SFAS 123R from continuing operations	$	66	$	94
Impact on basic and diluted earnings per share		0.01		0.01

     The total compensation cost related to nonvested awards not yet recognized is approximately $696,000, which will be expensed over a weighted average remaining life of 38.8 months.

     For the first quarter of fiscal 2010, no stock options were granted. For the first quarter of fiscal 2009, 30,000 options were granted. The 30,000 stock options granted during the first quarter of fiscal 2009 had a per share weighted-average value of $2.09 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:

	Three Months Ended
	April 30, 2008
Expected dividend yield		0.0	%
Expected volatility		37.9	%
Weighted average risk-free interest rate		2.7	%
Expected life (in years)		5.9
Expected forfeitures		8.2	%

     Comarco, Inc. has stock-based compensation plans under which outside directors and certain employees receive stock options. The employee stock option plans and a director stock option plan provide that officers, key employees, and directors may be granted options to purchase up to 2,562,500 shares of common stock of the Company at not less than 100 percent of the fair market value at the date of grant, unless the optionee is a 10 percent shareholder of the Company, in which case the price must not be less than 110 percent of the fair market value. Figures for these plans reflect a 3-for-2 stock split declared during the year ended January 31, 2001.

     The Company’s Director Stock Option Plan (the “Director Plan”) expires in December 2010, and the Company’s former employee stock option plan (the “Employee Plan”) expired during May 2005. These plans provide for 637,500 and 825,000 shares issuable, respectively. During December 2005, the Board of Directors approved and adopted the Company’s 2005 Equity Incentive Plan (the “2005 Plan”) covering 450,000 shares of common stock. The 2005 Plan was approved by the Company’s shareholders at its annual shareholders’ meeting in June 2006, and subsequently amended at its annual shareholders meeting in June 2008 to increase the number of shares issuable under the plan from 450,000 to 1,100,000 shares.

     Under the 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards. Under all plans, awards vest or become exercisable in installments determined by the compensation committee of the Company’s Board of Directors; however, no employee option may be exercised prior to one year following the grant of the option. The options granted under the Director Plan and the Employee Plan expire as determined by the committee, but no later than ten years and one week after the date of grant (five years for 10 percent shareholders). The options granted under the 2005 Plan expire as determined by the committee, but no later than ten years after the date of grant (five years for 10 percent shareholders).

8

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

     Transactions and other information related to these plans for the three months ended April 30, 2009 are summarized below:

	Outstanding Options
	Number of			Weighted-Average
	Shares			Exercise Price
Balance, January 31, 2009		1,184,000		$	4.34
Options granted		—			—
Options canceled or expired		(73,000	)		9.71
Options exercised		—			—
Balance, April 30, 2009		1,111,000		$	3.98

     As of April 30, 2009, the stock options outstanding have an intrinsic value of $405,000 based on a closing market price of $1.62 per share on April 30, 2009. The following table summarizes information about the Company’s stock options outstanding at April 30, 2009:

		Options Outstanding						Options Exercisable
				Weighted-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		9.5	$	1.29		7,500	$	4.90
	6.19 to 9.89		166,000		5.6		7.77		161,500		7.57
	10.43 to 11.60		60,000		6.0		10.72		48,750		10.79
	13.21 to 15.07		17,500		1.3		14.27		17,500		14.27
	20.04 to 23.67		54,000		1.1		22.16		54,000		22.16
			1,111,000	8.2 years			3.98		289,250		11.17

     Stock options exercisable at April 30, 2009 were 289,250 at a weighted-average exercise price of $11.17. At April 30, 2009, shares available for future grants under the 2005 Plan were 186,000 and under the director stock option plan were 625.

4. Recent Accounting Pronouncements

     In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009 and will be adopted by the Company in the second quarter of fiscal 2010. The Company does not expect the adoption of SFAS 165 will have a material effect on its consolidated results of operations and financial condition.

5. Discontinued Operations

     Call Box

     On July 10, 2008, the Company executed an asset purchase agreement to sell the assets of its Call Box business for $2.7 million in cash. The transaction closed on July 10, 2008 and accordingly, the Company recorded a pre-tax gain on the sale in the amount of $490,000 during fiscal 2009. In accordance with the provisions of SFAS No. 144,

9

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

“Accounting for the Impairment or Disposal of Long Lived Assets” the results of the Call Box business are now presented as discontinued operations for all periods in the unaudited interim condensed consolidated financial statements.

     Operating results of the Call Box discontinued operations are as follows (in thousands):

	Three Months Ended April 30,
	2009			2008
Revenues	$	—		$	2,421
Income (loss) from discontinued operations:
Gain on sale, net of taxes	$	—		$	—
Income (loss) from discontinued operations, before taxes		(4	)		774
Income tax expense		—			(303	)
Total income (loss) from discontinued operations	$	(4	)	$	471

     Wireless Test Solutions

     The Company entered into an Asset Purchase Agreement on September 26, 2008 with Ascom Holding AG and its subsidiary Ascom Inc. to sell the Wireless Test Solutions (“WTS”) business and related assets. Comarco’s shareholders approved the transaction on November 26, 2008 with approximately 85 percent of the Company’s shareholders voting in favor of the transaction. The transaction closed on January 6, 2009.

     The aggregate purchase price paid to Comarco in connection with the transaction was $12,750,000 in cash, with $1,275,000 of the proceeds placed in escrow for one year from the closing date as security for general indemnification rights.

     Operating results of the WTS discontinued operations are as follows (in thousands):

	Three Months Ended April 30,
	2009		2008
Revenues	$	—	$	6,092
Income from discontinued operations:
Gain on sale, net of taxes of $0	$	43	$	—
Income from discontinued operations, before taxes		—		1,659
Income tax expense		—		(651	)
Total income from discontinued operations	$	43	$	1,008

     The $43,000 relates primarily to adjustments to the acquired assets and liabilities assumed by Ascom.

6. Stockholders’ Equity

     During 1992, the Company’s Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Company’s common stock. From program inception through April 30, 2009, the Company repurchased approximately 2.7 million shares at an average price of $8.20 per share. During the quarters ended April 30, 2009 and 2008, the Company did not repurchase any shares of common stock.

10

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

7. Loss Per Share

     The Company calculates basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the three months ended April 30, 2009 and 2008, basic and diluted net loss per share for both such periods were the same because the inclusion of 68,717 and of 0 potentially dilutive securities related to outstanding stock options, respectively, would have been antidilutive.

8. Customer and Supplier Concentrations

     A significant portion of the Company’s revenue is derived from a limited number of customers. The customers providing 10 percent or more of the Company’s revenues for either quarter ended April 30, 2009 or 2008 are listed below (in thousands).

	Three Months Ended April 30,
	2009				2008
Total revenue	$	2,022	100	%	$	3,820	100	%
Customer concentration:
Lenovo Information Products Co., Ltd.	$	2,006	99	%	$	3,223	84	%
Kensington Technology Group		12	1	%		459	12	%
	$	2,018	100	%	$	3,682	96	%

     The Company’s revenues by geographic area, as determined by the “ship to” address, consisted of the following (in thousands):

	Three Months Ended
	April 30,
	2009		2008
North America	$	41	$	76
Europe		9		529
Asia		1,972		3,215
	$	2,022	$	3,820

     The customers comprising 10 percent or more of the Company’s gross accounts receivable at either April 30, 2009 or January 31, 2009 are listed below (in thousands).

	April 30, 2009				January 31, 2009
Total gross accounts receivable	$	2,088	100	%	$	3,988	100	%
Customer concentration:
Lenovo Information Products Co., Ltd.	$	2,044	98	%	$	3,366	84	%
Trust International BV		—	—			606	15	%
	$	2,044	98	%	$	3,972	99	%

     On March 16, 2009, the Company entered into a Strategic Product Development and Supply Agreement (the “Targus Agreement”) with Targus Group International, Inc. (“Targus”).

11

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

     Under the Targus Agreement, Comarco will sell certain current and future mobile power supply products exclusively to Targus, and Targus will purchase such products and any products substantially similar to such products exclusively from Comarco; provided, however, that the Targus Agreement does not prohibit Comarco from selling any mobile power supply products covered by the Targus Agreement to original equipment manufacturers that sell such products under their own name as long as such products do not incorporate any intellectual property of Targus. The Company began shipments to Targus under this agreement during the second quarter of fiscal 2010.

     A significant portion of our inventory purchases is derived from a limited number of contract manufacturers and other suppliers. The loss of one or more of our significant suppliers could adversely affect our operations. The contract manufacturers providing 10 percent or more of the Company’s purchases for the three months ended April 30, 2009 and 2008 are listed below (in thousands, except percentages):

	Three months Ended April 30,
	2009				2008
Total product costs	$	1,731	100	%	$	3,407	100	%
Supplier concentration:
Flextronics Electronics	$	1,098	63	%	$	3,123	92	%
	$	1,098	63	%	$	3,123	92	%

     At April 30, 2009 and January 31, 2009, approximately $82,000 or 8 percent and $472,000 or 31 percent, respectively, of the Company’s accounts payable of $1.0 million and $1.5 million, respectively, was payable to Flextronics Electronics.

9. Inventory

     Inventory, net of reserves, consists of the following (in thousands):

	April 30,		January 31,
	2009		2009
Raw materials	$	330	$	290
Finished goods		358		942
	$	688	$	1,232

     As of April 30, 2009, approximately $184,000 of total inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in China.

10. Warranty Arrangements

     The Company records an accrual for estimated warranty costs as products are sold. These amounts are recorded in short-term and long-term deferred revenue in the condensed consolidated balance sheets based upon the remaining term of the warranty commitment made at the time of sale. Warranty costs are estimated based on periodic analysis of historical experience. Changes in the estimated warranty accruals are recorded when the change in estimate is identified. A summary of the standard warranty accrual activity is shown in the table below (in thousands):

12

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

	April 30,
	2009			2008
Beginning balance	$	86		$	46
Accruals for warranties issued during the period		20			39
Utilization		(36	)		(18	)
	$	70		$	67

11. Loan Agreement

     On February 11, 2009, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The credit facility provided under the Loan Agreement matures, and any outstanding principal balance is payable in full, on February 10, 2010.

     Under the Loan Agreement, the Company may borrow up to (a) the lesser of (i) $5,000,000 or (ii) 80 percent of the Company’s eligible accounts receivable minus (b) the amount of any outstanding principal balance of any advances made by SVB under the Loan Agreement. The Company must maintain a quick ratio of 1.5 to 1.0 as its primary financial covenant and must also comply with certain monthly reporting covenants. As of June 15, 2009, the Company had not borrowed any amounts under this Loan Agreement, however we have one letter of credit outstanding in the amount of $77,000.

12. Commitments and Contingencies

Purchase Commitments with Suppliers

     The Company generally issues purchase orders to its suppliers with delivery dates from four to six weeks from the purchase order date. In addition, the Company regularly provides significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. The Company is committed to accepting delivery of materials pursuant to its purchase orders subject to various contract provisions that allow it to delay receipt of such order or allow it to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by the Company. In the past, the Company has been required to take delivery of materials from its suppliers that were in excess of its requirements and the Company has previously recognized charges and expenses related to such excess material. If the Company is unable to adequately manage its suppliers and adjust such commitments for changes in demand, it may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on the Company’s business, consolidated results of operations, and financial position.

Executive Severance Commitments

     The Company has severance compensation agreements with certain key executives. These agreements require the Company to pay these executives, in the event of a termination of employment following a change of control of the Company, the amount of their then current annual base salary and the amount of any bonus amount the executive would have achieved for the year in which the termination occurs. The exact amount of this contingent obligation is not known and accordingly has not been recorded in the condensed consolidated financial statements. During the three months ended April 30, 2008, severance of approximately $0.9 million was accrued relating to the departure of two corporate officers. No similar severance costs were incurred during the three months ended April 30, 2009.

Letter of Credit

     In May 2006, the Company obtained a $0.5 million letter of credit from US Bank pursuant to a lease provision for the corporate offices to which the Company relocated on August 28, 2006. On November 6, 2007, the letter of credit was reduced to $250,000 pursuant to the provisions of the lease. In the fourth quarter of fiscal 2009, the letter of credit was reduced a final time to $77,000 pursuant to the provisions of the lease. The letter of credit was secured by a

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

certificate of deposit that matured on May 1, 2009, and is reflected as restricted cash on the condensed consolidated balance sheets. During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from Silicon Valley Bank to allow for continuous and unlapsed compliance with the lease provision. The letter of credit from Silicon Valley Bank is not secured by a certificate of deposit but is treated as a reduction in available borrowings available to the Company under the Loan Agreement.

Legal Contingencies

     On June 8, 2007, iGo, Inc. (formerly Mobility Electronics, Inc.) (“iGo”) filed a complaint against Comarco and its subsidiary CWT in the United States District Court for the Eastern District of Texas, Case No. 5:07cv84, alleging that two iGo patents are infringed by the mechanical keying arrangement between power adapters and programming tips used by the Company in its mobile power products sold through its distributors and sold to a computer maker. The complaint seeks an unspecified amount of treble damages and injunctive relief. The Company has denied liability and countersued alleging that iGo breached a settlement agreement (the “Settlement Agreement”) entered into between the parties in 2003 settling a previous patent infringement lawsuit, and that iGo is liable for infringement of at least three of the Company’s patents. iGo has denied liability and amended its claims to further allege that the Company breached the Settlement Agreement by asserting claims against iGo. The Company has denied liability as to the additional claim made by iGo. On March 5, 2008, both parties attended mediation without reaching a settlement.

     On June 25, 2008, the parties jointly requested that the U.S. District Court for the Eastern District of Texas (the “Texas Court”) transfer the lawsuit to the U.S. District Court for the District of Arizona, the court in which the parties’ previous patent infringement lawsuit had been filed (the “Arizona Court”). The parties’ joint request also sought, following transfer, a stay of proceedings until January 2009 so that the parties could pursue settlement. On June 30, 2008, the Texas Court granted the parties’ joint request for transfer, transferring the lawsuit to the Arizona Court under the terms and conditions requested, including the stay. In May 2009, the parties agreed to dismiss the pending lawsuit without prejudice. On May 26, 2009, the Arizona Court issued the order of dismissal without prejudice.

     In addition to the matter described above, the Company is from time to time involved in various legal proceedings incidental to the conduct of its business. The Company believes that the outcome of all such pending legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.

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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 consolidated financial statements and the related notes and other financial information appearing elsewhere in this quarterly report onForm 10-Q.

Forward-Looking Statements

     This report, including the following discussion and analysis, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements included in this report. Additionally, statements concerning future matters are forward-looking statements.

     These forward-looking statements reflect current views about our plans, strategies, and prospects, but can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.

     Forward-looking statements in this report include those related to our objectives; our products and the availability of future products; our sales, revenues, and costs; the timing of fulfillment of purchase orders and completion of projects; demand for our products; the sufficiency of our cash and cash equivalent balances; and expected positive cash flow. Many important factors may cause the Company’s actual results to differ materially from those discussed in any such forward-looking statements, including but not limited to our customers’ demand for our products and the difficulty of accurately estimating demand; our reliance on a limited number of customers for a significant portion of our revenue; increased competition; our ability to develop and introduce new products successfully; the risk of third parties infringing our intellectual property; general economic, political, and market conditions; and litigation. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Accordingly, investors are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

     In addition to the risks, uncertainties, and other factors discussed elsewhere in this quarterly report on Form 10-Q, the risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed with the SEC, those contained in the Company’s other filings with the SEC, and those set forth above. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Basis of Presentation

     The financial information presented in this report is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, or cash flow. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

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Executive Summary

     Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “Comarco,” or the “Company”), is a leading designer of external mobile power adapters used to power and charge notebook computers, cellular telephones, BlackBerry^® smartphones, iPods^®, and other portable, rechargeable handheld devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

     Management currently considers the following additional trends, events, and uncertainties to be important to understanding our business:

• 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. It 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 the second quarter of fiscal 2010.
•	Revenue for the first quarter of fiscal 2010 decreased to $2.0 million compared to $3.8 million for the first quarter of fiscal 2009. The decrease is primarily attributable to reduced shipments to Lenovo, in anticipation of the release of our new product. We anticipate that we will begin shipping our new product for Lenovo in the second half of the current fiscal year.
•	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 first quarter of fiscal 2008, we entered into a non-exclusive distribution arrangement with Kensington Technology Group (“Kensington”), thereby terminating our exclusive distribution agreement. Under the exclusive Targus Agreement described above, we will no longer sell to Kensington effective during the second quarter of fiscal 2010.
•	The current level of sales is insufficient to fully absorb our operating expenses. Our ability to drive increased sales is dependent upon, among others, the following factors:

– Successful 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 the second and third quarters 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.

• We are currently in negotiations with our third party contract manufacturers in an effort to reduce our unit costs for our products. Reducing our product costs is important to our efforts to improve our margins.

• 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.

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Critical Accounting Policies

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.

     An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes there have been no significant changes during the three months ended April 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2009.

Results of Operations

     The following tables set forth certain items as a percentage of revenue from our condensed consolidated statements of operations for the three months ended April 30, 2009 and 2008:

Revenue

	Three Months Ended April 30,
	2009						2008
	(In thousands)
				% of						% of			2009 over 2008
				Revenue						Revenue			% Change
Revenue	$	2,022			100	%	$	3,820			100	%		(47	%)
Operating loss	$	(2,870	)				$	(4,143	)
Loss from continuing operations	$	(2,880	)				$	(3,136	)

Revenue by Geographic Region

	Three Months Ended April 30,
	2009		2008		2009 over 2008
	(In thousands)				% Change
Revenue:
North America	$	41	$	76		(46	%)
Europe		9		529		(98	%)
Asia		1,972		3,215		(39	%)
	$	2,022	$	3,820		(47	%)

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Revenue by Customer

	Three Months Ended April 30,
	2009		2008		2009 over 2008
	(In thousands)				% Change
Revenue:
Lenovo	$	2,006	$	3,223		(38	%)
Kensington		12		458		(97	%)
Tumi		—		139		(100	%)
Other		4		—		100	%
	$	2,022	$	3,820		(47	%)

Revenue

     The decrease in revenue of $1.8 million for the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009 is primarily attributable to a decrease in shipments to Lenovo. In the first quarter of the current fiscal year, revenue is down compared to the first quarter of the prior fiscal year because we are preparing to ship a new product to Lenovo and the demand for the legacy slim and light product has declined in expectation of the release of the new product. Additionally, as a result of the recently executed Targus Agreement, we no longer sell to Kensington.

Cost of Revenue and Gross Margin

	Three Months Ended April 30,
	2009					2008
	(In thousands)
			% of					% of			2009 over 2008
			Total					Total			% Change
Cost of revenue:
Product costs	$	1,731		74	%	$	3,407		89	%		(49	%)
Under-absorption of fixed supply chain overhead		493		21	%		386		10	%		28	%
Inventory reserve and scrap charges		112		5	%		—		—			100	%
Freight, expedite, and other charges		—		—			53		1	%		(100	%)
	$	2,336		100	%	$	3,846		100	%		(39	%)

	Three Months Ended April 30,						2009 over 2008
	2009			2008			ppt Change
Gross loss		(16	%)		(1	%)		(15	)

     The first quarter of fiscal 2010 decrease in cost of revenue of $1.5 million compared to the first quarter of fiscal 2009 was primarily attributable to a 47 percent volume decrease in revenue compared to the first quarter of fiscal 2009. During the first quarter of fiscal 2010 we incurred scrap charges of $0.1 million relating to engineering design changes. We did not incur any similar charges during the first quarter of fiscal 2009.

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Operating Costs and Expenses

	Three Months Ended April 30,
	2009					2008
	(in thousands)
			% of					% of			2009 over 2008
			Revenue					Revenue			% Change
Operating expenses:
Selling, general, and administrative expenses, excluding corporate overhead	$	815		40	%	$	1,139		30	%		(28	%)
Corporate overhead		871		43	%		2,363		62	%		(61	%)
Engineering and support expenses		870		43	%		615		16	%		41	%
	$	2,556		126	%	$	4,117		108	%		(37	%)

     Selling, general, and administrative expenses decreased by $0.3 million during the first quarter of fiscal 2010, compared to the same period of the prior year, primarily as a result of a reduction in legal expense of $0.6 million incurred during the quarter relating to the recently dismissed iGo litigation. The decrease in legal fees was partially offset by increased personnel and consulting costs of $0.2 million.

     Corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company. The decrease in corporate overhead of $1.5 million during the first quarter of fiscal 2010 compared to the same period of the prior year relates primarily to $0.9 million in non-recurring severance costs of former senior management incurred during the first quarter of fiscal 2009, as well as additional legal fees related to public company matters in the amount of $0.1 million incurred during the first quarter of fiscal 2009. We also incurred additional consulting fees of $0.1 million during the first quarter of fiscal 2009, which did not recur in the first quarter of fiscal 2010.

     Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our engineers and testing personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products. The increase in engineering and support expenses of $0.3 million during the first quarter of fiscal 2010 compared to the same period of the prior year relates to increased material usage relating to newly developed products as well as expanded engineering personnel and consulting expenses.

Other Income, net

     Other income, net, consists primarily of interest income earned on invested cash balances. Other income, net, for the first quarter of fiscal 2010 decreased approximately $20,000 compared to the first quarter of fiscal 2009. The decrease in other income is due to a reduction of invested cash and cash equivalent balances and lower interest rates.

Income Tax Expense

     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. The Company continues to have a fully valued deferred tax asset. This valuation allowance was previously established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses, carry forward temporary differences, and future tax deductions resulting from certain types of stock option exercises. Due to the losses of the first quarter of fiscal 2010, the adjusted net deferred tax assets remain fully reserved as of April 30, 2009. In accordance with paragraph 140 of Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes,” a tax benefit has been recorded utilizing a combined effective rate of 39.2 percent for the three months ended April 30, 2008, to reflect the utilization of losses from current operations to offset the income from discontinued operations. No similar tax allocation was made during the three months ended April 30, 2009 as the results from discontinued operations were minor.

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     The Company adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” (“FIN 48”), on February 1, 2007 and recorded an $86,000 decrease in retained earnings and increased non-current liabilities by $86,000. The FIN 48 liability recorded during the first quarter of fiscal 2008 has not changed since it was initially recorded.

Discontinued Operations, net of income taxes

Income from Discontinued Operations — Call Box
(in thousands except change)

	Three Months Ended April 30,						Year over Year
	2009			2008			% Change
Revenues	$	—		$	2,421			(100	%)
Income (loss) from discontinued operations:
Gain on sale, net of income taxes	$	—		$	—			—
Income (loss) from discontinued operations, before taxes		(4	)		774			(101	%)
Income tax expense		—			(303	)		(100	%)
Total income (loss) from discontinued operations	$	(4	)	$	471			(101	%)

     The sale of the Call Box business was completed on July 10, 2008, which resulted in a pre-tax gain of $490,000 during fiscal 2009. In accordance with the provisions of SFAS No.144, “Accounting for the Impairment or Disposal of Long Lived Assets” the results of the Call Box business are now presented as discontinued operations for all periods presented.

Income from Discontinued Operations — Wireless Test Solutions
(in thousands except change)

	Three Months Ended April 30,					Year over Year
	2009		2008			% Change
Revenues	$	—	$	6,092			(100	%)
Income from discontinued operations:
Gain on sale, net of income taxes of $0	$	43	$	—			100	%
Income from discontinued operations, before taxes		—		1,659			(100	%)
Income tax expense		—		(651	)		(100	%)
Total income from discontinued operations	$	43	$	1,008			(96	%)

     The sale of the wireless test solutions business was completed on January 6, 2009, which resulted in a pre-tax gain of $5.9 million recorded in fiscal 2009. The $43,000 recorded during the first quarter of fiscal 2010 relates primarily to adjustments to the acquired assets and liabilities assumed by Ascom. In accordance with the provisions of SFAS No.144, the results of the Wireless Test Solutions business are now presented as discontinued operations for all periods presented.

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Liquidity and Capital Resources

     Cash and cash equivalents at April 30, 2009 decreased $1.6 million to $12.5 million as compared to $14.1 million at January 31, 2009. The following table is a summary of our Condensed Consolidated Statements of Cash Flows.

	Three Months Ended April 30,
	2009			2008
	(in thousands)
Cash used in:
Operating activities	$	(1,526	)	$	(6,404	)
Investing activities		(58	)		(539	)
Financing activities		(43	)		—

Operating Activities

     Cash used in operating activities of $1.5 million for the first quarter of fiscal 2010 was primarily attributable to our net loss from continuing operations of $2.9 million and a decrease in accrued liabilities of $1.2 million offset by collection of receivables of $1.9 million and a decrease in inventory balances of $0.5 million. The decrease in accrued liabilities was primarily related to payments made to Ascom of $0.9 million which represent Comarco collections of accounts receivable balances sold to Ascom offset by payments made on behalf of Ascom for trade payables assumed in conjunction with the sale of WTS.

     Cash used in operating activities of $6.4 million for the first quarter of fiscal 2009 was comprised of cash used from continuing operations of $4.3 million and cash used from discontinued operations of $2.1 million. The cash used by continuing operations was driven by an increase in accounts receivable of $2.5 million and our net loss from continuing operations of $3.1 million, offset by an increase in accrued liabilities of $1.4 million. Included in our 2009 fiscal first quarter loss is non-recurring severance costs totaling $0.9 million.

     Cash used by discontinued operations is primarily driven by net income from discontinued operations of $1.5 million, an increase in deferred revenue and accrued liabilities of $2.4 million and $2.5 million respectively, offset by an increase in receivables of $8.4 million.

Investing Activities

     During the first quarter of fiscal 2010, we purchased $58,000 of property and equipment.

     During the first quarter of fiscal 2009, we purchased $0.2 million of property and equipment, primarily tooling and equipment used for the manufacture of our ChargeSource^® products.

     The cash used in discontinued investing activities of $0.3 million primarily related to the Wireless Test Solutions business. We capitalized software development costs in the amount of $153,000, acquired software license rights related to mobile phone technologies in the amount of $82,000, and purchased approximately $109,000 of property and equipment.

Financing Activities

     During the first quarter of fiscal 2010, we paid Silicon Valley Bank (“SVB”) $43,000 in conjunction with the Loan and Security Agreement described below. We had no cash flows from financing activities in the first quarter of fiscal 2009.

     On February 11, 2009, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with SVB. The credit facility provided under the Loan Agreement matures, and any outstanding principal balance is payable in full, on February 10, 2010.

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     Under the Loan Agreement, the Company may borrow up to (a) the lesser of (i) $5,000,000 or (ii) 80 percent of the Company’s eligible accounts receivable minus (b) the amount of any outstanding principal balance of any advances made by SVB under the Loan Agreement. The Company must maintain a quick ratio of 1.5 to 1.0 as its primary financial covenant and must also comply with certain monthly reporting covenants. As of June 15, 2009, the Company had not borrowed any amounts under this Loan Agreement, however we have one letter of credit outstanding in the amount of $77,000.

     We believe that our existing cash and cash equivalent balances, as well as our existing credit facility will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. As discussed above, certain factors and events could negatively affect our cash flows from operations, including:

• In the event that any of our significant customers cancel 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 manufacturer of our ChargeSource^® products become unable to manufacture our products at the level currently anticipated, our operating results and cash flows would be negatively impacted.

• The delay in development or release of our ChargeSource^® products could negatively impact our revenue, operating results and cash flows.

     We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Risk

     We are exposed to the risk of changes in currency exchange rates. As of April 30, 2009, we had no material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Interest Rate Sensitivity

     The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline in value. To minimize this risk, we maintain a significant portion of our cash balances in money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate.

     We do not hold any derivative financial instruments.

     Our cash and cash equivalents have maturity dates of three months or less and the fair value approximates the carrying value in our condensed consolidated financial statements. Our cash and cash equivalents are generally maintained in uninsured accounts, typically Eurodollar deposits with daily liquidity, which are subject to investment risk including possible loss of principal invested.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     “Disclosure controls and procedures” are the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

     Under the direction and participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2009, the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

     “Internal control over financial reporting” is a process designed by, or under the supervision of, the issuer’s principal executive and financial officers, and effected by the issuer’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

(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.

     There was no change in our internal control over financial reporting during the fiscal quarter ended April 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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.On June 8, 2007, iGo sued us alleging that two iGo patents are infringed by the mechanical keying arrangement between power adapters and programming tips used by us in our mobile power products sold through our distributors and to a computer maker. We have denied liability and countersued alleging that iGo has breached a Settlement Agreement entered into between the parties in 2003 to settle a previous patent infringement suit, and that iGo is liable for infringement of at least one Comarco patent by effectively sub-licensing a third party to manufacture and sell power adapter products and accessories covered by the Comarco patent. iGo has denied liability and amended its claims to further allege that we breached the Settlement Agreement by asserting claims against iGo because its activities are permissible under the Settlement Agreement. We have denied liability as to the additional claim made by iGo. On March 5, 2008, both parties attended mediation without reaching a settlement.

     On June 25, 2008, the parties jointly requested that the U.S. District Court for the Eastern District of Texas (the “Texas Court”) transfer the lawsuit to the U.S. District Court for the District of Arizona, the court in which the parties’ previous patent infringement lawsuit had been filed (the “Arizona Court”). The parties’ joint request also sought, following transfer, a stay of proceedings until January 2009 so that the parties could pursue settlement. On June 30, 2008, the Texas Court granted the parties’ joint request for transfer, transferring the lawsuit to the Arizona Court under the terms and conditions requested, including the stay. In May 2009, the parties agreed to dismiss the pending lawsuit without prejudice. On May 26, 2009 the Arizona Court issued the order of dismissal without prejudice.

     In addition to the matter described above, we are from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all such pending legal proceedings will not in the aggregate have a material adverse effect on our consolidated results of operations and financial position.

ITEM 1A. RISK FACTORS

     Our business, financial condition and operations are subject to a number of factors, risks and uncertainties, including those previously disclosed under Part I. Item 1A “Risk Factors” of our annual report on Form 10-K for the fiscal year ended January 31, 2009 as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q and any subsequent filings of quarterly reports on Form 10-Q. The disclosures in our annual report on Form 10-K, this quarterly report on Form 10-Q and our subsequent reports and filings are not necessarily a definitive list of all factors that may affect our business, financial condition and future results of operations. There have been no material changes to the risk factors as disclosed in our annual report on Form 10-K for the fiscal year ended January 31, 2009, except as provided in any amendments thereto and those set forth below.

Our Restated Articles of Incorporation and our Amended and Restated Bylaws and at least one agreement to which we are a party contain provisions which may discourage attempts by others to acquire or merge with us, which could reduce the market value of our common stock.

     Provisions of our Restated Articles of Incorporation and our Amended and Restated Bylaws and at least one agreement to which we are a party may discourage attempts by other companies to acquire or merge with us, which could reduce the market value of our common stock. Provisions in our Restated Articles of Incorporation and Amended and Restated Bylaws may delay or deter other persons from attempting to acquire control of us. These provisions include:

• the authorization of our board of directors to issue preferred stock with such rights and preferences as may be determined by the board of directors, without the approval of our shareholders;

• the prohibition of action by the written consent of the shareholders;

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• the establishment of advance notice requirements for director nominations and other proposals by shareholders for consideration at shareholder meetings;

• the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain business combinations with interested stockholders; and

• the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain changes to specific provisions of our Articles of Incorporation (including those provisions described above).

     In addition, if, pursuant to the terms of the Compromise Settlement Agreement and Release (the “iGo Agreement”), dated as of July 12, 2003, among the Company, iGo, Inc. (formerly, Mobility Electronics, Inc.) and the other parties identified therein, the Company assigns the iGo Agreement under the circumstances contemplated therein, the Company would be required to pay $5 million to iGo.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

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 3.1 to our Current Report on Form 8-K, filed on February 24, 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	Loan and Security Agreement, dated as of February 12, 2009, 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 February 18, 2009)
10.2	Strategic Product Development and Supply Agreement, dated as of March 16, 2009, by and between Comarco, Inc. and Targus Group International, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed March 20, 2009) *

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10.3	Compromise Settlement Agreement and Release, dated as of July 12, 2003, among Comarco, Inc., Comarco Wireless Technologies, Inc., iGo, Inc. (formerly Mobility Electronics, Inc.) and the other parties identified therein
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Confidential treatment has been requested with respect to certain provisions of this agreement. Omitted portions have been filed separately with the SEC.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMARCO, INC.
Date: June 15, 2009	/s/ SAMUEL M. INMAN, III
	Samuel M. Inman, III
	President and Chief Executive Officer (Principal Executive Officer), Director
Date: June 15, 2009	/s/ WINSTON E. HICKMAN
	Winston E. Hickman
	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit	Description
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 3.1 to our Current Report on Form 8-K, filed on February 24, 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	Loan and Security Agreement, dated as of February 12, 2009, 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 February 18, 2009)
10.2	Strategic Product Development and Supply Agreement, dated as of March 16, 2009, by and between Comarco, Inc. and Targus Group International, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed March 20, 2009) *
10.3	Compromise Settlement Agreement and Release, dated as of July 12, 2003, among Comarco, Inc., Comarco Wireless Technologies, Inc., iGo, Inc. (formerly Mobility Electronics, Inc.) and the other parties identified therein
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Confidential treatment has been requested with respect to certain provisions of this agreement. Omitted portions have been filed separately with the SEC.

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