e10vq

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 OCTOBER 31, 2009


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.

Yes þ No o

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).

Yes o No o

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.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a Smaller reporting company)		Smaller reporting company þ

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

Yes o No þ

The registrant had 7,326,671 shares of common stock outstanding as of December 4, 2009.

PART I — FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)


	October 31,			January 31,
	2009			2009^(A)
ASSETS
Current Assets:
Cash and cash equivalents	$	10,744		$	14,144
Accounts receivable, net of reserves of $14 and $14		8,153			3,974
Inventory, net of reserves of $1,460 and $1,488		468			1,232
Other current assets		330			862

Total current assets		19,695			20,212
Property and equipment, net		1,206			1,279
Restricted cash		—			77

Total assets	$	20,901		$	21,568


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,590		$	1,501
Accrued liabilities		4,294			3,178
Line of credit		1,000			—

Total current liabilities		7,884			4,679
Tax liability		33			86
Deferred rent, net of current portion		94			182

Total liabilities		8,011			4,947


Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2009 and January 31, 2009, respectively		—			—
Common stock, $0.10 par value, 50,625,000 shares authorized; 7,326,671 shares issued and outstanding at October 31, 2009 and January 31, 2009, respectively		733			733
Additional paid-in capital		14,903			14,705
Retained earnings (accumulated deficit)		(2,746	)		1,183

Total stockholders’ equity		12,890			16,621

Total liabilities and stockholders’ equity	$	20,901		$	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.

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	October 31,						October 31,
	2009			2008			2009			2008
Revenue	$	7,550		$	3,236		$	17,152		$	10,215
Cost of revenue		5,762			3,237			13,761			10,403

Gross profit (loss)		1,788			(1	)		3,391			(188	)


Selling, general, and administrative expenses		1,243			1,402			4,525			7,097
Engineering and support expenses		1,017			730			2,860			2,107

		2,260			2,132			7,385			9,204


Operating loss		(472	)		(2,133	)		(3,994	)		(9,392	)
Other income (expense), net		(5	)		24			3			105


Loss from continuing operations before income taxes		(477	)		(2,109	)		(3,991	)		(9,287	)
Income tax benefit (expense)		59			(882	)		59			636


Net loss from continuing operations		(418	)		(2,991	)		(3,932	)		(8,651	)
Income (loss) from discontinued operations, net of income taxes		(9	)		(1,368	)		3			986

Net loss	$	(427	)	$	(4,359	)	$	(3,929	)	$	(7,665	)


Basic and diluted income (loss) per share:
Net loss from continuing operations	$	(0.06	)	$	(0.41	)	$	(0.54	)	$	(1.18	)
Net income (loss) from discontinued operations		—			(0.18	)		—			0.13

	$	(0.06	)	$	(0.59	)	$	(0.54	)	$	(1.05	)

Weighted average common shares outstanding:
Basic		7,327			7,327			7,327			7,327

Diluted		7,327			7,327			7,327			7,327

Common shares outstanding		7,327			7,327			7,327			7,327

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

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	October 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(3,932	)	$	(8,651	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		582			887
Loss on sale/retirement of property and equipment		6			16
Loan origination fees		43			—
Stock based compensation expense		198			184
Provision for obsolete inventory		(28	)		—
Changes in operating assets and liabilities:
Accounts receivable		(4,179	)		(1,641	)
Inventory		792			(2,268	)
Other assets		532			(56	)
Accounts payable		1,089			440
Accrued liabilities		1,116			(259	)
Deferred rent		(88	)		(154	)
Tax liability		(53	)		—

Net cash used in continuing operating activities		(3,922	)		(11,502	)
Net cash provided by discontinued operating activities		3			3,426

Net cash used in operating activities		(3,919	)		(8,076	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(515	)		(554	)
Decrease in restricted cash		77			—

Net cash used in continuing investing activities		(438	)		(554	)
Net cash used in discontinued investing activities		—			(774	)

Net cash used in investing activities		(438	)		(1,328	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit		1,000			—
Loan origination fees		(43	)		—

Net cash provided by financing activities		957			—


Net decrease in cash and cash equivalents		(3,400	)		(9,404	)
Cash and cash equivalents, beginning of period		14,144			17,011

Cash and cash equivalents, end of period	$	10,744		$	7,607


Supplemental disclosures of cash flow information:
Cash paid for interest	$	17		$	—

Cash paid for income taxes, net of refunds	$	—		$	18

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

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 pre-tax losses from continuing operations during the three and nine months ended October 31, 2009 and 2008 totaling $0.5 million and $2.1 million and $4.0 million and $9.3 million, respectively. Further, the Company did not generate a positive gross margin on the sale of its ChargeSource^® products until the second 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 Strategic Product Development and Supply Agreement with Targus Group International, Inc. (“Targus”), dated March 16, 2009, pursuant to which the Company began shipment of ChargeSource^® products to Targus during the second quarter of fiscal 2010. Further, the Company has continued its negotiations with its contract manufacturers and other suppliers to reduce unit costs. Although certain cost reductions have been achieved, the Company continues to vigilantly compare component prices and availability among approved vendors in its efforts to achieve profitability objectives, as the pricing, availability and sourcing of components remain challenging as can be the case with many technology products. 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 $11.8 million at October 31, 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 remain relatively 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 fiscal 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 and nine months ended October 31, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2010. The Company has evaluated subsequent events through December 11, 2009, the date of issuance of its consolidated financial position and results of operations.

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

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 unaudited interim condensed consolidated financial statements. 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.

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.

Revenue Recognition

We recognize product revenue upon shipment provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is probable. Generally, our products are shipped FOB named point of shipment, whether it is Lake Forest, our corporate headquarters, or China, the shipping point of our contract manufacturers.

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.

Fair Value of Financial Instruments:

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and a line of credit. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. The carrying amount of the Company’s line of credit approximates fair value since the interest rate approximates the market rate for debt securities with similar terms and risk characteristics.

Recently Adopted Accounting Pronouncements:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (the

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

“Codification”) (ASC Topic 105). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. As a result of the adoption of this pronouncement, this Quarterly Report on Form 10-Q for the quarter ended October 31, 2009, has updated all accounting references with ASC references and references the former SFAS guidance. In all subsequent public filings references will be made to the Codification as the sole source of authoritative literature. The adoption of the Codification had no impact on the Company’s financial condition, results of operations or cash flows.

3. 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 $382,000 during the second quarter of fiscal 2009. In accordance with the provisions of ASC Topic 360-10-35 Property, Plant and Equipment (originally issued as 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 in the unaudited interim condensed consolidated financial statements.

During the third quarter of fiscal 2009, the Company recorded an additional pre-tax gain on the sale of the call box business of $150,000 in conjunction with the execution of a subcontractor agreement that provides for a monthly cash payment of $12,500 to the Company from the buyer of the call box business over a 12-month period. Offsetting the gain of $150,000 in the third quarter were additional pre-tax expenses incurred relating to the sale of the business of approximately $68,000.

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


	Three Months Ended				Nine Months Ended
	October 31,				October 31,
	2009		2008		2009			2008
Revenues	$	—	$	—	$	—		$	3,680

Income (loss) from discontinued operations:
Gain on sale, net of taxes of $32,000 and $182,000	$	—	$	50	$	—		$	282
Income (loss) from discontinued operations, before taxes		—		—		(25	)		1,149
Income tax expense		—		—		—			(450	)

Total income (loss) from discontinued operations	$	—	$	50	$	(25	)	$	981

During the fourth quarter of fiscal 2009, additional adjustments were made to the pre-tax gain on the sale of the call box business in the amount of $25,000 of additional gain. These adjustments were recorded in the period incurred.

The fiscal 2010 year to date loss from the call box discontinued operations of $25,000 relates primarily to adjustments to the assets acquired and liabilities assumed by Case Systems, Inc., the buyer of the call box business.

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

Wireless Test Solutions

The Company entered into an Asset Purchase Agreement on September 26, 2008 with Ascom Holding AG and its subsidiary Ascom Inc., (collectively, “Ascom”) 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						Nine Months Ended
	October 31,						October 31,
	2009			2008			2009		2008
Revenues	$	—		$	1,000		$	—	$	11,548

Income (loss) from discontinued operations:
Gain on sale, net of taxes of $0	$	—		$	—		$	—	$	—
Income (loss) from discontinued operations, before taxes		(9	)		(2,332	)		28		9
Income tax benefit (expense)		—			914			—		(4	)

Total income (loss) from discontinued operations	$	(9	)	$	(1,418	)	$	28	$	5

Included in the three and nine months ended October 31, 2008 income (loss) was approximately $1.0 million in professional fees incurred relating to the sale of the WTS business to Ascom.

The fiscal 2010 year to date income from the WTS discontinued operations of $28,000 relates primarily to adjustments to the acquired assets and liabilities assumed by Ascom.

4. Stock-Based Compensation

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

The Company accounts for stock-based compensation under ASC Topic 718 Stock Compensation (originally issued as SFAS No. 123R, “Share-Based Payment”), 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

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

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 subjective judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

The compensation expense recognized under ASC Topic 718 is summarized in the table below (in thousands except per share amounts):


	Three Months Ended					Nine Months Ended
	October 31,					October 31,
	2009		2008			2009		2008
Total compensation expense relating to ASC 718	$	68	$	16		$	198	$	208
Less: Amounts reflected in discontinued operations		—		(8	)		—		(24	)

Compensation expense relating to ASC 718 from continuing operations	$	68	$	8		$	198	$	184


Impact on diluted earnings per share	$	0.01	$	0.00		$	0.03	$	0.03

The total compensation cost related to nonvested awards not yet recognized is approximately $684,000, which will be expensed over a weighted average remaining life of 35.0 months.

During the three and nine months ended October 31, 2009, 69,204 restricted stock units were granted and no stock options were granted. The fair value of the restricted stock units granted during the three and nine months ended October 31, 2009 was estimated using the stock price on the date of the grant of $2.89 and a forfeiture rate of 8.2 percent. No stock options were granted during the three months ended October 31, 2008. The fair value of the 45,000 options granted under the Company’s stock option plans during the nine months ended October 31, 2008 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:


		Nine Months
		Ended
		October 31,
		2008
Weighted average risk-free interest rate		3.0%
Expected life (in years)		5.9
Expected stock volatility		38.1%
Dividend yield		None
Expected forfeitures		8.2%

Comarco, Inc. has stock-based compensation plans under which outside directors and certain employees are eligible to receive stock options and other equity-based awards. The employee stock option plans and a director stock option plan provide that officers, key employees, and directors may be granted awards 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

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

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 awards 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).

Transactions and other information related to these plans for the nine months ended October 31, 2009 are summarized below:


	Outstanding Awards
				Weighted-Average
	Number of Shares			Exercise Price
Balance, January 31, 2009		1,184,000		$	4.34
Awards granted		69,204			2.89
Awards canceled or expired		(80,500	)		10.04
Awards exercised		—			—

Balance, October 31, 2009		1,172,704		$	3.86

As of October 31, 2009, the stock awards outstanding have an intrinsic value of $1.6 million, based on a closing market price of $3.15 per share on October 31, 2009. The following table summarizes information about the Company’s stock awards outstanding at October 31, 2009:


	Awards Outstanding					Awards 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		882,704	8.30	$	1.41		11,250	$	4.57
6.19 to 9.89		166,000	5.08		7.77		150,250		7.80
10.43 to 11.60		60,000	5.46		10.72		52,500		10.76
15.07		10,000	1.67		15.07		10,000		15.07
20.04 to 23.67		54,000	0.55		22.16		54,000		22.16

		1,172,704	7.29 years		3.86		278,000		11.28

Stock awards exercisable at October 31, 2009 were 278,000 at a weighted-average exercise price of $11.28. At October 31, 2009, shares available for future grants under the 2005 Plan were 116,796 and under the Director Plan were 625.

5. 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 October 31, 2009, the Company

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

repurchased approximately 2.7 million shares for an average price of $8.20 per share. During the three and nine months ended October 31, 2009 and 2008, the Company did not repurchase any shares of common stock. During the fourth quarter of fiscal 2010, the Board of Directors terminated this program.

6. Earnings (Loss) Per Share

The Company calculates basic earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the three and nine months ended October 31, 2009 and 2008, basic and diluted loss per share were the same because the inclusion of potential common shares related to outstanding stock awards in the calculation would have been antidilutive.

Potential common shares of 252,565 and 194,246 have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2009, as the effect would have been antidilutive. There were no potentially dilutive common shares related to outstanding stock awards for the three and nine months ended October 31, 2008, because the exercise price of the outstanding stock awards exceeded the Company’s average closing stock price during the three and nine months ended October 31, 2008.

The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss). In the tables below, “Net income or loss” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	October 31,						October 31,
	2009			2008			2009			2008
Basic and diluted:
Net loss from continuing operations	$	(418	)	$	(2,991	)	$	(3,932	)	$	(8,651	)
Weighted average shares outstanding		7,327			7,327			7,327			7,327

Basic and diluted loss per share from continuing operations	$	(0.06	)	$	(0.41	)	$	(0.54	)	$	(1.18	)


Net income (loss) from discontinued operations	$	(9	)	$	(1,368	)	$	3		$	986
Weighted average shares outstanding		7,327			7,327			7,327			7,327

Basic and diluted earnings (loss) per share from discontinued operations	$	—		$	(0.18	)	$	—		$	0.13


Net loss	$	(427	)	$	(4,359	)	$	(3,929	)	$	(7,665	)
Weighted average shares outstanding		7,327			7,327			7,327			7,327

Basic and diluted loss per share	$	(0.06	)	$	(0.59	)	$	(0.54	)	$	(1.05	)

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

7. 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 revenue for the periods presented below are listed here:


	Three Months Ended October 31,
	2009					2008
			(In thousands)
Total revenue	$	7,550		100	%	$	3,236	100	%


Customer concentration:
Targus Group International, Inc.	$	6,471		86	%	$	—	—
Lenovo Information Products Co., Ltd		956		13	%		2,521	78	%
Trust International BV		123		1	%		521	16	%

	$	7,550		100	%	$	3,042	94	%


	Nine Months Ended October 31,
	2009					2008
			(In thousands)
Total revenue	$	17,152		100	%	$	10,215	100	%


Customer concentration:
Targus Group International, Inc.	$	12,235		71	%	$	—	—
Lenovo Information Products Co., Ltd		4,719		28	%		8,447	83	%

	$	16,954		99	%	$	8,447	83	%

In March 2009, the Company entered into a Strategic Product Development and Supply Agreement (the “Targus Agreement”) with Targus. The Company began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010.

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


	October 31, 2009				January 31, 2009
Total gross accounts receivable	$	8,167	100	%	$	3,988	100	%


Customer concentration:
Targus Group International, Inc.		6,306	77	%		—	—
Lenovo Information Products Co., Ltd		1,230	15	%		3,366	84	%
Trust International BV		123	2	%		606	15	%

	$	7,659	94	%	$	3,972	99	%

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 contract manufacturers or suppliers could adversely affect our operations. For the three and nine months ended October 31, 2009, two of our contract manufacturers provided an aggregate of 79 and 84 percent, respectively, of total product costs. For the three and nine months ended October 31, 2008, one of our contract manufacturers provided 81 and 74 percent, respectively, of total product costs.

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

At October 31, 2009, approximately $2.0 million or 78 percent, of the Company’s accounts payable of $2.6 million and $1.8 million or 42 percent of the Company’s accrued liabilities of $4.3 million was payable to one of our contract manufacturers providing the majority of the product costs for the three months ended October 31, 2009. At January 31, 2009, approximately $472,000 or 31 percent, of the Company’s accounts payable of $1.5 million, and $161,000 or 5 percent of the Company’s accrued liabilities of $3.2 million was payable to one of our contract manufacturers.

8. Inventory

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


	October 31,		January 31,
	2009		2009
Raw materials	$	373	$	290
Finished goods		95		942

	$	468	$	1,232

As of October 31, 2009, approximately $128,000 of total net inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in China.

9. Warranty Arrangements

The Company records an accrual for estimated warranty costs as products are sold. Warranty costs are estimated based on periodic analysis of historical experience. These amounts are recorded in accrued liabilities in the unaudited interim condensed consolidated balance sheets. 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):


	Nine Months Ended
	October 31,
	2009			2008
Beginning balance	$	86		$	46
Accruals for warranties issued during the period		172			106
Utilization		(90	)		(70	)

	$	168		$	82

10. 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. During the second quarter of fiscal 2010, the Company borrowed $1,000,000 under the Loan Agreement, which remains outstanding at October 31, 2009. Additionally, under this Loan Agreement, we have one letter of credit outstanding in the amount of $77,000. The Company’s obligations under the Loan Agreement are secured by a first priority

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

perfected security interest in Borrower’s assets, including intellectual property. As of October 31, 2009, the Company was in compliance with the covenants in the Loan Agreement and had $1.3 million in remaining unused borrowing availability.

11. 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, results of operations, and financial position.

Executive Severance Commitments

The Company has severance compensation agreements with several 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 current year. The exact amount of this contingent obligation is not known and accordingly has not been recorded in the unaudited interim condensed consolidated financial statements. During the three and nine months ended October 31, 2008, severance of approximately $0 and $1.0 million was accrued relating to the departure of three corporate officers. During the three and nine months ended October 31, 2009, no similar severance expense was incurred.

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 certificate of deposit that matured on May 1, 2009, and is reflected as restricted cash on the condensed consolidated balance sheet as of January 31, 2009. 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 under the Loan Agreement.

Legal Contingencies

On July 15, 2009, a former officer and employee of the Company filed a demand for arbitration against the Company with the American Arbitration Association claiming that he is entitled to a payment pursuant to the terms of a written Severance Compensation Agreement as well as reimbursement for his attorneys’ fees relating to this claim. The Severance Compensation Agreement provides that in the event the employee is terminated by the Company without “Cause” (as defined in such agreement), or ceases to be employed by the Company for reasons other than because of death, disability, retirement or Cause, or the employee terminates his employment with us for “Good Reason” (as defined in such agreement), in each case, within 24 months following a “Change of Control” (as defined in such agreement), the employee would be entitled to receive a lump sum cash payment equal to the sum of his annual base salary plus his annual incentive compensation bonus that would be payable assuming 100 percent

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

satisfaction of all performance goals. The former officer and employee claims that the Company’s January 2009 sale of its WTS business to Ascom constituted a Change of Control and that he is entitled to the specified payment because he ceased to be employed by the Company as a result of such transaction, although his employment was assumed by Ascom in essentially the same capacity following the consummation of the transaction. The Company denies that a Change of Control occurred and contends that the former employee is not entitled to any payment pursuant to the Severance Compensation Agreement. The outcome of this matter is neither determinable nor estimable as of the date of filing this quarterly report on Form 10-Q.

In addition to the pending 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 legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.

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

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 and profitability. The Company’s actual results may differ materially from those discussed in any such forward-looking statements. 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: the fact that we have a history of losses and may continue to incur losses in the future; the fact that we did not generate a positive margin on the sale of our ChargeSource^® products until the second quarter of fiscal 2010 and many factors, including factors outside our control, will determine our ability to generate positive gross margins in the future; uncertain demand for our products and the difficulty of accurately estimating demand; quarterly and seasonal fluctuations in revenue and other operating results; the risk that customers may cancel their orders, change production quantities or delay production; the fact that our products are complex and have short life cycles and the average selling prices of the products will likely decrease over their sales cycles; our reliance on a limited number of customers for a significant portion of our revenue; our reliance on a limited number of contract manufacturers and component suppliers and the fact that any delays or disruptions in their production of our products or in the components that go into our products, or any increases in component costs, would adversely impact our results of operations and financial condition; increased competition; unanticipated delays in our ability to develop and introduce new products timely and successfully; the risk of third parties infringing our intellectual property; general economic, political, and market conditions; and the costs and expenses that the Company may incur as a result of arbitration, litigation or other adverse proceedings and other factors, including factors outside our control. 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, as such risks, uncertainties and factors may be amended or supplemented from time to time, those contained in the Company’s other filings with the SEC, and those set forth in this quarterly report on Form 10-Q. 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.

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”).

The Company has experienced pre-tax losses from continuing operations during the three and nine months ended October 31, 2009 and 2008 totaling $0.5 million and $2.1 million and $4.0 million and $9.3 million, respectively. Further, the Company did not generate a positive gross margin on the sale of its ChargeSource^® products until the second 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 Strategic Product Development and Supply Agreement with Targus Group International, Inc. (“Targus”) dated March 16, 2009, pursuant to which the Company began shipment of ChargeSource^® products to Targus during the second quarter of fiscal 2010. Further, the Company has continued its negotiations with its contract manufacturers and other suppliers to reduce unit costs. Although certain costs reductions have been achieved, the Company continues to vigilantly compare component prices and availability among approved vendors in its efforts to achieve its profitability objectives, as the pricing, availability and sourcing of components remain challenging as can be the case with many technology products. The inability of the Company to successfully achieve these objectives will have a material adverse effect on the Company’s operations and financial condition.

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

	•		On June 30, 2009, we announced that we were selected by Dell Inc. to provide an innovative 90 watt DC adapter for use in automobiles and airplanes. The product is expected to ship early next calendar year.

	•		On March 16, 2009, we entered into an exclusive Strategic Product Development and Supply Agreement (the “Targus Agreement”) with Targus. The product offerings for Targus include the following:

	•		A programmable AC adapter that connects easily to a standard wall plug and includes a DC cable that supports charging two devices simultaneously. We expect this adapter will be packaged with up to 10 SmartTips^®.

	•		A programmable AC adapter that includes both input and output cables (AC or AC/DC) and will be packaged with up to 10 SmartTips^®.


			We began shipments to Targus under this Targus Agreement during June 2009.

	•		Revenue for the third quarter of fiscal 2010 increased to $7.6 million compared to $3.2 million for the third quarter of fiscal 2009. The increase is primarily attributable to shipments made to Targus under the Targus Agreement discussed above. Revenue for the nine months ended October 31, 2009 increased $6.9 million or 68 percent, compared to the comparable period of the prior fiscal year, and is also primarily attributable to sales to Targus.

	•		In late January 2008, we began volume production of a small form factor 90-watt AC/DC standalone power adapter designed to the stringent specifications of Lenovo, a leading notebook computer OEM. This innovative product is currently being marketed and sold as an OEM-branded aftermarket accessory. During the third quarter of the current fiscal year, we began shipments to Lenovo of our newest generation of our slim and light product.

	•		The fiscal 2009 level of sales was insufficient to fully absorb our fixed supply chain overhead, resulting in negative gross margins and we did not generate positive gross margins on the sale of our ChargeSource^® products until the second quarter of fiscal 2010, when our sales levels increased and fully absorbed our fixed supply chain overhead. Our future is highly dependent on our ability to sell our products at a profit and our ultimate return to overall profitability. The Company remains focused on efforts to drive further increases in sales in order to absorb our fixed operating costs and to become profitable. Our ability to drive increased sales is dependent upon a number of factors, including, among others:

	•		Our ability to timely deliver existing, new and enhanced products meeting our customers’ required specifications in sufficient quantities to satisfy demand of our customers including, but not limited to, the development and release for manufacture of certain AC and AC/DC standalone power adapter products designed to address the requirements of our retail and OEM accessories channels;

	•		Securing additional OEM partners; and

	•		Market and customer acceptance of our new products that began shipping in the third quarter of fiscal 2010.

	•		Our ChargeSource^® products are based on proprietary patented construction technology that enables the production of slim and light power sources for many rechargeable mobile devices from standard wall outlets, as well as power outlets in airplanes, cars, and other modes of transportation.

	•		Our ability to timely obtain sufficient quantities of products meeting our customers’ required specifications from our third party contract manufacturers and our ability to reduce our unit costs for such products. Reducing our product costs is important to our continuing efforts to improve our margins and we are currently in negotiations with our contract manufacturers in this regard.

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

Critical Accounting Policies

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 and nine months ended October 31, 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 — Continuing Operations

Revenue

(in thousands except change)


	Three Months Ended						Nine Months Ended						Year over Year
	October 31,						October 31,						% Change
													Three			Nine
	2009			2008			2009			2008			Months			Months
Revenue	$	7,550		$	3,236		$	17,152		$	10,215			133	%		68	%

Operating loss	$	(472	)	$	(2,133	)	$	(3,994	)	$	(9,392	)

Net loss from continuing operations	$	(418	)	$	(2,991	)	$	(3,932	)	$	(8,651	)

Revenue by Region

(in thousands except change)


	Three Months Ended				Nine Months Ended				Year over Year
	October 31,				October 31,				% Change
									Three			Nine
	2009		2008		2009		2008		Months			Months
Revenue:
North America	$	6,198	$	74	$	12,018	$	466		8,276	%		2,479	%
Europe		172		647		250		1,329		(73	%)		(81	%)
Asia		1,180		2,515		4,884		8,420		(53	%)		(42	%)

	$	7,550	$	3,236	$	17,152	$	10,215

Revenue by Customer

(in thousands except change)


	Three Months Ended										Nine Months Ended
	October 31,										October 31,										Year over Year
	2009					2008					2009					2008					% Change
			% of					% of					% of					% of			Three			Nine
			Revenue					Revenue					Revenue					Revenue			Months			Months
Revenue:
Kensington	$	—		—		$	125		4	%	$	72		—		$	946		9	%		(100	%)		(92	%)
Lenovo		956		13	%		2,521		78	%		4,719		28	%		8,447		83	%		(62	%)		(44	%)
Targus		6,471		86	%		—		—			12,235		71	%		—		—			100	%		100	%
Trust		123		1	%		521		16	%		123		1	%		530		5	%		(76	%)		(77	%)
Other		—		—			69		2	%		3		—			292		3	%		(100	%)		(99	%)

	$	7,550		100	%	$	3,236		100	%	$	17,152		100	%	$	10,215		100	%		133	%		68	%

Revenue for the three and nine months ended October 31, 2009 increased by $4.3 million, or 133 percent, and $6.9 million, or 68 percent, respectively, compared to the corresponding periods of fiscal 2009. The increase is attributable to increases in revenue relating to shipments to Targus commencing during the second quarter of fiscal 2010. In June, we began shipping a 90-watt AC adapter to Targus under the Targus Agreement and revenue for the third quarter of fiscal 2010 also includes initial shipments of the Company’s new retail “Slim and light” power adapter which were completed late in the quarter. The number of units shipped to Lenovo decreased during the

three and nine months ended October 31, 2009 compared to the corresponding periods of the prior fiscal year resulting in declining revenue attributable to Lenovo during the three and nine months ended October 31, 2009 compared to the comparable prior year periods. The Lenovo revenue decrease is due to reduced sales quantities of the current 90-watt slim and light product. We began shipping a new product to Lenovo late in the third quarter of fiscal 2010 and we believe demand for the legacy slim and light product declined in expectation of the release of the new product.

Cost of Revenue and Gross Margin
(in thousands except margin and change)


	Three Months Ended												Nine Months Ended										Year over Year
	October 31,												October 31,										% Change
																										Nine
	2009						2008						2009					2008					Three Months			Months
				% of Total						% of Total					% of Total					% of Total
Cost of revenue:
Product Cost	$	5,686			98	%	$	2,967			92	%	$	12,943		94	%	$	9,265		89	%		92	%		40	%
Under-absorption of fixed supply chain overhead		32			1	%		227			7	%		576		4	%		964		9	%		(86	%)		(40	%)
Inventory reserve and scrap charges		(45	)		(1	%)		54			1	%		150		1	%		54		1	%		(183	%)		178	%
Freight, expedite, and other charges		89			2	%		(11	)		—			92		1	%		120		1	%		909	%		(23	%)

	$	5,762			100	%	$	3,237			100	%	$	13,761		100	%	$	10,403		100	%		78	%		32	%


	Three Months Ended						Nine Months Ended						Year over Year
	October 31,						October 31,						ppt Change
	2009			2008			2009			2008			Three Months		Nine Months
Gross margin (loss)		24	%		0	%		20	%		(2	%)		24		22

Cost of revenue for the three and nine months ended October 31, 2009 increased by $2.5 million, or 78 percent, and $3.4 million, or 32 percent, respectively, compared to the corresponding periods of fiscal 2009. These increases are primarily attributable to the increase in sales for the three and nine months ended October 31, 2009 compared to the comparable prior year period. Gross margins improved with the introduction of the 90-watt AC product sold to Targus and the Company did not generate a positive gross margin on the sale of its ChargeSource^® products until the second quarter of fiscal 2010. The margins for products distributed into retail channels through our exclusive relationship with Targus are higher when compared to products developed for OEM customers due to certain design requirements of our OEM customers. Additionally, as revenues increased, combined gross margin improved over the three and nine months ended October 31, 2009 compared to the corresponding prior year periods, as the Company was better able to absorb its fixed manufacturing overhead, which remained fairly comparable during the three and nine months ended October 31, 2009 and 2008.

The inventory and scrap recovery recorded in the third quarter of fiscal 2010 relates to the adjustment of inventory reserves based upon the sale of some legacy product during the quarter.

Operating Costs and Expenses
(in thousands except change)


	Three Months Ended										Nine Months Ended
	October 31,										October 31,
	2009					2008					2009					2008					Year over Year % Change
			% of Revenue					% of Revenue					% of Revenue					% of Revenue			Three Months			Nine Months
Operating expenses:
SG&A expenses, excluding corporate overhead	$	362		5	%	$	443		14	%	$	1,687		10	%	$	2,557		25	%		(18	%)		(34	%)
Corporate overhead		881		12	%		959		30	%		2,838		17	%		4,540		44	%		(8	%)		(38	%)
Engineering and support expenses		1,017		13	%		730		22	%		2,860		16	%		2,107		21	%		39	%		36	%

	$	2,260		30	%	$	2,132		66	%	$	7,385		43	%	$	9,204		90	%		(6	%)		(20	%)

Selling, general, and administrative expenses for the three and nine months ended October 31, 2009 decreased $0.1 million, or 18 percent, and $0.9 million, or 34 percent, respectively, compared to the corresponding periods of fiscal 2009. The decreases are caused by decreased legal fees of $0.2 million and $1.3 million, respectively, for the three and nine months ended October 31, 2009 related to fees incurred in support of the iGo litigation which was dismissed in May 2009. The decrease in legal fees was partially offset by increased personnel and consulting costs of $0.1 million and $0.3 million, respectively, for the three and nine months ended October 31, 2009 in our sales and marketing department.

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. Corporate overhead decreased $0.1 million and $1.7 million, respectively, for the three and nine months ended October 31, 2009 when compared to the corresponding periods of the prior fiscal year. The decrease of $1.7 million for the nine months ended October 31, 2009 relates primarily to $1.0 million of non-recurring severance costs as well as decreased consulting fees of $0.3 million and decreased legal fees of $0.2 million. The corporate overhead reached a fairly stable run rate during the third quarter of the previous fiscal year.

Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our design engineers and testing and support 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. Engineering and support expenses for the three and nine months ended October 31, 2009 increased $0.3 million, or 39 percent, and $0.8 million, or 36 percent, respectively, when compared to the corresponding periods of the prior fiscal year. These increases are primarily due to increased personnel costs and material usage and lab fees in support of our on-going efforts to develop new products for our retail and OEM accessories channels, as well as legal fees incurred to protect and expand our intellectual property.

Other Income, net

Other income, net, consists primarily of interest income earned on invested cash balances offset by interest expense related to our credit facility. Interest income earned on invested cash balances for the three and nine months ended October 31, 2009 totaled $10,000 and $63,000, respectively. For the three and nine months ended October 31, 2008, interest income totaled $19,000 and $96,000, respectively. The current year decrease in interest income is due to decreased invested cash balances and decreased interest rates earned on invested cash balances. Additionally, interest expense recorded during the three and nine months ended October 31, 2009 totaled $15,000 and $60,000

respectively. The nine month amount includes loan origination fees related to the Loan Agreement entered into during the first quarter of fiscal 2010.

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 and carry forward temporary differences. Due to the losses incurred during the first nine months of fiscal 2010, the adjusted net deferred tax assets remain fully reserved as of October 31, 2009. In accordance with ASC Topic 740-10 Income Taxes (originally issued as Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes,”) a tax expense or benefit has been recorded utilizing a combined effective rate of 39.2 percent for the three and nine months ended October 31, 2008, to reflect the utilization of losses from current operations to offset the income or loss from discontinued operations. No similar tax allocation was made during the three and nine months ended October 31, 2009 as the results from discontinued operations were minor.

The Company adopted the provisions of ASC Topic 740 Income Taxes (originally issued as FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,”), on February 1, 2007 and recorded an $86,000 decrease in retained earnings and increased non-current liabilities by $86,000. The tax liability recorded during the first quarter of fiscal 2008 was reduced by $53,000 in the third quarter of fiscal 2010 in conjunction with the normal expiration of the statute of limitations in various states.

Discontinued Operations — Call Box
Income (loss) from Discontinued Operations

(in thousands except change)


	Three Months Ended				Nine Months Ended						Year over Year
	October 31,				October 31,						% Change
														Nine
	2009		2008		2009			2008			Three Months			Months
Gain on sale, net of income taxes of $32,000 and $182,000	$	—	$	50	$	—		$	282			(100	%)		(100	%)
Income (loss) from discontinued operations, before taxes		—		—		(25	)		1,149			—			(102	%)
Income tax expense		—		—		—			(450	)		—			(100	%)

Income (loss) from discontinued operations	$	—	$	50	$	(25	)	$	981			(100	%)		(103	%)

The sale of the call box business was completed on July 10, 2008, which resulted in an after tax gain of $232,000 during the second quarter of fiscal 2009. During the third quarter of fiscal 2009, the Company recorded an additional pre-tax gain on the sale of the call box business of $150,000 in conjunction with the execution of a subcontractor agreement that provides for a monthly cash payment of $12,500 to the Company from the buyer of the call box business over a 12-month period. Offsetting the gain of $150,000 in the third quarter were additional pre-tax expenses incurred relating to the sale of the business of approximately $68,000.

The year to date loss from the call box discontinued operations incurred in fiscal 2010 of $25,000 relates primarily to adjustments to the assets acquired and liabilities assumed by Case Systems, Inc., the buyer of the call box business.

Discontinued Operations — Wireless Test Solutions

Income(loss) from Discontinued Operations
(in thousands except change)


	Three Months Ended						Nine Months Ended					Year over Year
	October 31,						October 31,					% Change
	2009			2008			2009		2008			Three Months			Nine Months
Gain on sale, net of income taxes of $0	$	—		$	—		$	—	$	—			—			—
Income (loss) from discontinued operations, before taxes		(9	)		(2,332	)		28		9			(100	%)		(211	%)
Income tax benefit (expense)		—			914			—		(4	)		(100	%)		100	%

Income (loss) from discontinued operations	$	(9	)	$	(1,418	)	$	28	$	5			(99	%)		460	%

The sale of the wireless test solutions (“WTS”) business was completed on January 6, 2009. The year to date income from the WTS discontinued operations of $28,000 relates primarily to adjustments to the acquired assets and liabilities assumed by Ascom, the buyer of the WTS business.

Liquidity and Capital Resources

Cash and cash equivalents at October 31, 2009 decreased $3.4 million to $10.7 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.


	Nine Months Ended October 31,
	2009			2008
	(in thousands)
Cash provided by (used in):
Operating activities	$	(3,919	)	$	(8,076	)
Investing activities		(438	)		(1,328	)
Financing activities		957			—

Operating Activities

Cash used in operating activities of $3.9 million for the nine months ended October 31, 2009 was driven by our net loss from continuing operations of $3.9 million. Although the net changes to operating assets and liabilities were minor on a collective basis there were some noteworthy changes. Our accounts receivable balance increased by $4.2 million, primarily due to shipments to Targus during the third quarter, such increase was partially offset by increases in our payables and accrued liabilities of $1.1 million and $1.1 million, respectively, relating primarily to liabilities due to our contract manufacturers. Additionally, our inventory balance declined by $0.8 million due to shipments of the 90-watt slim and light product to Lenovo.

Cash used in operating activities of $8.1 million for the nine months ended October 31, 2008 was driven by our net loss from continuing operations of $8.7 million offset by non-cash depreciation and amortization of $0.9 million and cash provided by discontinued operations of $3.4 million, including proceeds of $2.7 million from the sale of our call box business in July 2008. Additionally our accounts receivable and inventory balances increased by $1.6 million and $2.3 million, respectively, as a result of increased sales volumes. Included in our year to date loss for the nine months ended October 31, 2008 was non-recurring severance costs totaling $1.0 million.

Investing Activities

During the nine months ended October 31, 2009, we purchased $0.5 million of property and equipment, primarily tooling and other equipment used by our contract manufacturers for our power products. During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from Silicon Valley Bank to replace the US Bank letter of credit in the same amount that matured on May 1, 2009. Although the US Bank letter of credit was secured by a $77,000 certificate of deposit, 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 under the Loan Agreement.

During the nine months ended October 31, 2008, we purchased $0.6 million of property and equipment, primarily tooling and equipment used for the manufacture of our ChargeSource^® products.

Financing Activities

During the nine months ended October 31, 2009, we borrowed $1.0 million against our credit facility with Silicon Valley Bank (“SVB”). Additionally, we paid SVB $43,000 in conjunction with the Loan and Security Agreement described below. During the nine months ended October 31, 2008, the Company did not engage in any financing activities.

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.

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. At October 31, 2009, the Company had $1.0 million in borrowings and one letter of credit in the amount of $77,000 outstanding under this Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a first priority perfected security interest in Borrower’s assets, including intellectual property. As of October 31, 2009 the Company was in compliance with the covenants on the Loan Agreement and had $1.3 million in remaining unused borrowing availability.

We believe that our existing cash and cash equivalent balances, as well as borrowings under our existing and anticipated credit facilities and our operating cash flows, will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. As of the date of this report, the Company is in the process of negotiating an extension to the termination date for the Loan Agreement or a renewal of such facility and a possible increase of the Company’s borrowing availability thereunder. The availability of borrowings under any new proposed credit arrangement remains subject to the successful negotiation and execution of definitive documentation and the terms set forth therein. 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 or delay a significant amount of orders or are unable to perform due to their inability to take delivery of the ordered products and/or pay for such products in a timely manner, we would be required to establish alternative distribution channels. Such significant change would negatively impact our revenue, operating results, and cash flows.

	•		If the contract manufacturers of our ChargeSource^® products were to become unable to manufacture our products at the level currently anticipated, should our ChargeSource^® products fail to meet any required specifications, or should we encounter any unexpected problems, difficulties or delays in the production of our ChargeSource^® products, our operating results and cash flows would be negatively impacted.

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

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 October 31, 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports that we file or submit with the SEC under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based upon this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has 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.

Our management, including the Chief Executive Officer and Chief Financial Officer, concluded there was no change in our internal control over financial reporting during the fiscal quarter ended October 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On July 15, 2009, a former officer and employee filed a demand for arbitration against us with the American Arbitration Association claiming that he is entitled to a payment pursuant to the terms of a written Severance Compensation Agreement as well as reimbursement for his attorneys’ fees relating to this claim. The Severance Compensation Agreement provides that in the event the employee is terminated by the Company without “Cause” (as defined in such agreement), or ceases to be employed by the Company for reasons other than because of death, disability, retirement or Cause, or the employee terminates his employment with us for “Good Reason” (as defined in such agreement), in each case, within 24 months following a “Change of Control” (as defined in such agreement), the employee would be entitled to receive a lump sum cash payment equal to the sum of his annual base salary plus his annual incentive compensation bonus that would be payable assuming 100 percent satisfaction of all performance goals. The former officer and employee claims that the January 2009 sale of our WTS business to Ascom constituted a Change of Control and that he is entitled to the specified payment because he ceased to be employed by us as a result of such transaction, although his employment was assumed by Ascom in essentially the same capacity following the consummation of the transaction. We have denied that a Change of Control occurred and contend that the former employee is not entitled to any payment pursuant to the Severance Compensation Agreement. The outcome of this matter is neither determinable nor estimable as of the date of filing this quarterly report on Form 10-Q.

In addition to the pending 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 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 our quarterly report on Form 10-Q for the first and second quarters of fiscal 2010, this quarterly report on Form 10-Q and any other reports and filings of quarterly reports on Form 10-Q. The disclosures in our annual report on Form 10-K, our quarterly report on Form 10-Q for the first and second quarters of fiscal 2010, this quarterly report on Form 10-Q and our other reports and filings are not necessarily a definitive list of all factors, risks and uncertainties, 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, as amended or supplemented by our quarterly report on Form 10-Q for the first and second quarters of fiscal 2010.

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

The Annual Meeting of Shareholders of Comarco was held on August 20, 2009 (the “Annual Meeting”). The holders of Comarco’s stock were entitled to elect five directors to serve until the next annual meeting of shareholders and until each such person’s respective successor is duly elected and qualified. The following table sets forth the names of the five persons elected at the Annual Meeting to serve as directors until 2010 and the number of votes cast for or withheld with respect to each such person.


	For	Withheld
Jeffrey R. Hultman	4,413,587	2,588,422
Samuel M. Inman, III	6,221,323	780,686
Gerald D. Griffin	5,996,413	1,005,596
Richard T. LeBuhn	6,672,144	329,865
Robert J. Majteles	6,190,725	811,284

At the Annual Meeting the shareholders also voted on and approved the ratification of the appointment of BDO Seidman, LLP as Comarco’s independent registered public accounting firm for the fiscal year ending January 31, 2010. The vote for the proposal was as follows:


For	Against		Abstentions
6,238,600		670,996		92,913

ITEM 5.

OTHER INFORMATION

On December 8, 2009, the Company’s Board of Directors took action to formally terminate the Company’s Stock Repurchase Plan (the “Repurchase Plan”). The Repurchase Plan was originally authorized in 1992, although the Company has not repurchased any shares pursuant to the plan since May 2007. From the Repurchase Plan’s inception through its termination, the Company repurchased an aggregate of 2,667,821 shares of its common stock through open market transactions pursuant to the Repurchase Plan.

On September 9, 2009, the Company’s Board of Directors adopted the Non-Employee Director Compensation Policy attached hereto as Exhibit 10.16, which is hereby incorporated by reference herein.

ITEM 6.

EXHIBITS


3.1		Articles of Incorporation of Comarco, Inc., as amended (incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-Q, filed on December 15, 2000)

3.2		Amended and Restated Bylaws of Comarco, Inc. (incorporated by reference to Exhibit 3.2 to our quarterly Report of Form 10-Q, filed on September 14, 2009)

3.3		Certificate of Determination of Series A Participating Preferred Stock (incorporated by reference to Exhibit 99.2 to our registration statement on Form 8-A, filed on February 6, 2003)

10.16*		Non-Employee Director Compensation Policy

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


*		Management contract or compensation agreement

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 3.2 to our Quarterly Report on Form 10-Q, filed on September 14, 2009)

3.3		Certificate of Determination of Series A Participating Preferred Stock (incorporated by reference to Exhibit 99.2 to our Registration Statement on Form 8-A, filed on February 6, 2003)

10.16*		Non-Employee Director Compensation Policy

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


*		Management contract or compensation agreement


	COMARCO, INC.
Date: December 11, 2009	/s/ Samuel M. Inman, III
	Samuel M. Inman, III
	President and Chief Executive Officer


Date: December 11, 2009	/s/ Winston E. Hickman
	Winston E. Hickman
	Vice President and Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


		Page
PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)

	Condensed Consolidated Balance Sheets as of October 31, 2009 and January 31, 2009		3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2009 and 2008		4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 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		17

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27

ITEM 4.	CONTROLS AND PROCEDURES		28

PART II — OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		29

ITEM 1A.	RISK FACTORS		30

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		30

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		30

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		30

ITEM 5.	OTHER INFORMATION		31

ITEM 6.	EXHIBITS		31

SIGNATURES			32
EX-10.16
EX-31.1
EX-31.2
EX-32.1
EX-32.2