10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

JULY 31, 2012

OR

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

25541 Commercentre Drive, Suite 250, 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  x    No  ¨

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  x    No  ¨

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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The registrant had 7,610,629 shares of common stock outstanding as of September 12, 2012.

COMARCO, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2012

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)
	Condensed Consolidated Balance Sheets as of July 31, 2012 and January 31, 2012		3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2012 and 2011		4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2012 and 2011		5
	Notes to Condensed Consolidated Financial Statements		6
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21
ITEM 4.	CONTROLS AND PROCEDURES		30
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		31
ITEM 1A.	RISK FACTORS		31
ITEM 6.	EXHIBITS		32
SIGNATURES			33

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value amounts)

	July 31, 2012			January 31, 2012 (A)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,619		$	908
Accounts receivable due from customers, net of reserves of $5 and $6, respectively		1,674			934
Accounts receivable due from suppliers, net of reserves of $50 and $81, respectively		564			673
Inventory, net of reserves of $1,162 and $1,791, respectively		1,127			1,131
Other current assets		53			63
Total current assets		5,037			3,709
Property and equipment, net		101			126
Restricted cash		92			92
Total assets	$	5,230		$	3,927
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	2,834		$	3,912
Accrued liabilities		2,179			1,315
Loan payable, net of discount		635			—
Derivative liabilities		1,365			—
Total current liabilities		7,013			5,227
Deferred rent, net of current portion		44			41
Total liabilities		7,057			5,268
Commitments, Contingencies and Subsequent Events
Stockholders’ Deficit:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 31, 2012 and January 31, 2012, respectively		—			—
Common stock, $0.10 par value, 50,625,000 shares authorized; 7,610,629 and 7,388,194 shares issued and outstanding at July 31, 2012 and January 31, 2012		761			739
Additional paid-in capital		15,496			15,443
Accumulated deficit		(18,084	)		(17,523	)
Total stockholders’ deficit		(1,827	)		(1,341	)
Total liabilities and stockholders’ deficit	$	5,230		$	3,927

^(A) Derived from the audited consolidated financial statements as of January 31, 2012.

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

3

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended July 31,						Six Months Ended July 31,
	2012			2011			2012			2011
Revenue	$	1,681		$	1,926		$	3,883		$	4,876
Cost of revenue (1)		(127	)		2,232			1,742			5,006
Gross profit (loss)		1,808			(306	)		2,141			(130	)
Selling, general, and administrative expenses		897			1,114			1,401			2,065
Engineering and support expenses		703			475			1,244			974
		1,600			1,589			2,645			3,039
Operating income (loss)		208			(1,895	)		(504	)		(3,169	)
Other loss, net		(55	)		(13	)		(55	)		(2	)
Income (loss) from continuing operations before income taxes		153			(1,908	)		(559	)		(3,171	)
Income tax expense		(2	)		(2	)		(2	)		(2	)
Income (loss) from continuing operations		151			(1,910	)		(561	)		(3,173	)
Loss from discontinued operations, net of income taxes		—			(21	)		—			(21	)
Net income (loss)	$	151		$	(1,931	)	$	(561	)	$	(3,194	)
Basic and diluted income (loss) per share:
Income (loss) from continuing operations	$	0.02		$	(0.26	)	$	(0.07	)	$	(0.43	)
Loss from discontinued operations		—			—			—			—
Net income (loss)	$	0.02		$	(0.26	)	$	(0.07	)	$	(0.43	)
Weighted average common shares outstanding:
Basic		7,585			7,344			7,508			7,344
Diluted		7,608			7,344			7,508			7,344
Common shares outstanding		7,611			7,344			7,611			7,344

⁽¹⁾ See Note 7

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

4

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended July 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(561	)	$	(3,194	)
Loss from discontinued operations	$	—		$	21
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation		54			271
Loan origination fees		—			53
Loss on retirement of property and equipment		11			—
Stock-based compensation		75			95
Recovery from doubtful accounts receivable		(32	)		—
Provision for obsolete inventory		(630	)		(185	)
Supplier settlement		(1,443	)		—
Changes in operating assets and liabilities:
Accounts receivable due from customers		(739	)		1,470
Accounts receivable due from suppliers		(393	)		(51	)
Inventory		634			(31	)
Other assets		10			(195	)
Accounts payable		886			(1,498	)
Accrued liabilities		876			(498	)
Deferred rent		3			39
Net cash used in continuing operating activities		(1,249	)		(3,703	)
Net cash used in discontinued operating activities		—			(21	)
Net cash used in operating activities		(1,249	)		(3,724	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(40	)		(48	)
Net cash used in investing activities		(40	)		(48	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable		2,000			—
Repayment of line of credit		—			(1,000	)
Loan origination fees		—			(53	)
Net cash provided by (used in) financing activities		2,000			(1,053	)
Net increase (decrease) in cash and cash equivalents		711			(4,825	)
Cash and cash equivalents, beginning of period		908			6,381
Cash and cash equivalents, end of period	$	1,619		$	1,556
Noncash investing and financing activities:
Loan discount recorded in connection with issuance of warrants	$	1,365		$	—
Issuance of common stock upon the vesting of restricted stock units	$	22		$	—
Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$	12
Cash paid for income taxes, net of refunds	$	2		$	2

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

5

COMARCO, INC. AND SUBSIDIARY

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 developer and designer of mobile power adapters used to simultaneously power and charge notebook computers, mobile phones, E-readers, iPads^®, 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. was incorporated in California in 1960 and its common stock has been publicly traded since 1971 when it was spun-off from Genge Industries, Inc.

Our business addresses the needs of today’s mobile culture by providing innovative charging solutions for the myriad of battery powered devices used by nearly all consumers today. Our innovative technology allows the consumer to charge multiple devices from a single charger, eliminating the need to carry multiple chargers while traveling. This technology was developed by Comarco and we own an extensive patent portfolio related to this technology.

2. Summary of Significant Accounting Policies

The accompanying condensed consolidated balance sheet as of January 31, 2012, which has been derived from our audited financial statements, and the unaudited condensed consolidated financial statements, have been prepared in accordance with accounting principles and SEC rules applicable to interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this report contain all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the Company’s consolidated financial position as of July 31, 2012 and its consolidated results of its operations and cash flows for the three and six months ended July 31, 2012 and 2011. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in its Annual Report on Form 10-K for its fiscal year ended January 31, 2012 (the “2012 10-K”), which was filed with the SEC on April 30, 2012. The consolidated results of operations for the three and six months ended July 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013 or any other interim period during such year.

The summary of our significant accounting policies presented below is designed to assist the reader in understanding our condensed consolidated financial statements.

Future Operations, Change in Strategy, Liquidity and Capital Resources

The Company has experienced pre-tax losses from continuing operations for the six months ended July 31, 2012 and 2011 totaling $0.6 million and $3.2 million, respectively. In addition, the Company experienced pre-tax losses from operations for fiscal 2012 totaling $5.3 million. The condensed consolidated financial statements have been prepared assuming that the Company will continue to operate as a going concern, which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business. The Company’s condensed consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. The Company’s future is highly dependent on its ability to sell its products at a profit, obtain liquidity, and its ultimate return to overall profitability. To accomplish this, we must increase the sales volumes of our current and newly designed ChargeSource^® products.

During the current fiscal year we had two significant customers, Lenovo Information Products Co., Ltd. (“Lenovo”) and Dell Inc. and affiliates (“Dell”), both of which are original equipment manufacturers, or “OEM’s.” However, we exited the business with Dell, and sold Dell all remaining product in inventory in May 2012, due to low sales volumes and thin product margins. In the prior fiscal year we had an additional significant customer, Targus Group, International, Inc. (“Targus”). Our Targus relationship began in March 2009, with our entry into a Strategic Product Development and Supply Agreement (the “Targus Agreement”). The Company began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. However, on January 25, 2011, Targus provided the Company with written notification of non-renewal of the Targus Agreement. As such, there has been no revenue from Targus since the second quarter of fiscal 2012, which was minor. We do not expect any future sales to Targus.

During the second quarter of fiscal 2012, we decided to change our sales strategy to sell our products directly to end users. Although we plan to continue to sell select products in the OEM channel, we believe that we can complement our OEM sales and increase sales and margins by selling our products direct to end users. To implement this strategy, we launched our website, www.chargesource.com during the fourth quarter of fiscal 2012, to sell our newest generation of AC adapter. There can be no assurance that we will be able to successfully achieve our sales volume initiatives through the launch of our new website, and the failure to achieve such initiatives could have a material adverse effect on our operations and financial condition.

6

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We had negative working capital totaling approximately $2.0 million at July 31, 2012. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, closely manage operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. (See Note 10 Loan & Related Agreements)

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, 2012. 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 six months ended July 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013.

Cash and Cash Equivalents

All highly liquid investments with original 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, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.

Accounts Receivable Due from Customers

We offer unsecured credit terms to customers and performs ongoing credit evaluations of our customers. Accounts receivable balances result primarily from the timing of remittance payments by these customers to the Company. Accounts receivable are stated net of an allowance for doubtful accounts. Management develops its estimate of this reserve based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s inability to pay, customer dissatisfaction, or other factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates. Historically, such losses have been within management’s expectations and the reserves established.

Accounts Receivable Due from Suppliers

We frequently source components locally that we later sell to our contract manufacturers (“CM’s”), who build the finished goods, and other suppliers. This is especially the case when new products are initially introduced into production. Sales to our contract manufacturers and other suppliers are excluded from revenue and are instead reclassified to cost of revenue. During fiscal 2013, our relationship with Flextronics Electronics (“Flex”), the CM who builds the product we sell to Lenovo transitioned from a relationship where we directly sourced just a few components in the bill of material to a process where we directly source all of the component parts in the bill of material.

7

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Restricted Cash

Our restricted cash balances are secured by separate bank accounts and represent i) a $77,000 letter of credit that serves as the security deposit for our corporate office lease and ii) $15,000 which serves as collateral for credit card chargebacks associated with our internet website.

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 made in the preparation of financial statements. Accordingly, our reported assets and liabilities and results of operations could differ, possibly significantly, 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, reserves for estimated warranty costs, including product recall costs, valuation of derivative liabilities, valuation allowances for deferred tax assets, and determination of stock based compensation expense.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation. The reclassifications have no effect on previously reported results of operations or accumulated deficit.

Impairment or Disposal of Long-lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. We did not recognize any impairment charges during the three or six months ended July 31, 2012.

Derivative Liabilities

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security.

8

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We evaluate free-standing derivative instruments to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.

The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.

During the second quarter of fiscal 2013, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The warrants contain provisions that adjust the exercise price in the event of certain dilutive issuance of securities. Accordingly, the Company considered the warrants to be subject to price protection and classified them as derivative liabilities at the date of issuance with a fair value of $1.3 million and a corresponding discount to the underlying loan payable. (see Note 11).

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, accrued liabilities, a short-term loan and derivative liabilities. The carrying amount of cash and cash equivalents, accounts receivable due from customers and suppliers, 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 our loan, net of discount, approximates fair value since the loan balance is derived from the third party valuation report discussed below.

The fair value of the derivative liabilities, which are comprised exclusively of warrants, at July 31, 2012 was $1.4 million, based upon a third party valuation report that we commissioned. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of operations. During the second quarter of fiscal 2012 we did not record any charge or credit to the current period results of operation as the warrants were issued on July 27, 2012 in conjunction with the execution of the Loan Agreement.

3. Discontinued Operations

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 which closed on January 6, 2009.

The fiscal 2012 year to date loss from WTS discontinued operations of $21,000 relates to a sales tax audit performed by the California State Board of Equalization during the second quarter of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne by Comarco for the sale of the WTS business to Ascom and we do not expect to incur any future costs related to the sale of the WTS business.

4. Stock-Based Compensation

We grant stock awards for a fixed number of shares to employees, consultants, and directors pursuant to the Company’s shareholder-approved equity incentive plans.

9

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We account for stock-based compensation 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 optionees 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 awards 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 applicable accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an 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 our current estimates.

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

	Three Months Ended July 31,				Six Months Ended July 31,
	2012		2011		2012		2011
Total stock-based compensation expense	$	36	$	24	$	75	$	95
Impact on basic and diluted earnings per share	$	0.00	$	0.00	$	0.01	$	0.01

The total compensation cost related to nonvested awards not yet recognized is approximately $136,000, which will be expensed over a weighted average remaining life of 9 months.

During the three and six months ended July 31, 2012, 0 and 300,000 restricted stock units were granted and no stock options were granted. During the three and six months ended July 31, 2011, 220,000 and 295,000 restricted stock units were granted and no stock options were granted. The fair value of the restricted stock units granted during the six months ended July 31, 2012 was estimated using the stock price on the date of the grant of $0.16 and a forfeiture rate of 10.6 percent. The fair value of the restricted stock units granted during the three and six months ended July 31, 2011 was estimated using the stock price on the date of the grant, which averaged $0.30 and average forfeiture rates of 9.6 percent and 9.3 percent, respectively.

Comarco has stock-based compensation plans under which outside directors, consultants, and employees are eligible to receive stock options and other equity-based awards. The stock option plans provide that officers, key employees, directors and consultants may be granted options to purchase up to 2,675,000 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 grantee 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.

The Company’s former employee stock option plan (the “Employee Plan”) expired during May 2005. As a result, no new options could be granted under the plan thereafter. This plan provided for the issuance of up to 825,000 shares of common stock. 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. In July 2011, the Company’s shareholders approved the 2011 Equity Incentive Plan (the “2011” Plan) covering 750,000 shares of common stock.

10

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Under both the 2011 and 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards to employees, consultants and directors. Under all plans, awards vest or become exercisable in installments determined by the compensation committee of the Company’s Board of Directors; however, under the 2005 Plan no option may be exercised prior to one year following the grant of the option. The options granted under 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 2011 and 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 stock options granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Options
	Number of Shares			Weighted-Average Exercise Price
Balance, January 31, 2012		380,000		$	3.93
Options granted		—			—
Options canceled or expired		(80,500	)		7.9
Options exercised		—			—
Balance, July 31, 2012		299,500		$	3.15
Stock Options Exercisable at July 31, 2012		179,325		$	4.53

Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Restricted Stock Units
	Number of Shares			Weighted-Average Stock Price On Grant Date
Balance, January 31, 2012		293,651		$	0.37
RSU’s granted		300,000			0.16
RSU’s canceled or expired		(32,565	)		0.26
Common stock issued		(222,435	)		0.31
Balance, July 31, 2012		338,651		$	0.23

The RSU’s canceled or expired in the table above represent the difference between the number of shares awarded and the number issued because the recipient elected a net award to cover personal income taxes.

As of July 31, 2012, the stock awards outstanding have an aggregate intrinsic value of $16,000, based on a closing market price of $0.21 per share on July 31, 2012. The following table summarizes information about the Company’s stock awards outstanding at July 31, 2012:

	Awards Outstanding					Awards Exercisable
Range of Exercise/Grant Prices	Number Outstanding		Weighted-Avg. Remaining Contractual Life	Weighted-Avg. Exercise/Grant Price		Number Exercisable		Weighted-Avg. Exercise/Grant Price
$             0.16 to   1.20		548,500	3.03	$	0.54		98,325	$	1.10
2.89 to   4.90		23,651	4.45		4.16		15,000		4.90
8.08 to 10.43		66,000	3.36		9.56		66,000		9.56
		638,151	3.12 years		1.60		179,325		4.53

11

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

At July 31, 2012, shares available for future grants were 920,224.

5. Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards and provides increased transparency around valuation inputs and investment categorization. ASU 2011-04 also requires new disclosures about qualitative and quantitative information regarding the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The Company adopted ASU 2011-04 in the second quarter of fiscal 2013, when it became applicable to our Company.

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which is intended to reduce the complexity and cost of performing a quantitative test for impairment of indefinite-lived intangible assets by permitting an entity the option to perform a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired in order to determine whether it should calculate the fair value of the asset. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value is an indefinite-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, or in fiscal 2014 for Comarco’s annual impairment test. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

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 six months ended July 31, 2011 and the six months ended July 31, 2012, basic and diluted loss per share for those periods were the same because the inclusion of potential common shares related to outstanding stock options in the calculation would have been antidilutive.

Potential common shares of 255,000 and 230,000 have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2011, as the effect would have been antidilutive. Similarly, potential common shares of 330,000 have been excluded from diluted weighted average common shares for the six months ended July 31, 2012, as the effect would have been antidilutive.

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):

12

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three Months Ended July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Basic:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)

	Three Months Ended July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Diluted:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings per share from continuing operations		7,608		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,608		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings (loss) per share		7,608		7,344			7,508			7,344
Diluted earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)

13

COMARCO, INC. AND SUBSIDIARY

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 any of the periods presented below are listed here:

	Three Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	1,681	100	%	$	1,926	100	%
Customer concentration:
Dell Inc. and affiliates.	$	15	1	%	$	314	16	%
Lenovo Information Products Co., Ltd.		1,657	98	%		1,593	83	%
	$	1,672	99	%	$	1,907	99	%

	Six Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	3,883	100	%	$	4,876	100	%
Customer concentration:
Dell Inc. and affiliates.	$	67	1	%	$	685	14	%
Targus Group International, Inc.		—	—	%		1,174	24	%
Lenovo Information Products Co., Ltd.		3,793	98	%		2,947	60	%
	$	3,860	99	%	$	4,806	98	%

We exited the business with Dell due to low sales volumes and thin product margins. We sold Dell all remaining product in inventory in May 2012. As previously described, on January 25, 2011, Targus provided us with written notification of non-renewal of the Targus Agreement. We did not generate any revenue from Targus in fiscal 2013 nor do we expect any revenue from sales to Targus in the future.

The customers comprising 10 percent or more of the Company’s gross accounts receivable due from customers at either July 31, 2012 or January 31, 2012 are listed below (in thousands):

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from customers	$	1,679	100	%	$	940	100	%
Customer concentration:
Dell Inc. and affiliates.		4	—	%		371	39	%
Lenovo Information Products Co., Ltd.		1,668	99	%		562	60	%
	$	1,672	99	%	$	933	99	%

14

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The suppliers comprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either July 31, 2012 or January 31, 2012 are listed below (in thousands).

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from suppliers	$	614	100	%	$	754	100	%
Customer concentration:
EDAC Power Electronics Co. Ltd (see Note 12)	$	—	—	%	$	532	71	%
Flextronics Electronics.		442	72	%		40	5	%
Zheng Ge Electrical Co., Ltd.		122	20	%		122	16	%
	$	564	92	%	$	694	92	%

The increase in the receivables due from Flex is driven by a change in our business processes. Flex is the contract manufacturer for the products we sell to OEM’s. In the prior fiscal year, we sourced only a few components on behalf of Flex. During fiscal 2013, we began procuring all of the components included in the bill of material on behalf of Flex for the products we sell to OEM’s and by doing so we have been able to secure more favorable payment terms among our expanded supplier base.

During the second quarter of fiscal 2013, we entered a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with EDAC, the former supplier of the now discontinued Manhattan product, ending the litigation between the two companies (see Note 12). The settlement involved no cash payments by either of the parties, but allowed us to recover previously incurred product and freight cost and to remove all liabilities and assets related to EDAC from our condensed consolidated balance sheet. The settlement resulted in a decrease to cost of revenue of $1.4 million.

We expect to fully collect the accounts receivable due from suppliers listed above.

The companies comprising 10 percent or more of our gross accounts payable at either July 31, 2012 or January 31, 2012 are listed below (in thousands, except percentages).

	July 31, 2012				January 31, 2012
Total gross accounts payable	$	2,834	100	%	$	3,912	100	%
Accounts payable concentration:
EDAC Power Electronics Co. Ltd	$	—	—	%	$	1,964	50	%
Chicony Power Technology, Co. Ltd		1,100	39	%		1,100	28	%
Pillsbury Winthrop Shaw Pittman, LLP.		817	29	%		386	10	%
	$	1,917	68	%	$	3,450	88	%

Chicony was the manufacturer of the Bronx product, which was subject to a recall and we are currently in litigation with Chicony (see Note 12). We made no payments to this supplier during either fiscal 2013 or 2012. The outcome of such litigation is not determinable at this time and we do not know whether or not we will be obligated to pay this liability. If we prevail in this case, based upon our causes of action, it is likely we will be relieved of this liability. There is no assurance, however, as to the outcome of this litigation. (see Note 12)

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers (“CM’s”) and other suppliers. The loss of one or more of our significant CM’s or suppliers could materially adversely affect our operations. For the three and six months ended July 31, 2012 three of our CM’s provided an aggregate of 61 and 49 percent, respectively, of total product costs. For the three and six months ended July 31, 2011 two of our CM’s provided an aggregate of 50 and 88 percent, respectively, of total product costs.

15

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During fiscal 2013, we began procuring all of the components included in the bill of materials for the product we sell to Lenovo. In the prior fiscal year we procured the finished good directly from Flex and they were responsible for procuring the components.

Additionally, at July 31, 2012, approximately $0.8 million or 64 percent of total uninvoiced materials and services of $1.2 million, included in accrued liabilities were payable to Flex and Zhengge Electrical Co. Ltd. (“Zhengge”). At January 31, 2012, approximately $0.3 million or 54 percent of total uninvoiced materials and services of $0.6 million, included in accrued liabilities were payable to Zhengge. Zhengge was a tip supplier for the Bronx product, and we ceased paying Zhengge during the course of the product recall.

8. Inventory

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

	July 31, 2012		January 31, 2012
Raw materials	$	824	$	1,002
Finished goods		303		129
	$	1,127	$	1,131

As of July 31, 2012, approximately $520,000 of total inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.

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 warranty accrual activity is shown in the table below (in thousands):

	As of And For the Six Months Ended July 31,
	2012			2011
Beginning balance	$	193		$	310
Accruals for warranties issued during the period		—			399
Utilization		(123	)		(679	)
	$	70		$	30

The Company believes that the balance remaining as of July 31, 2012 is adequate to cover standard warranty costs and believes that we have accrued for and paid substantially all of our material financial obligations with respect to the product recall.

16

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. Loan & Related Agreements

Senior Secured Six Month Term Loan Agreement

As previously reported in a Current Report on Form 8-K filed with the SEC on August 2, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company.

Pursuant to that Agreement, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company and to CWT, as co-borrower. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company and is due and payable in full on January 28, 2013 (the “Maturity Date”). The Company is using the net proceeds of the Loan primarily to fund its working capital requirements and those of CWT, but may use up to $400,000 of those proceeds to fund capital expenditures required in the conduct of its business and the business of CWT.

Related Debt Agreements

To provide security for the repayment of the Loan, (i) CWT entered into a Guaranty pursuant to which it agreed to guarantee the payment and performance by the Company of its obligations under the Loan Agreement; (ii) the Company and CWT entered security agreements granting Broadwood a first priority perfected security interest in all of their respective assets, including its intellectual property rights; (iii) the Company has entered into a Pledge Agreement pursuant to which it pledged and delivered possession of all of CWT’s outstanding shares to Broadwood.

The foregoing summaries of the Loan Agreement, the Loan and the Related Debt Agreements are not intended to be complete and are qualified by reference to the more detailed descriptions thereof contained in the above-referenced Current Report on Form 8-K and to the Loan Agreement and the Related Agreements filed as exhibits to that Current Report.

Stock Purchase Agreement and Stock Purchase Warrants

Concurrently with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). That Agreement provides for the purchase by Broadwood of up to 3,000,000 shares of the Company’s common stock (the “Shares”), at a price of $1.00 per Share, subject to the following conditions: (i) during the six month term of the Loan, the Company will use its best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which may include other shareholders of the Company, and (ii) the Company remains in compliance with its covenants under the Loan Agreement. The Company will decide how many of those 3,000,000 Shares to sell to Broadwood pursuant to the Stock Purchase Agreement, based primarily on the Company’s cash requirements. The Stock Purchase Agreement provides that if, at any time during the next 12 months, the Company sells any shares of its common stock (or sells or issues securities that are convertible or exercisable into shares of common stock) at a price less than $1.00 per share, the Company will be required to issue outright to Broadwood, without additional consideration from it, a number of additional Shares (the “Make-Whole Shares”) sufficient to reduce the per share price paid by Broadwood for the total number of the Shares and Make-Whole Shares issued under the Stock Purchase Agreement to that lower price.

As consideration for the Loan and Broadwood’s entry into the Stock Purchase Agreement, on July 27, 2012 the Company issued stock purchase warrants (the “Warrants”) to Broadwood entitling it to purchase up to a total of 1,704,546 shares of the Company’s common stock (the “Warrant Shares”), at a price of $1.00 per Warrant Share, at any time during the succeeding eight years.

On July 27, 2012, the Company also entered into a Warrant Commitment Letter which provides that if the Company raises less than $3.0 million from sales of equity securities to other investors during the six month term of the Loan, then Broadwood will receive an additional Warrant (the “Additional Warrant”) entitling it to purchase, also at a price of $1.00 per share, an amount of shares of the Company’s common stock to be determined based on a formula in the Warrant Commitment Letter, with such amount not to exceed 1,000,000 additional shares (the amount of such additional shares, “Additional Warrant Shares”). The exercise price is to be adjusted if the Company completes subsequent financings at less than the current exercise price.

Broadwood currently owns approximately 21 percent of the Company’s outstanding shares and is the Company’s largest shareholder. If the Company sells a total of 3,000,000 Shares to Broadwood under the Stock Purchase Agreement, then Broadwood’s share ownership would increase to approximately 43 percent of the Company’s outstanding shares, and would further increase to approximately 55 percent of the Company’s outstanding shares, if Broadwood were to exercise the Warrants and the Additional Warrants in their entirety. The Warrants and Additional Warrant shares are recorded as derivative liabilities in our condensed consolidated balance sheet. (see Note 11)

The Warrants, including the Additional Warrant, provide that if the Company sells shares of its common stock (or any securities that are convertible or exercisable into shares of Company common stock) at a price less than $1.00 per share, then, subject to certain exceptions (including grants of stock incentives and sales of shares to officers, employees or directors under the Company’s equity incentive plans and issuances of shares in business acquisitions), the exercise price of the Warrants, including the Additional Warrant, then outstanding will be reduced to that lower price and the number of Warrant Shares purchasable by Broadwood on exercise of the Warrants and the Additional Warrant will be proportionately increased.

The Warrants and the Additional Warrant also grant to Broadwood the right to require the Company (i) to register the Warrant Shares under the Securities Act of 1933, as amended (the “Securities Act”) for possible resale and (ii) to include the Warrant Shares in any registration statement that the Company may file to register, under the Securities Act, the sale of Company shares for cash.

The foregoing summaries of the Stock Purchase Agreement and the Warrants, including the Additional Warrant, are not intended to be complete and are qualified by reference to the more detailed descriptions thereof contained in the above-referenced Current Report on Form 8-K and to the Stock Purchase Agreement, the form of Common Stock Purchase Warrant and the Warrant Commitment Letter which provides for the possible issuance by the Company of the Additional Warrant to Broadwood, which were filed as exhibits to that Current Report.

17

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Fair Value Measurements

We follow FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.

ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.

Our fair value measurements at the July 31, 2012 reporting date are classified based on the valuation technique level noted in the table below (in thousands):

Description	July 31, 2012		Quoted Prices in Active Markets for (Level 1)		Significant Other Observable (Level 2)		Significant Unobservable (Level 3)
Derivative Liabilities	$	1,365	$	—	$	—	$	1,365

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our outstanding and contingent warrants issued to Broadwood as described in Note 10 utilizing the Monte Carlo simulation model:

	Three Months Ended July 31, 2012
Risk free interest rate	1.22%
Average expected life	8 years
Expected volatility	100.05%
Expected dividends	None

Since the warrants and contingent warrants were issued on July 27, 2012, the fair market value reported at July 31, 2012, the end of the fiscal quarter, is deemed to represent the fair market value on the date of the issuance. Accordingly, there has been no change in fair value reported in current period results of operations.

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

18

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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. During the second quarter of fiscal 2012 we accrued a charge of $380,000 relating to such excess material relating to purchase commitments made to support the Targus business.

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 Agreements

The Company has severance compensation agreements with certain key executives. These agreements require the Company to pay these executives, in the event of certain terminations of employment following a change of control of the Company, up to the amount of their then current annual base salary and the amount equal to any bonus which the executive would have earned for the year in which the termination occurs plus the acceleration of unvested options. Since a change of control has not occurred, we have not recorded any liability in the unaudited interim condensed consolidated financial statements for these agreements.

Although the contemplated sale of shares of common stock and the issuance of the Warrants and possible issuance of the Additional Warrant Shares by the Company to Broadwood could result in a “Change of Control” for purposes of the severance compensation agreements, each of the executives who are parties to those agreements has waived their rights to receive payments under those agreements in the event that a “Change of Control” occurs as a result of the sale of shares and the issuance of Warrants and Additional Warrants to Broadwood.

Letter of Credit

During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from SVB to allow for continuous and unlapsed compliance with a lease provision for the Company’s corporate offices. The letter of credit expires on August 1, 2014.

Legal Proceedings and Contingencies

On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that was the subject of a product recall, filed a complaint against us for breach of contract, seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony’s failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. The trial date is currently set for March 11, 2013. The outcome of this matter is not determinable as of the date of the filing of this report. We have previously accrued $1.1 million for the possibility that we could incur a liability to Chicony should it prevail in the lawsuit.

On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. The five Comarco patents are U.S. Patent Nos. 6,831,848 titled “Programmable Power Supply to Simultaneously Power a Plurality of Electronic Devices”; 7,495,941 titled “Power Supply Equipment with Matching Indicators on Converter and Connector Adaptors”; 7,613,021 titled “Small Form Factor Power Supply”; 7,863,770 titled “Power Supply Equipment for Simultaneously Providing Operating Voltages To a Plurality of Devices”; and 7,999,412 titled “Detachable Tip for Communicating with Adapter and Electronic Device.” On February 29, 2012 we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. The Court required that the parties mediate the dispute by the end of July, 2012. Although the parties met for mediation, the dispute was not settled. This matter is ongoing and the outcome is not determinable, however if we do not prevail we will likely not obtain a license agreement to earn future license revenue from products sold by Kensington.

19

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On March 6, 2012, we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for the failure to deliver goods ordered by us in the time, place, manner and price indicated by each purchase order. As previously reported, the parties entered into a Settlement Agreement on July 24, 2012, ending the litigation between the parties. The settlement involved no cash payments by either of the parties, but allowed us to recover previously incurred product and freight costs and to discharge net liabilities of $1.4 million from our consolidated balance sheet that would otherwise have been due to EDAC had it prevailed in the lawsuit. The settlement resulted in a decrease to cost of revenue of $1.4 million.

In addition to the pending matters 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.

20

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 are only based on facts and factors known by us as of the date of this report. 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 future sales, revenues, and costs; the timing of fulfillment of purchase orders and completion of projects; demand for our products; and the sufficiency of our cash and cash equivalent balances. Many risk factors and uncertainties may cause our actual financial results to differ materially from those discussed in any such forward-looking statements. Those risk factors and uncertainties include, but are not limited to: the risk that we will be unable to continue our business as a going concern if our internally generated cash flows are not sufficient to fund our operations and we are unable to obtain funds from external sources to make up the resulting cash shortfall; the impact of general economic and retail uncertainty and perceived or actual weakening of economic conditions on customers’ and prospective customers’ spending on our products; quarterly and seasonal fluctuations in our revenue or other operating results; fluctuations in the demand for our products and the fact that a significant portion of our revenue is derived from a limited number of customers, the loss of any of which would materially and adversely affect our revenues and prevent us from funding our operations in the future; unexpected difficulties and delays associated with our efforts to achieve higher sales volumes for our ChargeSource^® products or to obtain cost reductions, including risks related to market acceptance of our products; failure to accurately forecast customer demand and the risk that our 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 our products will likely decrease over their sales cycles; disruptions in our relationships with our suppliers; failure to meet financial expectations of analysts and investors; risks related to our ability to meet contractual and technical commitments with our customers; activities by us and others regarding protection of intellectual property; competitors’ release of competitive products and other actions; and costs and potential adverse determinations in pending 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 in this report, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans or that our future financial results or outcomes, as set forth in the forward looking statements in this report 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 above or elsewhere in this report, 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, 2012 filed with the SEC, those contained in the Company’s other filings with the SEC, and those set forth above. Readers of this report are urged to review the descriptions of those risks and uncertainties contained in those other reports.

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Basis of Presentation

The condensed consolidated results of our operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending January 31, 2013 or any other interim period during such year. 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 those fiscal quarters.

Executive Summary

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “Comarco,” or the “Company”), is a leading developer and designer of innovative mobile power products. These standalone, multi-function mobile power adapters are used to simultaneously power and charge notebook computers, mobile phones, E-readers, iPads^®, iPods^®, and many other portable, rechargeable consumer electronic devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly report on Form 10-Q and in the Company’s other filings with the SEC, management currently considers the following additional trends, events, and uncertainties to be important to understanding our results of operations for the quarter ended July 31, 2012:

• On July 28, 2012 the Company’s Board of Directors appointed Mr. Louis Silverman to the board and as Chairman of the Board.

• On July 27, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company. Pursuant to the Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company and is due and payable in full on January 28, 2013. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Loan Agreement, the Loan and certain related agreements.

• Concurrent with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement provides for the purchase by Broadwood of up to $3.0 million worth of the Company’s common stock, at a price of up to $1.00 per share, at the Company’s discretion, subject to certain conditions provided for in the Stock Purchase Agreement. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Stock Purchase Agreement, and certain related agreements.

• On July 24, 2012 the Company entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company discharged $1.4 million in net liabilities due to EDAC.

• Revenue for the second quarter of fiscal 2013 decreased to $1.7 million compared to $1.9 million for the second quarter of fiscal 2012. The decrease is primarily attributable to our previously described exit from the Dell business during the prior quarter.

• 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 have the highest probability of contributing to our profitability.

Business Strategy and Future Plans

Our business today is principally driven by sales of our products to Lenovo, and we continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customer.

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Simultaneously, we are working to build sales of our newest generation AC adapter, branded ChargeSource^®. This product line is currently available exclusively on our retail website www.chargesource.com. We anticipate analyzing and testing additional marketing and sales avenues for our ChargeSource product line during the balance of calendar 2012 and into 2013.

During this same period, we expect to engage a team of experienced marketing professionals to assist us with development of our ChargeSource marketing and branding strategy as well as our marketing/sales strategy implementation and execution. Our goal is to leverage ChargeSource’s superior design and patent protected technologies to the advantage of both consumers and shareholders. Our strategy development and execution will take into account our need to judiciously manage our resources while concurrently testing a small number of high probability sales strategies. We are confident that our products compete very effectively in the marketplace from a technology and value perspective. Our challenge is to ensure that awareness of our products is growing.

In addition to contributing significantly to the value of our ChargeSource products, our extensive patent portfolio covering key technical aspects of our products can be used in our research and development efforts and could potentially generate an additional revenue stream for our company based upon royalties paid to us by others for the use of some or all of our patents in third party products. We have also focused a small portion of our research and development work around the use of our patent portfolio toward creating additional products and revenue streams.

Regarding litigation, the EDAC resolution, discussed above, increased our retained earnings by $1.4 million based on the elimination of net liabilities. A positive outcome in our ongoing litigation with Chicony and Kensington, described in Note 12 of Item 1 of this Form 10-Q, could not only increase our retained earnings, but could also provide us with a cash infusion.

In summary, our current objectives are focused primarily on maintaining our relationship with Lenovo, creating and implementing a data driven strategic marketing plan for our ChargeSource product line, and continuing to stabilize and strengthen the company’s financial position.

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 that other than Derivative Liabilities and Classification, described in Note 2 of Item 1 of this Form 10-Q, there have been no significant changes during the three and six months ended July 31, 2012 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, 2012.

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Results of Operations – Continuing Operations

Revenue

(in thousands except % change)

	Three Months Ended July 31,					Six Months Ended July 31,						Year over Year % Change
	2012		2011			2012			2011			Three Months			Six Months
Revenue	$	1,681	$	1,926		$	3,883		$	4,876			(13	%)		(20	%)
Operating income (loss)	$	207	$	(1,895	)	$	(504	)	$	(3,169	)
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)

Revenue by Region

(in thousands except % change)

	Three Months Ended July 31,				Six Months Ended July 31,				Year over Year % Change
	2012		2011		2012		2011		Three Months			Six Months
Revenue:
North America	$	4	$	303	$	45	$	1,715		(99	%)		(97	%)
Europe		3		4		8		14		(25	%)		(43	%)
Asia		1,674		1,619		3,830		3,147		3	%		22	%
	$	1,681	$	1,926	$	3,883	$	4,876

Revenue by Customer

(in thousands except % change)

	Three Months Ended July 31,										Six Months Ended July 31,										Year over Year % Change
	2012					2011					2012					2011					Three Months			Six Months
			% of Revenue					% of Revenue					% of Revenue					% of Revenue
Revenue:
Dell		15		1	%		314		16	%		67		2	%		685		14	%		(95	%)		(90	%)
Lenovo		1,657		99	%		1,593		83	%		3,793		97	%		2,947		61	%		4	%		29	%
Targus		—		—			—		—			—		—			1,174		24	%		—			(100	%)
Other		9		—			19		1	%		23		1	%		70		1	%		(58	%)		(67	%)
	$	1,681		100	%	$	1,926		100	%	$	3,883		100	%	$	4,876		100	%		(13	%)		(20	%)

Revenue for the three and six months ended July 31, 2012 decreased by $0.2 million, or 13 percent, and $1.0 million, or 20 percent, respectively, compared to the corresponding periods of fiscal 2012. Revenue from product sales to Lenovo increased during the three and six months ended July 31, 2012, compared to the corresponding periods of the prior fiscal year, due in part to filling a backlog created by a supply chain disruption that occurred in the fourth quarter of fiscal 2012. Revenue from shipments to Dell decreased $0.3 million or 95 percent and $0.6 million or 90 percent, respectively, during the three and six months ended July 31, 2012. As previously discussed, we decided to exit the Dell business due to low sales volumes and thin product margins. We completed the wind down of our Dell business relationship in May 2012. In March 2009, the Company entered into the Strategic Product Development and Supply Agreement with Targus Group, International, Inc. (“Targus”). The Company began shipments to Targus under that Agreement during the second quarter of fiscal 2010. However, on January 25, 2011, Targus notified the Company that it would not renew that Agreement. Consequently, revenue from the Targus relationship ceased during the second quarter of fiscal 2012.

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Cost of Revenue and Gross Margin

(in thousands except margin and % change)

	Three Months Ended July 31,											Six Months Ended July 31,											Year over Year % Change
	2012						2011					2012						2011					Three Months			Six Months
				% of Total					% of Total						% of Total					% of Total
Cost of revenue:
Product cost	$	1,157			(911	%)	$	1,187		53	%	$	2,649			152	%	$	2,667		53	%		(3	%)		1	%
Accrued product recall costs		—			—			—		—			—			—			350		7	%		—			(100	%)
Supplier Settlement		(1,443	)		1,136	%		383		17	%		(1,443	)		(83	%)		383		8	%		(477	%)		(477	%)
Supply chain overhead		222			(175	%)		608		27	%		464			27	%		1,031		21	%		(63	%)		(55	%)
Inventory reserve and scrap charges		(63	)		50	%		54		3	%		72			4	%		575		11	%		(217	%)		(87	%)
	$	(127	)		100	%	$	2,232		100	%	$	1,742			100	%	$	5,006		100	%		(106	%)		(65	%)

	Three Months Ended July 31,						Six Months Ended July 31,						Year over Year ppt Change
	2012			2011			2012			2011			Three Months		Six Months
Gross margin (loss)		108	%		(16	%)		55	%		(3	%)		124		58

Cost of revenue for the three and six months ended July 31, 2012 decreased by $2.4 million, or 106 percent, and $3.2 million, or 65 percent, respectively, compared to the corresponding periods of fiscal 2012. Although the product cost has changed slightly, the decrease in total cost of revenue is primarily caused by other cost of revenue components. Although revenue decreased by $1.0 million, or 20 percent, in the six months ended July 31, 2012 compared to the corresponding prior year period, the product costs remained flat. This is due to the fact that the first quarter of fiscal 2012 included approximately $0.9 million in revenue from Targus for which the corresponding product cost had been recorded in prior periods. During the three months ended July 31, 2012 we entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company recovered previously incurred product and freight costs and reversed $1.4 million in net liabilities due to EDAC. During the three months ended July 31, 2011 we accrued a charge of $380,000 relating to a settlement reached with a supplier relating primarily to inventory purchase commitments, made to support the Targus business. During the six months ended July 31, 2011, we recorded an additional accrual of $350,000 for our product Recall. No similar costs were incurred in the comparable periods of the current fiscal year. During the three and six months ended July 31, 2012, our supply chain overhead costs decreased by $0.4 million and $0.6 million or 63 percent and 55 percent, respectively, when compared to the supply chain overhead costs in the comparable prior year periods. These decreases were the result of continued cost cutting relating to personnel and other expenses. During the first quarter of fiscal 2012 we incurred scrap charges of $0.5 million relating to Manhattan product components that we procured from a supplier during the first quarter of fiscal 2012. The Manhattan product was previously sold to Targus and we have scrapped those components that could only be used in that product. We did not incur any similar charges during the comparable periods of fiscal 2013.

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Operating Costs and Expenses

(in thousands except % change)

	Three Months Ended July 31,										Six Months Ended July 31,										Year over Year % Change
	2012					2011					2012					2011					Three Months			Six Months
			% of Revenue					% of Revenue					% of Revenue					% of Revenue
Operating expenses:
SG&A expenses, excluding corporate overhead	$	45		2	%	$	289		15	%	$	110		3	%	$	462		9	%		(84	%)		(76	%)
Corporate overhead		852		51	%		825		43	%		1,291		33	%		1,603		33	%		3	%		(19	%)
Engineering and support expenses		703		42	%		475		25	%		1,244		32	%		974		20	%		48	%		28	%
	$	1,600		95	%	$	1,589		83	%	$	2,645		68	%	$	3,039		62	%		1	%		(13	%)

Selling, general, and administrative (“SG&A”) expenses for the three and six months ended July 31, 2012 decreased $0.2 million, or 84 percent and $0.4 million, or 76 percent, respectively, compared to the corresponding periods of fiscal 2012. In the prior fiscal year, through August 2011, we had an executive serving in the sales and marketing capacity. We currently have no employees in our sales and marketing departments, but instead utilize various consultants who are focused on digital media and search engine optimization to assist us with generation of sales on our retail website www.chargesource.com, which was launched in the fourth quarter of fiscal 2012.

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 remained flat and decreased $0.3 million for the three and six months ended July 31, 2012, respectively, when compared to the corresponding periods of the prior fiscal year. The decreases in the current year relates primarily to a reduction in legal fees and other costs relating to public company matters, partially offset by increased legal fees relating to the Chicony litigation.

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 six months ended July 31, 2012 increased $0.2 million, or 48 percent, and $0.3 million, or 28 percent, respectively. The increase in the current year primarily relates to increased legal fees relating to the Kensington litigation and other patent infringement matters. These increases account for $0.4 million and $0.6 million for the three and six months ended July 31, 2012, respectively, compared to the comparable periods of the prior fiscal year. Offsetting these increase are decreases in the current year personnel costs, rent and occupancy costs and testing and certification fees, which varies with the timing of new product development.

Other Income (loss), net

Other income (loss), net, consists primarily of interest expense offset by any income earned on invested cash balances. For the three and six months ended July 31, 2012 and 2011, interest income was negligible. Loan fees totaling $55,000 related to our Loan Agreement with Broadwood were expensed as incurred. Interest expense and loan fee expenses related to our prior credit facility with Silicon Valley Bank totaled $13,000 and $38,000 for the three and six months ended July 31, 2011. During the first quarter of fiscal 2012, we received a payment of $34,000, representing the final payment related to our investment in SwissQual, which was sold in fiscal 2006.

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During the third and fourth quarter of fiscal 2013, we expect to incur interest expense related to our Loan Agreement with Broadwood of approximately $25,000 per quarter. Additionally, during the third and fourth quarter of fiscal 2013 we expect to amortize the loan discount using the effective interest method, and consequently incur other non-cash expenses of approximately $0.5 million and $0.9 million, respectively.

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 six months of fiscal 2013, the adjusted net deferred tax assets remain fully reserved as of July 31, 2012.

Discontinued Operations – Wireless Test Solutions (“WTS”)

The fiscal 2012 year to date loss from WTS discontinued operations of $21,000 relates to a sales tax audit performed by the California State Board of Equalization during the second quarter of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne by Comarco for the sale of the WTS business to Ascom and we do not expect to incur any future costs related to the sale of the WTS business.

Liquidity and Capital Resources

Cash and cash equivalents at July 31, 2012 increased $0.7 million to $1.6 million as compared to $0.9 million at January 31, 2012. That increase was attributable to the Broadwood Loan that we obtained on July 27, 2012. The following table is a summary of our Condensed Consolidated Statements of Cash Flows.

	Six Months Ended July 31,
	2012			2011
	(in thousands)
Cash provided by (used in):
Operating activities	$	(1,249	)	$	(3,724	)
Investing activities		(40	)		(48	)
Financing activities		2,000			(1,053	)

Operating Activities

Cash used in operating activities was $1.2 million for the six months ended July 31, 2012 and was driven by our net loss from continuing operations of $0.6 million. Additionally, in the second quarter of fiscal 2013 we entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company reversed $1.4 million in net liabilities relating to inventory due to EDAC, which represents a non-cash gain included in our net loss from continuing operations. Our combined receivables increased by $1.1 million for the six months ended July 31, 2012. Offsetting these uses of cash, on a combined basis our accounts payable and accrued liabilities, excluding the EDAC settlement described above, increased by $1.8 million.

Cash used in operating activities was $3.7 million for the six months ended July 31, 2011 and was driven by our net loss from continuing operations of $3.2 million. On a combined basis, our accounts payable and accrued liabilities decreased $2.0 million during the six months ended July 31, 2011. Offsetting these uses of cash, we collected a net $1.5 million in accounts receivable.

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Investing Activities

During the six months ended July 31, 2012 and 2011, we purchased $40,000 and $48,000, respectively, of property and equipment, which was primarily tooling and equipment used for the manufacture of our ChargeSource^® products.

Financing Activities

On July 27, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement (the “Loan Agreement”) with Broadwood.

Pursuant to the Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company, is secured by a first priority security interest granted to Broadwood in all of our assets, and is due and payable in full on January 28, 2013. In conjunction with the Loan Agreement we incurred $55,000 in loan fees that are reported in other loss, net in our condensed consolidated statement of operations for the three and six months ended July 31, 2012.

On February 11, 2009, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement was renewed on February 8, 2010 and again on February 9, 2011 and originally matured, on February 9, 2012, at which time, any outstanding principal balance was to be paid in full.

During the first quarter of fiscal 2012, we repaid the $1.0 million that had been outstanding under the Loan Agreement and we incurred $53,000 in loan origination fees relating to its renewal. On September 15, 2011, we received a letter from SVB terminating the Loan Agreement effective September 22, 2011.

Future Operations and Liquidity Requirements for the Next 12 Months

As of July 31, 2012 we had negative working capital of approximately $2.0 million. In order for us to continue our operations for the next twelve months and to be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, reduce operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our cash requirements during the next twelve months. No assurance can be given, however, that will be successful in meeting those cash requirements.

Concurrently with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement provided for the purchase by Broadwood of up to 3,000,000 shares of the Company’s common stock (the “Shares”), at a price of $1.00 per Share, subject to the following conditions: (i) during the six month term of the Loan, the Company will use its best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which may include other shareholders of the Company, and (ii) the Company remains in compliance with its covenants under the Loan Agreement. The Company will decide how many of those 3,000,000 Shares to sell to Broadwood pursuant to the Stock Purchase Agreement, based primarily on the Company’s cash requirements. The Company is currently evaluating alternatives for raising additional capital. However, there can be no assurance that we will be successful in raising capital beyond the amount contemplated by the Stock Purchase Agreement.

These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. The condensed consolidated financial statements included in this report do not reflect any adjustments related to the outcome of this uncertainty.

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As discussed above, there are several factors and events that could significantly affect our cash flows from operations, including, without limitation the following:

• Our future retail sales of our ChargeSource^® products generated from our recently launched website www.chargesource.com;

• The outcome of litigation with our contract manufacturer of the Bronx product, the subject of a product recall;

• Our ability to raise additional debt or equity financing; and

• The ability of our contract manufacturers of our products to manufacture our products at the level currently anticipated, and the ability of our products to meet any required specifications.

We are currently 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 future profitability. As we execute our current strategy, however, we may require further debt and/or equity capital to fund our working capital needs. In particular, we have experienced, and anticipate that we may again experience a negative operating cash flow. We are currently evaluating alternatives for raising additional capital beyond that contemplated by the Stock Purchase Agreement. We cannot be certain that any additional financing will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of opportunities, develop new products or sales avenues or otherwise respond to competitive pressures, and our operating results and financial condition could be adversely affected. In fiscal 2012, we notified approximately 11 companies that we believe they are manufacturing and distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. We intend to aggressively protect our intellectual property and are vigorously pursuing all potential infringers. Our patent infringement efforts are ongoing and the outcomes of these efforts are not determinable.

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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 our reports 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 SEC’s rules and forms, and that such information is accumulated and communicated to management, including our CEO and CAO, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of July 31, 2012, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” 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.

In connection with its evaluation, our management has concluded that, as of July 31, 2012, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Our management’s finding of ineffective internal control over financial reporting results primarily from a lack of sufficient accounting and information technology staff which results in a lack of segregation of duties necessary for an appropriate system of internal controls. While the lack of effective internal control over financial reporting during the fiscal quarter ended July 31, 2012 did not result in any particular deficiency in our financial reporting for the fiscal quarter then ended, management believes that the lack of effectiveness of our internal control over financial reporting could result in a failure to provide reliable financial reporting in the future. In order to remedy our existing internal control deficiency, we will need raise additional capital or improve our working capital position to allow us to hire additional staff.

Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended July 31, 2012 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

Chicony Power Technology Co., LTD., (“Chicony”) vs. Comarco, Inc., Case No. 30-2011-00470249, Superior Court of California County of Orange – Central Justice Center. On April 26, 2011, Chicony, which was the contract manufacturer of the Bronx product that was the subject of a product recall, filed a complaint against us for breach of contract seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony’s failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. The trial date is currently set for March 11, 2013. The outcome of this matter is not determinable as of the date of the filing of this report.

Acco Brands USA LLC (“Acco”) vs. Comarco Wireless Technologies, Inc., Case No. 5:11-cv-04378-HRL, U.S. District Court for the Northern District of California. On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012 we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. Efforts to resolve the dispute, by court ordered mediation, have been unsuccessful. This matter is ongoing and the outcome is not determinable.

Comarco Inc. vs. EDAC Electronics Co. Ltd. (“EDAC”) Case No. 30-2012-00551827, Superior Court of California County of Orange – Central Justice Center. On March 6, 2012, we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for failure to deliver goods we ordered in the time, place, manner and price indicated by each purchase order. We entered a Settlement and Mutual Release on July 24, 2012, which ended the litigation among the parties. In conjunction with the settlement, we reversed $1.4 million of net liabilities payable to EDAC.

In addition to the matters described above, we are from time to time involved in various legal proceedings incidental to the conduct of our business. The legal proceedings potentially cover a variety of allegations spanning our entire business. Although the outcome of legal proceedings is inherently uncertain, we believe 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 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, 2012 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, 2012.

31

ITEM 6. EXHIBITS

3.2	Amended and Restated By-Laws, as amended through July 28, 2012, filed herewith
10.14	Form of Comarco, Inc. Indemnification Agreement for Officers and Directors, filed herewith
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extension Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

32

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: September 14, 2012	/s/ THOMAS W. LANNI
	Thomas W. Lanni
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: September 14, 2012	/s/ ALISHA K. CHARLTON
	Alisha K. Charlton
	Vice President and Chief Accounting Officer
	(Principal Financial and Accounting Officer)

33

EXHIBIT INDEX

Exhibit	Description
3.2	Amended and Restated By-Laws, as amended through July 28, 2012, filed herewith
10.14	Form of Comarco, Inc. Indemnification Agreement for Officers and Directors, filed herewith
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extension Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

34

EX-3.2

AMENDED AND RESTATED BYLAWS

Restated as of August 1, 1996, June 26, 2001, February 4, 2003, April 10, 2007,

July 17, 2007, March 1, 2008, March 10, 2008, June 24, 2008, February 18, 2009 August 20,

2009, February 23, 2011, April 5, 2011, July 21, 2011, August 15, 2011 and July 28, 2012

COMARCO, INC.

July 28, 2012

TABLE OF CONTENTS

				Page
ARTICLE I		APPLICABILITY			1
	Section 1.		Applicability of Bylaws		1
ARTICLE II		OFFICES			1
	Section 1.		Principal Executive Office		1
	Section 2.		Other Offices		1
	Section 3.		Change in Location or Number of Offices		1
ARTICLE III		MEETINGS OF SHAREHOLDERS			1
	Section 1.		Place of Meetings		1
	Section 2.		Annual Meetings		2
	Section 3.		Special Meetings.		2
	Section 4.		Notice of Annual, Special or Adjourned Meetings.		2
	Section 5.		Record Date.		3
	Section 6.		Quorum; Action at Meetings.		4
	Section 7.		Adjournment		4
	Section 8.		Validation of Defectively Called, Noticed or Held Meetings.		4
	Section 9.		Voting for Election of Directors.		5
	Section 10.		Proxies		5
	Section 11.		Inspectors of Election.		6
	Section 12.		No Action by Written Consent		6
	Section 13.		Advance Notice of Shareholder Business and Nominations		6
	Section 14.		Order of Business		10
ARTICLE IV		DIRECTORS			10
	Section 1.		Number of Directors.		10
	Section 2.		Election of Directors		11
	Section 3.		Term of Office		11
	Section 4.		Vacancies.		11
	Section 5.		Removal.		11
	Section 6.		Resignation		11
	Section 7.		Fees and Compensation		12

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TABLE OF CONTENTS

(continued)

				Page
ARTICLE V		COMMITTEES OF THE BOARD OF DIRECTORS			12
	Section 1.		Designation of Committees		12
	Section 2.		Powers of Committees		12
ARTICLE VI		MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES THEREOF			12
	Section 1.		Place of Meetings		12
	Section 2.		Organization Meeting		13
	Section 3.		Other Regular Meetings		13
	Section 4.		Special Meetings		13
	Section 5.		Notice of Special Meetings.		13
	Section 6.		Validation of Defectively Held Meetings		13
	Section 7.		Quorum of Meetings.		13
	Section 8.		Adjournment		14
	Section 9.		Motion Without a Meeting		14
	Section 10.		Meeting of and Actions by Committees		14
ARTICLE VII		OFFICERS			14
	Section 1.		Officers		14
	Section 2.		Selection of Officers		14
	Section 3.		Subordinate Officers		14
	Section 4.		Removal and Resignation.		15
	Section 5.		Vacancies		15
	Section 6.		Chairman of the Board		15
	Section 7.		President		15
	Section 8.		Vice President		15
	Section 9.		Secretary.		15
	Section 10.		Chief Financial Officer.		16
ARTICLE VIII		RECORDS AND REPORTS			16
	Section 1.		Minute Book - Maintenance and Inspection		16
	Section 2.		Share Register - Maintenance and Inspection		16
	Section 3.		Books and Records of Account - Maintenance and Inspection		16

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TABLE OF CONTENTS

(continued)

				Page
	Section 4.		Bylaws - Maintenance and Inspection		16
ARTICLE IX		MISCELLANEOUS			17
	Section 1.		Checks, Drafts, Etc		17
	Section 2.		Contracts, Etc. - How Executed		17
	Section 3.		Certificates; Direct Registration System		17
	Section 4.		Lost Certificates		17
	Section 5.		Representation of Shares of Other Corporations		18
	Section 6.		Construction and Definitions		18
	Section 7.		Indemnification of Corporate Agent; Purchase of Liability Insurance		18
ARTICLE X		AMENDMENTS			19
	Section 1.		Amendments		19

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AMENDED AND RESTATED BYLAWS

OF

COMARCO, INC.

A CALIFORNIA CORPORATION

Amended and Restated as of August 20, 2009

ARTICLE I

APPLICABILITY

Section 1. Applicability of Bylaws. These Bylaws govern, except as otherwise provided by statute or its Articles of Incorporation, the management of the business and the conduct of the affairs of the Corporation.

ARTICLE II

OFFICES

Section 1. Principal Executive Office. The location of the principal executive office of the Corporation is 25541 Commercentre Drive, Lake Forest, CA 92630.

Section 2. Other Offices. The Board of Directors may establish other offices at any place or places within or without the State of California.

Section 3. Change in Location or Number of Offices. The Board of Directors may change any office from one location to another or eliminate any office or offices.

ARTICLE III

MEETINGS OF SHAREHOLDERS

Section 1. Place of Meetings. Meetings of the shareholders shall be held at any place within or without the State of California designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the Corporation.

Section 2. Annual Meetings. An annual meeting of the shareholders shall be held each fiscal year of the Corporation at a date and time designated by the Board of Directors. Directors shall be elected at each annual meeting and any other proper business that may come before such meeting may be transacted thereat.

Section 3. Special Meetings.

(a) Special meetings of the shareholders may be called by a majority of the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than 10 percent of the votes on the record date established for such meeting. The person or persons calling any such meeting shall concurrently specify the purpose of such meeting and the business proposed to be transacted at such meeting (which must constitute a proper matter for shareholder action under California law) and if such person or persons calling the meeting are shareholders, include the information required by Section 13(a)(iii) of this Article III to the extent applicable.

(b) In connection with any special meeting called in accordance with the provisions of this Section 3, upon request in writing sent by registered mail to the Chairman of the Board, the President, a Vice President or the Secretary of the Corporation, or delivered to any such officer in person, by the person or persons calling such meeting (such request, if sent by a shareholder or shareholders, to include the information required by Section 13(a)(iii) of this Article), it shall be the duty of such officer, subject to the immediately succeeding sentence, to cause notice of such meeting to be given in accordance with Section 4 of this Article and, in connection therewith, to establish the place and, subject to Section 601(c) of the California Corporations Code, the date and hour of such meeting. Within five (5) business days after receiving such a request from a shareholder or shareholders of the Corporation, the Board of Directors shall determine whether such shareholder or shareholders have satisfied the requirements for calling a special meeting of the shareholders and notify the requesting party or parties of its finding. Nothing contained in this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by a member of the Board of Directors may be held.

Section 4. Notice of Annual, Special or Adjourned Meetings.

(a) Whenever any meeting of the shareholders is to be held, a written notice of such meeting shall be given in the manner described in subdivision (d) of this Section not less than 10 nor more than 60 days before the date thereof to each shareholder entitled to vote thereat. The notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the giving of the notice, intend to present for action by the shareholders including, whenever directors are to be elected at a meeting, the names of nominees intended at the time of giving of the notice to be presented by management for election.

(b) Any proper matter may be presented at an annual meeting for action, except as is provided in subdivision (f) of Section 601 of the Corporations Code of the State of California.

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(c) Notice need not be given of an adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except that if the adjournment is for more than 45 days or if after the adjournment a new record date is provided for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat.

(d) Notice of any meeting of the shareholders or any report shall be given either personally or by first class mail, postage prepaid, or other means of written communication, addressed to the shareholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice; or if no such address appears or is given at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of these Bylaws or the General Corporation Law of the State of California, executed by the Secretary, assistant secretary or any transfer agent of the Corporation, shall be prima facie evidence of the giving of the notice or report.

(e) If any notice or report addressed to the shareholder at his address appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon his written demand at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders.

Section 5. Record Date.

(a) The Board of Directors may fix a time in the future as a record date for the determination of the shareholders (1) entitled to notice of any meeting or to vote thereat, (2) entitled to receive payment of any dividend or other distribution or allotment of any rights or (3) entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall be not more than 60 nor less than 10 days prior to the date of any meeting of the shareholders nor more than 60 days prior to any other action.

(b) In the event no record date is fixed:

(1) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.

(2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given.

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(3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later.

(c) Only shareholders of record at the close of business on the record date are entitled to notice and to vote or to receive a dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date.

(d) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting.

Section 6. Quorum; Action at Meetings.

(a) A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders.

(b) Except as provided in subdivision (c) of this Section, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number is required by law or the Articles of Incorporation.

(c) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

Section 7. Adjournment. Any meeting of the shareholders may be adjourned from time to time whether or not a quorum is present by the vote of a majority of the shares represented thereat either in person or by proxy. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting.

Section 8. Validation of Defectively Called, Noticed or Held Meetings.

(a) The transactions of any meeting of the shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote thereat, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

(b) Attendance of a person at a meeting shall constitute a waiver of notice of, and presence at, such meeting, except (1) when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and (2)

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that attendance at a meeting is not a waiver of any right to object to the consideration of any matter required by the General Corporation Law of the State of California to be included in the notice but not so included, if such objection is expressly made at the meeting.

(c) Any written waiver of notice shall comply with subdivision (f) of Section 601 of the Corporations Code of the State of California.

Section 9. Voting for Election of Directors.

(a) Every shareholder complying with subdivision (b) of this Section and entitled to vote at any election of directors may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are normally entitled, or distribute his votes on the same principle among as many candidates as he thinks fit.

(b) No shareholder shall be entitled to cumulate his votes (i.e., cast for any one candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless such candidates or candidates’ names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting, prior to the voting, of his intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination.

(c) Elections for directors may be by voice vote or by ballot unless any shareholder entitled to vote demands election by ballot at the meeting prior to the voting, in which case the vote shall be by ballot.

(d) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected as directors.

Section 10. Proxies.

(a) Every person entitled to vote shares may authorize another person or persons to act with respect to such shares by a written proxy signed by him or his attorney-in-fact and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by him or his attorney-in-fact.

(b) Any duly executed proxy shall continue in full force and effect until the expiration of the term specified therein or upon its earlier revocation by the person executing it prior to the vote pursuant thereto (1) by a writing delivered to the Corporation stating that it is revoked, (2) by a subsequent proxy executed by the person executing the proxy and presented to the meeting or (3) by the attendance at the meeting and voting in person by the person executing the proxy. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. The date contained on the form of proxy shall be deemed to be the date of its execution.

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(c) A proxy which states that it is irrevocable, is irrevocable for the period specified therein subject to the provisions of subdivisions (e) and (f) of Section 705 of the Corporations Code of the State of California.

Section 11. Inspectors of Election.

(a) In advance of any meeting of the shareholders, the Board of Directors may appoint either one or three persons (other than nominees for the office of director) as inspectors of election to act at such meeting or any adjournments thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse to act) at the meeting. If appointed at a meeting on the request of one or more shareholders or the proxies thereof, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed.

(b) The duties of inspectors of election and the manner of performance thereof shall be as prescribed in Section 707 of the Corporations Code of the State of California.

Section 12. No Action by Written Consent. Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual meeting or special meeting of shareholders of the Corporation.

Section 13. Advance Notice of Shareholder Business and Nominations.

(a) Annual Meetings of Shareholders.

(i) At an annual meeting of the shareholders, only such business will be conducted or considered as is properly brought before the meeting. At an annual meeting, nominations of persons for election to the Board of Directors and the proposal of business to be considered by the shareholders may be made only (a) pursuant to the Corporation’s notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or any duly authorized committee thereof, or (c) by any shareholder of the Corporation who was a shareholder of record of the Corporation at the time the notice provided for in this Section 13(a) is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting, and who complies with the notice procedures and requirements set forth in this Section 13(a).

(ii) For nominations or other business to be properly brought before an annual meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation and any such proposed business must constitute a proper matter for shareholder action under California law. To be timely, a shareholder’s notice shall be received by the Secretary at the principal executive offices of the Corporation not less than 45 or more than 75 days prior to the one-year anniversary of the date on which the Corporation first mailed its proxy materials for the immediately preceding year’s annual meeting of shareholders; provided, however, that if the annual meeting is convened more than 30 days before, or delayed by more than 30 days after, the one-year anniversary of the immediately preceding year’s annual meeting of shareholders, notice by the shareholder to be timely must be so received by the Secretary at the principal executive offices not later than the

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close of business on the later of (i) the 90th day before such annual meeting or (ii) the 10th day following the day on which Public Announcement (as defined below in Section 13(c)(ii)) below of the date of such meeting is first made. Notwithstanding anything in the preceding sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors at the annual meeting is increased to a number above the authorized number of directors immediately before such election, and there is no Public Announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 10 days before the last day a shareholder may deliver a notice of nomination in accordance with the preceding sentence, a shareholder’s notice shall also be considered timely, but only with respect to nominees for director for any new positions created by such increase, if it shall be received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such Public Announcement is first made by the Corporation. In no event shall the Public Announcement of an adjournment or postponement of an annual meeting of shareholders commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above.

(iii) To be in proper written form, a shareholder’s notice (whether pursuant to Section 3, this Section 13(a) or Section 13(b)) must set forth, as applicable:

(A) as to each person, if any, whom the shareholder proposes to nominate for election as a director (x) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Exchange Act and (y) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected;

(B) if the notice relates to any business (other than the nomination of persons for election as directors) that the shareholder proposes to bring before the meeting, (w) a brief description of the business desired to be brought before the meeting, (x) the full and complete text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Articles of Incorporation or the Bylaws of the Corporation, the language of the proposed amendment), (y) the reasons for conducting such business at the meeting, and (z) any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and

(C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (t) the name and address of such shareholder, as they appear on the Corporation’s books, and of such beneficial owner, (u) the class or series and number of shares of capital stock of the Corporation that are, directly or indirectly, owned beneficially and of record by such shareholder and by such beneficial owner, including any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock

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of the Corporation or otherwise (a “Derivative Instrument”) directly or indirectly owned beneficially by each such party, and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation, (v) any proxy, contract, arrangement, understanding, or relationship pursuant to which either party has a right to vote any shares of any security of the Company, (w) any short interest in any security of the Company held by each such party, (x) any rights to dividends on the shares of the Corporation owned beneficially by each such party that are separated or separable from the underlying shares of the Corporation, (y) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which either party is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and (z) any performance-related fees (other than an asset-based fee) that each such party is entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, in each case with respect to clauses (t) through (z) herein as of the close of business on the date of such notice, including without limitation any such interests held by members of each such party’s immediate family sharing the same household (which information set forth in this paragraph shall be supplemented by such stockholder or such beneficial owner, as the case may be, not later than 10 days after the record date for the meeting to disclose such ownership as of the close of business on the record date);

(D) any other information relating to each such party that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act; and

(E) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and

(F) a representation whether the shareholder or the beneficial owner, if any, intends or is part of a group that intends (y) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee or (z) otherwise to solicit proxies from shareholders in support of such proposal or nomination.

The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine (i) the eligibility of such proposed nominee to serve as a director of the Corporation, and (ii) whether such nominee qualifies as an “independent director” or “audit committee financial expert” under applicable law, securities exchange rule or regulation, or any publicly-disclosed corporate governance guideline or committee charter of the Corporation.

(b) Special Meetings of Shareholders.

(i) At a special meeting of shareholders, only such business may be conducted or considered as is properly brought before such special meeting and any such proposed business must constitute a proper matter for shareholder action under California law. At a special meeting, business must be (y) specified in the notice of the meeting (or any

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supplement thereto) given by or at the direction of the chairman of the board of directors, the president, a vice president or the secretary or (z) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the board of directors.

(ii) Any shareholder or shareholders seeking to call a special meeting pursuant to Section 3 of this Article III of these Bylaws, shall provide information in such shareholder’s notice in the same form as required by sub-section (a)(iii) of this Section 13, to the extent applicable, in any request made pursuant to such Section.

(iii) In the event a special meeting of shareholders is called for the purpose of electing one or more directors to the Board of Directors, any such shareholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, only if the shareholder’s notice in the same form as required by sub-section (a)(iii) of this Section 13 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of (y) the 90th day prior to such special meeting or (z) the 10th day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above.

(c) General.

(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 13 shall be eligible to be elected at an annual or special meeting of shareholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 13. Notwithstanding the foregoing provisions of this Section 13, unless otherwise required by law, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or special meeting of shareholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be considered, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 5.13, to be considered a qualified representative of the shareholder, a person must be authorized by a writing executed by such shareholder or an electronic transmission delivered by such shareholder to act for such shareholder as proxy at the meeting of shareholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of shareholders.

(ii) For purposes of this Section 13, “Public Announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act.

(iii) Notwithstanding the foregoing provisions of this Section 13, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules

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and regulations thereunder with respect to matters set forth in this Section 13. Nothing in this Section 13 shall be deemed to affect any rights (a) of shareholders to request inclusion of proposals or nominations in the Corporation’s proxy statement pursuant to Rule 14a-8 (or any successor thereto) promulgated under the Exchange Act or (b) of the holders of any series of Preferred Stock to nominate and elect directors pursuant to and to the extent provided in any applicable provisions of the articles of incorporation.

Section 14. Order of Business. The chairman of the board of directors, or such other officer of the Corporation designated by a majority of the board of directors, will call meetings of the shareholders to order and will act as presiding officer thereof. Unless otherwise determined by the board of directors prior to the meeting, the presiding officer of the meeting of the shareholders will also determine the order of business and have the authority in his or her sole discretion to regulate the conduct of any such meeting, including without limitation by (i) imposing restrictions on the persons (other than shareholders of the corporation or their duly appointed proxies) who may attend any such shareholders’ meeting, (ii) ascertaining whether any shareholder or his proxy may be excluded from any meeting of the shareholders based upon any determination by the presiding officer, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and (iii) determining the circumstances in which any person may make a statement or ask questions at any meeting of the shareholders. The determination of whether any business sought to be brought before any annual or special meeting of the shareholders is properly brought before such meeting in accordance with Article III of these Bylaws, and whether any nomination of a person for election as a director of the Corporation at any meeting of the shareholders was properly made in accordance with this Article III of these Bylaws will be made by the presiding officer of such meeting. If the presiding officer determines that any business is not properly brought before such meeting, or any nomination was not properly made, he will so declare to the meeting and any such business will not be conducted or considered and any such nomination will be disregarded.

ARTICLE IV

DIRECTORS

Section 1. Number of Directors.

(a) The authorized number of directors shall be no less than four nor more than seven. The exact number of directors shall be fixed from time to time, within the limits specified in this subdivision, by an amendment of subdivision (b) of this Section adopted by the Board of Directors.

(b) The exact number of directors shall be seven, until changed as provided in subdivision (a) of this Section.

(c) The maximum or minimum authorized number of directors may only be changed by an amendment of this Section approved by the vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the minimum number to a number less than five shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the case of action by written consent)

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exceed 16 -2/3% of such outstanding shares; and provided, further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one.

Section 2. Election of Directors. Directors shall be elected at each annual meeting of the shareholders.

Section 3. Term of Office. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which he is elected and until a successor has been elected.

Section 4. Vacancies.

(a) A vacancy in the Board of Directors exists whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors, or otherwise.

(b) Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director shall be filled only by shareholders.

(c) The shareholder may elect a director at any time to fill any vacancy not filled by the directors.

Section 5. Removal.

(a) The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony.

(b) Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) if whenever the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected.

(c) Any reduction of the authorized number of directors does not remove any director prior to the expiration of his term of office.

Section 6. Resignation. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective.

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Section 7. Fees and Compensation. Directors may be paid for their services in such capacity a sum in such amounts, at such times and upon such conditions as may be determined from time to time by resolution of the Board of Directors, and may be reimbursed for their expenses, if any, incurred in such capacity, including (without limitation) expenses of attendance at any meeting of the Board. No such payments shall preclude any director from serving the Corporation in any other capacity and receiving compensation in any manner therefor.

ARTICLE V

COMMITTEES OF THE BOARD OF DIRECTORS

Section 1. Designation of Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate (1) one or more committees, each consisting of two or more directors and (2) one or more directors as alternate members of any committee, who may replace any absent member at any meeting thereof. Any member or alternate member of a committee shall serve at the pleasure of the Board.

Section 2. Powers of Committees. Any committee, to the extent provided in the resolution of the Board of Directors designating such committee, shall have all the authority of the Board, except with respect to:

(a) The approval of any action for which the General Corporation Law of the State of California also requires any action by the shareholders;

(b) The filling of vacancies on the Board or in any committed thereof;

(c) The fixing of compensation of the directors for serving on the Board or on any committee thereof;

(d) The amendment or repeal of these Bylaws or the adoption of new bylaws;

(e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable;

(f) A distribution to the shareholders of the Corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or

(g) The designation of other committees of the Board or the appointment of members or alternate members thereof.

ARTICLE VI

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES THEREOF

Section 1. Place of Meetings. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated from time to time by the Board, or, in the absence of such designation, at the principal executive office of the Corporation. Special meetings of the Board shall be held either at any place within or without the State of California which has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Corporation.

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Section 2. Organization Meeting. Immediately following each annual meeting of the shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization and transaction of other business. Notice of any such meeting is not required.

Section 3. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held without call at such time as shall be designated from time to time by the Board. Notice of any such meeting is not required.

Section 4. Special Meetings. Special meetings of the Board of Directors may be called at any time for any purpose or purposes by the Chairman of the Board or the President or any Vice President or the Secretary or any two directors. Notice shall be given of any special meeting of the Board.

Section 5. Notice of Special Meetings.

(a) Notice of the time and place of special meetings of the Board of Directors shall be delivered personally to each director or sent to each director by first class mail or telegraph, charges prepaid, telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, electronic mail, or other electronic means. Such notice shall be given four days prior to the holding of the special meeting if sent by mail or 48 hours prior to the holding thereof if delivered personally or given by telephone, telegraph, facsimile, electronic mail, or other electronic means permitted in this Section. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of communication permitted in this Section.

(b) Notice of any special meeting of the Board of Directors need not specify the purpose thereof and need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him.

Section 6. Validation of Defectively Held Meetings. The transactions of any meetings of the Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. Such waivers, consents and approvals (a) need not specify the purpose of any meeting of the Board of Directors and (b) shall be filed with the corporate records or made a part of the minutes of the meeting.

Section 7. Quorum of Meetings.

(a) A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, unless action by a greater proportion of the directors is required by law or the Articles of Incorporation.

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(b) A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting.

(c) Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment so long as all members participating in such meeting can hear one another. Participation in a meeting by this means constitutes presence at such meeting.

Section 8. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting for another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.

Section 9. Motion Without a Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors.

Section 10. Meeting of and Actions by Committees. The provisions of this Article apply to committees of the Board of Directors and action by such committees with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board and its members.

ARTICLE VII

OFFICERS

Section 1. Officers. The Corporation shall have as officers, a President, a Secretary, and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article.

Section 2. Selection of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors.

Section 3. Subordinate Officers. The Board of Directors may appoint by resolution, and may empower the Chairman of the Board, if there be such an officer, or the President, to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are determined from time to time by resolution of the Board or, in the absence of any such determination, as are provided in these Bylaws. Any appointment of an officer shall be evidenced by a written instrument filed with the Secretary of the Corporation and maintained with the corporate records.

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Section 4. Removal and Resignation.

(a) Any officer may be removed, either with or without cause, by the Board of Directors or, except in case of any officer chosen by the Board, by any officer upon whom such power of removal may be conferred by resolution of the Board.

(b) Any officer may resign at any time effective upon giving written notice to the Chairman of the Board, President, any vice president, or Secretary of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation.

Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office.

Section 6. Chairman of the Board. If there is a Chairman of the Board, he shall, if present, preside at all meetings of the Board of Directors and at all meetings of the shareholders, exercise and perform such other powers and duties as may be from time to time assigned to him by resolution of the Board and, if there is no President, the Chairman of the Board shall be the chief executive officer of the Corporation and have the power and duties set forth in Section 7 of this Article.

Section 7. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an Officer, the President shall be the Chief Executive Officer and General Manager of the Corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. In the absence of the Chairman of the Board or if there be none, the President shall preside at all meetings of the shareholders and at all meetings of the board. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by resolution of the Board.

Section 8. Vice President. In the absence or disability of the President, the vice presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or as the President may from time to time delegate.

Section 9. Secretary.

(a) The Secretary shall keep or cause to be kept (1) the minute book, (2) the share register and (3) the seal, if any, of the Corporation.

(b) The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board.

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Section 10. Chief Financial Officer.

(a) The Chief Financial Officer shall perform the duties of a chief financial officer of a corporation. The Chief Financial Officer also shall keep, or cause to be kept, the books and records of account of the Corporation.

(b) The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated from time to time by resolution of the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and Board, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board or as the President may from time to time delegate.

ARTICLE VIII

RECORDS AND REPORTS

Section 1. Minute Book - Maintenance and Inspection. The Corporation shall keep or cause to be kept in written form at its principal executive office or such other place as the Board of Directors may order, a minute book which shall contain a record of all actions by its shareholders, Board or committees of the Board including the time, date and place of each meeting; whether a meeting is regular or special and, if special, how called; the manner of giving notice of each meeting and a copy thereof; the names of those present at each meeting of the Board or committees thereof; the number of shares present or represented at each meeting of the shareholders; the proceedings of all meetings; any written waivers of notice, consents to the holding of a meeting or approval of the minutes thereof; and written consents for action without a meeting.

Section 2. Share Register - Maintenance and Inspection. The Corporation shall keep or cause to be kept at its principal executive office or, if so provided by resolution of the Board of Directors, at the Corporation’s transfer agent or registrar, a share register, or a duplicate share register, which shall contain the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation.

Section 3. Books and Records of Account - Maintenance and Inspection. The Corporation shall keep or cause to be kept at its principal executive office or such other place as the Board of Directors may order, adequate and correct books and records of account

Section 4. Bylaws - Maintenance and Inspection. The Corporation shall keep at its principal executive office or, in the absence of such office in the State of California, at its principal business office in that state, the original or a copy of the Bylaws as amended to date.

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ARTICLE IX

MISCELLANEOUS

Section 1. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, and any assignment or endorsement thereof, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors.

Section 2. Contracts, Etc. - How Executed. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confirmed to specific instances; and, unless so authorized or ratified by the Board, no officer, employee or other agent shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount

Section 3. Certificates; Direct Registration System.

(a) Shares of the Corporation’s capital stock may be certificated or uncertificated, as provided under California law. Any certificates that are issued shall be signed in the name of the Corporation by the Chairman of the Board or the President or a Vice President and by the Treasurer or an assistant treasurer or the Secretary or an assistant secretary, certifying the number of shares and the class or series thereof owned by the shareholder. Any or all of the signatures on a certificate may be by facsimile signature. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Shares of the Corporation’s capital stock may also be evidenced by registration in the holder’s name in uncertificated, book-entry form on the books of the Corporation in accordance with a direct registration system approved by the Securities and Exchange Commission and by the NASDAQ Stock Market or any securities exchange on which the stock of the Corporation may from time to time be traded.

(b) Transfers of shares of stock of the Corporation shall be made by the transfer agent and registrar on the books of the Corporation after receipt of a request with proper evidence of succession, assignment, or authority to transfer by the record holder of such stock, or by an attorney lawfully constituted in writing, and in the case of stock represented by a certificate, upon surrender of the certificate. Subject to the foregoing, the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer, and registration of shares of stock of the Corporation, and to appoint and remove transfer agents and registrars of transfers.

Section 4. Lost Certificates. Except as provided in this Section, no new certificates for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Board of Directors may in case any share

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certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof (or uncertificated shares in lieu of a new certificate), upon such terms and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.

Section 5. Representation of Shares of Other Corporations. Any person designated by resolution of the Board of Directors or, in the absence of such designation, the Chairman of the Board, the President or any Vice President or the Secretary, or any other person authorized by any of the foregoing, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, owned by the Corporation.

Section 6. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the Corporations Code of the State of California shall govern the construction of these Bylaws.

Section 7. Indemnification of Corporate Agent; Purchase of Liability Insurance.

(a) The Corporation shall, to the maximum extent permitted by the General Corporation Law of the State of California, and as the same may from time to time be amended, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding to which such person was or is a party or is threatened to be made a party arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 7, an “agent” of the Corporation includes any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; “proceeding” means any threatened, pending or completed action or proceeding, whether civil, criminal administrative or investigative, and includes an action or proceeding by or in the right of the Corporation to procure a judgment in its favor; and “expense” includes attorney’s fees and any expenses of establishing a right to indemnification under this subdivision (a).

(b) The right of indemnification provided in this Section shall inure to each person referred to herein, and shall extend to his legal representatives in the event of his death. The right of indemnification provided herein shall not be exclusive of any other rights to which any such person, or any other individual, may be entitled as a matter of law, or pursuant to any agreement, vote of directors or shareholders or otherwise.

(c) The Corporation shall, if and to the extent the Board of Directors so determines, by resolution, purchase and maintain insurance in an amount and on behalf of such agents of the Corporation as the Board may specify in such resolution against any liability asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such whether or not the Corporation would have the capacity to indemnify the agent against such liability under the provisions of this Section.

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ARTICLE X

AMENDMENTS

Section 1. Amendments. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote. Subject to the next preceding sentence, bylaws (other than a bylaw or amendment thereof specifying or changing a fixed number of directors or the maximum or minimum number, or changing from a fixed to a variable board or vice versa) may be adopted, amended or repealed by the Board of Directors.

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EX-10.14

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the “Agreement”), is made and entered into this     day of         , 20XX, by and between COMARCO, Inc. a California corporation (the “Company”), and                     (the “Indemnitee”) with reference to the following facts:

A. Indemnitee is an agent, officer and/or director of the Company.

B. The Company has determined that, to retain highly competent persons as agents, officers and directors of the Company, such persons should be adequately protected against liabilities incurred in the performance of their duties in such capacities.

C. The Company desires to provide Indemnitee with the protection provided for below.

NOW, THEREFORE, it is agreed as follows:

1. Definitions. For purposes of this Agreement, the following terms shall have the meaning set forth below:

(a) “Agent” of the Company shall mean any person who is or was a director, officer, employee or other agent of the Company; or is or was serving at the request of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company; or was a director, officer, employee or agent of another enterprise at the request of such predecessor corporation.

(b) “Expenses” shall include without limitation attorneys’ fees and any expenses of establishing a right to indemnification under this Agreement, Section 317 of the California Corporation Code or otherwise.

(c) “Proceeding” shall mean any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative or investigative.

2. Agreement to Serve. Indemnitee will continue to serve as an Agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an Agent of the Company, so long as he is duly elected or appointed and qualified in accordance with the By-Laws of the Company, or until he tenders his written resignation therefrom; provided, however, that nothing contained herein shall create or is intended to create any right to continued employment of Indemnitee by the Company.

3. Indemnification. The Company hereby agrees to indemnify Indemnitee, and hold Indemnitee harmless form and against:

(a) If Indemnitee was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Company to procure a judgement in its favor) by reason of the fact that Indemnitee is or was an Agent of the Company, or by reason of anything done or not done by him in such capacity, any and all Expenses, judgments, fines, settlements and other amounts actually and reasonably incurred by him in connection with such Proceeding if Indemnitee acted in good faith and in a manner he reasonably believed to be in the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful.

(b) If Indemnitee was or is a party to or is threatened to be made a party to any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Agent of the Company, or by reason of anything done or not done by him in any such capacity, any and all Expenses actually and reasonably incurred by him in connection with the defense or settlement of such Proceeding if he acted in good faith and in a manner he believe to be in the best interests of the Company and its shareholders; except that no indemnification shall be made hereunder in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of his duty to the Company and its shareholders unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses and then only to the extent that the court shall determine.

C-1

(c) If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some, but not all, of any Expenses incurred by him, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

(d) This Agreement and the indemnification provided for hereunder shall apply only to Proceedings based on or arising out of facts or errors, acts or omissions by Indemnitee initiated or occurring after the effective date of this Agreement.

4. Advancement of Expenses. Subject to Section 9 and Section 10 hereof, the Company shall advance all Expenses incurred by Indemnitee in defending any Proceeding to which Indemnitee is a party or is threatened to be made a party by reason of the fact that Indemnitee is or was an Agent of the Company prior to the final disposition thereof upon receipt by the Company of an agreement by or on behalf of Indemnitee to repay the Company such advanced amount if it shall be determined ultimately that Indemnitee is not entitled to be indemnified by the company as authorized hereby. The advances of Expenses to be made hereunder shall be paid by the Company to Indemnitee within 30 days following delivery of a written request therefor by Indemnitee to the Company.

5. Indemnification Procedure; Determination of Right to Indemnification.

(a) Promptly upon receipt by Indemnitee of notice of the commencement of, or the threatened commencement of, any Proceeding against him, Indemnitee shall give written notice thereof to the Company.

(b) If, at the time of receipt of the written notice specified in subparagraph (a) above, the Company has in effect directors’ and officers’ liability insurance, the Company shall promptly notify its insurer or insurers of the matters contained in such written notice in accordance with the terms of such insurance policy or policies and shall thereafter take all action necessary to cause such insurer or insurers to pay, on Indemnitee’s behalf, all amounts payable as a result of such Proceeding or threatened Proceeding in accordance with the terms of such policies. If the Company does not have such insurance covering the actions arising out of the Proceeding, or threatened Proceeding, or the Company determines that any Expenses will not be payable under such insurance, the Company shall assume defense of such Proceeding, or threatened Proceeding, with counsel reasonably satisfactory to Indemnitee. Thereafter, the Company shall not be liable to Indemnitee under this Agreement for any attorneys’ fee subsequently incurred by Indemnitee with respect to the defense of such Proceeding(s) provided that Indemnitee shall have the right to employ, at his expense, counsel of his choice in such Proceeding(s) and provided further that if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is or may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such Proceeding(s) or (C) the Company shall not, in fact, employ counsel to assume the defense of such Proceeding(s), then the reasonable fees and expenses of counsel for Indemnitee shall be borne by the Company.

(c) Except as provided in Section 4 hereof, all payments on account of the Company’s indemnification obligations hereunder shall be made within 60 days of Indemnitee’s written request therefor unless it is determined by (A) the Board of Directors of the Company by a majority vote of a quorum thereof consisting of directors who are not parties to the Proceeding for which indemnification is sought; (B) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (C) by the shareholders of the Company within said 60 day period that Indemnitee has not met the applicable standard of conduct set forth in Section 3 hereof and is not entitled to such indemnification. Notwithstanding a determination that Indemnitee is not entitled to indemnification under Section 3 hereof, Indemnitee shall have the right to apply to any court of competent jurisdiction for the purpose of enforcing Indemnitees right to indemnification pursuant to this Agreement.

6. Non-Exclusivity. The indemnification and advancement of Expenses provided for in this Agreement shall not be exclusive of other rights Indemnitee may have under applicable law, other agreements between the Company and Indemnitee, the Company’s Articles of Incorporation or By-Laws or by vote of the Company’s shareholders or disinterested directors or otherwise.

C-2

7. Continuation of Indemnity. The indemnification and advancement of Expenses by the Company to Indemnitee provided for under this Agreement shall survive and continue after termination of Indemnitee as an officer, director, employee or other agent of the Company as to any acts or omissions by Indemnitee while serving in such capability.

8. No Presumption. The termination of any Proceeding against Indemnitee by judgement, order, settlement (with or without court approval) or conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in the best interests of the Company and, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

9. Limitations on Indemnification. To the extent that Indemnitee has been successful on the merits in defense of any Proceeding referred to in Section 3 hereof, or in defense of any claim, issue or matter described therein, the Company shall indemnify Indemnitee and hold him harmless from and against all Expenses actually and reasonably incurred by him in connection therewith. Notwithstanding the foregoing or any other provision of this Agreement, the Company shall not be liable hereunder to indemnify Indemnitee (a) if Indemnitee is or was a director of the Company, for any acts, omissions or transactions by him in such capacity from which he may not be relieved of liability as set forth in Section 204(a)(10) of the California Corporation Code, (b) as to any circumstances in which indemnity is expressly prohibited by Section 317 of the California Corporations Code, (c) in connection with any Proceeding or threatened Proceeding (i) initiated or brought voluntarily by Indemnitee and not by way of defense, unless, subject to subparagraph (g) below, brought to establish or enforce a right of indemnification under this Agreement or any statute or law or otherwise under said Section 317, provided however, that indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors of the Company, in its sole discretion, finds it to be appropriate, or (ii) against indemnitee:

(a) Which is settled by Indemnitee unless Indemnitee gives written notice of the threatened Proceeding in accordance with Section 5(a) hereof and the Company consents to such settlement;

(b) For which Indemnitee is otherwise indemnified by the Company;

(c) For which Indemnitee has been paid or is entitled to be paid by an insurance company under any insurance policy maintained by the Company;

(d) If a court of competent jurisdiction determines that indemnification relating to such claim would be unlawful;

(e) If, pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provision of any state or federal securities law, a claim is made for an accounting of profits arising from the purchase and sale by Indemnitee of securities of the Company;

(f) If a court of competent jurisdiction determines that Indemnitee’s conduct was knowingly fraudulent or deliberately dishonest and was material to the claim adjudicated by the court; or

(g) If a court of competent jurisdiction determines that the material assertions made by Indemnitee in a Proceeding instituted by him to enforce or interpret the provisions hereof was not made in good faith or was frivolous.

10. Additional Indemnification. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent now or hereafter permitted by law, although such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Articles of Incorporation, the Company’s By-Laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a California corporation to indemnify a director or an officer of the Company, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and the Company’s obligations under this Agreement. In the event of any change, after the date hereof, in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a director or an officer of the Company, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on the Agreement or the parties’ rights and obligations under this Agreement.

C-3

11. Savings Clause. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions (including any Section or subparagraph hereof containing an invalid, illegal or unenforceable provision) shall not be impaired thereby. To the extent practicable, any invalid, illegal or unenforceable provision of this Agreement shall be deemed modified as necessary to comply with all applicable laws.

12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

13. Gender; Plural. For purposes hereof, the masculine gender shall include the feminine and neutral and the singular shall include the plural and vice-versa.

14. Headings; Governing Law. The Section headings used herein are for convenience of reference only and shall not be used in construing the meaning of any provision hereof. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California.

15. Notices. All notices or other communication hereunder shall be in writing and shall be deemed to be effective and to have been duly given upon delivery, if personally delivered, or upon deposit in the mail if delivered by certified mail, postage prepaid, return receipt requested, to the respective parties, as follows:

If to Company:	COMARCO, Inc.
	22541 Commercentre Drive
	Lake Forest, CA 92630
If to Indemnitee:

or to such other address as a party may have furnished to the other in writing in accordance with this paragraph, except that notice of change of address shall only be effective upon receipt.

16. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.

17. Amendment and Waiver. No supplement, modification or amendment of the Agreement shall be binding unless set forth in a writing executed by both parties hereto. No waiver of any provision of this Agreement shall be deemed or constitute a waiver of any other provision hereof nor shall such waiver constitute a continuing waiver.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the date first above written.

COMARCO, Inc.

C-4

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Thomas W. Lanni, President and Chief Executive Officer of Comarco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comarco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 14, 2012	/s/ Thomas W. Lanni
	Thomas W. Lanni
	President and Chief Executive Officer
	(Principal Executive Officer)

35

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Alisha K. Charlton, Vice President and Chief Accounting Officer of Comarco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comarco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 14, 2012	/s/ Alisha K. Charlton
	Alisha K. Charlton
	Vice President and Chief Accounting Officer
	(Principal Financial Officer)

36

EX-32.1

Exhibit 32.1

Certification of Principal Executive Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc., I, Thomas W. Lanni, President and Chief Executive Officer of Comarco, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Comarco, Inc.

Date: September 14, 2012	/s/ Thomas W. Lanni
	Thomas W. Lanni
	President and Chief Executive Officer
	(Principal Executive Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

37

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc., I, Alisha K. Charlton, Vice President and Chief Accounting Officer of Comarco, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Comarco, Inc.

Date: September 14, 2012	/s/ Alisha K. Charlton
	Alisha K. Charlton
	Vice President and Chief Accounting Officer
	(Principal Financial Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

38

XML

Inventory (Details Textual) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Inventory (Textual) [Abstract]
Total inventory	$ 1,127	$ 1,131
Corporate headquarters [Member]
Inventory (Textual) [Abstract]
Total inventory	$ 520,000

XML

Earnings Loss Per Share (Details Textual)	3 Months Ended	6 Months Ended
	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011
Earning Loss Per Share (Textual) [Abstract]
Potential Common Shares Excluded from Diluted Weighted Average	255,000	330,000	230,000

XML

Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended		6 Months Ended		11 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012 Customers	Jul. 31, 2011	Jan. 07, 2012
Summary Of Significant Accounting Policies (Additional Textual) [Abstract]
Derivative Liabilities	$ 1,365,000		$ 1,365,000
Summary of Significant Accounting Policies (Textual) [Abstract]
Pre-tax losses from operations	208,000	(1,895,000)	(504,000)	(3,169,000)	5,300,000
Total approximate amount of negative working capital	2,000,000		2,000,000
Number of significant customers			2
Impairment Charges	0		0
Warrant [Member]
Summary Of Significant Accounting Policies (Additional Textual) [Abstract]
Issuance of fair value	1,300,000		1,300,000
Derivative Liabilities	1,400,000		1,400,000
Letter Of Credit [Member]
Summary Of Significant Accounting Policies (Additional Textual) [Abstract]
Restricted Cash And Cash Equivalents	77,000		77,000
Collateral for Credit Card [Member]
Summary Of Significant Accounting Policies (Additional Textual) [Abstract]
Restricted Cash And Cash Equivalents	$ 15,000		$ 15,000

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012
Fair value measurements
Derivative Liabilities	$ 1,365
Quoted Prices in Active Markets for (Level 1) [Member]
Fair value measurements
Derivative Liabilities
Significant Other Observable (Level 2) [Member]
Fair value measurements
Derivative Liabilities
Significant Unobservable (Level 3) [Member]
Fair value measurements
Derivative Liabilities	$ 1,365

XML

Customer and Supplier Concentrations (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended			6 Months Ended
	Jul. 31, 2012	Apr. 30, 2012 Person	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012 Flex and Zhengge [Member]	Jan. 31, 2012 Flex and Zhengge [Member]
Customer and Supplier Concentrations (Textual) [Abstract]
Number of suppliers		3
Percentage of Suppliers accounted for total product costs	61.00%		50.00%	49.00%	88.00%
Total uninvoiced materials and services						$ 0.8	$ 0.3
Percentage of uninvoiced materials and services						64.00%	54.00%
Accrued liabilities payable						1.2	0.6
Decrease in cost of revenue				$ 1.4

XML

Stock-Based Compensation

6 Months Ended

Jul. 31, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

4. Stock-Based Compensation

We grant stock awards for a fixed number of shares to employees, consultants, and directors pursuant to the Company’s shareholder-approved equity incentive plans.

We account for stock-based compensation 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 optionees 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 awards 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 applicable accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an 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 our current estimates.

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

	Three Months Ended July 31,				Six Months Ended July 31,
	2012		2011		2012		2011
Total stock-based compensation expense	$	36	$	24	$	75	$	95
Impact on basic and diluted earnings per share	$	0.00	$	0.00	$	0.01	$	0.01

The total compensation cost related to nonvested awards not yet recognized is approximately $136,000, which will be expensed over a weighted average remaining life of 9 months.

During the three and six months ended July 31, 2012, 0 and 300,000 restricted stock units were granted and no stock options were granted. During the three and six months ended July 31, 2011, 220,000 and 295,000 restricted stock units were granted and no stock options were granted. The fair value of the restricted stock units granted during the six months ended July 31, 2012 was estimated using the stock price on the date of the grant of $0.16 and a forfeiture rate of 10.6 percent. The fair value of the restricted stock units granted during the three and six months ended July 31, 2011 was estimated using the stock price on the date of the grant, which averaged $0.30 and average forfeiture rates of 9.6 percent and 9.3 percent, respectively.

Comarco has stock-based compensation plans under which outside directors, consultants, and employees are eligible to receive stock options and other equity-based awards. The stock option plans provide that officers, key employees, directors and consultants may be granted options to purchase up to 2,675,000 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 grantee 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.

The Company’s former employee stock option plan (the “Employee Plan”) expired during May 2005. As a result, no new options could be granted under the plan thereafter. This plan provided for the issuance of up to 825,000 shares of common stock. 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. In July 2011, the Company’s shareholders approved the 2011 Equity Incentive Plan (the “2011” Plan) covering 750,000 shares of common stock.

Under both the 2011 and 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards to employees, consultants and directors. Under all plans, awards vest or become exercisable in installments determined by the compensation committee of the Company’s Board of Directors; however, under the 2005 Plan no option may be exercised prior to one year following the grant of the option. The options granted under 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 2011 and 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 stock options granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Options
	Number of Shares			Weighted-Average Exercise Price
Balance, January 31, 2012		380,000		$	3.93
Options granted		—			—
Options canceled or expired		(80,500	)		7.9
Options exercised		—			—
Balance, July 31, 2012		299,500		$	3.15
Stock Options Exercisable at July 31, 2012		179,325		$	4.53

Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Restricted Stock Units
	Number of Shares			Weighted-Average Stock Price On Grant Date
Balance, January 31, 2012		293,651		$	0.37
RSU’s granted		300,000			0.16
RSU’s canceled or expired		(32,565	)		0.26
Common stock issued		(222,435	)		0.31
Balance, July 31, 2012		338,651		$	0.23

The RSU’s canceled or expired in the table above represent the difference between the number of shares awarded and the number issued because the recipient elected a net award to cover personal income taxes.

As of July 31, 2012, the stock awards outstanding have an aggregate intrinsic value of $16,000, based on a closing market price of $0.21 per share on July 31, 2012. The following table summarizes information about the Company’s stock awards outstanding at July 31, 2012:

	Awards Outstanding					Awards Exercisable
Range of Exercise/Grant Prices	Number Outstanding		Weighted-Avg. Remaining Contractual Life	Weighted-Avg. Exercise/Grant Price		Number Exercisable		Weighted-Avg. Exercise/Grant Price
$             0.16 to   1.20		548,500	3.03	$	0.54		98,325	$	1.10
2.89 to   4.90		23,651	4.45		4.16		15,000		4.90
8.08 to 10.43		66,000	3.36		9.56		66,000		9.56
		638,151	3.12 years		1.60		179,325		4.53

At July 31, 2012, shares available for future grants were 920,224.

XML

Fair Value Measurements (Details 1)	3 Months Ended
	Jul. 31, 2012
Significant weighted average assumptions used to estimate fair value
Risk free interest rate	1.22%
Average expected life	8 years
Expected volatility	100.05%
Expected dividends

XML

Stock Based Compensation (Details 2) (Restricted Stock Units (RSUs) [Member], USD $)	6 Months Ended
	Jul. 31, 2012
Restricted Stock Units (RSUs) [Member]
Transactions and other information related to restricted stock units (RSUs) granted under these plans
Number of share, beginning balance, January 31, 2012	293,651
Beginning balance, weighted average stock price in grants January 31,2012	$ 0.37
Number of share RSUs granted	300,000
Weighted average Stock Price on Grant Date of RSUs granted	$ 0.16
Number of share RSUs canceled or expired	(32,565)
Weighted Average Stock Price on Grant Date of RSUs canceled or expired	$ 0.26
Number of share Common stock issued	(222,435)
Weighted Average Stock Price on Grant Date of RSU Common stock issued	$ (0.31)
Number of share, ending balance, July 31, 2012	338,651
Ending balance, weighted average stock price in grants July 31,2012	$ 0.23

XML

Stock Based Compensation (Details1) (USD $)	6 Months Ended
	Jul. 31, 2012
Transactions and other information related to stock options granted under these plans
Number of shares beginning balance, January31, 2012	380,000
Weighted average exercise price, beginning balance, January31, 2012	$ 3.93
Number of shares awards granted
Weighted average exercise price of awards granted
Number of shares awards canceled or expired	(80,500)
Weighted average exercise price of awards canceled or expired	$ (7.9)
Number of shares awards exercised
Weighted average exercise price of awards exercised
Number of shares ending balance, July 31, 2012	299,500
Weighted average exercise price, ending balance, July 31, 2012	$ 3.15
Number of shares stock options exercisable at July 31, 2012	179,325
Weighted average exercise price of stock options exercisable at July 31, 2012	$ 4.53

XML

Commitments and Contingencies (Details Textual) (USD $)	3 Months Ended	6 Months Ended			6 Months Ended		6 Months Ended
	Apr. 30, 2010	Jul. 31, 2012	Jan. 31, 2012	Sep. 01, 2011 Patent	Jul. 31, 2012 Chicony [Member]	May 13, 2011 Chicony [Member]	Jul. 31, 2012 EDAC [Member]
Commitments and Contingencies (Textual) [Abstract]
Breach of contract seeking payment					$ 1,200,000		$ 2,500,000
Complaint for recovery of damages						4,900,000
Previously accrued seeking payments					1,100,000
Existing accounts payable		2,834,000	3,912,000
Accounts receivable due		1,674,000	934,000
Forecasts of material and finished goods requirements		6 months
Period identified for issuing purchase orders to suppliers with delivery dates		four to six weeks
Number of patents relating to power technology				5
Number of Comaro patents				5
Excess material relating to purchase commitments		380,000
Letter of credit	77,000
Net liabilities		$ (1,443,000)
Settlement agreement date		July 24, 2012
Letter of credit expires		Aug. 01, 2014

XML

Stock Based Compensation (Details 3) (USD $)	6 Months Ended
	Jul. 31, 2012
Company's stock awards outstanding
Awards Outstanding, Number of Outstanding	638,151
Awards Outstanding, Weighted Average Remaining Contractual Life	3 years 1 month 13 days
Awards Outstanding, Weighted Average Exercise	$ 1.60
Awards Exercisable, Number of Exercisable Awards	179,325
Awards Exercisable, Weighted Average Exercise	$ 4.53
Range One [Member]
Company's stock awards outstanding
Range of Exercise/Grant Prices, Lower Limit	$ 0.16
Range of Exercise/Grant Prices, Upper Limit	$ 1.20
Awards Outstanding, Number of Outstanding	548,500
Awards Outstanding, Weighted Average Remaining Contractual Life	3 years 11 days
Awards Outstanding, Weighted Average Exercise	$ 0.54
Awards Exercisable, Number of Exercisable Awards	98,325
Awards Exercisable, Weighted Average Exercise	$ 1.10
Range Two [Member]
Company's stock awards outstanding
Range of Exercise/Grant Prices, Lower Limit	$ 2.89
Range of Exercise/Grant Prices, Upper Limit	$ 4.90
Awards Outstanding, Number of Outstanding	23,651
Awards Outstanding, Weighted Average Remaining Contractual Life	4 years 5 months 12 days
Awards Outstanding, Weighted Average Exercise	$ 4.16
Awards Exercisable, Number of Exercisable Awards	15,000
Awards Exercisable, Weighted Average Exercise	$ 4.90
Range Three [Member]
Company's stock awards outstanding
Range of Exercise/Grant Prices, Lower Limit	$ 8.08
Range of Exercise/Grant Prices, Upper Limit	$ 10.43
Awards Outstanding, Number of Outstanding	66,000
Awards Outstanding, Weighted Average Remaining Contractual Life	3 years 4 months 10 days
Awards Outstanding, Weighted Average Exercise	$ 9.56
Awards Exercisable, Number of Exercisable Awards	66,000
Awards Exercisable, Weighted Average Exercise	$ 9.56

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Stock Based Compensation (Details Textual) (USD $)	3 Months Ended		6 Months Ended						6 Months Ended		3 Months Ended		6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012 Employee Plan [Member]	Jul. 31, 2012 2005 Plan [Member]	Jun. 30, 2008 2005 Plan [Member]	Dec. 31, 2005 2005 Plan [Member]	Jul. 31, 2012 2011 Plan [Member]	Jul. 31, 2011 2011 Plan [Member]	Jul. 31, 2012 Restricted Stock Units (RSUs) [Member]	Jul. 31, 2011 Restricted Stock Units (RSUs) [Member]	Jul. 31, 2012 Restricted Stock Units (RSUs) [Member]	Jul. 31, 2011 Restricted Stock Units (RSUs) [Member]
Stock Based Compensation (Additional Textual) [Abstract]
Common Stock					825,000			450,000		750,000
Number of shares awards exercised						0
Restricted stock units granted											0	220,000	300,000	295,000
Stock Price on Date of Grant											$ 0.30		$ 0.16	$ 0.30
Forfeiture Rate of Stock											93.00%		10.60%	96.00%
Additional Common stock authorized							1,100,000
Share Based Compensation Options Maximum Expiration Period Following Grant Date					10 years 30 days	10 years			10 years
Share Based Compensation Options Maximum Expiration Period Following Grant Date for Specified Percentage Ownership					5 years	5 years			5 years
Stock Based Compensation (Textual) [Abstract]
Total approximate compensation cost related to nonvested awards not yet recognized	$ 136,000		$ 136,000
Weighted average remaining life of compensation cost related to nonvested awards not yet recognized			9 months
Stock Options Granted	0	0	0	0
Number of Common Shares Granted to Purchase	2,675,000		2,675,000
Percentage of fair market value at the date of grant, unless the optionee is a 10 percent shareholder			100.00%
Minimum percentage of shareholding required for optionee for granting common stock at not less than 100 percent of the fair market value at the date of grant			10.00%
Minimum Percentage of share price specified for meeting the condition			110.00%
Number of shares available for future grants under plans	920,224		920,224
Share Price	$ 0.21		$ 0.21
Aggregate intrinsic value	$ 16,000		$ 16,000
Specified ownership percentage for determination of expiration period			10.00%

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Discontinued Operations

6 Months Ended

Jul. 31, 2012

Discontinued Operations [Abstract]

Discontinued Operations

3. Discontinued Operations

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 which closed on January 6, 2009.

The fiscal 2012 year to date loss from WTS discontinued operations of $21,000 relates to a sales tax audit performed by the California State Board of Equalization during the second quarter of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne by Comarco for the sale of the WTS business to Ascom and we do not expect to incur any future costs related to the sale of the WTS business.

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Earnings (Loss) Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011
Basic:
Income (loss) from continuing operations	$ 151	$ (1,910)	$ (561)	$ (3,173)
Weighted average shares outstanding	7,585	7,344	7,508	7,344
Basic and diluted income (loss) per share from continuing operations	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)
Net loss from discontinued operations		(21)		(21)
Basic and diluted earnings per share from discontinued operations
Net loss	151	(1,931)	(561)	(3,194)
Basic earnings (loss) per share	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)
Diluted:
Income (loss) from continuing operations	151	(1,910)	(561)	(3,173)
Weighted average shares outstanding	7,585	7,344	7,508	7,344
Effect of dilutive securities stock options	23
Weighted average shares outstanding, Diluted	7,608	7,344	7,508	7,344
Income (loss) from continuing operations	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)
Net loss from discontinued operations		(21)		(21)
Basic and diluted earnings per share from discontinued operations
Net loss	$ 151	$ (1,931)	$ (561)	$ (3,194)
Diluted earnings (loss) per share	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)

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Warranty Arrangements (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011
Summary of the warranty accrual activity
Beginning Balance	$ 193	$ 310
Accruals for warranties issued during the period		399
Utilization	(123)	(679)
Ending Balance	$ 70	$ 30

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Current Assets:
Cash and cash equivalents	$ 1,619	$ 908
Accounts receivable due from customers, net of reserves of $5 and $6, respectively	1,674	934
Accounts receivable due from suppliers, net of reserves of $50 and $81, respectively	564	673
Inventory, net of reserves of $1,162 and $1,791, respectively	1,127	1,131
Other current assets	53	63
Total current assets	5,037	3,709
Property and equipment, net	101	126
Restricted cash	92	92
Total assets	5,230	3,927
Current Liabilities:
Accounts payable	2,834	3,912
Accrued liabilities	2,179	1,315
Loan payable, net of discount	635
Derivative liabilities	1,365
Total current liabilities	7,013	5,227
Deferred rent, net of current portion	44	41
Total liabilities	7,057	5,268
Commitments, Contingencies and Subsequent Events
Stockholders' Deficit:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 31, 2012 and January 31, 2012, respectively
Common stock, $0.10 par value, 50,625,000 shares authorized; 7,610,629 and 7,388,194 shares issued and outstanding at July 31, 2012 and January 31, 2012	761	739
Additional paid-in capital	15,496	15,443
Accumulated deficit	(18,084)	(17,523)
Total stockholders' deficit	(1,827)	(1,341)
Total liabilities and stockholders' deficit	$ 5,230	$ 3,927

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Organization

6 Months Ended

Jul. 31, 2012

Organization [Abstract]

Organization

1. Organization

Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “Comarco,” or the “Company”), is a leading developer and designer of mobile power adapters used to simultaneously power and charge notebook computers, mobile phones, E-readers, iPads ^®, 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. was incorporated in California in 1960 and its common stock has been publicly traded since 1971 when it was spun-off from Genge Industries, Inc.

Our business addresses the needs of today’s mobile culture by providing innovative charging solutions for the myriad of battery powered devices used by nearly all consumers today. Our innovative technology allows the consumer to charge multiple devices from a single charger, eliminating the need to carry multiple chargers while traveling. This technology was developed by Comarco and we own an extensive patent portfolio related to this technology.

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Customer and Supplier Concentrations (Details 1) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Customer concentration:
Accounts receivable due	$ 1,674	$ 934
Customer concentration [Member]
Company's gross accounts receivable due from customers and suppliers
Total gross accounts receivable due from customers	1,679	940
Total gross accounts receivable due from customers, Percentage	100.00%	100.00%
Customer concentration:
Accounts receivable due	1,672	933
Accounts Receivable Net Current, Percentage	99.00%	99.00%
Supplier concentration [Member]
Company's gross accounts receivable due from customers and suppliers
Total gross accounts receivable due from suppliers	614	754
Total gross accounts receivable due from suppliers, Percentage	100.00%	100.00%
Accounts payable concentration:
Net Accounts Receivable	564	694
Accounts Receivable Net Percentage	92.00%	92.00%
Dell Inc. and affiliates [Member] | Customer concentration [Member]
Customer concentration:
Accounts receivable due	4	371
Accounts Receivable Net Current, Percentage		39.00%
Lenovo Information Products Co., Ltd. [Member] | Customer concentration [Member]
Customer concentration:
Accounts receivable due	1,668	562
Accounts Receivable Net Current, Percentage	99.00%	60.00%
EDAC Power Electronics Co. Ltd [Member] | Supplier concentration [Member]
Accounts payable concentration:
Net Accounts Receivable		532
Accounts Receivable Net Percentage		71.00%
Flextronics Electronics [Member] | Supplier concentration [Member]
Accounts payable concentration:
Net Accounts Receivable	422	40
Accounts Receivable Net Percentage	72.00%	5.00%
Zheng Ge Electrical Co., Ltd [Member] | Supplier concentration [Member]
Accounts payable concentration:
Net Accounts Receivable	$ 122	$ 122
Accounts Receivable Net Percentage	20.00%	16.00%

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Inventory (Tables)

6 Months Ended

Jul. 31, 2012

Inventory [Abstract]

Summary of Inventory, net of reserves

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

	July 31, 2012		January 31, 2012
Raw materials	$	824	$	1,002
Finished goods		303		129
	$	1,127	$	1,131

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Customer and Supplier Concentrations (Details 2) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Company's gross accounts payable
Accounts Payable, Current	$ 2,834	$ 3,912
Accounts Payable Current Percentage	100.00%	100.00%
Accounts payable concentration:
Net Accounts Payable Amount	1,917	3,450
Net Accounts Payable, Percentage	68.00%	88.00%
EDAC Power Electronics Co. Ltd [Member]
Accounts payable concentration:
Net Accounts Payable Amount		1,964
Net Accounts Payable, Percentage		50.00%
Chicony Power Technology, Co. Ltd [Member]
Accounts payable concentration:
Net Accounts Payable Amount	1,100	1,100
Net Accounts Payable, Percentage	39.00%	28.00%
Pillsbury Winthrop Shaw Pittman, LLP [Member]
Accounts payable concentration:
Net Accounts Payable Amount	$ 817	$ 386
Net Accounts Payable, Percentage	29.00%	10.00%

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Fair Value Measurements (Tables)

6 Months Ended

Jul. 31, 2012

Fair Value Measurements [Abstract]

Fair value measurements

Our fair value measurements at the July 31, 2012 reporting date are classified based on the valuation technique level noted in the table below (in thousands):

Description	July 31, 2012		Quoted Prices in Active Markets for (Level 1)		Significant Other Observable (Level 2)		Significant Unobservable (Level 3)
Derivative Liabilities	$	1,365	$	—	$	—	$	1,365

Significant weighted average assumptions used to estimate fair value

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our outstanding and contingent warrants issued to Broadwood as described in Note 10 utilizing the Monte Carlo simulation model:

	Three Months Ended July 31, 2012
Risk free interest rate	1.22%
Average expected life	8 years
Expected volatility	100.05%
Expected dividends	None

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Summary of Significant Accounting Policies

6 Months Ended

Jul. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

The accompanying condensed consolidated balance sheet as of January 31, 2012, which has been derived from our audited financial statements, and the unaudited condensed consolidated financial statements, have been prepared in accordance with accounting principles and SEC rules applicable to interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this report contain all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the Company’s consolidated financial position as of July 31, 2012 and its consolidated results of its operations and cash flows for the three and six months ended July 31, 2012 and 2011. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in its Annual Report on Form 10-K for its fiscal year ended January 31, 2012 (the “2012 10-K”), which was filed with the SEC on April 30, 2012. The consolidated results of operations for the three and six months ended July 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013 or any other interim period during such year.

The summary of our significant accounting policies presented below is designed to assist the reader in understanding our condensed consolidated financial statements.

Future Operations, Change in Strategy, Liquidity and Capital Resources

The Company has experienced pre-tax losses from continuing operations for the six months ended July 31, 2012 and 2011 totaling $0.6 million and $3.2 million, respectively. In addition, the Company experienced pre-tax losses from operations for fiscal 2012 totaling $5.3 million. The condensed consolidated financial statements have been prepared assuming that the Company will continue to operate as a going concern, which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business. The Company’s condensed consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. The Company’s future is highly dependent on its ability to sell its products at a profit, obtain liquidity, and its ultimate return to overall profitability. To accomplish this, we must increase the sales volumes of our current and newly designed ChargeSource ^® products.

During the current fiscal year we had two significant customers, Lenovo Information Products Co., Ltd. (“Lenovo”) and Dell Inc. and affiliates (“Dell”), both of which are original equipment manufacturers, or “OEM’s.” However, we exited the business with Dell, and sold Dell all remaining product in inventory in May 2012, due to low sales volumes and thin product margins. In the prior fiscal year we had an additional significant customer, Targus Group, International, Inc. (“Targus”). Our Targus relationship began in March 2009, with our entry into a Strategic Product Development and Supply Agreement (the “Targus Agreement”). The Company began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. However, on January 25, 2011, Targus provided the Company with written notification of non-renewal of the Targus Agreement. As such, there has been no revenue from Targus since the second quarter of fiscal 2012, which was minor. We do not expect any future sales to Targus.

During the second quarter of fiscal 2012, we decided to change our sales strategy to sell our products directly to end users. Although we plan to continue to sell select products in the OEM channel, we believe that we can complement our OEM sales and increase sales and margins by selling our products direct to end users. To implement this strategy, we launched our website, www.chargesource.com during the fourth quarter of fiscal 2012, to sell our newest generation of AC adapter. There can be no assurance that we will be able to successfully achieve our sales volume initiatives through the launch of our new website, and the failure to achieve such initiatives could have a material adverse effect on our operations and financial condition.

We had negative working capital totaling approximately $2.0 million at July 31, 2012. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, closely manage operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. (See Note 10 Loan & Related Agreements)

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, 2012. 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 six months ended July 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013.

Cash and Cash Equivalents

All highly liquid investments with original 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, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.

Accounts Receivable Due from Customers

We offer unsecured credit terms to customers and performs ongoing credit evaluations of our customers. Accounts receivable balances result primarily from the timing of remittance payments by these customers to the Company. Accounts receivable are stated net of an allowance for doubtful accounts. Management develops its estimate of this reserve based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s inability to pay, customer dissatisfaction, or other factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates. Historically, such losses have been within management’s expectations and the reserves established.

Accounts Receivable Due from Suppliers

We frequently source components locally that we later sell to our contract manufacturers (“CM’s”), who build the finished goods, and other suppliers. This is especially the case when new products are initially introduced into production. Sales to our contract manufacturers and other suppliers are excluded from revenue and are instead reclassified to cost of revenue. During fiscal 2013, our relationship with Flextronics Electronics (“Flex”), the CM who builds the product we sell to Lenovo transitioned from a relationship where we directly sourced just a few components in the bill of material to a process where we directly source all of the component parts in the bill of material.

Restricted Cash

Our restricted cash balances are secured by separate bank accounts and represent i) a $77,000 letter of credit that serves as the security deposit for our corporate office lease and ii) $15,000 which serves as collateral for credit card chargebacks associated with our internet website.

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 made in the preparation of financial statements. Accordingly, our reported assets and liabilities and results of operations could differ, possibly significantly, 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, reserves for estimated warranty costs, including product recall costs, valuation of derivative liabilities, valuation allowances for deferred tax assets, and determination of stock based compensation expense.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation. The reclassifications have no effect on previously reported results of operations or accumulated deficit.

Impairment or Disposal of Long-lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. We did not recognize any impairment charges during the three or six months ended July 31, 2012.

Derivative Liabilities

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security.

We evaluate free-standing derivative instruments to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.

The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.

During the second quarter of fiscal 2013, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The warrants contain provisions that adjust the exercise price in the event of certain dilutive issuance of securities. Accordingly, the Company considered the warrants to be subject to price protection and classified them as derivative liabilities at the date of issuance with a fair value of $1.3 million and a corresponding discount to the underlying loan payable. (see Note 11).

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, accrued liabilities, a short-term loan and derivative liabilities. The carrying amount of cash and cash equivalents, accounts receivable due from customers and suppliers, 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 our loan, net of discount, approximates fair value since the loan balance is derived from the third party valuation report discussed below.

The fair value of the derivative liabilities, which are comprised exclusively of warrants, at July 31, 2012 was $1.4 million, based upon a third party valuation report that we commissioned. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of operations. During the second quarter of fiscal 2012 we did not record any charge or credit to the current period results of operation as the warrants were issued on July 27, 2012 in conjunction with the execution of the Loan Agreement.

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Condensed Consolidated Balance Sheets [Abstract]
Reserves on accounts receivable due from customers	$ 5	$ 6
Reserves on accounts receivable due from suppliers	50	81
Reserves on inventory	$ 1,162	$ 1,791
Preferred stock, no par value
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 0.10	$ 0.10
Common stock, shares authorized	50,625,000	50,625,000
Common stock, shares issued	7,610,629	7,388,194
Common stock, shares outstanding	7,610,629	7,388,194

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Commitments and Contingencies

6 Months Ended

Jul. 31, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

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. During the second quarter of fiscal 2012 we accrued a charge of $380,000 relating to such excess material relating to purchase commitments made to support the Targus business.

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 Agreements

The Company has severance compensation agreements with certain key executives. These agreements require the Company to pay these executives, in the event of certain terminations of employment following a change of control of the Company, up to the amount of their then current annual base salary and the amount equal to any bonus which the executive would have earned for the year in which the termination occurs plus the acceleration of unvested options. Since a change of control has not occurred, we have not recorded any liability in the unaudited interim condensed consolidated financial statements for these agreements.

Although the contemplated sale of shares of common stock and the issuance of the Warrants and possible issuance of the Additional Warrant Shares by the Company to Broadwood could result in a “Change of Control” for purposes of the severance compensation agreements, each of the executives who are parties to those agreements has waived their rights to receive payments under those agreements in the event that a “Change of Control” occurs as a result of the sale of shares and the issuance of Warrants and Additional Warrants to Broadwood.

Letter of Credit

During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from SVB to allow for continuous and unlapsed compliance with a lease provision for the Company’s corporate offices. The letter of credit expires on August 1, 2014.

Legal Proceedings and Contingencies

On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that was the subject of a product recall, filed a complaint against us for breach of contract, seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony’s failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. The trial date is currently set for March 11, 2013. The outcome of this matter is not determinable as of the date of the filing of this report. We have previously accrued $1.1 million for the possibility that we could incur a liability to Chicony should it prevail in the lawsuit.

On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. The five Comarco patents are U.S. Patent Nos. 6,831,848 titled “Programmable Power Supply to Simultaneously Power a Plurality of Electronic Devices”; 7,495,941 titled “Power Supply Equipment with Matching Indicators on Converter and Connector Adaptors”; 7,613,021 titled “Small Form Factor Power Supply”; 7,863,770 titled “Power Supply Equipment for Simultaneously Providing Operating Voltages To a Plurality of Devices”; and 7,999,412 titled “Detachable Tip for Communicating with Adapter and Electronic Device.” On February 29, 2012 we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. The Court required that the parties mediate the dispute by the end of July, 2012. Although the parties met for mediation, the dispute was not settled. This matter is ongoing and the outcome is not determinable, however if we do not prevail we will likely not obtain a license agreement to earn future license revenue from products sold by Kensington.

On March 6, 2012, we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for the failure to deliver goods ordered by us in the time, place, manner and price indicated by each purchase order. As previously reported, the parties entered into a Settlement Agreement on July 24, 2012, ending the litigation between the parties. The settlement involved no cash payments by either of the parties, but allowed us to recover previously incurred product and freight costs and to discharge net liabilities of $1.4 million from our consolidated balance sheet that would otherwise have been due to EDAC had it prevailed in the lawsuit. The settlement resulted in a decrease to cost of revenue of $1.4 million.

In addition to the pending matters 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.

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Document and Entity Information	6 Months Ended
	Jul. 31, 2012	Sep. 12, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	COMARCO INC
Entity Central Index Key	0000022252
Document Type	10-Q
Document Period End Date	Jul. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--01-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		7,610,629

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jul. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Future Operations, Liquidity and Capital Resource

Future Operations, Change in Strategy, Liquidity and Capital Resources

The Company has experienced pre-tax losses from continuing operations for the six months ended July 31, 2012 and 2011 totaling $0.6 million and $3.2 million, respectively. In addition, the Company experienced pre-tax losses from operations for fiscal 2012 totaling $5.3 million. The condensed consolidated financial statements have been prepared assuming that the Company will continue to operate as a going concern, which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business. The Company’s condensed consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. The Company’s future is highly dependent on its ability to sell its products at a profit, obtain liquidity, and its ultimate return to overall profitability. To accomplish this, we must increase the sales volumes of our current and newly designed ChargeSource ^® products.

During the current fiscal year we had two significant customers, Lenovo Information Products Co., Ltd. (“Lenovo”) and Dell Inc. and affiliates (“Dell”), both of which are original equipment manufacturers, or “OEM’s.” However, we exited the business with Dell, and sold Dell all remaining product in inventory in May 2012, due to low sales volumes and thin product margins. In the prior fiscal year we had an additional significant customer, Targus Group, International, Inc. (“Targus”). Our Targus relationship began in March 2009, with our entry into a Strategic Product Development and Supply Agreement (the “Targus Agreement”). The Company began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. However, on January 25, 2011, Targus provided the Company with written notification of non-renewal of the Targus Agreement. As such, there has been no revenue from Targus since the second quarter of fiscal 2012, which was minor. We do not expect any future sales to Targus.

During the second quarter of fiscal 2012, we decided to change our sales strategy to sell our products directly to end users. Although we plan to continue to sell select products in the OEM channel, we believe that we can complement our OEM sales and increase sales and margins by selling our products direct to end users. To implement this strategy, we launched our website, www.chargesource.com during the fourth quarter of fiscal 2012, to sell our newest generation of AC adapter. There can be no assurance that we will be able to successfully achieve our sales volume initiatives through the launch of our new website, and the failure to achieve such initiatives could have a material adverse effect on our operations and financial condition.

We had negative working capital totaling approximately $2.0 million at July 31, 2012. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, closely manage operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. (See Note 10 Loan & Related Agreements)

Basis of Presentation

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, 2012. 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 six months ended July 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013.

Cash and Cash Equivalents

Cash and Cash Equivalents

All highly liquid investments with original 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

Principles of Consolidation

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

Accounts Receivable due from Customers

Accounts Receivable Due from Customers

We offer unsecured credit terms to customers and performs ongoing credit evaluations of our customers. Accounts receivable balances result primarily from the timing of remittance payments by these customers to the Company. Accounts receivable are stated net of an allowance for doubtful accounts. Management develops its estimate of this reserve based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s inability to pay, customer dissatisfaction, or other factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates. Historically, such losses have been within management’s expectations and the reserves established.

Accounts Receivable due from Suppliers

Accounts Receivable Due from Suppliers

We frequently source components locally that we later sell to our contract manufacturers (“CM’s”), who build the finished goods, and other suppliers. This is especially the case when new products are initially introduced into production. Sales to our contract manufacturers and other suppliers are excluded from revenue and are instead reclassified to cost of revenue. During fiscal 2013, our relationship with Flextronics Electronics (“Flex”), the CM who builds the product we sell to Lenovo transitioned from a relationship where we directly sourced just a few components in the bill of material to a process where we directly source all of the component parts in the bill of material.

Restricted Cash

Restricted Cash

Our restricted cash balances are secured by separate bank accounts and represent i) a $77,000 letter of credit that serves as the security deposit for our corporate office lease and ii) $15,000 which serves as collateral for credit card chargebacks associated with our internet website.

Use of Estimates

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 made in the preparation of financial statements. Accordingly, our reported assets and liabilities and results of operations could differ, possibly significantly, 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, reserves for estimated warranty costs, including product recall costs, valuation of derivative liabilities, valuation allowances for deferred tax assets, and determination of stock based compensation expense.

Reclassifications:

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation. The reclassifications have no effect on previously reported results of operations or accumulated deficit.

Impairment or Disposal of Long-lived Assets

Impairment or Disposal of Long-lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. We did not recognize any impairment charges during the three or six months ended July 31, 2012.

Derivative Liabilities

Derivative Liabilities

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security.

We evaluate free-standing derivative instruments to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.

The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.

During the second quarter of fiscal 2013, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The warrants contain provisions that adjust the exercise price in the event of certain dilutive issuance of securities. Accordingly, the Company considered the warrants to be subject to price protection and classified them as derivative liabilities at the date of issuance with a fair value of $1.3 million and a corresponding discount to the underlying loan payable. (see Note 11).

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, accrued liabilities, a short-term loan and derivative liabilities. The carrying amount of cash and cash equivalents, accounts receivable due from customers and suppliers, 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 our loan, net of discount, approximates fair value since the loan balance is derived from the third party valuation report discussed below.

The fair value of the derivative liabilities, which are comprised exclusively of warrants, at July 31, 2012 was $1.4 million, based upon a third party valuation report that we commissioned. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of operations. During the second quarter of fiscal 2012 we did not record any charge or credit to the current period results of operation as the warrants were issued on July 27, 2012 in conjunction with the execution of the Loan Agreement.

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011
Condensed Consolidated Statements of Operations [Abstract]
Revenue	$ 1,681	$ 1,926	$ 3,883	$ 4,876
Cost of revenue	(127)	2,232	1,742	5,006
Gross profit (loss)	1,808	(306)	2,141	(130)
Selling, general, and administrative expenses	897	1,114	1,401	2,065
Engineering and support expenses	703	475	1,244	974
Total operating expenses	1,600	1,589	2,645	3,039
Operating income (loss)	208	(1,895)	(504)	(3,169)
Other loss, net	(55)	(13)	(55)	(2)
Income (loss) from continuing operations before income taxes	153	(1,908)	(559)	(3,171)
Income tax expense	(2)	(2)	(2)	(2)
Income (loss) from continuing operations	151	(1,910)	(561)	(3,173)
Loss from discontinued operations,net of income taxes		(21)		(21)
Net income (loss)	$ 151	$ (1,931)	$ (561)	$ (3,194)
Basic and diluted income (loss) per share:
Income (loss) from continuing operations	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)
Loss from discontinued operations
Net income (loss)	$ 0.02	$ (0.26)	$ (0.07)	$ (0.43)
Weighted average common shares outstanding:
Basic	7,585	7,344	7,508	7,344
Diluted	7,608	7,344	7,508	7,344
Common shares outstanding	7,611	7,344	7,611	7,344

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Customer and Supplier Concentrations

6 Months Ended

Jul. 31, 2012

Customer and Supplier Concentrations [Abstract]

Customer and Supplier Concentrations

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 any of the periods presented below are listed here:

	Three Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	1,681	100	%	$	1,926	100	%
Customer concentration:
Dell Inc. and affiliates.	$	15	1	%	$	314	16	%
Lenovo Information Products Co., Ltd.		1,657	98	%		1,593	83	%
	$	1,672	99	%	$	1,907	99	%

	Six Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	3,883	100	%	$	4,876	100	%
Customer concentration:
Dell Inc. and affiliates.	$	67	1	%	$	685	14	%
Targus Group International, Inc.		—	—	%		1,174	24	%
Lenovo Information Products Co., Ltd.		3,793	98	%		2,947	60	%
	$	3,860	99	%	$	4,806	98	%

We exited the business with Dell due to low sales volumes and thin product margins. We sold Dell all remaining product in inventory in May 2012. As previously described, on January 25, 2011, Targus provided us with written notification of non-renewal of the Targus Agreement. We did not generate any revenue from Targus in fiscal 2013 nor do we expect any revenue from sales to Targus in the future.

The customers comprising 10 percent or more of the Company’s gross accounts receivable due from customers at either July 31, 2012 or January 31, 2012 are listed below (in thousands):

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from customers	$	1,679	100	%	$	940	100	%
Customer concentration:
Dell Inc. and affiliates.		4	—	%		371	39	%
Lenovo Information Products Co., Ltd.		1,668	99	%		562	60	%
	$	1,672	99	%	$	933	99	%

The suppliers comprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either July 31, 2012 or January 31, 2012 are listed below (in thousands).

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from suppliers	$	614	100	%	$	754	100	%
Customer concentration:
EDAC Power Electronics Co. Ltd (see Note 12)	$	—	—	%	$	532	71	%
Flextronics Electronics.		442	72	%		40	5	%
Zheng Ge Electrical Co., Ltd.		122	20	%		122	16	%
	$	564	92	%	$	694	92	%

The increase in the receivables due from Flex is driven by a change in our business processes. Flex is the contract manufacturer for the products we sell to OEM’s. In the prior fiscal year, we sourced only a few components on behalf of Flex. During fiscal 2013, we began procuring all of the components included in the bill of material on behalf of Flex for the products we sell to OEM’s and by doing so we have been able to secure more favorable payment terms among our expanded supplier base.

During the second quarter of fiscal 2013, we entered a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with EDAC, the former supplier of the now discontinued Manhattan product, ending the litigation between the two companies (see Note 12). The settlement involved no cash payments by either of the parties, but allowed us to recover previously incurred product and freight cost and to remove all liabilities and assets related to EDAC from our condensed consolidated balance sheet. The settlement resulted in a decrease to cost of revenue of $1.4 million.

We expect to fully collect the accounts receivable due from suppliers listed above.

The companies comprising 10 percent or more of our gross accounts payable at either July 31, 2012 or January 31, 2012 are listed below (in thousands, except percentages).

	July 31, 2012				January 31, 2012
Total gross accounts payable	$	2,834	100	%	$	3,912	100	%
Accounts payable concentration:
EDAC Power Electronics Co. Ltd	$	—	—	%	$	1,964	50	%
Chicony Power Technology, Co. Ltd		1,100	39	%		1,100	28	%
Pillsbury Winthrop Shaw Pittman, LLP.		817	29	%		386	10	%
	$	1,917	68	%	$	3,450	88	%

Chicony was the manufacturer of the Bronx product, which was subject to a recall and we are currently in litigation with Chicony (see Note 12). We made no payments to this supplier during either fiscal 2013 or 2012. The outcome of such litigation is not determinable at this time and we do not know whether or not we will be obligated to pay this liability. If we prevail in this case, based upon our causes of action, it is likely we will be relieved of this liability. There is no assurance, however, as to the outcome of this litigation. (see Note 12)

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers (“CM’s”) and other suppliers. The loss of one or more of our significant CM’s or suppliers could materially adversely affect our operations. For the three and six months ended July 31, 2012 three of our CM’s provided an aggregate of 61 and 49 percent, respectively, of total product costs. For the three and six months ended July 31, 2011 two of our CM’s provided an aggregate of 50 and 88 percent, respectively, of total product costs. During fiscal 2013, we began procuring all of the components included in the bill of materials for the product we sell to Lenovo. In the prior fiscal year we procured the finished good directly from Flex and they were responsible for procuring the components.

Additionally, at July 31, 2012, approximately $0.8 million or 64 percent of total uninvoiced materials and services of $1.2 million, included in accrued liabilities were payable to Flex and Zhengge Electrical Co. Ltd. (“Zhengge”). At January 31, 2012, approximately $0.3 million or 54 percent of total uninvoiced materials and services of $0.6 million, included in accrued liabilities were payable to Zhengge. Zhengge was a tip supplier for the Bronx product, and we ceased paying Zhengge during the course of the product recall.

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Earnings (Loss) Per Share

6 Months Ended

Jul. 31, 2012

Earnings (Loss) Per Share [Abstract]

Earnings (Loss) Per Share

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 six months ended July 31, 2011 and the six months ended July 31, 2012, basic and diluted loss per share for those periods were the same because the inclusion of potential common shares related to outstanding stock options in the calculation would have been antidilutive.

Potential common shares of 255,000 and 230,000 have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2011, as the effect would have been antidilutive. Similarly, potential common shares of 330,000 have been excluded from diluted weighted average common shares for the six months ended July 31, 2012, as the effect would have been antidilutive.

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 July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Basic:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)

	Three Months Ended July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Diluted:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings per share from continuing operations		7,608		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,608		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings (loss) per share		7,608		7,344			7,508			7,344
Diluted earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)

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Warranty Arrangements (Tables)

6 Months Ended

Jul. 31, 2012

Warranty Arrangements [Abstract]

Summary of the warranty accrual activity

A summary of the warranty accrual activity is shown in the table below (in thousands):

	As of And For the Six Months Ended July 31,
	2012			2011
Beginning balance	$	193		$	310
Accruals for warranties issued during the period		—			399
Utilization		(123	)		(679	)
	$	70		$	30

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Stock Based Compensation (Tables)

6 Months Ended

Jul. 31, 2012

Stock-Based Compensation [Abstract]

Summary of share-based compensation expense

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

	Three Months Ended July 31,				Six Months Ended July 31,
	2012		2011		2012		2011
Total stock-based compensation expense	$	36	$	24	$	75	$	95
Impact on basic and diluted earnings per share	$	0.00	$	0.00	$	0.01	$	0.01

Summary of transactions and other information related to stock options granted under these plans

Transactions and other information related to stock options granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Options
	Number of Shares			Weighted-Average Exercise Price
Balance, January 31, 2012		380,000		$	3.93
Options granted		—			—
Options canceled or expired		(80,500	)		7.9
Options exercised		—			—
Balance, July 31, 2012		299,500		$	3.15
Stock Options Exercisable at July 31, 2012		179,325		$	4.53

Summary of transactions and other information related to restricted stock units (RSUs) granted under these plans

Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the six months ended July 31, 2012 are summarized below:

	Outstanding Restricted Stock Units
	Number of Shares			Weighted-Average Stock Price On Grant Date
Balance, January 31, 2012		293,651		$	0.37
RSU’s granted		300,000			0.16
RSU’s canceled or expired		(32,565	)		0.26
Common stock issued		(222,435	)		0.31
Balance, July 31, 2012		338,651		$	0.23

Summary of information about the Company's stock awards outstanding

The following table summarizes information about the Company’s stock awards outstanding at July 31, 2012:

	Awards Outstanding					Awards Exercisable
Range of Exercise/Grant Prices	Number Outstanding		Weighted-Avg. Remaining Contractual Life	Weighted-Avg. Exercise/Grant Price		Number Exercisable		Weighted-Avg. Exercise/Grant Price
$             0.16 to   1.20		548,500	3.03	$	0.54		98,325	$	1.10
2.89 to   4.90		23,651	4.45		4.16		15,000		4.90
8.08 to 10.43		66,000	3.36		9.56		66,000		9.56
		638,151	3.12 years		1.60		179,325		4.53

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Loan & Related Agreements

6 Months Ended

Jul. 31, 2012

Loan & Related Agreements [Abstract]

Loan & Related Agreements

10. Loan & Related Agreements

Senior Secured Six Month Term Loan Agreement

As previously reported in a Current Report on Form 8-K filed with the SEC on August 2, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company.

Pursuant to that Agreement, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company and to CWT, as co-borrower. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company and is due and payable in full on January 28, 2013 (the “Maturity Date”). The Company is using the net proceeds of the Loan primarily to fund its working capital requirements and those of CWT, but may use up to $400,000 of those proceeds to fund capital expenditures required in the conduct of its business and the business of CWT.

Related Debt Agreements

To provide security for the repayment of the Loan, (i) CWT entered into a Guaranty pursuant to which it agreed to guarantee the payment and performance by the Company of its obligations under the Loan Agreement; (ii) the Company and CWT entered security agreements granting Broadwood a first priority perfected security interest in all of their respective assets, including its intellectual property rights; (iii) the Company has entered into a Pledge Agreement pursuant to which it pledged and delivered possession of all of CWT’s outstanding shares to Broadwood.

The foregoing summaries of the Loan Agreement, the Loan and the Related Debt Agreements are not intended to be complete and are qualified by reference to the more detailed descriptions thereof contained in the above-referenced Current Report on Form 8-K and to the Loan Agreement and the Related Agreements filed as exhibits to that Current Report.

Stock Purchase Agreement and Stock Purchase Warrants

Concurrently with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). That Agreement provides for the purchase by Broadwood of up to 3,000,000 shares of the Company’s common stock (the “Shares”), at a price of $1.00 per Share, subject to the following conditions: (i) during the six month term of the Loan, the Company will use its best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which may include other shareholders of the Company, and (ii) the Company remains in compliance with its covenants under the Loan Agreement. The Company will decide how many of those 3,000,000 Shares to sell to Broadwood pursuant to the Stock Purchase Agreement, based primarily on the Company’s cash requirements. The Stock Purchase Agreement provides that if, at any time during the next 12 months, the Company sells any shares of its common stock (or sells or issues securities that are convertible or exercisable into shares of common stock) at a price less than $1.00 per share, the Company will be required to issue outright to Broadwood, without additional consideration from it, a number of additional Shares (the “Make-Whole Shares”) sufficient to reduce the per share price paid by Broadwood for the total number of the Shares and Make-Whole Shares issued under the Stock Purchase Agreement to that lower price.

As consideration for the Loan and Broadwood’s entry into the Stock Purchase Agreement, on July 27, 2012 the Company issued stock purchase warrants (the “Warrants”) to Broadwood entitling it to purchase up to a total of 1,704,546 shares of the Company’s common stock (the “Warrant Shares”), at a price of $1.00 per Warrant Share, at any time during the succeeding eight years.

On July 27, 2012, the Company also entered into a Warrant Commitment Letter which provides that if the Company raises less than $3.0 million from sales of equity securities to other investors during the six month term of the Loan, then Broadwood will receive an additional Warrant (the “Additional Warrant”) entitling it to purchase, also at a price of $1.00 per share, an amount of shares of the Company’s common stock to be determined based on a formula in the Warrant Commitment Letter, with such amount not to exceed 1,000,000 additional shares (the amount of such additional shares, “Additional Warrant Shares”). The exercise price is to be adjusted if the Company completes subsequent financings at less than the current exercise price.

Broadwood currently owns approximately 21 percent of the Company’s outstanding shares and is the Company’s largest shareholder. If the Company sells a total of 3,000,000 Shares to Broadwood under the Stock Purchase Agreement, then Broadwood’s share ownership would increase to approximately 43 percent of the Company’s outstanding shares, and would further increase to approximately 55 percent of the Company’s outstanding shares, if Broadwood were to exercise the Warrants and the Additional Warrants in their entirety. The Warrants and Additional Warrant shares are recorded as derivative liabilities in our condensed consolidated balance sheet. (see Note 11)

The Warrants, including the Additional Warrant, provide that if the Company sells shares of its common stock (or any securities that are convertible or exercisable into shares of Company common stock) at a price less than $1.00 per share, then, subject to certain exceptions (including grants of stock incentives and sales of shares to officers, employees or directors under the Company’s equity incentive plans and issuances of shares in business acquisitions), the exercise price of the Warrants, including the Additional Warrant, then outstanding will be reduced to that lower price and the number of Warrant Shares purchasable by Broadwood on exercise of the Warrants and the Additional Warrant will be proportionately increased.

The Warrants and the Additional Warrant also grant to Broadwood the right to require the Company (i) to register the Warrant Shares under the Securities Act of 1933, as amended (the “Securities Act”) for possible resale and (ii) to include the Warrant Shares in any registration statement that the Company may file to register, under the Securities Act, the sale of Company shares for cash.

The foregoing summaries of the Stock Purchase Agreement and the Warrants, including the Additional Warrant, are not intended to be complete and are qualified by reference to the more detailed descriptions thereof contained in the above-referenced Current Report on Form 8-K and to the Stock Purchase Agreement, the form of Common Stock Purchase Warrant and the Warrant Commitment Letter which provides for the possible issuance by the Company of the Additional Warrant to Broadwood, which were filed as exhibits to that Current Report.

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Inventory

6 Months Ended

Jul. 31, 2012

Inventory [Abstract]

Inventory

8. Inventory

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

	July 31, 2012		January 31, 2012
Raw materials	$	824	$	1,002
Finished goods		303		129
	$	1,127	$	1,131

As of July 31, 2012, approximately $520,000 of total inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.

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Warranty Arrangements

6 Months Ended

Jul. 31, 2012

Warranty Arrangements [Abstract]

Warranty Arrangements

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 warranty accrual activity is shown in the table below (in thousands):

	As of And For the Six Months Ended July 31,
	2012			2011
Beginning balance	$	193		$	310
Accruals for warranties issued during the period		—			399
Utilization		(123	)		(679	)
	$	70		$	30

The Company believes that the balance remaining as of July 31, 2012 is adequate to cover standard warranty costs and believes that we have accrued for and paid substantially all of our material financial obligations with respect to the product recall.

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Fair Value Measurements

6 Months Ended

Jul. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

11. Fair Value Measurements

We follow FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.

ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.

Our fair value measurements at the July 31, 2012 reporting date are classified based on the valuation technique level noted in the table below (in thousands):

Description	July 31, 2012		Quoted Prices in Active Markets for (Level 1)		Significant Other Observable (Level 2)		Significant Unobservable (Level 3)
Derivative Liabilities	$	1,365	$	—	$	—	$	1,365

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our outstanding and contingent warrants issued to Broadwood as described in Note 10 utilizing the Monte Carlo simulation model:

	Three Months Ended July 31, 2012
Risk free interest rate	1.22%
Average expected life	8 years
Expected volatility	100.05%
Expected dividends	None

Since the warrants and contingent warrants were issued on July 27, 2012, the fair market value reported at July 31, 2012, the end of the fiscal quarter, is deemed to represent the fair market value on the date of the issuance. Accordingly, there has been no change in fair value reported in current period results of operations.

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Customer and Supplier Concentrations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011
Company's Revenue
Total revenue	$ 1,681	$ 1,926	$ 3,883	$ 4,876
Total Revenue, Percentage	100.00%	100.00%	100.00%	100.00%
Customer concentration:
Major Customer Revenue	1,672	1,907	3,860	4,806
Major Customer Revenue, Percentage	99.00%	99.00%	99.00%	98.00%
Dell Inc. and affiliates [Member]
Customer concentration:
Major Customer Revenue	15	314	67	685
Major Customer Revenue, Percentage	1.00%	16.00%	1.00%	14.00%
Lenovo Information Products Co., Ltd. [Member]
Customer concentration:
Major Customer Revenue	1,657	1,593	3,793	2,947
Major Customer Revenue, Percentage	98.00%	83.00%	98.00%	60.00%
Targus Group International, Inc. [Member]
Customer concentration:
Major Customer Revenue				$ 1,174
Major Customer Revenue, Percentage				24.00%

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Customer and Supplier Concentrations (Tables)

6 Months Ended

Jul. 31, 2012

Customer and Supplier Concentrations [Abstract]

Customers providing 10 percent or more of the Company's revenues for either quarter ended

The customers providing 10 percent or more of the Company’s revenue for any of the periods presented below are listed here:

	Three Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	1,681	100	%	$	1,926	100	%
Customer concentration:
Dell Inc. and affiliates.	$	15	1	%	$	314	16	%
Lenovo Information Products Co., Ltd.		1,657	98	%		1,593	83	%
	$	1,672	99	%	$	1,907	99	%

	Six Months Ended July 31,
	2012				2011
	(In thousands)
Total revenue	$	3,883	100	%	$	4,876	100	%
Customer concentration:
Dell Inc. and affiliates.	$	67	1	%	$	685	14	%
Targus Group International, Inc.		—	—	%		1,174	24	%
Lenovo Information Products Co., Ltd.		3,793	98	%		2,947	60	%
	$	3,860	99	%	$	4,806	98	%

Customers comprising 10 percent or more of the Company's gross accounts receivable due from customers

The customers comprising 10 percent or more of the Company’s gross accounts receivable due from customers at either July 31, 2012 or January 31, 2012 are listed below (in thousands):

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from customers	$	1,679	100	%	$	940	100	%
Customer concentration:
Dell Inc. and affiliates.		4	—	%		371	39	%
Lenovo Information Products Co., Ltd.		1,668	99	%		562	60	%
	$	1,672	99	%	$	933	99	%

Suppliers comprising 10 percent or more of the Company's gross accounts receivable due from suppliers

The suppliers comprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either July 31, 2012 or January 31, 2012 are listed below (in thousands).

	July 31, 2012				January 31, 2012
Total gross accounts receivable due from suppliers	$	614	100	%	$	754	100	%
Customer concentration:
EDAC Power Electronics Co. Ltd (see Note 12)	$	—	—	%	$	532	71	%
Flextronics Electronics.		442	72	%		40	5	%
Zheng Ge Electrical Co., Ltd.		122	20	%		122	16	%
	$	564	92	%	$	694	92	%

Suppliers comprising 10 percent or more of the Company's gross accounts payable

The companies comprising 10 percent or more of our gross accounts payable at either July 31, 2012 or January 31, 2012 are listed below (in thousands, except percentages).

	July 31, 2012				January 31, 2012
Total gross accounts payable	$	2,834	100	%	$	3,912	100	%
Accounts payable concentration:
EDAC Power Electronics Co. Ltd	$	—	—	%	$	1,964	50	%
Chicony Power Technology, Co. Ltd		1,100	39	%		1,100	28	%
Pillsbury Winthrop Shaw Pittman, LLP.		817	29	%		386	10	%
	$	1,917	68	%	$	3,450	88	%

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Discontinued Operations (Details Textual) (WTS [Member], USD $)	6 Months Ended
	Jul. 31, 2012
WTS [Member]
Discontinued Operation (Textual) [Abstract]
Discontinued operations related to a sales tax audit	$ 21,000

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Loan & Related Agreements (Details Textual) (USD $)	Jul. 31, 2012	Jul. 27, 2012
Loan And Related Agreements (Textual) [Abstract]
Additional shares		1,000,000
Ownership percentage of Broadwood		21.00%
Warrant covenant trigger price per share	$ 1
Senior Secured [Member]
Loan And Related Agreements (Textual) [Abstract]
Face amount of Loan		2,000,000
Interest rate on Loan		5.00%
Possible use of debt funds in capital expenditure		400,000
Stock Purchase And Warrant Agreement [Member]
Loan And Related Agreements (Textual) [Abstract]
Common stock agreed to be purchased, shares		3,000,000
Common stock agreed to be purchased, per share price		1.00
Sale of additional equity securities		3,000,000
Warrant Shares entitled as per Stock Purchase Agreement		1,704,546
Exercise price of Warrant Shares		1.00
Ownership percentage of Broadwood post Stock Purchase Agreement		43.00%
Ownership percentage of Broadwood post Stock Purchase Agreement and post exercise of warrants		55.00%

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (561)	$ (3,194)
Loss from discontinued operations		21
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation	54	271
Loan origination fees		53
Loss on retirement of property and equipment	11
Stock-based compensation	75	95
Recovery from doubtful accounts receivable	(32)
Provision for obsolete inventory	(630)	(185)
Supplier settlement	(1,443)
Changes in operating assets and liabilities:
Accounts receivable due from customers	(739)	1,470
Accounts receivable due from suppliers	(393)	(51)
Inventory	634	(31)
Other assets	10	(195)
Accounts payable	886	(1,498)
Accrued liabilities	876	(498)
Deferred rent	3	39
Net cash used in continuing operating activities	(1,249)	(3,703)
Net cash used in discontinued operating activities		(21)
Net cash used in operating activities	(1,249)	(3,724)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(40)	(48)
Net cash used in investing activities	(40)	(48)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable	2,000
Repayment of line of credit		(1,000)
Loan origination fees		(53)
Net cash provided by (used in) financing activities	2,000	(1,053)
Net increase (decrease) in cash and cash equivalents	711	(4,825)
Cash and cash equivalents, beginning of period	908	6,381
Cash and cash equivalents, end of period	1,619	1,556
Noncash investing and financing activities:
Loan discount recorded in connection with issuance of warrants	1,365
Issuance of common stock upon the vesting of restricted stock units	22
Supplemental disclosures of cash flow information:
Cash paid for interest		12
Cash paid for income taxes, net of refunds	$ 2	$ 2

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Recent Accounting Pronouncements

6 Months Ended

Jul. 31, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

5. Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards and provides increased transparency around valuation inputs and investment categorization. ASU 2011-04 also requires new disclosures about qualitative and quantitative information regarding the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The Company adopted ASU 2011-04 in the second quarter of fiscal 2013, when it became applicable to our Company.

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which is intended to reduce the complexity and cost of performing a quantitative test for impairment of indefinite-lived intangible assets by permitting an entity the option to perform a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired in order to determine whether it should calculate the fair value of the asset. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value is an indefinite-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, or in fiscal 2014 for Comarco’s annual impairment test. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

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Stock Based Compensation (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Jul. 31, 2012	Jul. 31, 2011
Share-based Compensation Expense
Total stock-based compensation expense	$ 36	$ 24	$ 75	$ 95
Impact on basic and diluted earnings per share	$ 0.00	$ 0.00	$ 0.01	$ 0.01

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Inventory (Details) (USD $) In Thousands, unless otherwise specified	Jul. 31, 2012	Jan. 31, 2012
Summary of Inventory, net of reserves
Raw materials	$ 824	$ 1,002
Finished goods	303	129
Total inventory	$ 1,127	$ 1,131

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Earnings (Loss) Per Share (Tables)

6 Months Ended

Jul. 31, 2012

Earnings (Loss) Per Share [Abstract]

Summary of reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss)

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 July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Basic:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Basic earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)

	Three Months Ended July 31,					Six Months Ended July 31,
	2012		2011			2012			2011
Diluted:
Net income (loss) from continuing operations	$	151	$	(1,910	)	$	(561	)	$	(3,173	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings per share from continuing operations		7,608		7,344			7,508			7,344
Basic and diluted income (loss) per share from continuing operations	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)
Net loss from discontinued operations	$	—	$	(21	)	$	—		$	(21	)
Weighted average shares outstanding		7,608		7,344			7,508			7,344
Basic and diluted earnings per share from discontinued operations	$	—	$	—		$	—		$	—
Net income (loss)	$	151	$	(1,931	)	$	(561	)	$	(3,194	)
Weighted average shares outstanding		7,585		7,344			7,508			7,344
Effect of dilutive securities – stock options		23		—			—			—
Weighted average shares used in the calculation of diluted earnings (loss) per share		7,608		7,344			7,508			7,344
Diluted earnings (loss) per share	$	0.02	$	(0.26	)	$	(0.07	)	$	(0.43	)