~~Comarco, Inc., through~~ its ~~wholly-owned~~ subsidiary, Comarco Wireless Technologies, Inc. ~~(collectively, “we,” "us," "our," “Comarco,” or~~The officers serve at the “Company”), is a developer and designer of innovative technologies and intellectual property currently used in power adapters to power and charge battery powered devices such as laptop computers, tablets, smart phones and readers. Our operations consist solelypleasure of the ~~operations~~Board of Directors, subject to the terms of severance compensation agreements with the Company.

Name	Age	Position
Alisha K. Charlton	43	Vice President, Chief Accounting Officer andCorporate Secretary
Donald L. McKeefery	51	Vice President and Chief Operating Officer

Alisha Charltonhas over 20 years of experience in accounting and finance. Ms. Charlton joined the Company as Assistant Controller in October 2000, became Corporate Controller in May 2003 and became Vice President, Corporate Controller and Secretary in March 2008. Ms. Charlton was appointed Chief Accounting Officer on April 19, 2011 and currently serves as the Company’s principal financial officer and principal accounting officer. Before joining the Company, Ms. Charlton held various accounting and finance positions with CKE Restaurants, Inc. (“CKE”) from 1995 to 2000, including Director, Controller of Santa Barbara Restaurant Group, Inc., a CKE affiliate. Prior to joining CKE, Ms. Charlton was a certified public accountant and supervisor with KPMG Peat Marwick (now KPMG LLP). Ms. Charlton holds a B.A. in Business Economics with High Honors from the University of California, Santa Barbara.

Donald McKeeferywas appointed Chief Operating Officer of Comarco in August 2011. Prior to this appointment, Mr. McKeefery was Vice President — Manufacturing & Operations for all of the company’s operations, starting in May 2008. He joined the Company in February 2005, as Director of Operations for the Wireless ~~Technologies,~~Test Solutions and Call Box Divisions (both of which were sold during fiscal 2009). From August 1997 to February 2005, Mr. McKeefery held various management positions with Western Digital Corporation, a company that designs, manufactures and sells hard drives for the computer and consumer industries. From January 1996 to August 1997, he was the North American Service Manager for EDAP Technomed, Inc. ~~(“CWT”~~(now EDAP TMS S.A.)., a company that designs, manufactures and sells minimally invasive medical devices for the treatment of urological diseases to hospitals, clinics and private practices. From 1989 to 1996, he held various, progressive positions in the manufacturing division of Beckman Instruments, Inc. (now Beckman Coulter, Inc.), a leading provider of clinical and biomedical devices.

~~Going Concern Qualification~~

Corporate Governance

Code of Ethics

The Audit and Finance Committee has adopted a Code of Ethics for Senior Financial Officers to promote and provide for honest and ethical conduct by the Company’s Senior Financial Officers, as well as for full, fair, accurate and timely financial management and reporting. The Company’s Senior Financial Officers include the Chief Executive Officer and the Chief Accounting Officer. The Company ~~has experienced pre-tax losses from continuing operations~~expects these financial officers to act in accordance with the highest standards of professional integrity, to provide full and accurate disclosure in reports and other documents filed with the SEC and other regulators and in any public communications, to comply with all applicable laws, rules and regulations and to deter wrongdoing. The Company’s Code of Ethics for ~~fiscal 2013 and fiscal 2012 totaling $5.6 million and $5.3 million, respectively. The Company also has negative working capital and uncertainties surrounding~~Senior Financial Officers is available on the Company’s ~~future ability~~website at www.comarco.com. We will post any amendment to ~~obtain borrowings and raise additional capital. These factors, among others, raise substantial doubt about~~this code, as well as any waivers that are required to be disclosed by the rules of the SEC, on our ~~ability to continue as a going concern.~~

~~Business Strategy and Future Plans~~

Our business today is almost entirely driven by sales of our products to Lenovo (accounting for 98% of our fiscal 2013 revenue), and we continue to focus a significant percentage of our time and resources on providing outstanding products and service to Lenovo, our valued principal customer.

In addition to contributing significantly to the value of our ChargeSource® products, our extensive patent portfolio covering key technical aspects of our products could potentially generate an additional revenue stream based upon royalties paid to us by others for the use of some or all of our patents in third party products. We believe that a favorable outcome in the Kensington matter described in Note 13 of Part II, Item 8 of this report, would likely ensure such a revenue stream. Such a favorable outcome cannot be guaranteed and based upon the existing trial date of January, 2014, we may not generate significant royalties, if any, until fiscal 2015. We are concurrently exploring opportunities to monetize our patent portfolio, including through enforcement.

A positive outcome in our ongoing litigation with Chicony and Kensington, described in Note 13 of Part II, Item 8 of this report, if such an outcome were realized, could not only reduce our accumulated deficit, but could also provide us with a cash infusion. However, the outcome of our ongoing litigation matters is not determinable as ofwebsite promptly following the date of ~~filing~~such amendment or waiver. The Company will provide a copy of this ~~report.~~

~~Simultaneously, we are working~~document to ~~build sales~~any person, without charge, upon receipt of ~~our newest generation AC adapter, branded ChargeSource®. This product line is currently available exclusively on our retail website www.chargesource.com~~a request addressed to the Corporate Secretary at Comarco, Inc., 25541 Commercentre Drive, Suite 250, Lake Forest, CA 92630.

. Audit and Finance Committee~~We believe retail website sales~~

The Audit and Finance Committee monitors the quality and integrity of the Company’s financial statements, internal controls, risk management and legal and regulatory compliance. In addition, the Audit and Finance Committee oversees the accounting and financial reporting processes and the audits of the Company’s financial statements, including monitoring the independence, qualifications and performance of the Company’s independent registered public accounting firm. In this capacity, the Audit and Finance Committee determines the compensation of, evaluates and, when appropriate, replaces the Company’s independent registered public accounting firm, pre-approves all audit and permitted non-audit services and reviews the scope and results of each fiscal year’s outside audit. The fiscal 2013 members of the Audit and Finance Committee were Messrs. Levin, who chaired the committee, Borowiec and Mulroy. The Board determined that the members of the Audit and Finance Committee during fiscal 2013 were ~~constrained~~independent as defined under Rule 10A-3(b) promulgated by our lack of financial resources to implement a marketing plan. Although our financial position has not materially improved, we continue to implement very low cost marketing trials in an attempt to generate retail sales. We are confident that our products can compete very effectively in the marketplace from a technology and value perspective. Our challenge is to ensure that our strategies are tightly aligned with our limited available assets and resources.

In summary, our current objectives are focused primarily on maintaining our relationship with Lenovo, monetizing our existing patent portfolio, prevailing or otherwise successfully resolving our current litigation and implementing creative, low cost marketing trials in an attempt to generate sales from our ChargeSource® product line. However, there can be no assurance that we will be successful in any of these objectives.

~~Company Trends and Uncertainties~~

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

Revenue for fiscal 2013 decreased to $6.3 million compared to $8.1 million for fiscal 2012. The decrease is attributable to our exit from the Dell business during the second quarter of fiscal 2013, due to low volumes and thin margins, as well as recording the final Targus sales in fiscal 2012 offset by increased sales to our principal customer Lenovo.

On February 11, 2013, we entered into a Secured Loan Agreement (the “Loan Agreement”) with Elkhorn Partners Limited Partnership (“Elkhorn”). Pursuant to the Loan Agreement, on February 11, 2013, Elkhorn made a $1,500,000 senior secured term loan (the “Loan”) to us. The Loan bears interest at 7% per annum for the first year; increasing to 8.5% per annum thereafter, ranks senior in right of payment to all of our other indebtedness, is secured by a first priority security interest in all of the assets of Comarco and CWT, and is due and payable in full on November 30, 2014. See Note 14 to our 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, Elkhorn entered into a Stock Purchase Agreement with us (the “Stock Purchase Agreement”). Pursuant to that Stock Purchase Agreement, we sold 6,250,000 shares of our common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. The purchase price of $0.16 per share paid by Elkhorn for those shares was determined by arms-length negotiations between Elkhorn and the members of a special committee of our Board of Directors, comprised of three of the directors who have no affiliation with Elkhorn and no financial interest, other than their interests solely as our shareholders, in either the loan or share transactions with Elkhorn. See Note 14 to our consolidated financial statements contained elsewhere in this report for additional information regarding the Stock Purchase Agreement and certain related agreements.

As a result of our sale of the 6,250,000 shares of common stock to Elkhorn pursuant to the Elkhorn Stock Purchase Agreement, Elkhorn’s beneficial ownership has increased from approximately 9% to approximately 49% of our outstanding voting stock, making Elkhorn our largest shareholder.

On January 28, 2013, Broadwood Partners, L.P. (“Broadwood”) informed us of its position that one or more of the conditions precedent to its obligation to purchase shares of our common stock pursuant to the SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase. See Note 7 to our consolidated financial statements contained elsewhere in this report for additional information.

On July 28, 2012, our Board of Directors appointed Mr. Louis Silverman to the board and as Chairman of the Board. Mr. Silverman has a track record of turning business opportunities into successful companies with significant revenue and profit growth, resulting in substantial shareholder value creation.

On July 27, 2012, we entered into a Senior Secured Six Month Term Loan Agreement (the “Prior Loan Agreement”) with 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 “Prior Loan”) to us. The Prior Loan was repaid on February 11, 2013 from the proceeds received from the Elkhorn Loan and stock purchase described above. See Note 7 to our consolidated financial statements contained elsewhere in this report for additional information regarding the Prior Loan Agreement, the Prior Loan and certain related agreements.

As previously reported, on July 24, 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, we discharged $1.4 million in net liabilities due to EDAC.

In December 2011, we launched our direct-to-consumer retail sales channel through our website www.chargesource.com in an effort to increase retail sales and improve gross margins. Revenue generated from this sales channel in fiscal 2013 was not significant and we believe sales were constrained by our lack of financial resources to implement a marketing plan. We continue to implement very low cost marketing trials in an attempt to generate retail sales.

On January 25, 2011 we received written notification from Targus Group International, Inc. (“Targus”) of its non-renewal of the Strategic Product Development and Supply Agreement (the “Targus Agreement”). Approximately 15 percent of our revenue for fiscal 2012 was from sales to Targus. We generated no revenue from sales to Targus in fiscal 2013 nor do we expect any future revenue from sales to Targus.

We are focused on preserving our cash balances by monitoring expenses, identifying costs savings, and investing only in those strategies and products that we believe will most likely contribute to our profitability. Additionally, during fiscal 2013 a significant portion of our cash used in operations reported as part of our net loss relates to funding the litigation described in Note 13 to our consolidated financial statements contained elsewhere in this report.

~~Critical Accounting Policies~~

The preparation of our consolidated financial statements requires us to apply accounting policies and make certain estimates and judgments. All of our significant accounting policies are presented in Note 2 of the notes to the consolidated financial statements in Item 8 of this report. Of our significant accounting policies, we believe the following are the most significant and involve a higher degree of uncertainty, subjectivity, and judgments. These policies involve estimates and judgments that are inherently uncertain. Changes in these estimates and judgments may significantly impact our annual and quarterly operating results.

~~Revenue Recognition~~

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

~~Stock-based Compensation~~

We recognize compensation costs for all stock-based awards made to employees, consultants, and directors. The fair value of stock based awards is estimated on the date of grant, and is recognized as expense ratably over the requisite service period. We currently use either a Lattice Binomial or the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. Both the Lattice Binomial and the Black-Scholes option-pricing model are based on a number of assumptions, including expected volatility, expected forfeiture rates, expected life, risk-free interest rate and expected dividends. The prevailing difference between the two models is the Lattice Binomial model’s ability to enhance the simple assumptions that underlie the Black-Sholes model. The Lattice Binomial model allows for assumptions such as risk-free rate of interest, volatility and exercise rate to vary over time reflecting a more realistic pattern of economic and behavioral occurrences. If the assumptions change under either model, stock-based compensation may differ significantly from what we have recorded in the past.

~~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, we do not invest in separable financial derivatives or engage in hedging transactions. However, we have entered into certain financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. We may engage in other similar complex financing 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. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as loss due to change in fair value of derivative liabilities on the consolidated statement of operations. 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.

~~Accounts Receivable~~

We perform ongoing credit evaluations of our customers and adjust credit limits and related terms based upon payment history and the customer’s current credit worthiness. We continually monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Specifically, our management must make estimates of the collectability of our accounts receivable. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables 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.

~~Valuation of Inventory~~

We value inventory at the lower of the actual cost to purchase and/or manufacture the inventory (calculated on average costs, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on excess quantities on hand based upon historical and forecasted component usage. As demonstrated during prior periods, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of revenue at the time of such determination. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our operating results.

~~Income Taxes~~

We are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. We then assess on a periodic basis the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was 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 loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2013.

~~Valuation of Long-Lived Assets~~

We evaluate long-lived assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns that negatively impact our customers or markets, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and the discounted expected future cash flows using a discount rate based upon our cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.

~~Warranty Costs~~

We provide limited warranties for products for a period generally not to exceed 24 months. We accrue for the estimated cost of warranties at the time revenue is recognized. The accrual is a fixed rate which is consistent with our actual claims experience. Should actual warranty claim rates differ from our estimates, revisions to the liability would be required.

We recorded an additional accrual of $0.2 million related to the recall during fiscal 2012. Significant management judgments and estimates have been made to determine the amount of the recall accrual. We believe we have accrued and paid for substantially all of our material financial obligations with respect to the recall. We are in on-going litigation with the manufacturer of the Bronx product that is the subject of the recall.

~~Results of Operations—Continuing Operations~~

~~The following tables set forth certain items as a percentage of revenue from our audited consolidated statements of operations for fiscal 2013 and fiscal 2012:~~

Years Ended January 31, 2013 over
2013 2012 2012
(In thousands) % Change
% of Revenue % of Revenue
Revenue
$ 6,338 100% $ 8,069 100% (21 %)

Operating loss
$ (3,008 ) $ (5,263 )
Net loss from continuing operations $ (5,592 ) $ (5,289 )

Years Ended January 31, 2013 over
2013 2012 2012
(In thousands) % Change

Revenue:
North America
$ 78 $ 2,397 (97 %)
Europe
22 26 (15 %)
Asia – Pacific
6,238 5,646 10 %
$ 6,338 $ 8,069 (21 %)

Years Ended January 31, 2013 over
2013 2012 2012
(In thousands) % Change

Revenue:
Dell
$ 67 $ 1,398 (95 %)
Lenovo
6,203 5,345 16 %
Targus
— 1,174 (100 %)
Other
68 152 (55 %)
$ 6,338 $ 8,069 (21 %)

~~Revenue~~

The fiscal 2013 decrease in revenue of $1.7 million is attributable primarily to the loss of Targus as a customer during fiscal 2012. As previously discussed, on January 25, 2011, we received written notification from Targus of its non-renewal of the Targus Agreement. We expect no future revenue from Targus. Additionally, revenue to Lenovo increased $0.9 million or 16 percent. The increase was primarily due to a prior year disruption in our supply chain, which was remediated in fiscal 2013. We introduced a 90 watt DC adapter sold exclusively to Dell in May 2010. We exited the Dell business during fiscal 2013 due to low sales volumes and thin product margins, coupled with high administrative costs. We expect no future revenue from Dell.

~~Cost of Revenue and Gross Margin~~

Years Ended January 31, 2013 over
2013 2012 2012
(In thousands) % Change

% of
Total

% of
Total

Cost of Revenue:
Product costs
$ 4,375 105 % $ 4,824 58 % (9 %)
Accrued product recall costs — — 248 3 % (100 %)
Supplier Settlement (1,443 ) (35 %) 383 5 % (477 %)
Supply chain overhead
812 20 % 1,620 20 % (50 %)
Inventory reserve and scrap charges
406 10 % 1,014 12 % (60 %)
Freight, expedite, and other charges
— — 172 2 % (100 %)
$ 4,150 100 % $ 8,261 100 % (50 %)

Years Ended January 31, 2013 over
2013 2012 2012 ppt
Change
Gross profit (loss) percent
35 % (2 %) 37
Gross profit percent, excluding supplier settlement 12 % 2 % 10

The fiscal 2013 decrease in the total cost of revenue of $4.1 million compared to fiscal 2012 is attributable to reduced product costs, freight, expedite and other costs, supply chain overhead, inventory reserve and scrap charges and recall accruals incurred during fiscal 2012 as well as a favorable settlement with a former supplier in fiscal 2013 compared to the fiscal 2012 supplier settlement. The product costs incurred in fiscal 2013 decreased by $0.4 million or 9 percent compared to fiscal 2012, which is generally consistent with our 21 percent decrease in revenue. However, approximately $0.9 million of the Targus revenue recorded in fiscal 2012 related to re-worked Bronx product, and it had no associated product costs as those costs, totaling approximately $0.6 million, had been recorded in the fiscal 2011, and the associated revenue had been deferred due to uncertainty of collection at the time. As previously discussed, in fiscal 2011 we announced a voluntary product safety recall of approximately 500,000 units of our Bronx 90-watt universal AC power adapter sold to our distributer, Targus. Included in the cost of revenue fiscal 2012 is an accrual for the estimated product costs associated with the recall of $0.2 million.

During 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, we reversed previously incurred product and freight costs and discharged $1.4 million in net liabilities due to EDAC. During the second quarter of fiscal 2012, we accrued a charge of $0.4 million relating to a settlement reached with Anam Electronics (“Anam”) relating to purchase commitments made to support the Targus business.

Our supply chain overhead expenses decreased $0.8 million or 50 percent in fiscal 2013 compared to fiscal 2012. The decrease is due to reductions in personnel and related costs as well as other expenses as a result of continued cost cutting measures.

The inventory reserve and scrap charges of $0.4 million recorded in fiscal 2013 relates primarily to reserves established for excess ChargeSource components as well as slow-moving inventory. The inventory reserve and scrap charges of $1.0 million recorded in fiscal 2012 relates primarily to Manhattan product components that we procured from Anam during fiscal 2012 as well as reserves established for excess tips located in many warehouses as well as increases in our reserves due to slow-moving inventory.

The freight, expedite and other charges in fiscal 2012 relate primarily to Dell shipments. As Dell has worldwide inventory hubs, our shipping costs increased due to the lower per-shipment volume required by these various locations. Although we still incur freight expenses, the amounts are not material compared to the prior fiscal year amounts and the current year amounts are included in the supply chain overhead.

~~Operating Costs and Expenses~~

Years Ended January 31, 2013 over
2013 2012 2012
(In thousands) % Change
% of Revenue % of Revenue
Operating expenses:
Selling, general, and administrative expenses, excluding corporate overhead $ 256 4 % $ 675 8 % (62 %)
Corporate overhead
2,505 40 % 2,465 31 % 2 %
Engineering and support expenses
2,435 38 % 1,931 24 % 26 %
$ 5,196 82 % $ 5,071 63 % 2 %

The fiscal 2013 decrease in selling, general and administrative expenses of $0.4 million compared to fiscal 2012 relates primarily to decreased personnel and related costs. During the third quarter of fiscal 2012, our former Vice President of Sales and Marketing and interim Chief Executive Officer was terminated and a settlement of $40,000 paid in the third fiscal quarter of fiscal 2012 is included in the amounts above. During fiscal 2013, the sales and marketing function was performed by various consultants who are focused on digital media and search engine optimization to assist with generation of sales on our website www.chargesource.com.

Corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company. The increase of $40,000 for the year ended January 31, 2013 relates primarily to increased legal expenses of approximately $0.3 million related primarily to the Chicony litigation offset by decreases in rent expense, insurance, travel and other expenses.

Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our engineers and testing personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products. The fiscal 2013 increase in engineering and support costs includes approximately $0.9 million in increased legal fees primarily due to the Kensington litigation offset by decreases of approximately $0.3 million and $0.1 million respectively, in personnel and related expenses (due primarily to a reduction in overall headcount) and decreased rent expense (pursuant to the amended lease we entered into in fiscal 2012).

~~Interest Expense, Net~~

Interest expense, net, consists primarily of amortization expense related to the loan discount and interest expense offset by interest income, if any. During fiscal 2013, we incurred approximately $1.4 million in amortization of the loan discount. Additionally, loan fees totaling $55,000 related to our Loan Agreement with Broadwood were expensed as incurred. During fiscal 2012, we earned $2,000 in interest income and incurred approximately $65,000 in interest expense and loan origination fees related to our former Silicon Valley Bank (“SVB”) credit facility.

~~Loss Due to Change in Fair Value of Derivative Liabilities~~

For fiscal 2013, we reported an increase in the fair value of our derivative liabilities of approximately $1.1 million (See Note 8 of Part II, Item 8 of this report). Our derivative liabilities consist solely of the warrants issued to Broadwood in the second quarter of fiscal 2013.

~~Other Income (Loss), Net~~

~~During fiscal 2012, we recorded other income of $35,000 related to a final distribution of the sale of our investment in SwissQual AG from fiscal 2006.~~

~~Income Tax Benefit~~

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was 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 loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2012.

During fiscal 2013, we recorded a net loss of $5.6 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset of $17.7 million, $2.4 million of which relates to net operating losses created in fiscal 2013, at January 31, 2013 continues to be fully reserved.

During fiscal 2012, we recorded a net loss of $5.3 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset of $17.1 million at January 31, 2012 was fully reserved, and included $1.5 million of net operating loss carryforwards created in fiscal 2012.

~~Discontinued Operations, net of income taxes~~

~~Income from Discontinued Operations – Wireless Test Solutions~~

The sale of our wireless test solutions (“WTS”) business was completed on January 6, 2009, between us and Ascom Holding AG and its subsidiary Ascom Inc., (collectively, “Ascom”), which resulted in a pre-tax gain of $5.9 million.

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 borne by us for the sale of our WTS business to Ascom.

~~Liquidity and Capital Resources~~

~~The following table is a summary of our Consolidated Statements of Cash Flows:~~

Years Ended January 31,
2013 2012
(In thousands)
Cash provided by (used in):
Operating activities
$ (2,712 ) $ (4,236 )
Investing activities
(92 ) (184 )
Financing activities
2,000 (1,053 )

~~Cash Flows from Operating Activities~~

The cash used in operating activities during fiscal 2013 of $2.7 million relates to our net loss of $5.6 million and is offset by non-cash amortization of the Broadwood loan discount of $1.4 million, an increase in the fair value of derivative liabilities of $1.1 million and stock-based compensation expense of $0.2 million. Additionally, we had a non-cash settlement with EDAC crediting our cost of revenue in the amount of $1.4 million and total receivable increases of $1.3 million, offset by increases totaling $2.2 million in accounts payable and accrued liabilities and a decrease in net inventory of $0.7 million.

The cash used in operating activities during fiscal 2012 of $4.2 million relates to our net loss of $5.3 million and is offset by non-cash depreciation and stock–based compensation of $0.4 million and $0.2 million, respectively. Accounts receivable collections from customers totaled $2.6 million in fiscal 2012. This source of cash is offset by a combined net decrease in accrued liabilities and accounts payable of $2.7 million related primarily to supplier payments.

Late in the fourth quarter of fiscal 2013, we initiated a reduction in force across all departments in order to reduce our cash burn. Our January 31, 2013 cash balance was approximately $100,000 which was increased by approximately $400,000 from the proceeds received from Elkhorn during the first quarter of fiscal 2014. While we anticipate that our cost cutting measures will reduce our cash burn during fiscal 2014, we may require further cost cutting measures and/or additional capital from debt or equity financing to fund our operations. We cannot be certain that such financing will be available to us on acceptable terms, or at all.

~~Cash Flows from Investing Activities~~

During fiscal 2013, we spent $0.1 million in capital equipment purchases, which primarily related to purchases of tooling and other equipment used by our contract manufacturers and engineers for the manufacture and design of our products. Our restricted cash balance declined by $10,000 in fiscal 2013 as we reduced the collateral requirement for our chargebacks related to our merchant services account, which we opened in the third quarter of fiscal 2012 in anticipation of the launch of our retail website www.chargesource.com.

During fiscal 2012, we spent $0.1 million in capital equipment purchases, which primarily related to purchases of tooling and other equipment used by our contract manufacturers and engineers for the manufacture and design of our ChargeSource® products. Additionally, during fiscal 2012, we generated restricted cash of $92,000, of which $77,000 relates to the security deposit of for our corporate lease, which became collateralized by cash in a separate bank account. The remaining $15,000 of restricted cash relates to collateralized cash balances for chargebacks related to our merchant services account.

~~Cash Flows from Financing Activities; Loan Agreement & Credit Facility~~

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

Pursuant to the Broadwood Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Broadwood Loan”) to us. The Broadwood Loan bore interest at 5% per annum, ranked senior in right of payment to all of our other indebtedness, was secured by a first priority security interest granted to Broadwood in all of our assets, and was due and payable in full on January 28, 2013. The Broadwood Loan was paid in full on February 11, 2013 with debt and equity financing secured from Elkhorn Partners Limited Partnership (“Elkhorn”). (See Notes 7 and 14 of Part II, Item 8 of this report). In conjunction with the Broadwood Loan Agreement, we incurred $55,000 in loan fees that are reported in interest expense, net in our consolidated statement of operations for fiscal 2013.

On February 11, 2009, we entered into a Loan and Security Agreement (the “SVB Agreement”) with SVB. The SVB 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 SVB 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 SVB Agreement effective September 22, 2011.

~~Uncertainties Regarding Future Operations and the Funding of Liquidity Requirements for the Next 12 Months~~

As of January 31, 2013, we had negative working capital of approximately $7.0 million, of which $2.5 million relates to the fair value of derivative liabilities. 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, it will be necessary for us to increase sales, effectively manage operating expenses, and 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 we will be successful in meeting those operating objectives or cash requirements.

On February 11, 2013, we and Elkhorn, entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements (collectively, the “Elkhorn Agreements”). Pursuant to those agreements, Elkhorn made a $1.5 million senior secured loan to us with a maturity date of November 30, 2014 (the “Elkhorn Loan”) and purchased a total of 6,250,000 shares of our common stock at a cash purchase price of $0.16 per share, generating an additional $1.0 million of cash for the Company. On February 11, 2013, we used approximately $2.1 million of the proceeds of $2.5 million from the Elkhorn Loan and the sale of the shares to Elkhorn to pay the entire principal amount of and all accrued interest on the Broadwood Loan.

Concurrent with the execution of the Broadwood Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “SPA”). The SPA provided for the purchase by Broadwood of up to 3,000,000 shares of our common stock, at a price of $1.00 per share, subject to the following conditions: (i) during the six month term of the Broadwood Loan, we would use our best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which could include other shareholders of the Company, and (ii) we remain in compliance with our covenants under the Broadwood Loan Agreement.

We were informed by Broadwood on January 28, 2013, that it was Broadwood’s position that one or more of the conditions precedent to its obligation to purchase shares of our common stock pursuant to the SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase.

It is our position that, contrary to Broadwood’s assertions, all of the conditions under the SPA had been satisfied, and Broadwood’s refusal to purchase 3,000,000 shares of our common stock, at the price of $1.00 per share, constituted a material breach by Broadwood of its obligations under the SPA. As a result, as of the date of filing this report, we have not issued any additional stock purchase warrants to Broadwood and each party has reserved its rights under and with respect to the SPA and any stock purchase warrants that may be owed to Broadwood.

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

~~Our continued relationship with our primary customer Lenovo (representing 98% of our total revenues for fiscal 2013);~~

~~Our patent enforcement efforts;~~

~~Our future retail sales of our ChargeSource® products generated from our website www.chargesource.com;~~

~~The cost and outcome of ongoing litigation with our former contract manufacturer of the Bronx product, the subject of a product recall, and with Kensington, the maker of competitive power adapters;~~

~~The outcome of our dispute with Broadwood;~~

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

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

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. However, there can be no assurance that the additional financing we may need 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, enforce our intellectual property, develop new revenue streams or otherwise respond to competitive pressures, our operating results and financial condition could be adversely affected and we may not be able 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 consolidated financial statements included in this report do not reflect any adjustments related to the outcome of this uncertainty.

~~Contractual Obligations~~

In the course of our business operations, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Payments under these contracts are summarized as follows as of January 31, 2013 (in thousands):

Payments due by Period
Long Term Debt Obligations
Less than
1 year

1 to 3
years

3 to 5
years
More than 5 years Total
Operating lease obligations $ 239 $ 504 $ 152 $ — $ 895
Purchase obligations 1,509 — — — 1,509
$ 1,748 $ 504 $ 152 $ — $ 2,404

We generally issue purchase orders to our suppliers with delivery dates from four to six weeks from the purchase order date. In addition, we regularly provide significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accepting delivery of materials pursuant to our purchase orders subject to various contract provisions that allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. During fiscal 2012, we incurred expenses relating to cancellation of purchase orders to Anam in the amount of $0.4 million, which amount was recorded in cost of revenue in our consolidated statement of operations. If we are unable to adequately manage our suppliers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, results of operations, and financial position. Our fixed purchase commitments at January 31, 2013 totaled $1.5 million, of which approximately $0.3 million was cancelable as of January 31, 2013.

~~In addition to the amounts shown in the table above, we have unrecognized tax benefits in the amount of $0.8 million, which we are uncertain as to if or when such amounts may be settled.~~

We have severance compensation agreements with key executives. These agreements require us to pay these executives, in the event of a termination of employment following a change of control of the Company or other circumstances, their then current annual base salary and the amount of any bonus amount the executive would have achieved for the current year. We have not recorded any liability in the 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 additional warrant shares by us 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.

Additionally, as a result of our sale of the 6,250,000 shares of common stock to Elkhorn, as discussed above, Elkhorn’s beneficial ownership of our common stock has increased from approximately 9% to approximately 49%, making Elkhorn our largest shareholder. Each of the executives who are parties to severance compensation agreements has waived their rights to receive payments under those agreements as a result of the issuance of shares to Elkhorn.

~~Recent Accounting Pronouncements~~

~~In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)~~,” 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. We adopted ASU 2011-04 in the second quarter of fiscal 2013, when it became applicable to us.

~~In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income~~.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 did not have a material impact on our consolidated balance sheet, results of operations or cash flow.

~~ITEM 7A.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

~~Not applicable.~~

~~ITEM 8.~~

~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

~~COMARCO, INC. AND SUBSIDIARY~~

~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~

	~~Page~~
~~Report of Independent Registered Public Accounting Firm~~	30
~~Financial Statements:~~
~~Consolidated Balance Sheets, January 31, 2013 and 2012~~	31
~~Consolidated Statements of Operations, Years Ended January 31, 2013 and 2012~~	32
~~Consolidated Statements of Stockholders’ Equity (Deficit), Years Ended January 31, 2013 and 2012~~	33
~~Consolidated Statements of Cash Flows, Years Ended January 31, 2013 and 2012~~	34
~~Notes to Consolidated Financial Statements~~	35
~~Schedule II — Valuation and Qualifying Accounts, Years Ended January 31, 2013 and 2012~~	63

All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.

~~Report of Independent Registered Public Accounting Firm~~

~~To the Board of Directors and Stockholders~~

~~Comarco, Inc.~~

~~Lake Forest, California~~

We have audited the accompanying consolidated balance sheets of Comarco, Inc. and subsidiary (the “Company”) as of January 31, 2013 and 2012 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. Our audits also included the financial statement schedule of Comarco, Inc. listed in Part IV, Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comarco, Inc. and subsidiary as of January 31, 2013 and 2012 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cashflow from operations, has negative working capital and uncertainties surrounding the Company’s ability to raise additional funds. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP~~

~~Newport Beach, California~~

~~April 30, 2013~~

~~COMARCO, INC. AND SUBSIDIARY~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(In thousands, except share data)~~

January 31,
2013 2012
ASSETS
Current Assets:
Cash and cash equivalents $ 104 $ 908
Accounts receivable due from customers, net of reserves of $0 and $6 1,307 934
Accounts receivable due from suppliers, net of reserves of $24 and $81 1,132 673
Inventory, net of reserves of $631 and $1,791 466 1,131
Other current assets — 63
Total current assets 3,009 3,709
Property and equipment, net 120 126
Restricted cash 82 92
Total assets $ 3,211 $ 3,927

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable $ 3,688 $ 3,912
Accrued liabilities 1,789 1,315
Loan payable 2,000 —
Derivative liabilities 2,466 —
Total current liabilities 9,943 5,227
Deferred rent, net of current portion 42 41
Total liabilities 9,985 5,268

Commitments and Contingencies

Stockholders’ Deficit:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding — —
Common stock, $0.10 par value, 50,625,000 shares authorized; 7,635,039 and 7,388,194 shares issued and outstanding at January 31, 2013 and 2012, respectively 764 739
Additional paid-in capital 15,577 15,443
Accumulated deficit (23,115 ) (17,523 )
Total stockholders’ deficit (6,774 ) (1,341 )
Total liabilities and stockholders’ deficit $ 3,211 $ 3,927

~~COMARCO, INC. AND SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(In thousands, except per share data)~~

Years Ended January 31,
2013 2012

Revenue $ 6,338 $ 8,069
Cost of revenue(1)
4,150 8,261
Gross profit (loss) 2,188 (192 )

Selling, general, and administrative expenses 2,761 3,140
Engineering and support expenses 2,435 1,931
5,196 5,071
Operating loss (3,008 ) (5,263 )
Interest expense, net 1,481 62
Loss due to change in fair value of derivative liabilities 1,101 —
Other income, net — (38 )

Loss from continuing operations before income taxes (5,590 ) (5,287 )
Income tax expense 2 2

Net loss from continuing operations (5,592 ) (5,289 )
Loss from discontinued operations, net of income taxes — (21 )
Net loss $ (5,592 ) $ (5,310 )

Basic and diluted loss per share:
Net loss from continuing operations
$ (0.74 ) $ (0.72 )
Net loss from discontinued operations
— —
$ (0.74 ) $ (0.72 )

Weighted average common shares outstanding:
Basic
7,545 7,365
Diluted
7,545 7,365
Common shares outstanding 7,635 7,388

~~(1)~~

~~See Note 3~~

~~COMARCO, INC. AND SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)~~

~~(In thousands, except share data)~~

Common Stock Additional Paid-in Capital Accumulated Deficit Total
Balance at February 1, 2011, 7,343,869 shares $ 734 $ 15,298 $ (12,213 ) $ 3,819
Net loss — — (5,310 ) (5,310 )
Issuance of 44,325 shares of common stock upon the vesting of restricted stock units 5 (5 ) — —
Stock based compensation expense — 150 — 150

Balance at January 31, 2012, 7,388,194 shares $ 739 $ 15,443 $ (17,523 ) $ (1,341 )
Net loss — — (5,592 ) (5,592 )
Issuance of 246,845 shares of common stock upon the vesting of restricted stock units 25 (25 ) — —
Stock based compensation expense — 159 — 159

Balance at January 31, 2013, 7,635,039 shares $ 764 $ 15,577 $ (23,115 ) $ (6,774 )

~~COMARCO, INC. AND SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(In thousands)~~

Years Ended January 31,
2013 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (5,592 ) $ (5,310 )
Loss from discontinued operations
— 21
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization 97 387
Loss (gain) on sale/retirement of property and equipment 11 (1 )
Loan origination fees — 53
Amortization of loan discount 1,365 —
Stock based compensation expense 159 150
Provision for doubtful accounts receivable (63 ) 32
Provision for obsolete inventory (1,161 ) 210
Change in fair value of derivative liabilities 1,101 —
Supplier settlement (1,443 ) —
Changes in operating assets and liabilities:
Accounts receivable due from customers (367 ) 2,570
Accounts receivable due from suppliers (935 ) 65
Inventory 1,826 180
Other assets 63 102
Accounts payable 1,740 (1,268 )
Deferred rent, net of current portion 1 41
Accrued liabilities 486 (1,447 )
Net cash used in continuing operating activities (2,712 ) (4,215 )
Net cash used in discontinued operating activities — (21 )
Net cash used in operating activities (2,712 ) (4,236 )

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (102 ) (93 )
Proceeds from sale of property and equipment — 1
(Increase) decrease in restricted cash 10 (92 )
Net cash used in continuing investing activities (92 ) (184 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit repayment — (1,000 )
Loan origination fees — (53 )
Proceeds from loan payable 2,000 —
Net cash provided by (used in) financing activities 2,000 (1,053 )

Net decrease in cash and cash equivalents (804 ) (5,473 )
Cash and cash equivalents, beginning of year
908 6,381
Cash and cash equivalents, end of year $ 104 $ 908

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 $ 25 $ 5

Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds
$ 2 $ 2
Cash paid for interest $ — $ 12

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~1. Organization~~

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “our”, “Comarco,” or the “Company”), is a developer and designer of innovative technologies and intellectual property currently used in power adapters to power and charge battery powered devices such as laptop computers, tablets, smart phones and readers. 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 targets 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. Our patent portfolio is the result of years of research and development to provide charging solutions. We continue to develop new technologies and expand our patent portfolio, while concurrently exploring other ways to capitalize on this strategic asset.

~~2. Summary of Significant Accounting Policies~~

The summary of our significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial statements. Such financial statements and related notes are the representations of our management, who are responsible for their integrity and objectivity. In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

~~Principles of Consolidation~~

~~Our consolidated financial statements include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits have been eliminated.~~

~~Future Operations, Liquidity and Capital Resources~~

We have experienced substantial pre-tax losses from continuing operations for fiscal 2013 and fiscal 2012 totaling $5.6 million and $5.3 million, respectively. The consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. Our consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. Our future is highly dependent on our ability to sell our products at a profit, successfully resolve our current litigation, capitalize on our growing portfolio of patents, generate positive cash flows and obtain borrowings or raise capital to meet our liquidity needs.

During the second quarter of fiscal 2012, we decided to change our sales strategy to sell our products directly to consumers. Although we plan to continue to sell select products in the OEM channel, we believe that we can increase sales and margins by also selling our products direct to consumers. 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. During fiscal 2013, our direct to consumer revenue was negligible and we believe sales were constrained by our lack of financial resources to implement a marketing plan. We continue to implement very low cost marketing trials in an attempt to generate retail sales.

We had negative working capital totaling approximately $7.0 million at January 31, 2013, of which $2.5 million relates to the fair value of derivative liabilities. 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 raise additional funds, through either debt and/or equity financing to meet our working capital needs. Although we are currently seeking other forms of financing, we cannot be certain we will be able to secure additional financing on terms acceptable to us, or at all. There is no assurance that we will succeed in doing so and if we are not successful in raising additional funds, we may have to evaluate other alternatives or partially, or entirely cease our operations.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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 consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty.

~~Use of Estimates~~

The preparation of 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 consolidated financial statements, and the reported amounts of revenue and expenses during the years reported. Actual results could materially differ from those estimates.

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

~~Revenue Recognition~~

Revenue from product sales is recognized upon shipment of products provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is probable. Generally, our products are shipped FOB named point of shipment, whether it is Lake Forest, which is the location of our corporate headquarters, or China, the shipping point for most of our contract manufacturers.

~~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 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.

~~Accounts Receivable due from Customers~~

Our management monitors collections and payments from our customers and maintains a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables 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. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Accounts Receivable due from Suppliers~~

Oftentimes we are able to source components locally that we later sell to our contract manufacturers, 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 (or “CMs”) and other suppliers are excluded from revenue and are recorded as a reduction to cost of revenue. During fiscal 2013, our relationship with Power System Technologies, Ltd. (formerly Flextronics Electronics) 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.

~~Inventory~~

Inventory is valued at the lower of cost (calculated on average cost, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on excess quantities on hand based upon historical and forecasted component usage.

~~Property and Equipment~~

Property and equipment are stated at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals are capitalized; maintenance, repairs, and minor renewals are expensed as incurred. Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the property and equipment. The expected useful lives of office furnishings and fixtures are five to seven years, and of equipment and purchased software are two to five years. The expected useful life of tooling equipment, molds used for pre-production and mass production of our power adapters, is 18 months. The expected useful life of leasehold improvements, which is included in office furnishings and fixtures, is the lesser of the term of the lease or five years.

We evaluate property and equipment for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. Factors considered important which could trigger an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our overall business, and significant negative industry or economic trends. If such assets are identified to be impaired, the impairment to be recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. We did not experience any changes in our business or circumstances to require an impairment analysis nor did we recognize any impairment charges during the fiscal years ended January 31, 2013 and 2012.

~~Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.~~

~~Research and Development Costs~~

Research and development costs are charged to expense as incurred and are reported as engineering and support costs. During fiscal 2013 and fiscal 2012, we incurred approximately $0.9 million and $1.3 million in research and development expense, respectively.

~~Income Taxes~~

As part of the process of preparing our consolidated financial statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conducts business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. On a periodic basis, we assess the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, we conclude that it is more likely than not that we will not recover some portion or all of the net deferred tax assets, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

We apply the uncertain tax provisions of the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”), which interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The topic also provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition.

During fiscal 2013, we recorded a net loss of $5.6 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset of $17.7 million at January 31, 2013, $2.4 million of which relates to net operating losses created in fiscal 2013, continues to be fully reserved.

During fiscal 2012, we recorded a net loss of $5.3 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset of $17.1 million, at January 31, 2012 was fully reserved, and included $1.5 million of net operating loss carryforwards created in fiscal 2012.

~~Advertising~~

Advertising costs are expensed as incurred. We began advertising late in the fourth quarter of fiscal 2012 in order to drive internet users to visit our website, www.chargesource.com, and ultimately make a purchase. Advertising incurred during fiscal 2013 and 2012 totaled approximately $23,000 and $5,000, respectively.

~~Warranty Costs~~

We provide limited warranties for products for a period generally not to exceed 24 months. We accrue for the estimated cost of warranties at the time revenue is recognized. The accrual is consistent with our actual claims experience. Should actual warranty claim rates differ from our estimates, revisions to the liability would be required.

~~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 certain 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 financing 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. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as loss due to change in fair value of derivative liabilities on the consolidated statement of operations. 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.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

We evaluate free-standing derivative instruments to properly classify such instruments within stockholders’ 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 issued to Broadwood Partners, L.P. (“Broadwood”) contain provisions that adjust the exercise price in the event of certain dilutive issuance of our securities (see Note 7). 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 $1.4 million and a corresponding discount to the underlying loan payable (see Note 8).

~~Concentrations of Credit Risk~~

Our cash and cash equivalents are principally on deposit in a non-insured short-term asset management account at a large financial institution. Accounts receivable potentially subject us to concentrations of credit risk. Currently, our customer base is comprised primarily of one company (see Note 3). We generally do not require collateral for accounts receivable. When required, we maintain allowances for credit losses, and to date such losses have been within management’s expectations. Once a specific account receivable has been reserved for as potentially uncollectible, our policy is to continue to pursue collections for a period of up to one year prior to recording a receivable write-off.

~~Loss Per Common Share~~

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period excluding the dilutive effect of potential common stock, which for us consists solely of stock awards. Diluted earnings per share reflects the dilution that would result from the exercise of all dilutive stock awards outstanding during the period. The effect of such potential common stock is computed using the treasury stock method (see Note 11).

~~Stock-Based Compensation~~

~~We grant stock awards for a fixed number of shares to employees, consultants, and directors with an exercise price equal to the fair value of the shares at the date of grant.~~

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.

~~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, 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 valuation of the derivative liabilities discussed below. The fair value of the derivative liabilities, which are comprised exclusively of the warrants issued/issuable to Broadwood, at January 31, 2013 was $2.5 million. 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.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~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) $5,000 which serves as collateral for credit card chargebacks associated with our internet website. The second account was reduced from $15,000 in the third quarter of fiscal 2013, due to low credit card sales volumes and negligible chargeback history through our website sales to date.

~~Legal expense classification~~

Our legal expenses are classified in either selling, general, and administrative expenses or engineering and support expenses depending on the nature of the legal expense. All legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio, are included in engineering and support expenses in our consolidated statement of operations. The legal expenses included in engineering and support expenses increased approximately $0.9 million during the year ended January 31, 2013, when compared to the prior fiscal year. The increase in legal expenses during fiscal 2013 is predominantly due to the ongoing patent infringement litigation described in Note 13. All other legal expenses, including all other litigation expense and public company legal expense are included in selling, general, and administrative expenses in our consolidated statement of operations. The legal expense included in selling, general and administrative expenses increased approximately $0.2 million during fiscal 2013 when compared to the prior fiscal year. The increase is primarily attributable to the ongoing Bronx product litigation described in Note 13.

~~Reclassifications~~

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

~~Subsequent Events~~

~~Management has evaluated events subsequent to January 31, 2013 through the date the accompanying consolidated financial statements were filed with~~ the Securities and Exchange Commission (the “SEC”) and that Mr. Mulroy was an “audit committee financial expert” for ~~transactions~~purposes of the rules and regulations of the SEC. Additionally, the Board determined that each of Messrs. Levin, Borowiec and Mulroy understood fundamental financial statements, including a balance sheet, statement of operations and cash flow statement, and met the other ~~events~~requirements for audit committee members prescribed by the NASDAQ Listing Rules. However, none of the Company’s securities are listed for trading on the NASDAQ Stock Market. The Audit and Finance Committee met four times during fiscal 2013.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the rules issued thereunder, the Company’s executive officers, directors and persons that ~~may require adjustment of and/or disclosure in such financial statements(see Note 14).~~

~~3. Customer and Supplier Concentrations~~

~~A significant portion of our revenue is derived from a limited number of customers (and in fiscal 2013 from a single customer). The loss of one or~~own more ~~of our significant customers would have a material impact on our revenues and results of operations.~~

~~The customers providing~~than 10 percent ~~or more of our revenue for either of the years ended January 31, 2013 and 2012 are listed below (in thousands, except percentages).~~

Years Ended January 31,
2013 2012
Total revenue
$ 6,338 100 % $ 8,069 100 %

Customer concentration:
Dell Inc. and affiliates.
$ 67 1 % $ 1,398 17 %
Targus Group International, Inc. — — 1,174 15 %
Lenovo Information Products Co., Ltd. 6,203 98 % 5,345 66 %
$ 6,270 99 % $ 7,917 98 %

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In March 2009, we entered into the Targus Agreement. We began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. As previously described, on January 25, 2011, Targus provided us with written notification of non-renewal of the Targus Agreement. We do not expect any revenue from sales to Targus in the future.

~~Our revenues by geographic location for the years ended January 31, 2013 and 2012 are listed below (in thousands, except percentages).~~

Years Ended January 31,
2013 2012
Revenue:
North America
$ 78 1 % $ 2,397 30 %
Europe 22 — 26 —
Asia – Pacific 6,238 99 % 5,646 70 %
$ 6,338 100 % $ 8,069 100 %

~~The customers comprising 10 percent or more of our gross accounts receivable at either January 31, 2013 or 2012 are listed below (in thousands, except percentages).~~

January 31,
2013 2012
Total gross accounts receivable due from customers $ 1,307 100 % $ 940 100 %

Customer concentration:
Dell Inc. and affiliates.
$ — — $ 371 39 %
Lenovo Information Products Co., Ltd.
1,291 99 % 562 60 %
$ 1,291 99 % $ 933 99 %

~~The suppliers comprising 10 percent or more of our gross accounts receivable due from suppliers at either January 31, 2013 or 2012 are listed below (in thousands, except percentages).~~

January 31,
2013 2012
Total gross accounts receivable due from suppliers $ 1,156 100 % $ 754 100 %

Supplier concentration:
EDAC Electronics Co. Ltd.
$ — — $ 532 71 %
Power Systems Technologies, Ltd...
1,008 87 % 40 5 %
Zheng Ge Electrical Co., Ltd.
122 11 % 122 16 %
$ 1,130 98 % $ 694 92 %

During the second quarter of fiscal 2013, we entered a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with EDAC Power Electronics Co. Ltd. (“EDAC”), the former supplier of the now discontinued Manhattan product, ending the litigation between the two companies (see Note 13). The settlement involved no cash payments by either of the parties, but allowed us to reverse previously incurred product and freight costs and to remove all liabilities and assets related to EDAC from our consolidated balance sheet. The settlement resulted in a decrease to cost of revenue of $1.4 million.

The increase in the receivables due from Power Systems Technologies, Ltd. (“Power,” formerly Flextronics Electronics) is driven by a change in our business process. Power is the contract manufacturer for the products we sell to Lenovo. In the prior fiscal year, we sourced only a few components on behalf of Power. During the first quarter of fiscal 2013, we began procuring all of the components included in the bill of material on behalf of Power.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) was a tip supplier for the Bronx product, which was subject to a recall. We previously sourced some of the component parts that Zheng Ge used in the manufacture of the tips. We ceased paying Zheng Ge during the course of the product recall while we investigated the manufacturing defect which ultimately caused the recall and, likewise, Zheng Ge ceased paying us.

We expect to fully collect the accounts receivable balances as of January 31, 2013 due from Power in the normal course and expect to offset the receivables due from Zheng Ge from amounts owed, which are included in accrued liabilities in our consolidated balance sheet. Further, we anticipate proposing a settlement to Zheng Ge upon the conclusion of our litigation with Chicony Power Technology, Co. Ltd. (“Chicony”).

~~The suppliers comprising 10 percent or more of our gross accounts payable at either January 31, 2013 or 2012 are listed below (in thousands, except percentages).~~

January 31,
2013 2012
Total gross accounts payable
$ 3,688 100 % $ 3,912 100 %

Accounts payable concentration:
EDAC Electronics Co. Ltd.
$ — — $ 1,964 50 %
Chicony Power Technology, Co. Ltd.
1,100 30 % 1,100 28 %
Pillsbury Winthrop Shaw Pittman, LLP.
1,614 44 % 386 10 %
$ 2,714 74 % $ 3,450 88 %

Chicony Power Technology, Co. Ltd., (“Chicony”) was the manufacturer of the Bronx product, which was subject to a recall and we are currently in litigation with Chicony (see Note 13). 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 can be no assurance, however, as to the likely outcome of this litigation (see Note 13).

Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) is our legal counsel for the Kensington litigation as well as other patent and intellectual property matters (See Note 13). We have paid Pillsbury $0.3 million during the fiscal 2013.

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers and other suppliers. The loss of one or more of our significant suppliers could adversely affect our operations. For the year ended January 31, 2013, four suppliers accounted for 58 percent of the total product costs. For the year ended January 31, 2012, one contract manufacturer accounted for an aggregate of 94 percent of total product costs. During the first quarter of fiscal 2013, we began procuring all of the components included in the bill of materials for the product we sell to Lenovo. In fiscal 2012, we procured the finished good directly from Power and they were responsible for procuring the components.

~~4. Inventory~~

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

January 31,
2013 2012
Raw materials $ 397 $ 1,002
Finished goods 69 129
$ 466 $ 1,131

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

As of January 31, 2013 and 2012, approximately $720,000 and $680,00, respectively, of total gross inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.

~~5. Property and Equipment~~

~~Property and equipment consist of the following (in thousands):~~

January 31,
2013 2012
Office furnishings and fixtures $ 619 $ 1,020
Equipment 2,294 2,451
Purchased software 66 65
2,979 3,536
Less: Accumulated depreciation and amortization (2,859 ) (3,410 )
$ 120 $ 126

~~As of January 31, 2013, equipment with a net book value of approximately $45,000, primarily tooling and fixtures, was located at various contract manufacturer locations in China.~~

During fiscal 2013, nearly fully depreciated office furnishings and equipment with a cost basis of $400,000 and $275,000, respectively, was retired through a process of physical inspection and management inquiry. We recorded a loss on retirement of assets of $11,000 related to these transactions.

During the fourth quarter of fiscal 2012, fully depreciated equipment and computer software with a cost basis of $2.0 million and $20,000, respectively, was retired through a process of physical inspection and management inquiry. Additionally, during the third quarter of fiscal 2012, in conjunction with the finalization of our move into a smaller space in our corporate headquarters and a new lease with our landlord, we retired fully amortized leasehold improvements with a cost basis of $0.3 million, reported in office furnishings and fixtures above.

~~Depreciation and amortization expense for fiscal 2013 and fiscal 2012 totaled $0.1 million and $0.4 million, respectively.~~

~~6. Accrued Liabilities~~

~~Accrued liabilities consist of the following (in thousands):~~

January 31,
2013 2012
Accrued payroll and related expenses $ 147 $ 103
Uninvoiced materials and services received 1,269 602
Accrued legal and professional fees 169 204
Accrued warranty 68 193
Other 136 213
$ 1,789 $ 1,315

At January 31, 2013, approximately $1.1 million or 85 percent of total uninvoiced materials and services of $1.3 million, included in accrued liabilities were payable to Power and Zheng Ge Electrical Co. Ltd. (“Zheng Ge”). 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 Zheng Ge. We ceased paying Zheng Ge during the course of the recall.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~7. Loan Agreement~~

~~Senior Secured Six Month Term Loan Agreement~~

As previously reported, the Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with 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 bore interest at 5% per annum, ranked senior in right of payment to all other indebtedness of the Company and was due and payable in full on January 28, 2013. The Company originally intended to repay the Loan and accrued interest from the $3.0 million in proceeds that was expected to be received from Broadwood in the fourth quarter of fiscal 2013, pursuant to the Stock Purchase Agreement (“SPA”) discussed below.

On January 28, 2013, the maturity date of the Loan, the Company was informed by Broadwood, that it was Broadwood’s position that one or more of the conditions precedent to its obligation to purchase the Company’s shares pursuant to the Broadwood SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase and, therefore, the Company would have to repay the Loan in cash. Subsequent to the fiscal year-ended January 31, 2013, the Company repaid the amounts outstanding under the Loan Agreement in full (see Note 14).

~~Stock Purchase Agreement and Stock Purchase Warrants~~

~~Concurrently with the execution of the Loan Agreement, the Company and Broadwood entered into the SPA. That 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~~are required to file with the SEC reports of ~~$1.00 per Share, subject to the following conditions: (i) during the six month term~~ownership and changes in ownership of ~~the Loan,~~common stock and furnish the Company ~~would use its best commercial efforts~~copies of all such reports. During fiscal 2013, one Form 4 for each of Messrs. Lanni and McKeefery and Ms. Charlton was not filed timely to ~~raise at least $3.0 million from~~report the ~~sale~~forfeiture of ~~additional equity securities to other investors, which could include other shareholders~~shares in satisfaction of applicable withholding taxes on the vesting of previously awarded restricted shares. The Form 4 for Mr. McKeefery and Ms. Charlton covered two transactions reported untimely and the Form 4 for Mr. Lanni covered three transactions reported untimely and each Form 4 was filed in fiscal 2014.

Other than the instances noted above, the Company believes that during fiscal 2013, its executive officers, directors and ~~(ii) the Company remained in compliance with its covenants under the Loan Agreement. The SPA provided~~persons that if, at any time between July 27, 2012 and July 27, 2013, 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 lessowned more 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 SPA to that lower price.

As consideration for the Loan and Broadwood’s entry into the SPA, 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 shares10 percent of the Company’s common stock ~~(the “Warrant Shares”), at~~complied with the Section 16(a) reporting requirements on a ~~price of $1.00 per Warrant Share, at any time through July 2020.~~

timely basis, based on the reports received by the Company or written certifications received by the Company from its executive officers and directors.

~~On July 27, 2012,~~

ITEM 11.

EXECUTIVE COMPENSATION

Executive Compensation

The following table sets forth the total compensation earned by each of the three Named Executive Officers of the Company ~~also entered into a Warrant Commitment Letter, which~~for fiscal 2013 and 2012. The amounts shown include compensation for services in all capacities that were provided ~~that if~~to the Company raised 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 as described below.

Company.

Summary Compensation Table

Name and Principal Position	Year	Salary ($)		Equity Awards⁽¹⁾ ($)		Vacation Payouts ($)		All Other Compensation⁽²⁾ ($)		Total ($)
Thomas W. Lanni	2013	$	230,006	$	12,800	$	8,416	$	46,861	$	298,083
President & Chief Executive Officer.	2012	$	222,510	$	13,200	$	11,058	$	50,909	$	297,677
Alisha K. Charlton	2013	$	176,613	$	6,400	$	—	$	10,555	$	193,568
Vice President & Chief Accounting Officer	2012	$	176,613	$	7,800	$	5,944	$	47,654	$	238,011
Donald L, McKeefery	2013	$	185,016	$	6,400	$	10,674	$	36,476	$	238,566
Vice President & Chief Operating Officer.	2012	$	180,014	$	7,800	$	8,895	$	55,312	$	252,021

⁽¹⁾

This column represents the grant date fair value of restricted stock units granted to the Named Executive Officers in fiscal 2013 and 2012, in accordance with the Stock Compensation Topic of the FASB Accounting Standards Codification. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service based vesting conditions. The assumptions used in calculating the fair value of these stock options can be found under Note 10 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2013. On July 5, 2011, each of Messrs. Lanni and McKeefery and Ms. Charlton were granted 30,000 restricted share units under the 2005 Plan, each of which vested in full on July 5, 2012. On December 8, 2011, Mr. Lanni was granted 30,000 restricted share units under the 2011 Plan, which vested on December 8, 2012. On February 1, 2012, Mr. Lanni was granted 80,000 restricted shares under the 2011 Plan, which vested on January 31, 2013. On February 1, 2012, Mr. McKeefery and Ms. Charlton were each granted 40,000 restricted shares under the 2011 Plan, which vested on January 31, 2013. Amounts shown reflect accounting expenses and do not reflect whether the recipient has actually realized a financial benefit from the awards.

⁽²⁾	The amounts reported above under the heading “All Other Compensation” consist of the following:

		All Other Compensation ($)
Name	Year	Insurance Premiums		Medical Expenses⁽³⁾		Tax Gross-Ups⁽⁴⁾		401(k) Contributions		Total
Thomas W. Lanni	2013	$	46,861	$	—	$	—	$	—	$	46,861
	2012	$	43,409	$	5,000	$	2,500	$	—	$	50,909
Alisha K. Charlton	2013	$	1,724	$	—	$	—	$	8,831	$	10,555
	2012	$	38,866	$	—	$	—	$	8,788	$	47,654
Donald. L. McKeefery	2013	$	34,519	$	—	$	—	$	1,957	$	36,476
	2012	$	41,736	$	5,000	$	2,500	$	6,076	$	55,312

⁽³⁾	This column represents cash payments made to our Named Executive Officers to reimburse them for out-of-pocket medical expenses.

⁽⁴⁾	This column represents cash payments made to reimburse our Named Executive Officers for taxes imposed on Company reimbursed out-of-pocket medical expenses.

2013 Outstanding Equity Awards at Fiscal Year-End Table

The ~~Warrants, including~~following tables sets forth certain information with respect to outstanding grants of plan-based awards to the ~~Additional Warrant,~~Named Executive Officers at January 31, 2013.

Option Awards
	Number of Securities Underlying Unexercised Options					Option
Name	Exercisable (#)		Unexercisable (#)			Exercise Price ($)		Option Expiration Date
Thomas W. Lanni		10,000		—		$	9.89	02/03/2014
		20,000		—		$	10.43	6/19/2016
		60,000		40,000	(1)	$	1.09	11/11/2018
Alisha K. Charlton		5,000		—		$	8.08	9/09/2013
		10,000		—		$	8.38	02/04/2015
		11,100		7,400	(1)	$	1.20	12/15/2018
Donald L. McKeefery		11,000		—		$	8.64	12/6/2015
		10,000		—		$	10.43	6/19/2016
		60,000		40,000	(1)	$	1.09	11/11/2018

⁽¹⁾	These shares will vest when and if the closing price of the Company’s common stock is $5.00 or greater for 90 consecutive days.

Restricted Stock Unit Awards
	Number of Securities Underlying Restricted Stock Units
Name	(#) Granted		Stock Price at Date of Issue		Vesting Date
Thomas W. Lanni		80,000	$	0.16	01/31/2013
Alisha K. Charlton		40,000	$	0.16	01/31/2013
Donald L. McKeefery		40,000	$	0.16	01/31/2013

Potential Payments Upon Change of Control

The Company and each of Mr. Lanni, Mr. McKeefery and Ms. Charlton are parties to Severance Compensation Agreements, which provide that, if, within 24 months following a “Change in Control” (as defined in such agreements), he or she is terminated by us other than for “Cause” (as defined in such agreements) or ceases to be employed by us for reasons other than because of death, disability, retirement or Cause, or he or she terminates his or her employment with us for “Good Reason” (as defined in such agreements), then he or she is entitled to receive a lump sum cash payment equal to the ~~Company sells shares~~sum of ~~its common stock (or any securities that are convertible~~his or ~~exercisable into shares~~her annual base salary plus his or her annual incentive compensation bonus assuming 100 percent satisfaction 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 have been accounted for as derivative liabilities resulting from the instruments’ price protection features.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Letter of Credit~~

~~During the first quarter of~~

Non-Employee Director Compensation

The annual cash retainer payable in fiscal ~~2010, the Company obtained a $77,000 letter of credit from Silicon Valley Bank (“SVB”)~~2013 to ~~allow for continuous and unlapsed compliance with a lease provision~~our non-employee directors was $7,800 per year. Additional annual retainers for the ~~Company’s corporate offices.~~Audit Committee Chairman, Compensation Committee Chairman and Nominating and Governance Chairman were $2,400, $1,200 and $1,200, respectively. The ~~letter of credit expires on August 1, 2014.~~

~~Legal Contingencies~~

~~On April 26, 2011, Chicony,~~additional annual retainer for the ~~contract manufacturer~~Chairman of the ~~Bronx product~~Board was $14,400 from January 1, 2012 through July 31, 2012. Upon the appointment of Mr. Silverman as Chairman of the Board, effective July 28, 2012, the Chairman of the Board’s annual retainer increased to $148,200. The Chairman of the Board’s retainer increased because the Board terminated the former interim Chief Executive Officer and appointed Mr. Lanni as the Chief Executive Officer, and the Board felt that greater oversight was needed during the ~~subject~~transition. Effective May 1, 2013, the additional retainer paid to the Chairman of the Board was reduced to $76,200. These cash retainers were paid monthly through December 2012 and were paid quarterly, in arrears, beginning on January 1, 2013. Non-employee directors who serve on, but do not chair, a ~~product recall, filed a complaint against us~~committee of the Board are not paid any separate annual retainers for ~~breach of contract, seeking payment of $1.2 million~~service on such committee. No separate meeting fees are paid for ~~the alleged non-payment by us of amounts alleged by Chicony~~attendance at any Board or committee meetings. From time to be due it for products purchased from it by the Company. 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 adheretime we may grant equity-based compensation to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. On April 16, 2013, the court approved our first-amended cross-complaint, which adds intentional interference to our complaint and increases the damages we seek to at least $15.0 million. The trial date is currently set for October, 2013. In an effort to resolve this litigation before the previous trial date of April, 2013, we sent Chicony a settlement offer, which has since lapsed. During the fourth quarter of fiscal 2013, we received reimbursement of previously incurred legal fees in the amount of $0.4 million from our insurance carrier under a reservation of rights. 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, subsequent to receiving an infringement notification from us, 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. Currently, the trial date is set for January, 2014. A number of these patents are currently the subject of re-examination proceedings iniated by Kensington or other third parties. This matter is ongoing and the outcome is not determinable, however ifnon-employee directors, but we do not ~~prevail we will likely not obtain a license agreement to earn future license revenue from products sold~~have any formal policy under which such grants are made.

Director Compensation Table

The following table details the cash retainers and fees, as well as equity compensation in the form of stock awards earned by ~~Kensington. Conversely, should we prevail~~our non-employee directors during fiscal 2013:

Name	Fees Earned or Paid in Cash ($)		Option Awards⁽¹⁾ ($)		Total ($)
Paul Borowiec	$	7,800	$	7,600	$	15,400
Wayne G. Cadwallader	$	9,000	$	8,550	$	17,550
Richard T. LeBuhn	$	9,000	$	8,550	$	17,550
Michael R. Levin	$	17,400	$	8,550	$	25,950
Michael H. Mulroy	$	7,800	$	7,600	$	15,400
Louis E. Silverman	$	79,677	$	42,500	$	122,177

⁽¹⁾

This column represents the grant date fair value of stock options granted to the non-employee directors in fiscal 2013, in accordance with the Stock Compensation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service based vesting conditions. On August 2, 2012, Mr. Silverman was granted 250,000 stock options under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”), which awards vest on August 2, 2013. On October 18, 2012 each of Messrs. Cadwallader, LeBuhn and Levin were granted 45,000 stock options and each of Messrs. Borowiec and Mulroy were granted 40,000 stock options from the 2011 Plan, which awards vest on October 18, 2013. As of January 31, 2013, the aggregate amount of restricted share units outstanding for Mr. LeBuhn was 4,326. None of the other directors had any restricted share units outstanding. The aggregate amount of options outstanding on such date was 40,000, 45,000, 60,000 45,000, 40,000 and 250,000 for Messrs. Borowiec, Cadwallader, LeBuhn, Levin, Mulroy and Silverman, respectively. Amounts shown reflect accounting expenses and do not reflect whether the recipient has actually realized a financial benefit from the awards.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information concerning the beneficial ownership of the Company’s common stock as of May 31, 2013 by:

●

each member of the Board;

●

each of the Company’s executive officers named in the “Summary Compensation Table” included in the “Executive Compensation” section of this Form 10-K/A (collectively, the “Named Executive Officers”);

●

all of the Company’s directors and executive officers as a group; and

●

each person or entity known to the Company that beneficially owns more than 5 percent of the Company’s common stock.

Beneficial ownership is determined in accordance with the rules of the SEC. Unless otherwise indicated below, the address of each beneficial owner is c/o Comarco, Inc., 25541 Commercentre Drive, Suite 250, Lake Forest, California, 92630. Unless otherwise indicated below, the Company ~~may be awarded a royalty which would generate license revenue to~~believes that each of the ~~Company~~persons listed in the ~~future.~~table (subject to applicable community property laws) has the sole power to vote and to dispose of the shares listed opposite the shareholder’s name.

The percentages of common stock beneficially owned are based on 14,259,839 shares of the Company’s common stock outstanding at May 31, 2013.

Name and Address of Beneficial Owner	Number of Shares Beneficially Owned			Percent of Class
Paul Borowiec		387,520	(1)		2.7	%
Wayne G. Cadwallader⁽⁶⁾		97,500	(6)		*
Alisha K. Charlton		75,925	(2)		*
Thomas W. Lanni		280,470	(2), (6)		1.9	%
Richard T. LeBuhn		140,475	(2), (6)		1.0	%
Michael R. Levin		54,099			*
Donald L. McKeefery		166,141	(2)		1.2	%
Michael H. Mulroy		30,000			*
Louis E. Silverman		—			*
All Directors, Director Nominees and Executive Officers as a group (9 persons)		1,232,130	(2)		8.5	%
T. Rowe Price Associates, Inc. T. Rowe Price Small-Cap Value Fund, Inc. 100 East Pratt Street
Baltimore, MD 21202		674,623	(3)		4.7	%
Broadwood Partners, L.P. Broadwood Capital, Inc.
Neal Bradsher 724 Fifth Avenue, 9^thFloor
New York, New York 10019		3,268,682	(4)		20.5	%
Elkhorn Partners Limited Partnership 222 Skyline Drive Elkhorn, NE 68022		6,939,872	(5)		48.7	%

*	Indicates less than 1 percent of the outstanding shares of common stock.

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 reverse 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 are unable to predict the ultimate outcome of these matters.

~~14. Subsequent Events~~

~~As previously reported in a Form 8-K~~

⁽¹⁾	Mr. Borowiec holds an indirect beneficial ownership in 352,520 of these shares and has a pecuniary interest in such shares. Mr. Borowiec disclaims any beneficial ownership of such securities beyond his pecuniary interest therein.

⁽²⁾

Includes shares which the person has the right to acquire within 60 days of May 31, 2013. For Messrs. Lanni, LeBuhn, McKeefery, and Ms. Charlton 130,000, 15,000, 121,000 and 33,500 shares listed in this column, respectively, include shares which may be acquired through the exercise of stock options or the vesting of restricted shares. For all current directors and executive officers as a group, the shares indicated in this column include an aggregate of 299,500 shares that may be acquired through the exercise of stock options or the vesting of restricted shares.

⁽³⁾

Based on a Schedule 13G (Amendment 20) filed with the SEC on February 8, 2013. These securities are owned by various individual and institutional investors including T. Rowe Price Small-Cap Value Fund, Inc. (which owns 664,700 shares), for which T. Rowe Price Associates, Inc. (“Price Associates”) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such shares; however Price Associates expressly disclaims the beneficial ownership of such shares.

⁽⁴⁾

Includes an aggregate of 1,704,546 shares that may be acquired through the exercise of common stock purchase warrants, which Broadwood Partners L.P. has the right to exercise within 60 days of May 31, 2013. Based on a Schedule 13D (Amendment 11) filed with the SEC on February 19, 2013 by Broadwood Partners, L.P. (“Broadwood Partners”), Broadwood Capital, Inc. (“Broadwood Capital”), the general partner of Broadwood Partners and Neal C. Bradsher, the President of Broadwood Capital. Broadwood Partners and Broadwood Capital have shared power voting and dispositive power for 3,253,182 shares; however, Broadwood Partners and Broadwood Capital specifically disclaim beneficial ownership of such shares. Neal C. Bradsher has the sole voting and dispositive power for 15,500 shares and the shared voting and dispositive power for 3,253,182.

⁽⁵⁾	Based on a Schedule 13D (Amendment 8) filed with the SEC on February 13, 2013 by Elkhorn Partners Limited Partnership, which has sole voting and dispositive power for 6,939,872 shares.

⁽⁶⁾	Each of Messrs. Cadwallader, Lanni and LeBuhn entered into a Stock Purchase Agreement with the Company during the first quarter of fiscal 2014 and each purchased 62,500 shares at a purchase price of $0.16 per share.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with ~~the SEC on February 12, 2013, on~~Related Persons

Elkhorn Partners Transactions Summary

On February 11, 2013, the Company and Elkhorn Partners Limited Partnership (“Elkhorn”), entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements, which are described below (collectively, the “Elkhorn Agreements”). As shown in the beneficial ownership table under Item 12 of this Form 10-K/A, Elkhorn is a significant shareholder of the Company. In addition, Wayne Cadwallader, Managing Partner – Research for Elkhorn Partners L.P. is (and was at the time of the transactions described below) one of our board members.

Pursuant to ~~those~~the Elkhorn Agreements, Elkhorn ~~has~~ made a $1.5 million senior secured loan to the Company with a maturity date of November 30, 2014 and ~~has~~ purchased a total of 6,250,000 shares of the Company’s common stock ~~(the “Elkhorn Shares”)~~ at a cash purchase price of $0.16 per share, generating an additional $1.0 million of cash for the Company. The average of the closing prices of the Company’s common stock in the over-the-counter market for the five trading days immediately preceding February 11, 2013 was $0.14 per share and, for the 29 trading days that began on January 2, 2013 and ended on February 8, 2013, was $0.158 per share. On February 11, 2013, the Company used approximately $2.1 million of the proceeds of $2.5 million from the Elkhorn Loan and the sale of the shares to Elkhorn to pay the entire principal amount of and all accrued interest on the Broadwood ~~Loan.~~

Loan (described below).

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Secured Loan Agreement with Elkhorn ~~Partners.~~

Partners

The Elkhorn Loan, which is evidenced by a promissory note (the “Elkhorn Note”), issued by the Company to Elkhorn, bears interest at 7% for the first 12 months of the Elkhorn Loan, increasing to 8.5% thereafter and continuing until the Elkhorn Loan is paid in full. The Elkhorn Loan matures on November 30, 2014 (the “Maturity Date”); however, the Company has the right, at its option, to prepay the Elkhorn Loan, in whole or in part, without penalty or premium.

The Elkhorn Loan Agreement provides that if and to the extent the Company does not pay the Elkhorn Loan in full by its Maturity Date, then, Elkhorn will have the right, at its option (but not the obligation), to convert the then unpaid balance of the Elkhorn Loan, in whole or in part, into shares of Company common stock at a conversion price of $0.25 per share. That conversion price is subject to possible adjustment on (i) certain sales of Company common stock at a price lower than $0.25 per share, (ii) stock splits of, stock dividends on and any reclassification of the Company’s outstanding shares, and (iii) certain mergers or reorganizations of the Company, as provided in Article III of the Elkhorn Loan Agreement.

The Elkhorn Loan Agreement contains customary representations and warranties of and affirmative and negative covenants on the part of the Company and ~~CWT.~~its wholly owned subsidiary, Comarco Wireless Technologies, Inc. (“CWT”). The Agreement also provides that the Elkhorn Loan, together with accrued interest, will become immediately due and payable upon the occurrence of an Event of Default, which is defined in the Elkhorn Loan Agreement to include each of the following, among others: (i) a failure of the Company to pay the principal of or accrued interest on the Elkhorn Loan which continues unremedied for three calendar days (except that such grace period shall not apply to amounts due at the Maturity Date of the Loan), (ii) the Company or CWT commits a breach of any of their other material obligations under the Elkhorn Loan Agreement or under any of the ~~Debt Related Agreements (described below)~~related debt related agreements and the breach which remains uncured for a period ranging from 15 days to 30 days (depending on the nature of the breach) following receipt of notice of the breach from Elkhorn; (iii) any of the representations or warranties of the Company or CWT contained in the Elkhorn Loan Agreement prove to have been untrue or incorrect in any material respect, (iv) the Company or CWT fails to pay indebtedness in the amount of $200,000 or more owed to any other creditor, (v) one or more judgments are entered against the Company or CWT in an aggregate amount of $200,000 or more, which are not satisfied, discharged, stayed or bonded against within the succeeding 30 days, and (vi) the filing by the Company of a voluntary petition in bankruptcy or the Company’s failure to obtain the dismissal, within 60 days, of an involuntary petition filed against it in bankruptcy, or a receiver or liquidator is appointed over, or an attachment is issued against a substantial part of the assets of the Company or CWT, which in either case remains undismissed for the succeeding ~~thirty (30)~~30 days.

Upon the occurrence and during the continuance of an Event of Default, interest on the Elkhorn Loan will accrue at the lesser of (i) 15% per annum or (ii) the highest rate permitted by applicable law.

~~Debt Related Agreements~~. In connection with the Elkhorn Loan Agreement, the Company and CWT entered into a Security Agreement and the Company entered into a Pledge Agreement (collectively, the “Debt Related Agreements”) with Elkhorn to secure the payment and performance by the Company and CWT of their respective obligations under the Loan Agreement and the Debt Related Agreements. Set forth below is a summary of those Agreements.

~~Security Agreement~~. As security for the performance of their respective obligations under the Loan Agreement and the Debt Related Agreements, the Company and CWT have entered into a security agreement (the “Security Agreement”) granting Elkhorn a first priority perfected security interest in all of their assets, including their intellectual property rights. The Security Agreement provides that, on the occurrence and during the continuance of an Event of Default, whether by the Company or CWT, Elkhorn will become entitled to take possession of and to sell the assets of the Company and CWT to the extent necessary to recover the amounts due Elkhorn under the Loan Agreement and any other amounts that may be due and payable to Elkhorn under any of the Debt Related Agreements.

~~COMARCO, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Pledge Agreement~~. As additional security for the payment and performance of its obligations under the Elkhorn Loan Agreement, the Company has entered into a Pledge Agreement (the “Pledge Agreement”) pursuant to which it has pledged and will deliver possession to Elkhorn of all of CWT’s outstanding shares. The Pledge Agreement provides, among other things, that upon the occurrence and during the continuance of an Event of Default, Elkhorn will become entitled to transfer the CWT shares into its name, to vote those shares and, subject to applicable securities laws, to sell those shares in order to recover amounts owed to it by the Company.

Elkhorn Stock Purchase Agreement

Concurrently with the Company’s entry into the Elkhorn Loan Agreement, the Company and Elkhorn entered into the Elkhorn SPA. Pursuant to that Agreement, the Company has sold 6,250,000 shares of its common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. As noted above, that purchase price compares to an average per share closing price for Comarco’s shares of $0.14 during the five trading days immediately preceding the sale of the shares to Elkhorn, and an average per share closing price of $0.158 for the 29 trading days that that began on January 1, 2013 and ended on February 8, 2013.

The purchase price of $0.16 per share paid by Elkhorn for those shares was determined by arms-length negotiations between Elkhorn and the members of a special committee of the Company’s Board of Directors, comprised of three of the directors who have no affiliation with Elkhorn and no financial interest, other than their interests solely as shareholders of the Company, in either the loan or share transactions with Elkhorn. That per share purchase price was determined based on a number of factors, including the Company’s inability, notwithstanding its best efforts, to raise additional capital from other prospective institutional investors during the six month term of the Broadwood Loan and the recent trading prices of the Company’s shares in the over-the-counter market, which averaged $0.14 per share during the five trading days immediately preceding the sale of the shares to Elkhorn, and $0.158 per share over the 29 trading days that that began on January 2, 2013 and ended on February 8, 2013.

Broadwood Senior Secured Six Month Term Loan Agreement

The Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Broadwood Loan Agreement”) with Broadwood, a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. As shown in the beneficial ownership table under Item 12 of this Form 10-K.A, Broadwood is a significant shareholder of the Company. In addition, Richard LeBuhn, Senior Vice President of Broadwood Capital, Inc. (the general partner of Broadwood), is (and was at the time of the transactions described below) one of our board members.

Pursuant to that Agreement, Broadwood made a $2,000,000 senior secured six month loan (the “Broadwood Loan”) to the Company and to CWT, as co-borrower. The Broadwood Loan bore interest at 5% per annum, ranked senior in right of payment to all other indebtedness of the Company and was due and payable in full on January 28, 2013. The Company originally intended to repay the Broadwood Loan and accrued interest from the $3.0 million in proceeds that was expected to be received from Broadwood in the fourth quarter of fiscal 2013, pursuant to the Stock Purchase Agreement (“Broadwood SPA”) discussed below.

On January 28, 2013, the maturity date of the Broadwood Loan, the Company was informed by Broadwood, that it was Broadwood’s position that one or more of the conditions precedent to its obligation to purchase the Company’s shares pursuant to the Broadwood SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase and, therefore, the Company would have to repay the Broadwood Loan in cash. Subsequent to the fiscal year-ended January 31, 2013, the Company repaid the amounts outstanding under the Broadwood Loan Agreement in full from the Elkhorn proceeds discussed above.

Broadwood Stock Purchase Agreement and Stock Purchase Warrants

Concurrently with the execution of the Broadwood Loan Agreement, the Company and Broadwood entered into the Broadwood SPA. That 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 Broadwood Loan, the Company would use its best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which could include other shareholders of the Company, and (ii) the Company remained in compliance with its covenants under the Broadwood Loan Agreement. The Broadwood SPA provided that if, at any time between July 27, 2012 and July 27, 2013, 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 Broadwood SPA to that lower price.

As consideration for the Broadwood Loan and Broadwood’s entry into the Broadwood SPA, 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 through July 2020.

On July 27, 2012, the Company also entered into a Warrant Commitment Letter, which provided that if the Company raised less than $3.0 million from sales of equity securities to other investors during the six month term of the Broadwood 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 as described below.

~~ITEM 9.~~

~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~

~~None.~~

~~ITEM9 A.~~

~~CONTROLS AND PROCEDURES~~

~~Evaluation~~

The Warrants, including the Additional Warrant, provide that if the Company sells shares of ~~Disclosure Controls and Procedures~~

~~We maintain disclosure controls and procedures~~its common stock (or any securities that are ~~designed~~convertible or exercisable into shares of Company common stock) at a price less than $1.00 per share, then, subject to ~~ensure~~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 ~~information required~~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 have been accounted for as derivative liabilities resulting from the instruments’ price protection features.

The Warrants and the Additional Warrant (collectively, the “Broadwood Warrants”) also grant to ~~be disclosed in~~Broadwood the ~~periodic reports that we file or submit with~~right to require the ~~SEC~~Company (i) to register the Warrant Shares under the Securities ~~Exchange~~ Act of ~~1934,~~1933, as amended (the ~~“Exchange~~“Securities Act”) ~~is recorded, processed, summarized,~~for possible resale and ~~reported within~~(ii) to include the ~~time periods specified~~Warrant Shares in any registration statement that the ~~rules and forms~~Company may file to register, under the Securities Act, the sale of Company shares for cash.

As noted above, the Company was informed by Broadwood on January 28, 2013, that it was Broadwood’s position that one or more of the ~~SEC,~~conditions precedent to its obligation to purchase the Company’s shares pursuant to the Broadwood SPA had not been satisfied and, as a result, Broadwood would not consummate that ~~such information~~purchase.

The Company’s position is ~~accumulated and communicated~~that, contrary to ~~our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.~~

~~Our management,~~Broadwood’s assertions, all of the conditions under the ~~supervision~~Broadwood SPA had been satisfied, and ~~with~~Broadwood’s refusal to purchase 3,000,000 shares of Company common stock, at the ~~participation~~price of ~~our principal executive officer and principal financial officer, evaluated the effectiveness~~$1.00 per share, constituted a material breach by Broadwood of ~~our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated~~its obligations under the ~~Exchange Act~~Broadwood SPA. As a result, as of the ~~end~~date of filing this report, the Company has not issued any Additional Warrant Shares to Broadwood and each party has reserved its rights under and with respect to the Broadwood SPA and the Broadwood Warrants.

Related party relationships

Chad Giacopelli, the son-in-law of Mr. Lanni, our Chief Executive Officer, is currently employed by the Company as our IT Network Technician. Our Chief Executive Officer does not directly supervise Mr. Giacopelli nor is he involved in the determination of Mr. Giacopelli's compensation.

Policy on Related Person Transactions

Our Board of Directors has adopted a written policy and procedures for the review of any transaction, arrangement or relationship in which the Company was or is to be a participant and one of our executive officers, directors, director nominees or a 5 percent shareholder (or any member of the ~~period~~immediate family of any of the foregoing), or any entity in which persons listed above, either individually or in the aggregate, have a greater than 10 percent ownership interest, each of whom we refer to as a “related person,” has or will have a direct or indirect material interest. We refer to these transactions as “related person transactions.” The policy is administered by the Audit and Finance Committee.

The policy calls for any proposed related person transaction to be reviewed and approved by our Audit and Finance Committee. Whenever practicable, the Committee will review, and, in its discretion, may approve the related person transaction in advance, but the policy also permits the Committee to consider and ratify transactions that have already occurred, when necessary. Any related person transactions that are ongoing in nature will be reviewed annually. The Committee will review and consider such information regarding the related person transaction as it deems appropriate under the circumstances. The policy also requires Committee review and approval of (1) any charitable contribution to an organization in which a related person serves as a director or trustee or is actively engaged in fund-raising and (2) any proposed transaction in which a related person may participate that involves a corporate opportunity of potential value to the Company. The policy provides that certainde minimis transactions do not create a material direct or indirect interest on behalf of related parties and, therefore, are not covered ~~by this report. Based upon this evaluation, our management, including our principal executive officer~~under the policy.

The Audit and ~~principal financial officer,~~Finance Committee may approve a related person transaction only if the Committee determines that, under all of the circumstances, the transaction is in the best interest of the Company and its shareholders. If the Audit and Finance Committee determines not to approve or ratify a related person transaction, the transaction shall not be entered into or continued, as ~~more fully explained below, have concluded that, as~~the case may be. No member of ~~January 31, 2013, our disclosure controls and procedures were not effective.~~

the Committee will participate in any review or determination with respect to a related person transaction if the Committee member or any of his or her immediate family members is the related person.

~~Management’s Report on Internal Control over Financial Reporting~~

~~Our management is responsible~~

During fiscal 2013, the Board of Directors established a special Finance Committee, comprised solely of disinterested directors, and delegated to that Committee the authority to negotiate, consider and determine whether or not to approve (i) any debt or equity financing transactions with Elkhorn and (ii) any agreements that might be entered into with or any legal actions that might be taken against Broadwood. For these purposes, a director would be deemed to be disinterested, if he has no relationships with Elkhorn or Broadwood and has no financial interest (other than as a shareholder of Comarco) in any transactions that might be entered into or consummated with Elkhorn or in any agreements that might be negotiated with or actions that might be taken against Broadwood.

Since February 1, 2011, except as described above under transactions with related parties, the Company has not been a party to, and has no plans to be a party to, any transaction or series of transactions in which the amount involved exceeded or will exceed $120,000 and in which any related person had or will have a direct or indirect material interest.

Director Independence

The Board has determined that, except for ~~establishing~~Mr. Lanni, each individual who served as a member of the Board during fiscal 2013 was an “independent director” within the meaning of Rule 5605(a)(2) of the NASDAQ Listing Rules. Mr. Lanni was not considered independent as he was employed by the Company as its President and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervisionChief Executive Officer during fiscal 2013. Each of the Company’s ~~principal executive officer and principal financial officer, and effected by~~current directors are independent directors within the ~~Company’s Board~~meaning of Directors, management, and other personnel. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly and in accordance with GAAP, that disclosures are adequate, and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. Also, projections of any evaluationRule 5605(a)(2) of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our internal control over financial reporting includes 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 Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dispositionNASDAQ Listing Rules. However, none of the Company’s ~~assets that could have a material effect~~securities are listed for trading on the ~~consolidated financial statements.~~

~~Management conducted an evaluation of~~NASDAQ Stock Market.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Audit Committee has appointed Squar, Milner, Peterson, Miranda & Williamson LLP as the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was ineffective as of January 31, 2013. 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 year ended January 31, 2013 did not result in any particular deficiency in our financial reporting for the fiscal year, 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.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to either error or fraud will not occur at all or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

~~Because we are a smaller reporting company, the rules and regulations of the SEC do not require that we include a report of our~~Company’s independent registered public accounting firm ~~regarding our internal control over financial reporting.~~

~~Changes in Internal Control Over Financial Reporting~~

~~During the fourth quarter of~~for the fiscal year ~~ended~~ending January 31, ~~2013, there were no changes~~2013.

Audit Fees

The aggregate fees incurred and payable to Squar Milner for professional services rendered in ~~our internal control over~~connection with the audit and quarterly reviews of the Company’s consolidated financial ~~reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.~~

~~ITEM 9B.~~

~~OTHER INFORMATION~~

~~None.~~

~~PART III~~

~~ITEM 10.~~

~~DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE~~

~~The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31,~~statements during fiscal 2013 and ~~delivered to stockholders~~2012 were approximately $111,000.

Audit-Related Fees

During fiscal 2013 we paid Squar Milner approximately $3,000 in connection with our S-8 filing. No similar expenses were incurred during fiscal 2012.

Tax Fees

In fiscal 2013 ~~annual meeting~~and 2012, we engaged Squar, Milner, Peterson, Miranda & Williamson LLP to assist us with preparation of ~~shareholders.~~

the Company’s tax returns and incurred fees during these years of approximately $22,000 and $19,000, respectively.

All Other Fees

We paid Squar Milner approximately $11,000 each year for the audit of our Savings and Retirement Plan in fiscal 2013 and fiscal 2012, for the audits of our plan years ending December 31, 2011 and 2010, respectively.

Pre-Approval Policies and Procedures

It is the Company’s policy that all audit and non-audit services to be performed by the Company’s independent registered public accounting firm be approved in advance by the Audit Committee. All of the services provided in fiscal 2013 and 2012 were pre-approved.

PART IV

~~ITEM 11.~~

~~EXECUTIVE COMPENSATION~~

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2013, and delivered to stockholders in connection with our 2013 annual meeting of shareholders.

~~ITEM 12.~~

~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~

~~ITEM 13.~~

~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE~~

~~ITEM 14.~~

~~PRINCIPAL ACCOUNTING FEES AND SERVICES~~

The other information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2013, and delivered to stockholders in connection with our 2013 annual meeting of shareholders.

~~PART IV~~

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) ~~1. Financial Statements (See Item 8~~(3) Exhibits

The exhibit index below lists the exhibits that are filed as part of this ~~report)~~

~~2. Financial Statement Schedule:~~

~~The following additional information for the years ended January 31, 2013 and 2012 is submitted herewith:~~

~~II Valuation and Qualifying Accounts~~

~~3. Exhibits~~

~~Articles of Incorporation; Bylaws~~

amendment.

Exhibit

Number

~~3.1~~

~~Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated herein by reference to~~

Exhibit ~~3.1 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.~~Title

~~3.2~~

Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through July 28, 2012, are incorporated herein by reference to Exhibit 3.02 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on September 14, 2012.

31.1

~~3.3~~

Certificate of Determination of Series A Participating Preferred Stock. The Certificate of Determination is incorporated herein by reference to Exhibit 99.1 to the Company’s registration statement on Form 8-A (Filing No. 000-05449) filed with the Securities and Exchange Commission on February 6, 2003.

~~Material Contracts~~

~~10.1~~

1995 Employee Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 (File No. 33-63219) filed with the Securities and Exchange Commission on October 5, 1995. *

~~10.2~~

2005 Equity Incentive Plan, as amended, is incorporated by reference to Exhibit 4.3 to the Company’s registration statement on Form S-8 (File No. 33-156518) filed with the Securities and Exchange Commission on December 31, 2008. *

~~10.3~~

2011 Equity Incentive Plan is incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2011. *

~~10.4~~

Amended and Restated Severance Agreement, dated June 11, 2007, between the Company and Thomas W. Lanni is incorporated herein by reference to Exhibit 10.9 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2007. *

~~10.5~~

Severance Compensation Agreement, dated August 28, 2007, between the Company and Alisha Charlton is incorporated herein by reference to Exhibit 10.14 to the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on April 30, 2008. *

~~10.6~~

Severance Compensation Agreement, dated June 23, 2010, between the Company and Donald McKeefery is incorporated herein by reference to Exhibit 10.13 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 14, 2012. *

~~10.7~~

Loan Agreement, dated July 27, 2012, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Broadwood Partners LP, together with copies of the Guarantee, the Pledge Agreement, each of the Security Agreements, and form of Promissory Note issued by the Company to evidence the Loan, attached as Exhibits B, C, D-1 and D-2 and F, respectively to the Loan Agreement is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2012.

~~10.8~~

Stock Purchase Agreement, dated July 27, 2012 by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Broadwood Partners LP is incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2012.

~~10.9~~

~~Form of the Common Stock Purchase Warrants issued by the Company to Broadwood on July 27, 2012~~ ~~is incorporated herein by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2012.~~

~~10.10~~

~~Warrant Commitment Letter dated~~ ~~July 27, 2012, which~~ ~~provides for the possible issuance by the Company of the Additional Warrant to Broadwood~~ ~~is incorporated herein by reference to Exhibit 10.4 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2012.~~

~~10.11~~

Loan Agreement, dated February 11, 2013, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Elkhorn Partners Limited Partnership together with copies of the Promissory Note, the Security Agreement and the Pledge Agreement attached as Exhibits A, B and C, respectively to the Loan Agreement is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2013.

~~10.12~~

Stock Purchase Agreement, dated February 11, 2013, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Elkhorn Partners Limited Partnership is incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2013.

~~Other Exhibits~~

~~21.1~~

~~Subsidiaries of the Company†~~

~~23.1~~

~~Consent of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA &WILLIAMSON, LLP†~~

~~31.1~~

Certification of ~~Chief~~our Principal Executive Officer ~~pursuant~~Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002†~~2002.

	~~31.2~~
31.2		Certification of ~~Chief~~our Principal Financial Officer ~~pursuant~~Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002†~~2002.

~~32.1~~

~~Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†~~

~~32.2~~

~~Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†~~

~~101.INS~~

~~XBRL Instance Document~~ Ω

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document~~ Ω

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document~~ Ω

~~101.DEF~~

~~XBRL Taxonomy Extension Definition~~ Ω

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~ Ω

~~101.PRE~~

~~XBRL~~ ~~Taxonomy Extension Presentation Linkbase Document~~ Ω

~~† Filed herewith.~~

~~+ Furnished herewith.~~

*	~~These exhibits are identified as management contracts or compensatory plans or arrangements of the registrant pursuant to Item 15 of Form 10-K.~~

Pursuant to Rule 406T of Regulations S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of registration statement prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K/A Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~April 30, 2012.~~

May 31, 2013.

COMARCO, INC.
/s/ THOMAS W. LANNI
Thomas W. Lanni
President and Chief Executive Officer

~~POWER OF ATTORNEY~~

We, the undersigned directors and officers of Comarco, Inc., do hereby constitute and appoint Thomas Lanni, as our true and lawful attorney-in-fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

~~Signature~~	~~Title~~	~~Date~~

~~/s/ THOMAS W. LANNI~~	~~President and Chief Executive Officer~~	~~April 30, 2013~~
~~Thomas W. Lanni~~	(Principal Executive Officer)~~, Director~~

	/s/ ALISHA K. CHARLTON
	Alisha K. Charlton
	Chief Accounting Officer	~~April 30, 2013~~
~~Alisha K. Charlton~~	(Principal Financial Officer and Principal Accounting Officer)

~~/s/ LOUIS E. SILVERMAN~~	~~Chairman of the Board,~~	~~April 30, 2013~~
~~Louis E. Silverman~~	~~Director~~

~~/s/ PAUL BOROWIEC~~	~~Director~~	~~April 30, 2013~~
~~Paul Borowiec~~

~~/s/ WAYNE CADWALLADER~~	~~Director~~	~~April 30, 2013~~
~~Wayne Cadwallader~~

~~/s/ RICHARD T. LEBUHN~~	~~Director~~	~~April 30, 2013~~
~~Richard T. LeBuhn~~

~~/s/ MICHAEL R. LEVIN~~	~~Director~~	~~April 30, 2013~~
~~Michael R. Levin~~

~~/s/ MICHAEL H. MULROY~~	~~Director~~	~~April 30, 2013~~
~~Michael H. Mulroy~~

~~COMARCO, INC. AND SUBSIDIARY~~

~~SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS~~

~~Years Ended January 31, 2013 and 2012~~

~~(In thousands)~~

Balance at Beginning of Year Charged to Cost and Expense (Recovery) Deductions Other Changes Add (Deduct)
Balance at
End of Year

Allowance for doubtful accounts and provision for unbilled receivables (deducted from accounts receivable):

Year ended January 31, 2013
$ 87 $ (38 ) $ (25 ) $ — $ 24

Year ended January 31, 2012
$ 119 $ (29 ) $ (3 ) $ — $ 87

Allowance for deferred tax assets:

Year ended January 31, 2013
$ 17,130 $ — $ — $ 619 $ 17,749

Year ended January 31, 2012
$ 15,121 $ — $ — $ 2,009 $ 17,130

Reserve for obsolete inventory:

Year ended January 31, 2013
$ 1,792 $ — $ — $ (1,161 ) $ 631

Year ended January 31, 2012
$ 1,581 $ 357 $ (146 ) $ — $ 1,792

EXHIBIT INDEX ~~TO EXHIBITS~~

Exhibit

Number

Exhibit Title

~~Description~~

~~3.1~~

31.1

Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.

~~3.2~~

Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through July 28, 2012, are incorporated herein by reference to Exhibit 3.02 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on September 14, 2012.

~~3.3~~

~~10.1~~

~~10.2~~

~~10.3~~

2011 Equity Incentive Plan is incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2011. *

~~10.4~~

~~10.5~~

~~10.6~~

~~10.7~~

~~10.8~~

~~10.9~~

~~10.10~~

~~10.11~~

~~10.12~~

~~21.1~~

~~Subsidiaries of the Company†~~

~~23.1~~

~~Consent of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA &WILLIAMSON, LLP†~~

~~31.1~~

Certification of ~~Chief~~our Principal Executive Officer ~~pursuant~~Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002†~~2002.

~~31.2~~
31.2		Certification of ~~Chief~~our Principal Financial Officer ~~pursuant~~Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002†~~2002.

~~32.1~~

~~Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†~~

~~32.2~~

~~Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†~~

~~101.INS~~

~~XBRL Instance Document~~ Ω

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document~~ Ω

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document~~ Ω

~~101.DEF~~

~~XBRL Taxonomy Extension Definition~~ Ω

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~ Ω

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document~~ Ω

†	~~Filed herewith.~~

+	~~Furnished herewith.~~

*	~~These exhibits are identified as management contracts or compensatory plans or arrangements of the Registrant pursuant to Item 15 of Form 10-K.~~

California	~~95-2088894~~
(State or Other Jurisdiction	~~(I.R.S. Employer~~
of Incorporation or Organization)	~~Identification No.)~~

25541 Commercentre Drive, Lake Forest, CA	~~92630~~
(Address of Principal Executive Offices)	95-2088894 (I.R.S. Employer Identification No.) 92630 (Zip Code)

	High		Low
Year ended January 31, 2013:
First Quarter	$	0.25	$	0.13
Second Quarter		0.25		0.10
Third Quarter		0.32		0.16
Fourth Quarter		0.30		0.07
Year ended January 31, 2012:
First Quarter	$	0.38	$	0.22
Second Quarter		0.49		0.26
Third Quarter		0.40		0.15
Fourth Quarter		0.30		0.16

	~~January 31, 2013~~
~~Risk free interest rate~~	~~1.48%~~
~~Average expected life (years)~~	~~7.49~~
~~Expected volatility~~	~~107.49%~~
~~Expected dividends~~	~~None~~

	January 31,
	2013			2012
Deferred tax assets:
Inventory		277			748
Property and equipment, principally due to differing depreciation methods		206			671
Accruals and reserves		184			300
Net research and manufacturer investment credit carryforwards		2,563			2,576
Net operating losses		14,322			11,894
AMT credit carryforwards		126			126
Stock based compensation		69			796
Other		2			19
Total gross deferred tax assets		17,749			17,130
Less: valuation allowance		(17,749	)		(17,130	)
Net deferred tax assets	$	—		$	—

	Unrecognized Tax Benefits
Balance at February 1, 2012	$	760
Additions based on tax positions related to the current year		17
Reductions due to lapses of statute of limitations		—
Reductions for tax positions of prior years		—
Balance at January 31, 2013	$	777

PART I	1
~~ITEM 1.~~	~~BUSINESS~~	1
~~ITEM 1A.~~	~~RISK FACTORS~~	4
~~ITEM 1B.~~	~~UNRESOLVED STAFF COMMENTS~~	13
~~ITEM 2.~~	~~PROPERTIES~~	13
~~ITEM 3.~~	~~LEGAL PROCEEDINGS~~	14
~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~	14
III		1
~~PART II~~	15
~~ITEM 5.~~	~~MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~	15
~~ITEM 6.~~	~~SELECTED FINANCIAL DATA~~	16
~~ITEM 7.~~	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~	16
~~ITEM 7A.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~	28
~~ITEM 8.~~	~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~	29
~~ITEM 9.~~	~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~	56
~~ITEM 9A.~~	~~CONTROLS AND PROCEDURES~~	56
~~ITEM 9B.~~	~~OTHER INFORMATION~~	57

~~PART III~~		58
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	58 1
~~ITEM 11.~~	~~EXECUTIVE COMPENSATION~~	58
ITEM 11.	EXECUTIVE COMPENSATION	5

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	58 8

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	58 9

ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	58 13

PART IV		14
~~PART IV~~	59
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	59 14

			Year First	Other Public
			Elected/Appointed	Company Directorships
Name	Age	Principal Comarco Position	As Director	(Past Five Years)
Paul Borowiec	36	Director	2011	None
Wayne G. Cadwallader	56	Director	2011	Orbit International, Corp.
Thomas W. Lanni	60	Director and President and Chief Executive Officer	2011	None
Richard T. LeBuhn	48	Director	2008	None
Michael R. Levin	51	Director	2011	None
Michael H. Mulroy	47	Director	2011	None
Louis E. Silverman	54	Chairman of the Board	2012	Questcor Pharmaceuticals, Inc.

	Years Ended January 31,
	2013			2012			2011
	(In thousands, except per share data)
Revenue	$	6,338		$	8,069		$	28,949
Cost of revenue		4,150			8,261			26,012
Gross profit (loss)		2,188			(192	)		2,937
Selling, general and administrative expenses		2,761			3,140			5,128
Engineering and support expenses		2,435			1,931			3,151
		5,196			5,071			8,279
Operating loss		(3,008	)		(5,263	)		(5,342	)
Other loss, net		(2,582	)		(24	)		(106	)
Loss from continuing operations before income taxes		(5,590	)		(5,287	)		(5,448	)
Income tax (expense) benefit		(2	)		(2	)		75
Loss from continuing operations		(5,592	)		(5,289	)		(5,373	)
Net loss from discontinued operations, net of income taxes		—			(21	)		(601	)
Net loss	$	(5,592	)	$	(5,310	)	$	(5,974	)
Basic and diluted loss per share:
Loss from continuing operations	$	(0.74	)	$	(0.72	)	$	(0.73	)
Loss from discontinued operations		—			—			(0.08	)
Net loss per share	$	(0.74	)	$	(0.72	)	$	(0.81	)

	As of January 31,
	2013				2012				2011
	(In thousands)
Working capital		$	(6,935	)		$	(1,518	)		$	3,399
Total assets			3,211				3,927				12,761
Borrowing under loan agreement			2,000				—				1,000
Long-term debt			—				—				—
Stockholders’ (deficit) equity			(6,774	)			(1,341	)			3,819

	Years Ended January 31,										2013 over
	2013					2012					2012
	(In thousands)										% Change
					% of Revenue					% of Revenue
Revenue		$	6,338		100%		$	8,069		100%		(21	%)

Operating loss		$	(3,008	)			$	(5,263	)
Net loss from continuing operations		$	(5,592	)			$	(5,289	)

	Payments due by Period
Long Term Debt Obligations	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Operating lease obligations	$	239	$	504	$	152	$	—	$	895
Purchase obligations		1,509		—		—		—		1,509
	$	1,748	$	504	$	152	$	—	$	2,404

	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Total
Balance at February 1, 2011, 7,343,869 shares	$	734	$	15,298		$	(12,213	)	$	3,819
Net loss		—		—			(5,310	)		(5,310	)
Issuance of 44,325 shares of common stock upon the vesting of restricted stock units		5		(5	)		—			—
Stock based compensation expense		—		150			—			150

Balance at January 31, 2012, 7,388,194 shares	$	739	$	15,443		$	(17,523	)	$	(1,341	)
Net loss		—		—			(5,592	)		(5,592	)
Issuance of 246,845 shares of common stock upon the vesting of restricted stock units		25		(25	)		—			—
Stock based compensation expense		—		159			—			159

Balance at January 31, 2013, 7,635,039 shares	$	764	$	15,577		$	(23,115	)	$	(6,774	)

Description		January 31, 2013				Quoted Prices in Active Markets for (Level 1)				Significant Other Observable (Level 2)				Significant Unobservable (Level 3)
Derivative Liabilities		$	2,466			$	--			$	--			$	2,466

	July 31, 2012		Recorded New Derivative Liabilities		Change in estimated fair value recognized in results of operations		January 31, 2013

Derivative liabilities	$	1,365	$	–	$	1,101	$	2,466

	Years Ended January 31,
	2013			2012
Stock-based compensation expense	$	159		$	150
Impact on basic and diluted earnings per share	$	(0.02	)	$	(0.02	)

		~~Year Ended~~
		~~January 31, 2013~~
~~Weighted average risk-free interest rate~~		~~0.7%~~
~~Expected life (in years)~~		~~5.5~~
~~Expected stock volatility~~		~~121%~~
~~Dividend yield~~		~~None~~
~~Expected forfeitures~~		~~8.2%~~

	Outstanding Options
	Number of Shares			Weighted-Average Exercise Price
Balance, February 1, 2011		1,022,500		$	2.81
Options granted		—			—
Options canceled or expired		(642,500	)		2.03
Options exercised		—			—
Balance, January 31, 2012		380,000		$	3.93
Options granted		465,000			0.40
Options canceled or expired		(80,500	)		7.90
Options exercised		—			—
Balance, January 31, 2013		764,500		$	1.48
Stock Options Exercisable at January 31, 2013		212,100		$	4.00

	Outstanding Restricted Stock Units
	Number of Shares			Weighted-Average Stock Price On Grant Date
Balance, January 31, 2011		98,928		$	2.56
RSU’s granted		325,000			0.31
RSU’s canceled or expired		(85,952	)		1.63
Common Stock issued		(44,325	)		2.40
Balance, January 31, 2012		293,651		$	0.37
RSU’s granted		300,000			0.16
RSU’s canceled or expired		(42,480	)		0.24
Common Stock issued		(246,845	)		0.28
Balance, January 31, 2013		304,326		$	0.20

				Awards Outstanding						Options Exercisable
Range of Exercise/Grant Prices				Number Outstanding		Weighted-Average Remaining Contractual Life (years)		Weighted-Average Exercise/Grant Price		Number Exercisable		Weighted-Average Exercise Price
$	0.16	to	1.09		983,500		5.89	$	0.48		131,100	$	1.10
	2.89	to	4.90		19,326		4.09		4.45		15,000		4.90
	8.08	to	10.43		66,000		2.48		9.56		66,000		9.56
	0.16	to	10.43		1,068,826		5.65		1.11		212,100		4.00

	Operating Leases
Fiscal Year:
2014		239
2015		248
2016		256
2017		152
Total minimum lease payments	$	895

	COMARCO, INC.

	/s/ THOMAS W. LANNI
	Thomas W. Lanni
	President and Chief Executive Officer

	Balance at Beginning of Year		Charged to Cost and Expense (Recovery)			Deductions			Other Changes Add (Deduct)			Balance at End of Year
Allowance for doubtful accounts and provision for unbilled receivables (deducted from accounts receivable):

Year ended January 31, 2013	$	87	$	(38	)	$	(25	)	$	—		$	24

Year ended January 31, 2012	$	119	$	(29	)	$	(3	)	$	—		$	87

Allowance for deferred tax assets:

Year ended January 31, 2013	$	17,130	$	—		$	—		$	619		$	17,749

Year ended January 31, 2012	$	15,121	$	—		$	—		$	2,009		$	17,130

Reserve for obsolete inventory:

Year ended January 31, 2013	$	1,792	$	—		$	—		$	(1,161	)	$	631

Year ended January 31, 2012	$	1,581	$	357		$	(146	)	$	—		$	1,792