##### Table of Contents

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UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549





---





FORM 10-Q





x
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended

OCTOBER 31, 2003





OR





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from
                             to



Commission file number 0-5449





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COMARCO, INC.

(Exact name of registrant as specified in its charter)





|California                                                    |  | 95-2088894                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)





2 Cromwell, Irvine, California 92618

(Address of principal executive offices
and zip code)





(949) 599-7400

(Registrants telephone number, including area code)





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



Yes    þ            No ̈



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No    þ



The registrant had 7,217,051 shares of common stock outstanding as of December 10, 2003.





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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES



QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2003



TABLE OF CONTENTS





|                               |  |                                                                                                               |  | Page
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|                               | 
|PART I  FINANCIAL INFORMATION |  |                                                                                                              
|                               |  |                                                                                                              
|ITEM 1.                        |  | FINANCIAL STATEMENTS                                                                                          |  |     
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Balance Sheets as of October 31, 2003 and January 31, 2003                             |  | 3   
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
October 31, 2003 and 2002 |  | 4   
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
October 31, 2003 and 2002           |  | 5   
|                               |  |                                                                                                              
|                               |  | Notes to Condensed Consolidated Financial Statements                                                          |  | 6   
|                               |  |                                                                                                              
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |  | 16  
|                               |  |                                                                                                              
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    |  | 26  
|                               |  |                                                                                                              
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                       |  | 27  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                              
|                               |  |                                                                                                              
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                             |  | 28  
|                               |  |                                                                                                              
|ITEM 2.                        |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                     |  | 28  
|                               |  |                                                                                                              
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                               |  | 28  
|                               |  |                                                                                                              
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                           |  | 28  
|                               |  |                                                                                                              
|ITEM 5.                        |  | OTHER INFORMATION                                                                                             |  | 28  
|                               |  |                                                                                                              
|ITEM 6.                        |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                              |  | 28  
|                               | 
|SIGNATURES                     |  | 29                                                                                                           





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##### Table of Contents

PART I  FINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS



COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except
share data)



|                                                                                                                                                               |  | October 31, 2003 |        | January 31, 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ----------------
|ASSETS                                                                                                                                                         |  |                  |        |                 
|Current Assets:                                                                                                                                                |  |                  |        |                 
|Cash and cash equivalents                                                                                                                                      |  | $                | 13,498 |                 
|Short-term investments                                                                                                                                         |  |                  | 2,629  |                 
|Accounts receivable, net                                                                                                                                       |  |                  | 9,093  |                 
|Inventory                                                                                                                                                      |  |                  | 5,176  |                 
|Deferred tax assets, net                                                                                                                                       |  |                  | 3,626  |                 
|Other current assets                                                                                                                                           |  |                  | 1,380  |                 
|                                                                                                                                                               |  |                  |        |                 
|Total current assets                                                                                                                                           |  |                  | 35,402 |                 
|Property and equipment, net                                                                                                                                    |  |                  | 3,549  |                 
|Capitalized software development costs, net                                                                                                                    |  |                  | 5,956  |                 
|Goodwill, net                                                                                                                                                  |  |                  | 2,845  |                 
|Acquired intangible assets, net                                                                                                                                |  |                  | 1,086  |                 
|Other assets                                                                                                                                                   |  |                  | 1,133  |                 
|                                                                                                                                                               |  |                  |        |                 
|                                                                                                                                                               |  | $                | 49,971 |                 
|                                                                                                                                                               |  |                  |        |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                           |  |                  |        |                 
|Current Liabilities:                                                                                                                                           |  |                  |        |                 
|Accounts payable                                                                                                                                               |  | $                | 232    |                 
|Deferred revenue                                                                                                                                               |  |                  | 3,215  |                 
|Accrued liabilities                                                                                                                                            |  |                  | 6,635  |                 
|                                                                                                                                                               |  |                  |        |                 
|Total current liabilities                                                                                                                                      |  |                  | 10,082 |                 
|Deferred compensation                                                                                                                                          |  |                  | 2,629  |                 
|Deferred tax liabilities, net                                                                                                                                  |  |                  | 958    |                 
|Minority interest                                                                                                                                              |  |                  | 169    |                 
|Stockholders equity:                                                                                                                                          |  |                  |        |                 
|Preferred stock, no par value, 10,000,000 shares authorized, no shares outstanding at October 31, 2003 and January 31,
2003                                    |  |                  |       |                 
|Common stock, $0.10 par value, 50,625,000 shares authorized, 7,160,801 and 7,049,565 shares outstanding at October 31, 2003 and
January 31, 2003, respectively |  |                  | 716    |                 
|Additional paid-in capital                                                                                                                                     |  |                  | 11,986 |                 
|Retained earnings                                                                                                                                              |  |                  | 23,431 |                 
|                                                                                                                                                               |  |                  |        |                 
|Total stockholders equity                                                                                                                                     |  |                  | 36,133 |                 
|                                                                                                                                                               |  |                  |        |                 
|                                                                                                                                                               |  | $                | 49,971 |                 
|                                                                                                                                                               |  |                  |        |                 







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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)





|                                                                         |  | Three Months Ended October 31, |        |   | Nine Months Ended October 31, |  
|------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ----------------------------- | -
|                                                                         |  | 2003                           |        |   | 2002                          |  
|Revenue                                                                  |  | $                              | 11,222 |   |                               | $
|Cost of revenue                                                          |  |                                | 6,229  |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Gross profit                                                             |  |                                | 4,993  |   |                               |  
|Selling, general and administrative costs                                |  |                                | 2,113  |   |                               |  
|Asset impairment charges                                                 |  |                                |       |   |                               |  
|Engineering and support costs                                            |  |                                | 1,352  |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Operating income (loss)                                                  |  |                                | 1,528  |   |                               |  
|Other income, net                                                        |  |                                | 39     |   |                               |  
|Minority interest                                                        |  |                                | (10    | ) |                               |  
|                                                                         |  |                                |        |   |                               |  
|Income (loss) before income taxes                                        |  |                                | 1,557  |   |                               |  
|Income tax expense (benefit)                                             |  |                                | 572    |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Income (loss) before cumulative effect of change in accounting principle |  |                                | 985    |   |                               |  
|Cumulative effect of change in accounting principle                      |  |                                |       |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Net income (loss)                                                        |  | $                              | 985    |   |                               | $
|                                                                         |  |                                |        |   |                               |  
|Net income (loss) per share  basic and diluted:                         |  |                                |        |   |                               |  
|Income (loss) before cumulative effect of change in accounting principle |  | $                              | 0.14   |   |                               | $
|Cumulative effect of change in accounting principle                      |  |                                |       |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Net income (loss) per share  basic and diluted                          |  | $                              | 0.14   |   |                               | $
|                                                                         |  |                                |        |   |                               |  
|Weighted average common shares outstanding:                              |  |                                |        |   |                               |  
|Basic                                                                    |  |                                | 7,161  |   |                               |  
|                                                                         |  |                                |        |   |                               |  
|Diluted                                                                  |  |                                | 7,191  |   |                               |  
|                                                                         |  |                                |        |   |                               |  







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





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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)





|                                                                                          |  | Nine Months Ended October 31, |        
|----------------------------------------------------------------------------------------- |  | ----------------------------- | -------
|                                                                                          |  | 2003                          |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                               |        
|Net loss                                                                                  |  | $                             | (2,087 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                               |        
|Depreciation and amortization                                                             |  |                               | 3,845  
|Tax benefit from exercise of stock options                                                |  |                               | 99     
|Deferred income taxes                                                                     |  |                               | (796   
|Asset impairment charges                                                                  |  |                               |       
|Loss on disposal of property and equipment                                                |  |                               | 57     
|Cumulative effect of change in accounting principle                                       |  |                               |       
|Provision for doubtful accounts receivable                                                |  |                               | 370    
|Provision for obsolete inventory                                                          |  |                               | (271   
|Minority interest in loss of subsidiary                                                   |  |                               | (40    
|Changes in operating assets and liabilities:                                              |  |                               |        
|Decrease (increase) in accounts receivable                                                |  |                               | (7,410 
|Decrease (increase) in inventory                                                          |  |                               | (1,249 
|Decrease (increase) in other assets                                                       |  |                               | 22     
|Increase (decrease) in accounts payable                                                   |  |                               | (79    
|Decrease in deferred revenue                                                              |  |                               | (337   
|Increase (decrease) in accrued liabilities                                                |  |                               | 821    
|                                                                                          |  |                               |        
|Net cash provided by (used in) operating activities                                       |  |                               | (7,055 
|                                                                                          |  |                               |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                               |        
|Proceeds from sales of property and equipment                                             |  |                               |       
|Purchases of property and equipment                                                       |  |                               | (1,637 
|Acquired intangible assets                                                                |  |                               | (520   
|Capitalized software development costs                                                    |  |                               | (2,540 
|                                                                                          |  |                               |        
|Net cash used in investing activities                                                     |  |                               | (4,697 
|                                                                                          |  |                               |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                               |        
|Net proceeds from issuance of common stock                                                |  |                               |       
|Net proceeds from issuance of subsidiary common stock                                     |  |                               | 89     
|Purchase of common stock                                                                  |  |                               | (195   
|                                                                                          |  |                               |        
|Net cash used in financing activities                                                     |  |                               | (106   
|                                                                                          |  |                               |        
|Net increase (decrease) in cash and cash equivalents  continuing operations              |  |                               | (11,858
|Net increase (decrease) in cash and cash equivalents  discontinued operations            |  |                               | (31    
|                                                                                          |  |                               |        
|Net increase (decrease) in cash and cash equivalents                                      |  |                               | (11,889
|Cash and cash equivalents, beginning of period                                            |  |                               | 25,387 
|                                                                                          |  |                               |        
|Cash and cash equivalents, end of period                                                  |  | $                             | 13,498 
|                                                                                          |  |                               |        
|Supplemental disclosures of cash flow information:                                        |  |                               |        
|Cash paid for interest                                                                    |  | $                             |       
|                                                                                          |  |                               |        
|Cash paid for income taxes                                                                |  | $                             | 2      
|                                                                                          |  |                               |        







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





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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.     Organization



Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, Comarco or the Company), is a leading
provider of wireless field test applications for the wireless industry. Comarco also designs and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Comarco
Wireless Technologies, Inc. (CWT) was incorporated in the state of Delaware in September 1993. During October 1999, the Company embarked on a plan to divest its non-wireless businesses, which included the defense and commercial staffing
businesses. The divestiture plan was completed during November 2000. Accordingly, the Companys continuing operations consist solely of the operations of CWT.



2.     Summary of Significant Accounting Policies



Basis of Presentation:



The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in accordance with generally accepted
accounting principles for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Companys annual
report on Form 10-K for the year ended January 31, 2003. The financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented. The results for the three and nine months ended October 31, 2003 are not necessarily indicative of the results to be expected for the year ending January 31, 2004.



Stock-Based Compensation:



The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, as amended. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized
for the stock option grants. Had compensation cost for the Companys stock option plans been determined based on the fair value at the grant date for awards during the three and nine months ended October 31, 2003 and 2002 consistent with the
provisions of SFAS No. 123, the Companys Net Income (loss), Basic Earnings (loss) Per Share, and Diluted Earnings (loss) Per Share would have been reduced to the pro forma amounts as follows (in thousands, except per share amounts):



|                                                                                                                                            |  | Three Months EndedOctober 31, |   |  |      |       |   |  | Nine Months EndedOctober 31, | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | - |  | ---- | ----- | - |  | ---------------------------- | 
|                                                                                                                                            |  | 2003                          |   |  | 2002 |       |   |  |                              | 
|Net income (loss):                                                                                                                          |  |                               |   |  |      |       |   |  |                              | 
|As reported                                                                                                                                 |  | $ 985                         |   |  | $    | 1,486 |   |  |                              | 
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  | (156                          | ) |  |      | (153  | ) |  |                              | 
|                                                                                                                                            |  |                               |   |  |      |       |   |  |                              | 
|Pro forma                                                                                                                                   |  | $ 829                         |   |  | $    | 1,333 |   |  |                              | 
|                                                                                                                                            |  |                               |   |  |      |       |   |  |                              | 



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                            |  | Three Months EndedOctober 31, |      |      |   |      |  | Nine Months EndedOctober 31, | 
|------------------------------------------- |  | ----------------------------- | ---- | ---- | - | ---- |  | ---------------------------- | 
|                                            |  | 2003                          |      | 2002 |   |      |  |                              | 
|Earnings (loss) per common share  basic:   |  |                               |      |      |   |      |  |                              | 
|As reported                                 |  | $                             | 0.14 |      | $ | 0.21 |  |                              | 
|Pro forma                                   |  |                               | 0.12 |      |   | 0.19 |  |                              | 
|Earnings (loss) per common share  diluted: |  |                               |      |      |   |      |  |                              | 
|As reported                                 |  | $                             | 0.14 |      | $ | 0.21 |  |                              | 
|Pro forma                                   |  |                               | 0.11 |      |   | 0.18 |  |                              | 



The fair value of
options granted under the Companys stock option plans during the nine months ended October 31, 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



|                                         |  | Nine Months EndedOctober 31, |  
|---------------------------------------- |  | ---------------------------- | -
|                                         |  | 2003                         |  
|Weighted average risk-free interest rate |  | 3.1                          | %
|Expected life (in years)                 |  | 6                            |  
|Expected stock volatility                |  | 46.3                         | %
|Dividend yield                           |  | None                         |  



Principles of Consolidation:



The condensed consolidated financial statements of the
Company include the accounts of Comarco, Inc., CWT, and wholly owned subsidiaries primarily reported as discontinued operations. All material intercompany balances, transactions, and profits have been eliminated.



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 condensed consolidated financial
statements and the reported amounts of revenue and expenses during the period reported. Actual results could differ from those estimates.



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



Reclassifications:



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



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



3.     Recent Accounting Pronouncements



In June 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal
activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted the provisions of SFAS No. 146 as of February 1, 2003, and such adoption did not have a material effect on the Companys consolidated results of operations or financial
position.



In October 2002, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The EITF indicated that this guidance is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.
The adoption of EITF Issue No. 00-21 did not have a material effect on the Companys consolidated results of operations or financial position because the Companys qualifying arrangements were historically treated in a manner consistent
with the stated provisions.



In November 2002, the FASB issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34 (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN No. 45 also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN No. 45 are applicable to guarantees issued or modified after
December 31, 2002. The Company adopted the accounting and disclosure provisions of FIN No. 45 effective February 1, 2003. Such adoption did not have a material impact on the Companys consolidated results of operations or financial position.



In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to the accompanying condensed consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46). FIN No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. FIN No. 46 applies
immediately to variable interests in variable interest entities created after January 31, 2003, and becomes effective as of the first interim period after December 15, 2003 for variable interest entities created or obtained before February 1, 2003.
The application of FIN No. 46 did not have a material effect on the Companys consolidated results of operations or financial position. The Company has no variable interest entities that would require disclosure or consolidation under FIN No.
46.



In April 2003, FASB issued SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement
133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements, which will collectively result in more
consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



impact on the Companys consolidated financial statements as the Company has not entered into any derivative or
hedging transactions.



In May 2003, FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet:



| | · | A financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its
assets at a specified or determinable date or upon an event that is certain to occur;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuers equity shares, or is indexed to such an obligation, and requires
the issuer to settle the obligation by transferring assets; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary value of the
obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuers equity shares, or (3) variations inversely related to changes in the fair value of the
issuers equity shares.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SFAS No. 150 is
effective for financial instruments as of the first interim period beginning after December 15, 2004. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in accounting principle. The Company does not expect the adoption
of SFAS No. 150 will have a material impact on its consolidated financial statements.



4.     Stockholders Equity



During 1992, our Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through October 31, 2003, the Company has repurchased approximately 2.6 million
shares for an average price of $8.22 per share. During the third quarter ended October 31, 2003, the Company did not repurchase any shares of its common stock.



5.     ChargeSource Product Recall



In cooperation with the Consumer Products Safety Commission, on March 20, 2003, Comarco voluntarily initiated a product safety recall of certain of its
ChargeSource AC power adapters. This product safety recall impacts approximately 125,000 units that were sold in fiscal 2003. Comarco and Targus Group International (Targus), the Companys distributor of ChargeSource products,
entered into an agreement to address the impact of the recall action. Under the terms of the agreement Comarco issued a $3.2 million credit to Targus in fiscal 2003 in consideration of a full release. Additionally, the Company accrued $554,000 in
costs related to the recall action.



The following table
presents a reconciliation of the use of the product recall accrual (in thousands):



|Product Recall Liability 1/31/03 |  | Adjustments |  | Payments |  | Product Recall Liability 10/31/03
|-------------------------------- |  | ----------- |  | -------- |  | ---------------------------------
|                                 |  |             | 
|$554                             |  | $          |  | $(284)   |  | $270                             
|                                 |  |             |  |          |  |                                  





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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The product recall liability is included in accrued liabilities in the accompanying condensed
consolidated balance sheets. The Company believes that the balance remaining as of October 31, 2003 is adequate to cover additional product recall costs expected to be paid.



Additionally, of the $3.2 million credit issued to Targus in the fourth quarter of fiscal 2003, qualifying product returns
totaling $2.1 million were received from Targus through September 14, 2003, the date through which returns were allowed under the terms of the agreement. The remaining unused portion of the credit in the amount of $1.1 million was recorded as
revenue during the third quarter ended October 31, 2003.



6.
    Income (Loss) Per Share



The
Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of
common shares outstanding during the reporting period. Diluted income (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the nine months ended October 31, 2003 and October 31, 2002,
basic and diluted loss per share were the same because the inclusion of potential common shares in the calculation would have been antidilutive.



The following table presents reconciliations of the numerators and denominators of the basic and diluted loss per share computations for net loss. In the
tables below, Loss represents the numerator and Shares represents the denominator (in thousands, except per share amounts):



|                                                                                                                   |  | Three Months EndedOctober 31, |       |   |      |   |       |   | Nine Months EndedOctober 31, | 
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | ----- | - | ---- | - | ----- | - | ---------------------------- | 
|                                                                                                                   |  | 2003                          |       |   | 2002 |   |       |   |                              | 
|Basic:                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Income (loss) before cumulative effect of accounting change                                                        |  | $                             | 985   |   |      | $ | 1,486 |   |                              | 
|Weighted average shares outstanding                                                                                |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|Basic income (loss) per share before cumulative effect of accounting change                                        |  | $                             | 0.14  |   |      | $ | 0.21  |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|Cumulative effect of accounting change                                                                             |  | $                             |      |   |      | $ |      |   |                              | 
|Weighted average shares outstanding                                                                                |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|Basic loss per share from cumulative effect of accounting change                                                   |  | $                             |      |   |      | $ |      |   |                              | 
|Net income (loss)                                                                                                  |  | $                             | 985   |   |      | $ | 1,486 |   |                              | 
|Weighted average shares outstanding                                                                                |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|Basic income (loss) per share                                                                                      |  | $                             | 0.14  |   |      | $ | 0.21  |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|                                                                                                                   |  |                               |       |   |      |  
|Diluted:                                                                                                           |  |                               |       |   |      |   |       |   |                              | 
|Income (loss) before cumulative effect of accounting change                                                        |  | $                             | 985   |   |      | $ | 1,486 |   |                              | 
|Effect of subsidiary options                                                                                       |  |                               | (10   | ) |      |   | (36   | ) |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 
|Income (loss) used in calculation of diluted income (loss) per share before cumulative effect of accounting change |  | $                             | 975   |   |      | $ | 1,450 |   |                              | 
|                                                                                                                   |  |                               |       |   |      |   |       |   |                              | 



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                                                                                                             |  | Three Months EndedOctober 31, |       |   |      |   |       |   | Nine Months EndedOctober 31, | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---- | - | ----- | - | ---------------------------- | 
|                                                                                                                             |  | 2003                          |       |   | 2002 |   |       |   |                              | 
|Weighted average shares outstanding                                                                                          |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|Effect of dilutive securities  stock options                                                                                |  |                               | 30    |   |      |   | 23    |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Weighted average shares used in calculation of diluted income (loss) per share before cumulative effect of accounting
change |  |                               | 7,191 |   |      |   | 7,010 |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Diluted income (loss) per share before cumulative effect of accounting change                                                |  | $                             | 0.14  |   |      | $ | 0.21  |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Cumulative effect of accounting change                                                                                       |  | $                             |      |   |      | $ |      |   |                              | 
|Effect of subsidiary options                                                                                                 |  |                               |      |   |      |   |      |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Net loss used in calculation of diluted loss per share from cumulative effect of accounting change                           |  | $                             |      |   |      | $ |      |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Weighted average shares outstanding                                                                                          |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|Effect of dilutive securities  stock options                                                                                |  |                               | 30    |   |      |   | 23    |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Weighted average shares used in calculation of diluted loss per share from cumulative effect of accounting change            |  |                               | 7,191 |   |      |   | 7,010 |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Diluted loss per share from cumulative effect of accounting change                                                           |  | $                             |      |   |      | $ |      |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Net income (loss)                                                                                                            |  | $                             | 985   |   |      | $ | 1,486 |   |                              | 
|Effect of subsidiary options                                                                                                 |  |                               | (10   | ) |      |   | (36   | ) |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Net income (loss) used in calculation of diluted income (loss) per share                                                     |  | $                             | 975   |   |      | $ | 1,450 |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Weighted average shares outstanding                                                                                          |  |                               | 7,161 |   |      |   | 6,987 |   |                              | 
|Effect of dilutive securities  stock options                                                                                |  |                               | 30    |   |      |   | 23    |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Weighted average shares used in calculation of diluted income (loss) per share                                               |  |                               | 7,191 |   |      |   | 7,010 |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 
|Diluted income (loss) per share                                                                                              |  | $                             | 0.14  |   |      | $ | 0.21  |   |                              | 
|                                                                                                                             |  |                               |       |   |      |   |       |   |                              | 



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



7.     Inventory



Inventory consists of the following (in thousands):



|                 |  | October 31,2003 |       |  |  | January 31,2003
|---------------- |  | --------------- | ----- |  |  | ---------------
|Raw materials    |  | $               | 4,212 |  |  |                
|Work in progress |  |                 | 301   |  |  |                
|Finished goods   |  |                 | 663   |  |  |                
|                 |  |                 |       |  |  |                
|                 |  | $               | 5,176 |  |  |                
|                 |  |                 |       |  |  |                



Inventories are net of
write downs for excess and obsolete inventory of approximately $2.3 million and $2.6 million as of October 31, 2003 and January 31, 2003, respectively. The Company regularly reviews inventory quantities on hand and records a write down for excess
and obsolete inventory based primarily on historical usage, forecasted product demand, and production requirements for the next twelve months.



8.     Capitalized Software Development Costs, Net



Capitalized software development costs consist of the following (in thousands):



|                                       |  | October 31,2003 |        |   |  |  | January 31,2003 |  
|-------------------------------------- |  | --------------- | ------ | - |  |  | --------------- | -
|Capitalized software development costs |  | $               | 8,746  |   |  |  |                 | $
|Less: accumulated amortization         |  |                 | (2,790 | ) |  |  |                 |  
|                                       |  |                 |        |   |  |  |                 |  
|                                       |  | $               | 5,956  |   |  |  |                 | $
|                                       |  |                 |        |   |  |  |                 |  



Amortization of
software development costs for the three months ended October 31, 2003 and 2002 totaled $1.0 million and $0.3 million, respectively. For the nine months ended October 31, 2003 and 2002, amortization of software development costs totaled $2.1 million
and $2.4 million, respectively. Amortization of software development costs has been reported in cost of revenue in the accompanying condensed consolidated financial statements.



Additionally, during the first quarter of fiscal 2004, fully amortized software development costs totaling $3.2 million and
the corresponding accumulated amortization were retired.



9.
    Goodwill and Acquired Intangible Assets, Net



Goodwill and acquired intangible assets consist of the following (in thousands):



|                                 |  | October 31,2003 |       |   |  |  | January 31,2003 |  
|-------------------------------- |  | --------------- | ----- | - |  |  | --------------- | -
|Goodwill                         |  | $               | 3,248 |   |  |  |                 | $
|Less: accumulated amortization   |  |                 | (403  | ) |  |  |                 |  
|                                 |  |                 |       |   |  |  |                 |  
|                                 |  | $               | 2,845 |   |  |  |                 | $
|                                 |  |                 |       |   |  |  |                 |  
|Definite-lived intangible assets |  | $               | 971   |   |  |  |                 | $
|Less: accumulated amortization   |  |                 | (140  | ) |  |  |                 |  
|                                 |  |                 |       |   |  |  |                 |  
|                                 |  | $               | 831   |   |  |  |                 | $
|                                 |  |                 |       |   |  |  |                 |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                   |  | October 31,2003 |       |   |  |  | January 31,2003 |  
|---------------------------------- |  | --------------- | ----- | - |  |  | --------------- | -
|Indefinite-lived intangible assets |  | $               | 1,000 |   |  |  |                 | $
|Less: accumulated amortization     |  |                 | (745  | ) |  |  |                 |  
|                                   |  |                 |       |   |  |  |                 |  
|                                   |  | $               | 255   |   |  |  |                 | $
|                                   |  |                 |       |   |  |  |                 |  



The Company ceased
amortizing goodwill and indefinite-lived intangible assets beginning February 1, 2002 upon adoption of SFAS No. 142. Amortization of definite-lived acquired intangible assets for the three months ended October 31, 2003 totaled $64,000. No
amortization expense was recorded for the three months ended October 31, 2002. Amortization of definite-lived acquired intangible assets for the nine months ended October 31, 2003 and 2002, totaled $140,000 and $176,000, respectively.



Additions to goodwill totaled $0.5 million for the nine months ended October
31, 2003. There were no such additions for the three months ended October 31, 2003. The current fiscal year increase represents the Companys purchase of a minority interest in CWT. For the three and nine months ended October 31, 2003,
additions of definite-lived intangible assets totaled $0.3 million and $0.5 million, respectively. The additions represent costs incurred for license rights related to mobile phone technologies.



10.     Customer Concentrations



The Companys sales have historically been concentrated with a small
number of customers. During the three months ended October 31, 2003 and 2002, sales to customers that accounted for 10 percent or more of revenues for the period totaled $4.8 million and $6.8 million, respectively. Sales to Targus accounted for
approximately 53 percent and 52 percent of total revenue for the three months ended October 31, 2003 and 2002, respectively. During the three months ended October 31, 2003 and 2002, no other customer accounted for more than 10 percent of revenue.



For the nine months ended October 31, 2003 and 2002, sales to
customers that accounted for 10 percent or more of revenue for the period totaled $8.1 million and $13.5 million, respectively. Sales to Targus accounted for approximately 35 percent and 44 percent of total revenues during those periods,
respectively. For the nine months ended October 31, 2003 and 2002, no other customer constituted more than 10 percent of revenue.



As of October 31, 2003, approximately 51 percent of total accounts receivable related to one customer that accounted for 10 percent or more of
Comarcos total revenue. The loss of, or reduction in, sales to this customer could have a material adverse effect on the Companys business, results of operations, and financial position.



11.     Business Segment Information



The Company has two reportable operating segments: wireless test solutions
and wireless applications.



Wireless test solutions designs and
manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio frequency engineers, professional technicians, and others use these tools to design, deploy, and optimize wireless networks, and to verify
the performance of the wireless networks once deployed.



Wireless applications designs and manufactures call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Call box systems provide emergency communication over existing wireless
networks. In addition to the call box products, the Company provides system installation and long-term maintenance services. Currently, approximately 14,000 call boxes are installed, the majority of which are serviced and maintained under long-term
agreements, which expire at various dates through February 2011.





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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Performance measurement and resource allocation for the reportable segments are based on many
factors. The primary financial measures used are revenue and gross profit. The revenue, gross profit, gross margin, and total assets attributable to these segments are as follows (in thousands):



|                |  | Three Months Ended October 31, 2003 |       |   | Three Months Ended October 31, 2002 |  
|--------------- |  | ----------------------------------- | ----- | - | ----------------------------------- | -
|                |  | Wireless TestSolutions              |       |   | WirelessApplications                |  
|Revenue         |  | $                                   | 3,171 |   |                                     | $
|Cost of revenue |  |                                     | 1,981 |   |                                     |  
|                |  |                                     |       |   |                                     |  
|Gross profit    |  | $                                   | 1,190 |   |                                     | $
|                |  |                                     |       |   |                                     |  
|Gross margin    |  |                                     | 37.5  | % |                                     |  
|                |  |                                     |       |   |                                     |  
|                |  |                                    
|                |  | Nine Months Ended October 31, 2003  |       |   | Nine Months Ended October 31, 2002  |  
|                |  | Wireless TestSolutions              |       |   | WirelessApplications                |  
|Revenue         |  | $                                   | 7,505 |   |                                     | $
|Cost of revenue |  |                                     | 4,360 |   |                                     |  
|                |  |                                     |       |   |                                     |  
|Gross profit    |  | $                                   | 3,145 |   |                                     | $
|                |  |                                     |       |   |                                     |  
|Gross margin    |  |                                     | 41.9  | % |                                     |  
|                |  |                                     |       |   |                                     |  



|                                                                     |  | Wireless TestSolutions        |        | WirelessApplications         |   | Corporate |  | Total
|-------------------------------------------------------------------- |  | ----------------------------- | ------ | ---------------------------- | - | --------- |  | -----
|Assets at October 31, 2003                                           |  | $                             | 15,780 |                              | $ | 10,547    |  | $    
|                                                                     |  |                               |        |                              |   |           |  |      
|Assets at October 31, 2002                                           |  | $                             | 13,120 |                              | $ | 18,786    |  | $    
|                                                                     |  |                               |        |                              |   |           |  |      
|                                                                    
|Revenue by geographic area consists of the following (in thousands):
|                                                                     |  |                              
|                                                                     |  | Three Months EndedOctober 31, |        | Nine Months EndedOctober 31,
|                                                                     |  | 2003                          |        | 2002                         |   | 2003      |  | 2002 
|North America                                                        |  | $                             | 9,669  |                              | $ | 10,595    |  | $    
|Europe                                                               |  |                               | 482    |                              |   | 1,838     |  |      
|Asia                                                                 |  |                               | 118    |                              |   | 540       |  |      
|Latin America                                                        |  |                               | 953    |                              |   | 60        |  |      
|                                                                     |  |                               |        |                              |   |           |  |      
|                                                                     |  | $                             | 11,222 |                              | $ | 13,033    |  | $    
|                                                                     |  |                               |        |                              |   |           |  |      



12.
    Commitments and Contingencies



Purchase
Commitments with Suppliers



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 accept delivery of materials pursuant to our purchase orders subject to various contract provisions which 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



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



charges and expenses related to such excess material. 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.



Legal Contingencies



The Company is from time to time involved in various legal proceedings
incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our results of operations and financial position.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and
notes thereto included elsewhere in this quarterly report on Form 10-Q. This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or
continue, the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Important factors which may cause actual results to differ materially from the
forward-looking statements are described in the section entitled Risk Factors in Part I, Item 1 of the our report on Form 10-K for the year ended January 31, 2003, and other risks identified from time to time in our filings with the
Securities and Exchange Commission, press releases, and other communications.



Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither any other
person nor we assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.



Overview



Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, Comarco, or the
Company), is a leading provider of field test applications for the wireless industry. Comarco also designs and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other
handheld devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT).



Results of Operations



We have two reportable operating segments: wireless test solutions and wireless applications.



Wireless Test Solutions



Our wireless test solutions business designs and manufactures hardware and software tools for use by wireless carriers,
equipment vendors, and others. Radio frequency engineers, professional technicians, and others use these field test applications to design, deploy, and optimize wireless networks, and to verify the performance of the wireless networks once deployed.



During the first half of fiscal 2004, we completed the
development of our Seven.Five hardware and various related software applications, and began shipping products to customers in Europe, North America and Latin America. Seven.Five is a mobile test platform that is adaptable to many test applications.
It provides wireless infrastructure analysis, benchmarking and optimization for 2G, 2.5G and 3G network deployments. We expect to complete the development of additional Seven.Five software applications during the fourth quarter of fiscal 2004.



The Seven.Five family consists of the following members:



| |  | Seven.Five Solo: Suited for network deployment activities, Solo is a single calling module product available with a family of audio and data QoS algorithms. It is an
entry-level product, capable of seamless migration to the Seven.Five Duo.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Seven.Five Duo: As networks mature, the power of a calling module plus a scanner is necessary to quickly and efficiently optimize networks. Duo supports up to two calling
modules, which can have mixed technologies, and one multi-band, multi-technology RF scanner. A portability kit is available for in-building needs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Seven.Five Multi: Designed for flexibility and scalability, Seven.Five Multi can house up to any combination of six calling modules or scanners in each chassis. Multiple
chassis can be combined to allow for up to 96 calling modules. The customer can mix and match technologies for benchmarking applications or configure a system with similar technologies for optimization activities. Multi is also available with a
portability kit for in-building and pedestrian testing needs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Seven.Five Multi-Band, Multi-Technology RF Scanner: The most advanced and accurate scanner for field-test applications. Capable of lightning-fast scans (over 3000 channels
per second) in multiple frequency bands, with multiple technologies, doing DVCC, BSIC and PN decoding simultaneously. The scanner offers spectrum analyzer-type measurements and full baseband decoding for GSM 850/900/1800/1900, EDGE, IS-136, CDMA2000
and WCDMA.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Seven.Five Data Extractor (DX): A very complete and easy-to-use software application that allows operators to produce comprehensive benchmarking reports, as well as perform
desktop network optimization using all of the data collected by the Seven.Five hardware. DX includes a variety of features for data administration, filtering capability, analysis, statistics, integrated mapping and generation of reports, as well as
an interface (ODBC) for third-party software.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Wireless
Applications



Our wireless applications business designs
and manufactures emergency call box systems and mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. Our call box products provide emergency communication over existing wireless networks. In addition
to the call box products, we provide system installation and long-term maintenance services. Currently, we have approximately 14,000 call boxes installed, the majority of which are serviced and maintained under long-term agreements which expire at
various dates through February 2011.



Approximately 75 percent
of our call box revenue is derived from agencies of Californias state and local governments. The State of California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with
respect to the spending patterns of our California-based customers. As a result, projects and the related contracts to upgrade and expand certain call box systems have been delayed. While we currently believe that these projects will move ahead, we
are unable to forecast the timing of such events in the near-term.



The wireless applications business also includes the ChargeSource family of mobile power products. During the second quarter of fiscal 2004, our offering of ChargeSource products was expanded with the release of the 120-watt universal AC/DC
adapter and the 120-watt universal DC adapter. By simply changing the compact SmartTips connected to the end of the charging cable, these products are capable of charging and powering multiple target devices, including most notebook computers,
cellular telephones, PDAs, and other handheld devices.



Until
recently, most current notebook computers required no more than 70 watts of power to operate. However, the personal computer industry is currently transitioning to notebook computers with increasing power requirements. As the power requirement
increases, so does the size of the original equipment of the manufacturer (OEM) AC charger sold with the notebook computer. To address this industry wide trend, we have developed a family of ChargeSource products that are compatible with
legacy and current notebook computers, as well as those notebook computers expected to be available during the next 18 to 24 months. These new ChargeSource products are able to deliver up to 120 watts of power in a very small form factor. The new
ChargeSource family of products consists of the following:





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| |  | 120-Watt Universal AC/DC Adapter  A universal adapter capable of charging most notebook computers requiring up to 120 watts of power, as well as cell phones, PDAs, and
other handheld devices. This adapter is used in the office, home, hotel, as well as the automobile and airplane. This product began shipping at the end of the second quarter of the current fiscal year.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 120-Watt Universal DC Adapter  A universal adapter capable of charging most notebook computers requiring up to 120 watts of power, as well as cell phones, PDAs, and
other handheld devices. This adapter is used in the automobile and airplane. This product began shipping at the end of the second quarter of the current fiscal year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 60-Watt Hour Universal Battery  This universal battery is used to charge and power all notebook computers, cell phones, PDAs, and other handheld devices. This product
is expected to be shipped during the fourth quarter of the current fiscal year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our new 120-watt ChargeSource products, as well as the universal battery are compatible with existing Smart Tips and are backwards compatible with the 70-Watt adapters, which we continue to manufacture and sell based
on the requirements of the retailers. Targus Group International (Targus) currently distributes our available products.



In cooperation with the Consumer Products Safety Commission, on March 20, 2003, Comarco voluntarily initiated a product safety recall of its legacy
ChargeSource 70-watt AC power adapters. This product safety recall impacts approximately 125,000 units that were sold in fiscal 2003. Comarco and Targus entered into an agreement to address the impact of the recall action. Under the terms of the
agreement Comarco issued a $3.2 million credit to Targus in fiscal 2003 in consideration of a full release. Of the $3.2 million credit issued to Targus in the fourth quarter of fiscal 2003, qualifying product returns totaling $2.1 million have been
received from Targus through October 31, 2003. During the third quarter, the remaining $1.1 million unused credit was recorded as revenue, consistent with the expiration of the right of return and the term of the agreement. Additionally, the Company
accrued $554,000 in costs related to the recall action in cost of revenue. The Company believes that the balance remaining as of October 31, 2003 of $270,000 is adequate to cover additional product recall costs expected to be paid.



The following table sets forth certain items as a percentage of revenue from
our condensed consolidated statements of operations for the three and nine months ended October 31, 2003 and 2002. The table and discussion that follows provides information which management believes is relevant to an assessment and understanding of
our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes thereto included elsewhere herein.



|                                          |  | Three Months EndedOctober 31, |   |  |      |   |  |  | Nine Months EndedOctober 31, | 
|----------------------------------------- |  | ----------------------------- | - |  | ---- | - |  |  | ---------------------------- | 
|                                          |  | 2003                          |   |  | 2002 |   |  |  |                              | 
|Revenue                                   |  | 100                           | % |  | 100  | % |  |  |                              | 
|Cost of revenue                           |  | 55.5                          |   |  | 51.4 |   |  |  |                              | 
|                                          |  |                               |   |  |      |   |  |  |                              | 
|Gross margin                              |  | 44.5                          |   |  | 48.6 |   |  |  |                              | 
|Selling, general and administrative costs |  | 18.8                          |   |  | 18.2 |   |  |  |                              | 
|Asset impairment charge                   |  |                              |   |  |     |   |  |  |                              | 
|Engineering and support costs             |  | 12.1                          |   |  | 13.0 |   |  |  |                              | 
|                                          |  |                               |   |  |      |   |  |  |                              | 
|Operating income (loss)                   |  | 13.6                          |   |  | 17.4 |   |  |  |                              | 
|Other income, net                         |  | 0.4                           |   |  | 0.7  |   |  |  |                              | 
|Minority interest                         |  | (0.1                          | ) |  | (0.1 | ) |  |  |                              | 
|                                          |  |                               |   |  |      |   |  |  |                              | 



18



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##### Table of Contents

|                                                                             |  | Three MonthsEnded October 31, |   |  |      |   | Nine Months Ended October 31, | 
|---------------------------------------------------------------------------- |  | ----------------------------- | - |  | ---- | - | ----------------------------- | 
|                                                                             |  | 2003                          |   |  | 2002 |   |                               | 
|Income (loss) before income taxes                                            |  | 13.9                          |   |  | 18.0 |   |                               | 
|Income tax expense (benefit)                                                 |  | 5.1                           |   |  | 6.6  |   |                               | 
|                                                                             |  |                               |   |  |      |   |                               | 
|Net income (loss) before cumulative effect of change in accounting principle |  | 8.8                           | % |  | 11.4 | % |                               | 
|                                                                             |  |                               |   |  |      |   |                               | 



Comparison of the three months
ended October 31, 2003 to the three months ended October 31, 2002



Consolidated



Revenue



Total revenue for the third quarter of fiscal 2004, which ended October 31,
2003, was $11.2 million compared to $13.0 million for the third quarter of fiscal 2003, a decrease of $1.8 million or 13.9 percent. As discussed in the wireless applications revenue section, the decrease is attributable to decreased sales of our
wireless applications products, partially offset by a $1.1 million unused recall credit that expired under the terms of the agreement with Targus, recorded as revenue during the third quarter of fiscal 2004.



We track the geographic location of our sales based upon the location of our
customers to which our products are shipped. Certain of our customers purchase products from us at central locations and then reship the product to locations throughout the world. Accordingly, we are unable to track the ultimate geographic location
of our products. Sales to customers in North America and Europe accounted for approximately 86 percent and 4 percent of revenue, or $9.7 million and $0.5 million, respectively, for the third quarter ended October 31, 2003. For the comparable period
of the prior fiscal year, sales to customers in North America and Europe accounted for approximately 82 percent and 14 percent of revenue, or $10.6 million and $1.8 million, respectively.



Cost of Revenue and Gross Margin



Total cost of revenue for the third quarter of fiscal 2004 was $6.2 million compared to $6.7 million for the third quarter of fiscal 2003, a decrease of
approximately $0.5 million or 6.9 percent. As a percentage of revenue, gross margin decreased to 44.5 percent from 48.6 percent for the third quarter of the prior fiscal year. The decrease in gross margin is due to increased amortization of
capitalized software development costs related to our wireless test solutions business which totaled $1.0 million and $0.3 million for the three months ended October 31, 2003 and 2002, respectively and additional costs of ramping-up production of
our newly released 120-watt universal power adapters. The decrease in gross margin was partially offset by the $1.1 million unused recall credit.



Selling, General and Administrative Costs



Selling, general, and administrative costs for the third quarter of fiscal 2004 were $2.1 million compared to $2.4 million for the third quarter of fiscal
2003, a decrease of $0.3 million or 10.8 percent. Approximately $0.2 million of the decrease relates to reduced legal fees incurred in the third quarter of fiscal 2004 compared to the corresponding period of the prior fiscal year. The Company
settled ongoing litigation in the second quarter of fiscal 2004 and as a result our legal fees have decreased in the current quarter. Additionally, $0.1 million of the decrease is due to reduced employee benefits expense in the current year. We are
using previously forfeited employer matching contributions to fund our current savings and retirement plan matching obligations. As a percentage of revenue, selling, general, and administrative costs were 18.8 percent and 18.2 percent for the
quarters ended October 31, 2003 and 2002, respectively.





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##### Table of Contents

Engineering and Support Costs



The Company capitalizes costs incurred for the development of software embedded in our wireless test solutions products that
will be sold when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are
capitalized include direct labor and related overhead. Engineering and support costs for the third quarter of fiscal 2004 and 2003 are as follows (in thousands):



|                                             |  | Three Months Ended October 31, |      
|-------------------------------------------- |  | ------------------------------ | -----
|                                             |  | 2003                           |      
|Engineering                                  |  | $                              | 1,820
|Less: Capitalized software development costs |  |                                | (811 
|Support costs                                |  |                                | 343  
|                                             |  |                                |      
|                                             |  | $                              | 1,352
|                                             |  |                                |      



Engineering and
support costs, net of capitalized software development costs, for the third quarter of fiscal 2004 were $1.4 million compared to $1.7 million for the prior fiscal quarter, a decrease of approximately $0.3 million. Gross engineering and support
costs, before reduction for capitalized software development costs, decreased $0.2 million in comparison to the third quarter of fiscal 2003. This decrease is primarily due to reduced staffing of our product support function.



Other Income



Other income consists primarily of interest income.



Income Tax Benefit



The effective tax rates for the quarters ended October 31, 2003 and 2002 were constant at 36.7 percent.



Wireless Test Solutions



|                |  | Three Months Ended October 31, |      
|--------------- |  | ------------------------------ | -----
|                |  | 2003                           |      
|                |  | (In thousands)                 |      
|Revenue         |  | $                              | 3,171
|Cost of revenue |  |                                | 1,981
|                |  |                                |      
|Gross profit    |  | $                              | 1,190
|                |  |                                |      
|Gross margin    |  |                                | 37.5 
|                |  |                                |      



Revenue



Wireless test solutions revenue for the third quarter of fiscal 2004 was $3.2
million compared to $2.9 million for the third quarter of fiscal 2003, an increase of $0.3 million or 9.0 percent. This increase reflects customer orders for our newly released products developed under the Seven.Five platform.





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##### Table of Contents

Cost of Revenue and Gross Margin



Cost of revenue from our wireless test solutions business for the third quarter of fiscal 2004 was $2.0 million compared to
$1.1 million for the third quarter of fiscal 2003, an increase of approximately $0.9 million or 78.5 percent. Gross margin for the third quarter of fiscal 2004 decreased to 37.5 percent from 61.8 percent for the corresponding period of the prior
fiscal year. The decrease in gross margin is primarily a result of higher rates of capitalized software development amortization expense. Software amortization expense, recorded in cost of sales, was $1.0 million for the third quarter of fiscal 2004
compared to $0.3 million for the third quarter of fiscal 2003, an increase of $0.7 million. This increase in software amortization is due to the development and release of our Seven.Five product platform in the current year.



Wireless Applications



|                |  | Three Months Ended October 31, |      
|--------------- |  | ------------------------------ | -----
|                |  | 2003                           |      
|                |  | (In thousands)                 |      
|Revenue         |  | $                              | 8,051
|Cost of revenue |  |                                | 4,248
|                |  |                                |      
|Gross profit    |  | $                              | 3,803
|                |  |                                |      
|Gross margin    |  |                                | 47.2 
|                |  |                                |      



Revenue



Wireless applications revenue for the third quarter of fiscal 2004 was $8.0
million compared to $10.1 million for the third quarter of fiscal 2003, a decrease of approximately $2.1 million or 20.5 percent. This decrease was due to a $0.6 million decrease in sales of our ChargeSource products and a $1.5 million decrease in
sales of our call box products.



As discussed previously, the
ChargeSource revenue includes $1.1 million in revenue related to the unused portion of the product recall credit. Excluding this credit to revenue, ChargeSource revenue would have decreased $1.7 million or 25% compared to the third quarter of fiscal
2003. The decrease in sales of our ChargeSource products is due to the phase-out of our 70-watt products as our primary market offering and the transition to newly developed 120-watt products. We began shipping both the 120-watt universal AC/DC and
120-watt universal DC power adapters at the end of the second quarter of fiscal 2004, and increased production to expected monthly production levels in the middle of the third quarter.



The decrease in sales of our call box products relates to delays in receiving contracts to upgrade and expand several call
systems based in California. As previously discussed, California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with respect to the spending patterns of our California based
customers. As a result, projects and the related contracts to upgrade and expand certain call box systems have been delayed. Sales of call box products tend to fluctuate from quarter to quarter while revenue from the long-term maintenance contracts
is relatively comparable quarter to quarter.



Cost of Revenue and Gross
Margin



Wireless applications cost of revenue for the third
quarter of fiscal 2004 was $4.2 million compared to $5.6 million for the third quarter of fiscal 2003, a decrease of approximately $1.4 million or 23.9 percent. The decrease in cost of revenue is consistent with the decreased revenue for the same
period. As a percentage of revenue, gross margin was 47.2 percent versus 44.9 percent for the corresponding period of the prior fiscal year. Excluding the aforementioned $1.1 million credit to revenue, the gross margin for the third quarter of
fiscal 2004





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##### Table of Contents

would have been 38.7 percent. Gross margin for the three months ended October 31, 2003 includes costs of ramping-up
production of our newly released 120-watt universal power adapters, which began shipping at the end of the second quarter of fiscal 2004, and did not reach expected production levels until mid-third quarter.



Comparison of the Nine Months Ended October 31, 2003 to the Nine Months Ended October 31,
2002



Consolidated



Revenue



Total revenue for the nine months ended October 31, 2003, was $23.2 million compared to $30.8 million for the nine months
ended October 31, 2002, a decrease of approximately $7.6 million or 24.7 percent. As discussed below, the decrease is attributable to a $5.7 million decrease in sales of our wireless applications products and a $1.9 million decrease in sales of our
wireless test solutions products.



Sales to customers in North
America and Europe accounted for approximately 83 percent and 10 percent of revenue, or $19.2 million and $2.3 million, respectively, for the nine months ended October 31, 2003. For the comparable period of the prior fiscal year, sales to customers
in North America and Europe accounted for approximately 84 percent and 10 percent of revenue, or $26.0 million and $3.1 million, respectively.



Cost of Revenue and Gross Margin



Total cost of revenue for the nine months ended October 31, 2003, was $14.5 million compared to $18.9 million for the corresponding period of fiscal 2003,
a decrease of approximately $4.4 million or 23.3 percent. During the nine months ended October 31, 2002, we recorded a non-cash inventory impairment charge totaling $1.2 million related to our wireless test solutions legacy 2G products. No such
costs were incurred in the corresponding period of the current fiscal year. The remaining decrease in cost of revenue is consistent with the decrease in revenue for the current fiscal year. As a percentage of revenue, gross margin was 37.6 percent
as compared to 38.7 percent for the nine months ended October 31, 2003 and 2002, respectively. As discussed below, the decrease in gross margin in the current period is primarily attributable to the costs of ramping up production of our newly
released 120-watt universal power adapters.



Selling, General and
Administrative Costs



Selling, general and administrative
costs for the nine months ended October 31, 2003, were $7.9 million compared to $7.1 million for the corresponding period of the prior fiscal year, an increase of $0.8 million or 10.9 percent. The increase in selling, general and administrative
expenses is attributable to the legal settlements and related fees in the amount of $1.7 million incurred during the second quarter of fiscal 2004, partially offset by reductions in other indirect costs as well as markedly reduced legal fees
incurred in the third quarter of the current fiscal year. As a percentage of revenue, selling, general and administrative costs were 33.9 percent and 23.0 percent for the nine months ended October 31, 2003 and 2002, respectively.



Engineering and Support Costs



The Company capitalizes costs incurred for the development of software
embedded in our wireless test solutions products that will be sold when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in
hardware and software technologies. Costs that are capitalized include direct labor and related overhead. Engineering and support costs for the nine months ended October 31, 2003 and 2002, are as follows (in thousands):





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##### Table of Contents



|                                             |  | Nine Months Ended October 31, |       
|-------------------------------------------- |  | ----------------------------- | ------
|                                             |  | 2003                          |       
|Engineering                                  |  | $                             | 5,745 
|Less: Capitalized software development costs |  |                               | (2,538
|Support costs                                |  |                               | 1,120 
|                                             |  |                               |       
|                                             |  | $                             | 4,327 
|                                             |  |                               |       



Engineering and
support costs, net of capitalized software development costs, for the nine months ended October 31, 2003 were $4.3 million compared to $4.4 million for the corresponding period of the prior fiscal year, a decrease of approximately $0.1 million.
Gross engineering and support costs, before reduction for capitalized software development costs, decreased $0.3 million compared to the nine months ended October 31, 2003. This is primarily due to increased product development costs offset by
reduced staffing of our product support function. Capitalized software development costs decreased $0.2 million for the nine months ended October 31, 2003 in comparison to the comparable period of the prior fiscal year. The increase in engineering
costs during fiscal 2004 is attributable to the development and release of Seven.Five products, including the Seven.Five Solo and Seven.Five Duo, during the second quarter of fiscal 2004, and release of Seven.Five 1X during the third quarter of
fiscal 2004.



Other Income



Other income consists primarily of interest income.



Income Tax Benefit



The effective tax rate for the nine months ended October 31, 2003 and 2002 was 35.6 percent and 24.5 percent, respectively.
The lower prior year effective tax rate used to compute the tax benefit of $1.9 million was caused primarily by permanent differences in our taxable loss for fiscal 2003 as a result of non-deductible intangible asset impairment charges recorded
during the second quarter of fiscal 2003. No such non-deductible expenses were recorded in fiscal 2004.



Cumulative Effect of Accounting Change



The Company adopted SFAS No. 142 Goodwill and Other Intangible Assets effective February 1, 2002. During the second quarter of fiscal 2003, we completed the required transitional impairment test under the
new rules and recorded a non-cash charge of $2.9 million to write down fully the carrying value of the goodwill related to our EDX software reporting unit. This reporting unit is included in our wireless test solutions segment for financial
reporting purposes, and the related goodwill was generated through our acquisition of EDX Engineering, Inc. during December 2000. Such charge is reflected as a cumulative effect of change in accounting principle. In calculating the impairment
charge, the fair value of the impaired reporting unit underlying the wireless infrastructure segment was estimated using a discounted cash flow methodology. This charge writes off the entire carrying value of the recorded goodwill for that reporting
unit. No comparable charges were recorded during the nine months ended October 31, 2003.



Wireless Test Solutions



|                |  | Nine Months Ended October 31, |      
|--------------- |  | ----------------------------- | -----
|                |  | 2003                          |      
|                |  | (Dollars in thousands)        |      
|Revenue         |  | $                             | 7,505
|Cost of revenue |  |                               | 4,360
|                |  |                               |      
|Gross profit    |  | $                             | 3,145
|                |  |                               |      
|Gross margin    |  |                               | 41.9 
|                |  |                               |      







23



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##### Table of Contents

Revenue



Revenue from our wireless test solutions segment for the nine months ended October 31, 2003, was $7.5 million compared to $9.4 million for the nine months
ended October 31, 2002, a decrease of 20.1 percent. Of the total decrease of $1.9 million, $0.9 million relates to the exiting of the engineering services business, which we ceased providing in the second quarter of fiscal 2003. The remaining
decrease of $1.0 million represents the shifting of sales from our legacy 2G wireless test solutions products coupled with delays in receiving orders in anticipation of the release of our Seven.Five products.



Cost of Revenue and Gross Margin



Cost of revenue from our wireless test solutions segment for the nine months
ended October 31, 2003, was $4.4 million compared to $6.7 million for the nine months ended October 31, 2002, a decrease of approximately $2.4 million or 35.2 percent. Gross margin for the nine months ended October 31, 2003 increased to 41.9 percent
from 28.3 percent for the corresponding period of the prior fiscal year. The increase in gross margin was due to a non-cash inventory impairment charge totaling $1.2 million that was recorded during the nine months ended October 31, 2002. No
comparable costs were incurred during fiscal 2004.



Wireless Applications



|                |  | Nine Months Ended October 31, |       
|--------------- |  | ----------------------------- | ------
|                |  | 2003                          |       
|                |  | (Dollars in thousands)        |       
|Revenue         |  | $                             | 15,698
|Cost of revenue |  |                               | 10,131
|                |  |                               |       
|Gross profit    |  | $                             | 5,567 
|                |  |                               |       
|Gross margin    |  |                               | 35.5  
|                |  |                               |       



Revenue



Revenue from our wireless applications segment for the nine months ended
October 31, 2003 was $15.7 million compared to $21.4 million for the nine months ended October 31, 2002, a decrease of approximately $5.7 million or 26.7 percent. This decrease was due to a $3.2 million decrease in sales of our ChargeSource products
and a $2.5 million decrease in sales of our call box products.



The decrease in sales of our ChargeSource products is due to the phase-out of our 70-watt products as our primary market offering and the transition to newly developed 120-watt products. We began shipping both the 120-watt universal AC/DC
and 120-watt universal DC power adapters at the end of the second quarter of fiscal 2004. The decrease in sales during the current fiscal year is partially offset by a $1.1 million unused recall credit that expired under the terms of the agreement
with Targus. For the fourth quarter of fiscal 2004, we expect that our ChargeSource revenue will be approximately $5.5 million.



The decrease in sales of our call box products relates to delays in receiving contracts to upgrade and expand several call systems based in California. As
previously discussed, California is currently experiencing financial and political challenges. We believe these challenges have created uncertainty with respect to the spending patterns of our California based customers. As a result, projects and
the related contracts to upgrade and expand certain call box systems have been delayed. Sales of call box products tend to fluctuate from quarter to quarter while revenue from the long-term maintenance contracts is relatively comparable quarter to
quarter.





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##### Table of Contents

Cost of Revenue and Gross Margin



Cost of revenue from our wireless applications segment for the nine months ended October 31, 2003 was $10.1 million compared
to $12.1 million for the nine months ended October 31, 2002, a decrease of $2.0 million or 16.7 percent. As a percentage of revenue, gross margin decreased to 35.5 percent from 43.2 percent for the nine months ended October 31, 2002. The decrease in
gross margin is attributable to production costs associated with the new 120-watt products, which began shipping at the end of the second quarter of fiscal 2004.



Liquidity and Capital Resources



Our financial position remains strong, with cash and cash equivalents of $13.5 million at October 31, 2003 and no outstanding debt.



The following table summarizes Comarcos cash flows for the nine months
ended October 31, 2003 and 2002:



|                                                                             |  | Nine Months Ended October 31, |        
|---------------------------------------------------------------------------- |  | ----------------------------- | -------
|                                                                             |  | 2003                          |        
|                                                                             |  | (In thousands)                |        
|Net cash provided by (used in):                                              |  |                               |        
|Operating activities                                                         |  | $                             | (7,055 
|Investing activities                                                         |  |                               | (4,697 
|Financing activities                                                         |  |                               | (106   
|                                                                             |  |                               |        
|Net increase (decrease) in cash and cash equivalents  continuing operations |  | $                             | (11,858
|                                                                             |  |                               |        



Cash Flows from Operating
Activities



Cash used in operations was $7.1 million for
the nine months ended October 31, 2003 compared to $7.6 million of cash generated from operations for the corresponding period of the prior fiscal year. The net income from continuing operations before non-cash charges of depreciation and
amortization was approximately $1.8 million. Additionally, the Companys accounts receivable increased by $7.4 million and our inventory increased by $1.2 million. The increase in accounts receivable reflects our higher sales revenue in the
latter part of the third quarter primarily due to shipments of our new 120-watt universal power adapters. Similarly, our increase in inventory reflects purchases made to fulfill our existing orders for the fourth quarter.



The $7.6 million in cash provided by operations for the nine months ended
October 31, 2002 is primarily related to net income from operations before non-cash charges of depreciation and amortization, asset impairment charges, and cumulative effect of change in accounting principle of $7.9 million. Cash generated is
further increased by a reduction in accounts receivable of $2.3 million and is offset primarily by a decrease in deferred revenue of $1.1 million and the $2.0 million increase in the deferred tax benefit.



Cash Flows from Investing Activities



Net cash used in investing activities remained constant at $4.7 million for
the nine months ended October 31, 2003 and 2002. In both periods, capital expenditures for property and equipment and software development constituted substantially all of our cash used in investing activities.







25



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##### Table of Contents

Cash Flows from Financing Activities



Net cash used in financing activities for the first nine months of fiscal 2004 consisted of $195,000 that was used to
repurchase 25,640 shares of the Companys common stock in the open market for an average purchase price of $7.61. From program inception in 1992 through October 31, 2003, the Company has repurchased approximately 2.6 million shares for an
average price of $8.22 per share. The cash used was offset by $89,000 from the sale of common stock issued through the Companys subsidiary option plan. Net cash used in financing activities for the nine months ended October 31, 2002 consisted
of $402,000 that was used to repurchase 43,943 shares of the Companys common stock in the open market for an average price of $9.15 per share under our share repurchase program. The cash used was offset by proceeds of $78,000 received from the
sales of common stock issued through the Companys subsidiary stock option plan and proceeds from the sale of common stock issued through employee and director stock option plans of $226,000.



We believe that our existing cash and cash equivalent balances and cash from
operations will provide us sufficient funds to satisfy our cash requirements for at least the next twelve months.



Critical Accounting Policies



We have identified the following critical accounting policies as the most significant for purposes of fully understanding and evaluating our reported
financial results: revenue recognition, capitalized software development costs, accounts receivable, inventory, income taxes, valuation of goodwill, and valuation of long-lived assets. These critical accounting policies have been applied during the
first, second, and third quarters of fiscal 2004 consistent with the prior periods and the year ended January 31, 2003.



For further information, refer to the discussion of critical accounting policies included in Managements Discussion and Analysis in the
Companys annual report on Form 10-K for the year ended January 31, 2003.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Currency Risk



The Company is exposed to the risk of changes in currency exchange rates. As of October 31, 2003, we had no material accounts receivable denominated in
foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward
foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.



Interest Rate Sensitivity



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



We do not hold any derivative financial instruments.





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Our cash and cash equivalents have maturities dates of three months or less and the fair value
approximates the carrying value in our financial statements.



Equity Price
Risk



Our short-term investments consist primarily of
balances maintained in a non-qualified deferred compensation plan funded by our executives and directors. We value these investments using the closing market value for the last day of each month. These investments are subject to market price
volatility. We reflect these investments on our balance sheet at their market value, with the unrealized gains and losses excluded from reported operations. We have also invested in equity instruments of SwissQual, a privately held company. We
evaluate whether any decline in value of certain public and non-public equity investments is other than temporary.



Due to the inherent risk associated with some of our investments, and in light of current stock market conditions, we may incur future losses on the
sales, write-downs, or write-offs of our investments. We do not currently hedge against equity price changes.





|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



|(a) | Evaluation of disclosure controls and procedures
|--- | ------------------------------------------------



As of the end of the period covered by this report, an evaluation was performed, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934, as amended, Rule 13a-14c.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.



|(b) | Changes in internal controls over financial reporting
|--- | -----------------------------------------------------



There have been no significant changes in internal controls over financial reporting or in other factors that could significantly affect
the internal controls over financial reporting subsequent to the date of our most recent evaluation.





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##### Table of Contents



PART II  OTHER
INFORMATION





|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



None.



|ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------



None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



None.



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



None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



None.



|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



| | (a) | Exhibits:
| | --- | ---------



| | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------



| | 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------



| | 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K:
| | --- | --------------------



The Registrant filed a Current Report on Form 8-K with the SEC on September 4, 2003 under Item 12, Results of Operations and Financial
Condition, announcing financial results for the fiscal quarter ended July 31, 2003.





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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 to be signed on its behalf by the undersigned, thereunto duly authorized.







|                         |  | COMARCO, INC.                        
|------------------------ |  | -------------------------------------
|                         | 
|Date:  December 12, 2003 |  | /S/    THOMAS A. FRANZA              
|                         |  | Thomas A. Franza                     
|                         |  | President and Chief Executive Officer







|Date:  December 12, 2003 |  | /S/    DANIEL R. LUTZ                     
|------------------------ |  | ------------------------------------------
|                         |  | Daniel R. Lutz                            
|                         |  | Vice President and Chief Financial Officer







29