##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended JULY 31, 2004



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)



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



2 Cromwell, Irvine,
California 92618

(Address of principal executive offices and zip code)



(949) 599-7400

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.     Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The registrant had 7,340,216 shares of common
stock outstanding as of September 10, 2004.

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##### Table of Contents

COMAR
CO, INC. AND SUBSIDIARIES



QUARTERLY
REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2004



TABLE OF CONTENTS



|                               |  |                                                                                                           |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                           |  | Page
|PART I 
FINANCIAL INFORMATION |  |                                                                                                          
|                               |  |                                                                                                          
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                          |  |     
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Balance Sheets as of July 31, 2004 and January 31, 2004                            |  | 3   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2004 and 2003 |  | 4   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2004 and 2003           |  | 5   
|                               |  |                                                                                                          
|                               |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                               |  |                                                                                                          
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     |  | 14  
|                               |  |                                                                                                          
|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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES                          |  | 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                                                                          |  | 29  
|                               | 
|SIGNATURES                     |  | 30                                                                                                       



2



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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 amounts)



|                                                                                                                                                            |  |              |        |                 |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | --------------- | - | ------
|                                                                                                                                                            |  | July 31,2004 |        | January 31,2004
|ASSETS                                                                                                                                                      |  |              |        |                 |   |       
|Current Assets:                                                                                                                                             |  |              |        |                 |   |       
|Cash and cash equivalents                                                                                                                                   |  | $            | 13,812 |                 | $ | 15,047
|Short-term investments                                                                                                                                      |  |              | 1,575  |                 |   | 2,251 
|Accounts receivable, net                                                                                                                                    |  |              | 5,328  |                 |   | 8,982 
|Amounts due from affiliate                                                                                                                                  |  |              | 2,520  |                 |   | 2,627 
|Inventory                                                                                                                                                   |  |              | 8,465  |                 |   | 6,150 
|Deferred tax assets, net                                                                                                                                    |  |              |       |                 |   | 2,695 
|Other current assets                                                                                                                                        |  |              | 619    |                 |   | 524   
|                                                                                                                                                            |  |              |        |                 |   |       
|Total current assets                                                                                                                                        |  |              | 32,319 |                 |   | 38,276
|                                                                                                                                                            |  |             
|Property and equipment, net                                                                                                                                 |  |              | 2,607  |                 |   | 3,131 
|Software development costs, net                                                                                                                             |  |              | 4,519  |                 |   | 5,536 
|Deferred tax assets, net                                                                                                                                    |  |              |       |                 |   | 181   
|Goodwill                                                                                                                                                    |  |              | 2,394  |                 |   | 2,394 
|Acquired intangible assets, net                                                                                                                             |  |              | 1,480  |                 |   | 1,488 
|Other assets                                                                                                                                                |  |              | 1,130  |                 |   | 1,133 
|                                                                                                                                                            |  |              |        |                 |   |       
|                                                                                                                                                            |  | $            | 44,449 |                 | $ | 52,139
|                                                                                                                                                            |  |              |        |                 |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |              |        |                 |   |       
|Current Liabilities:                                                                                                                                        |  |              |        |                 |   |       
|Accounts payable                                                                                                                                            |  | $            | 114    |                 | $ | 537   
|Deferred revenue                                                                                                                                            |  |              | 5,215  |                 |   | 5,476 
|Deferred compensation                                                                                                                                       |  |              | 1,575  |                 |   | 2,251 
|Accrued liabilities                                                                                                                                         |  |              | 3,824  |                 |   | 4,799 
|                                                                                                                                                            |  |              |        |                 |   |       
|Total current liabilities                                                                                                                                   |  |              | 10,728 |                 |   | 13,063
|                                                                                                                                                            |  |             
|Minority interest                                                                                                                                           |  |              | 95     |                 |   | 185   
|Stockholders equity:                                                                                                                                       |  |              |        |                 |   |       
|Preferred stock, no par value, 10,000,000 shares authorized, no shares outstanding at July 31, 2004 and January 31, 2004                                    |  |              |       |                 |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized, 7,340,216 and 7,284,374 shares outstanding at July 31, 2004 and January 31, 2004,
respectively |  |              | 734    |                 |   | 728   
|Additional paid-in capital                                                                                                                                  |  |              | 13,554 |                 |   | 13,126
|Retained earnings                                                                                                                                           |  |              | 19,338 |                 |   | 25,037
|                                                                                                                                                            |  |              |        |                 |   |       
|Total stockholders equity                                                                                                                                  |  |              | 33,626 |                 |   | 38,891
|                                                                                                                                                            |  |              |        |                 |   |       
|                                                                                                                                                            |  | $            | 44,449 |                 | $ | 52,139
|                                                                                                                                                            |  |              |        |                 |   |       



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



3



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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 EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                    |  | 2004                       |        |   | 2003(Restated)           |   |        | 2004 |  |   | 2003(Restated) |  
|Revenue:                                            |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Products                                            |  | $                          | 5,357  |   |                          | $ | 3,949  |      |  | $ | 13,070         |   |  | $ | 8,947  |  
|Services                                            |  |                            | 1,299  |   |                          |   | 1,372  |      |  |   | 2,656          |   |  |   | 2,594  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|                                                    |  |                            | 6,656  |   |                          |   | 5,321  |      |  |   | 15,726         |   |  |   | 11,541 |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Cost of revenue:                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Products                                            |  |                            | 3,653  |   |                          |   | 3,504  |      |  |   | 8,636          |   |  |   | 6,693  |  
|Services                                            |  |                            | 839    |   |                          |   | 806    |      |  |   | 1,649          |   |  |   | 1,620  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|                                                    |  |                            | 4,492  |   |                          |   | 4,310  |      |  |   | 10,285         |   |  |   | 8,313  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Gross profit                                        |  |                            | 2,164  |   |                          |   | 1,011  |      |  |   | 5,441          |   |  |   | 3,228  |  
|Selling, general and administrative costs           |  |                            | 1,990  |   |                          |   | 3,391  |      |  |   | 4,626          |   |  |   | 5,639  |  
|Engineering and support costs                       |  |                            | 1,900  |   |                          |   | 1,346  |      |  |   | 3,756          |   |  |   | 2,804  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Operating loss                                      |  |                            | (1,726 | ) |                          |   | (3,726 | )    |  |   | (2,941         | ) |  |   | (5,215 | )
|Other income, net                                   |  |                            | 30     |   |                          |   | 58     |      |  |   | 78             |   |  |   | 166    |  
|Minority interest                                   |  |                            | 44     |   |                          |   | 28     |      |  |   | 49             |   |  |   | 51     |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Loss from continuing operations before income taxes |  |                            | (1,652 | ) |                          |   | (3,640 | )    |  |   | (2,814         | ) |  |   | (4,998 | )
|Income tax (expense) benefit                        |  |                            | (3,302 | ) |                          |   | 1,339  |      |  |   | (2,876         | ) |  |   | 1,798  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Loss from continuing operations                     |  |                            | (4,954 | ) |                          |   | (2,301 | )    |  |   | (5,690         | ) |  |   | (3,200 | )
|Discontinued operations                             |  |                            | (5     | ) |                          |   | 30     |      |  |   | (9             | ) |  |   | 52     |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Net loss                                            |  | $                          | (4,959 | ) |                          | $ | (2,271 | )    |  | $ | (5,699         | ) |  | $ | (3,148 | )
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Net loss per share  basic and diluted:             |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Net loss from continuing operations                 |  | $                          | (0.68  | ) |                          | $ | (0.32  | )    |  | $ | (0.78          | ) |  | $ | (0.44  | )
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Net loss                                            |  | $                          | (0.68  | ) |                          | $ | (0.32  | )    |  | $ | (0.78          | ) |  | $ | (0.44  | )
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Basic and diluted weighted average common shares    |  |                            | 7,312  |   |                          |   | 7,161  |      |  |   | 7,299          |   |  |   | 7,082  |  
|                                                    |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  



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



4



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                   |  |                          |        |   |                |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | -------------- | - | ------ | -
|                                                                                                   |  | Six Months EndedJuly 31, |       
|                                                                                                   |  | 2004                     |        |   | 2003(Restated) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                          |        |   |                |   |        |  
|Loss from continuing operations                                                                    |  | $                        | (5,690 | ) |                | $ | (3,200 | )
|Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |  |                          |        |   |                |   |        |  
|Depreciation and amortization                                                                      |  |                          | 2,287  |   |                |   | 2,334  |  
|Tax benefit from exercise of stock options                                                         |  |                          | 75     |   |                |   | 99     |  
|Deferred income taxes                                                                              |  |                          | 2,876  |   |                |   | (1,368 | )
|Loss on disposal of property and equipment                                                         |  |                          | 30     |   |                |   | 23     |  
|Provision for doubtful accounts receivable                                                         |  |                          | (263   | ) |                |   | 13     |  
|Provision for obsolete inventory                                                                   |  |                          |       |   |                |   | (254   | )
|Minority interest in earnings (losses) of subsidiary                                               |  |                          | (49    | ) |                |   | (50    | )
|Changes in operating assets and liabilities:                                                       |  |                          |        |   |                |   |        |  
|Accounts receivable                                                                                |  |                          | 3,917  |   |                |   | (1,068 | )
|Amounts due from affiliate                                                                         |  |                          | 107    |   |                |   | 426    |  
|Inventory                                                                                          |  |                          | (2,316 | ) |                |   | 141    |  
|Other assets                                                                                       |  |                          | (91    | ) |                |   | (219   | )
|Accounts payable                                                                                   |  |                          | (423   | ) |                |   | 380    |  
|Deferred revenue                                                                                   |  |                          | (261   | ) |                |   | (1,090 | )
|Accrued liabilities                                                                                |  |                          | (975   | ) |                |   | 282    |  
|                                                                                                   |  |                          |        |   |                |   |        |  
|Net cash used in operating activities                                                              |  |                          | (776   | ) |                |   | (3,551 | )
|                                                                                                   |  |                          |        |   |                |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                          |        |   |                |   |        |  
|Proceeds from sales of property and equipment                                                      |  |                          | 44     |   |                |   |       |  
|Purchases of property and equipment                                                                |  |                          | (583   | ) |                |   | (1,102 | )
|Software development costs                                                                         |  |                          |       |   |                |   | (1,728 | )
|Acquired intangible assets                                                                         |  |                          | (66    | ) |                |   | (161   | )
|                                                                                                   |  |                          |        |   |                |   |        |  
|Net cash used in investing activities                                                              |  |                          | (605   | ) |                |   | (2,991 | )
|                                                                                                   |  |                          |        |   |                |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                          |        |   |                |   |        |  
|Net proceeds from issuance of common stock                                                         |  |                          | 26     |   |                |   |       |  
|Proceeds from issuance of subsidiary common stock                                                  |  |                          | 129    |   |                |   | 89     |  
|Purchase and retirement of common stock                                                            |  |                          |       |   |                |   | (195   | )
|                                                                                                   |  |                          |        |   |                |   |        |  
|Net cash provided by (used in) financing activities                                                |  |                          | 155    |   |                |   | (106   | )
|                                                                                                   |  |                          |        |   |                |   |        |  
|Net decrease in cash and cash equivalents  continuing operations                                  |  |                          | (1,226 | ) |                |   | (6,648 | )
|Net increase (decrease) in cash and cash equivalents  discontinued operations                     |  |                          | (9     | ) |                |   | 138    |  
|                                                                                                   |  |                          |        |   |                |   |        |  
|Net decrease in cash and cash equivalents                                                          |  |                          | (1,235 | ) |                |   | (6,510 | )
|Cash and cash equivalents, beginning of period                                                     |  |                          | 15,047 |   |                |   | 25,385 |  
|                                                                                                   |  |                          |        |   |                |   |        |  
|Cash and cash equivalents, end of period                                                           |  | $                        | 13,812 |   |                | $ | 18,875 |  
|                                                                                                   |  |                          |        |   |                |   |        |  
|Supplemental disclosures of cash flow information:                                                 |  |                          |        |   |                |   |        |  
|Cash paid for interest                                                                             |  | $                        | 2      |   |                | $ |       |  
|                                                                                                   |  |                          |        |   |                |   |        |  
|Cash paid for income taxes                                                                         |  | $                        | 92     |   |                | $ | 2      |  
|                                                                                                   |  |                          |        |   |                |   |        |  



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



5



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. Organization



Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, Comarco or the Company), is a leading
provider of wireless test solutions 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.



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 accounting principles generally accepted in the United States of America for interim information and with the instructions for Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to
make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Companys annual report on Form 10-K for the year ended January 31, 2004. 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 months
and six months ended July 31, 2004 are not necessarily indicative of the results to be expected for the year ending January 31, 2005.



Prior Year Restatement of Quarterly Results (Fiscal 2004):



The consolidated financial statements for the three and six months ended July 31, 2003 were restated as of January 31, 2004 for the items described below:



| |  | Prior to the fourth quarter of fiscal 2004, the Company allocated revenue from the sales of its wireless test solutions products between the product and first year maintenance using
an estimate of the fair value of such maintenance as a percentage of the total sales price. The Company has since determined that the actual fair value of the first year maintenance as a percentage of the total sales price based on vendor specific
objective evidence was higher than the estimated percentage, 10 percent versus 5 percent. The effect of the restatement was to increase revenue for the three and six months ended July 31, 2003 by $26,000 and $32,000, respectively.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Effective the beginning of fiscal 2003 and in conjunction with the implementation of SFAS No. 142, the Company re-evaluated the useful lives of its identifiable assets, including
acquired algorithms with a net book value of $255,000 and an original historical cost basis of $1 million. Prior to the adoption of SFAS No. 142, the software algorithms were being amortized over five years. Upon the adoption of SFAS No. 142, it was
concluded that the software algorithms had an indefinite useful life and therefore, were not subject to amortization, but rather, periodic evaluation for impairment. It was subsequently concluded that the original useful life of five years should
have been applied after the adoption of SFAS No. 142. As a result, the three and six months ended July 31, 2003 have been restated to include additional amortization expense of $5,000 and $55,000, respectively, reported in cost of revenue.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the fourth quarter of fiscal 2003, the Company recorded estimated losses associated with the recall of its legacy ChargeSource 70-watt universal AC power adapter. Included in
the estimated loss were costs attributable to a third-party service bureau engaged to administer the Companys recall efforts. These specific costs should have been charged to expense as incurred. Accordingly, selling, general and
administrative costs for the three and six months ended July 31, 2004 have been increased $48,000 and $96,000, respectively, as a result of this restatement adjustment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| |  | As a result of the restatement adjustments, income tax benefit for the three and six months ended July 31, 2003 has been increased by $10,000 and $43,000, respectively.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The net effect of the restatement adjustments
increased the Companys net loss by $17,000, and $76,000 for the three and six months ended July 31, 2003 and increased the net loss per share by $0.01 for the three and six months ended July 31, 2003. Additionally, in the fourth quarter of
fiscal 2004, the Company sold the net assets of EDX Engineering (EDX) and therefore the EDX operations have been reclassified as discontinued operations for the first quarter of fiscal 2004. The following table presents the impact of the
restatement adjustments to amounts previously reported for fiscal 2004 (in thousands):



|                                          |  |                                  |        |   |                        |   |     |                                            |  |   |            |   |  |   |        |  
|----------------------------------------- |  | -------------------------------- | ------ | - | ---------------------- | - | --- | ------------------------------------------ |  | - | ---------- | - |  | - | ------ | -
|                                          |  | Three Months Ended July 31, 2003 |       
|                                          |  | AsPreviouslyReported             |        |   | RestatementAdjustments |   |     | Reclassificationfor DiscontinuedOperations |  |   | AsRestated |  
|Revenue                                   |  | $                                | 5,525  |   |                        | $ | 26  |                                            |  | $ | (230       | ) |  | $ | 5,321  |  
|Cost of revenue                           |  |                                  | 4,308  |   |                        |   | 5   |                                            |  |   | (3         | ) |  |   | 4,310  |  
|                                          |  |                                  |        |   |                        |   |     |                                            |  |   |            |   |  |   |        |  
|Gross profit                              |  |                                  | 1,217  |   |                        |   | 21  |                                            |  |   | (227       | ) |  |   | 1,011  |  
|Selling, general and administrative costs |  |                                  | 3,438  |   |                        |   | 48  |                                            |  |   | (95        | ) |  |   | 3,391  |  
|Income tax benefit                        |  |                                  | 1,312  |   |                        |   | 10  |                                            |  |   | 17         |   |  |   | 1,339  |  
|Loss from continuing operations           |  | $                                | (2,254 | ) |                        | $ | (17 | )                                          |  | $ | (30        | ) |  | $ | (2,301 | )
|                                          |  |                                  |        |   |                        |   |     |                                            |  |   |            |   |  |   |        |  
|                                          | 
|                                          |  | Six Months Ended July 31, 2003   |       
|                                          |  | AsPreviouslyReported             |        |   | RestatementAdjustments |   |     | Reclassificationfor DiscontinuedOperations |  |   | AsRestated |  
|Revenue                                   |  | $                                | 11,981 |   |                        | $ | 32  |                                            |  | $ | (472       | ) |  | $ | 11,541 |  
|Cost of revenue                           |  |                                  | 8,262  |   |                        |   | 55  |                                            |  |   | (4         | ) |  |   | 8,313  |  
|                                          |  |                                  |        |   |                        |   |     |                                            |  |   |            |   |  |   |        |  
|Gross profit                              |  |                                  | 3,719  |   |                        |   | (23 | )                                          |  |   | (468       | ) |  |   | 3,228  |  
|Selling, general and administrative costs |  |                                  | 5,757  |   |                        |   | 96  |                                            |  |   | (214       | ) |  |   | 5,639  |  
|Income tax benefit                        |  |                                  | 1,725  |   |                        |   | 43  |                                            |  |   | 30         |   |  |   | 1,798  |  
|Loss from continuing operations           |  | $                                | (3,072 | ) |                        | $ | (76 | )                                          |  | $ | (52        | ) |  | $ | (3,200 | )
|                                          |  |                                  |        |   |                        |   |     |                                            |  |   |            |   |  |   |        |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations in accounting for its stock-based compensation plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
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 six months ended July 31, 2004 and 2003, consistent
with the provisions of SFAS No. 123, the Companys net loss, basic loss per share, and diluted loss per share would have been reduced to the pro forma amounts as follows:



|                                                                                                                                         |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | -------------- | - |  | - | ------ | -
|                                                                                                                                         |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                                                                                                         |  | 2004                       |        |   | 2003(Restated)           |   |        | 2004 |  |   | 2003(Restated) |  
|Net loss:                                                                                                                                |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|As reported                                                                                                                              |  | $                          | (4,959 | ) |                          | $ | (2,271 | )    |  | $ | (5,699         | ) |  | $ | (3,148 | )
|Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                            | (92    | ) |                          |   | (154   | )    |  |   | (185           | ) |  |   | (309   | )
|                                                                                                                                         |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|Pro forma                                                                                                                                |  | $                          | (5,051 | ) |                          | $ | (2,425 | )    |  | $ | (5,884         | ) |  | $ | (3,457 | )
|Loss per common share  basic:                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|As reported                                                                                                                              |  | $                          | (0.68  | ) |                          | $ | (0.32  | )    |  | $ | (0.78          | ) |  | $ | (0.44  | )
|Pro forma                                                                                                                                |  |                            | (0.69  | ) |                          |   | (0.34  | )    |  |   | (0.81          | ) |  |   | (0.48  | )
|Loss per common share  diluted:                                                                                                         |  |                            |        |   |                          |   |        |      |  |   |                |   |  |   |        |  
|As reported                                                                                                                              |  | $                          | (0.68  | ) |                          | $ | (0.32  | )    |  | $ | (0.78          | ) |  | $ | (0.44  | )
|Pro forma                                                                                                                                |  |                            | (0.69  | ) |                          |   | (0.34  | )    |  |   | (0.81          | ) |  |   | (0.48  | )



The fair value of
options granted under the Companys stock option plans during the six months ended July 31, 2004 and 2003, was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



|                                         |  |                          |  |      
|---------------------------------------- |  | ------------------------ |  | -----
|                                         |  | Six Months EndedJuly 31,
|                                         |  | 2004                     |  | 2003 
|Weighted average risk-free interest rate |  | 3.8%                     |  | 3.4% 
|Expected life (in years)                 |  | 6                        |  | 6    
|Expected stock volatility                |  | 46.2%                    |  | 46.0%
|Dividend yield                           |  | None                     |  | None 



Deferred Income Taxes:



Deferred income taxes, reflecting the impact of temporary
differences between assets and liabilities recognized for financial reporting purposes, are based on tax law currently enacted. The Company assesses on a periodic basis the probability that the net deferred tax assets will be recovered. If after
evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided with a corresponding charge
to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.



During the second quarter of fiscal 2005, the Company considered both positive and negative evidence in determining the need for a valuation allowance
against the net deferred tax assets. The Companys second quarter results were less than previously expected. As of July 31, 2004, for the first time in recent history the Company has incurred cumulative losses, excluding certain non-recurring
items, for a three year period. This event has been determined to be a significant element of negative evidence. While the Company expects to be profitable in the future, the projections of future profitability are based on assumptions that are not
objectively verifiable. With this in mind, the negative evidence was considered to outweigh the positive evidence and the Company concluded that its net deferred tax asset should be fully reserved at the conclusion of the second quarter of the 2005
fiscal year. Accordingly, during the second quarter of fiscal 2005, a valuation allowance was established totaling approximately $2.9 million, or the entire deferred tax asset balance. Net deferred tax assets as of July 31, 2004 were zero.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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.



3. Recent Accounting Pronouncements



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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| |  | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain provisions
of SFAS No. 150 are effective immediately. However, generally 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. Adoption of the provisions that are effective immediately has not had a material impact on the Companys consolidated financial statements. The Company does not expect the adoption of the not yet effective
provisions 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 July 31, 2004, the Company has repurchased approximately 2.6 million
shares for an average price of $8.22 per share. During the three and six months ended July 31, 2004, the Company did not repurchase any shares of its common stock.



5. Earnings (Loss) Per Share



The Company calculates basic net earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding
during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the three and six months ended July 31, 2004 and 2003, basic and diluted net loss per share
were the same.



Potential common shares related to stock
options of 4,659 and 15,028 have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2004, as the effect would have been anti-dilutive. Similarly, potential common shares of 24,339 and 24,731 have
been excluded from diluted weighted average common shares for the three and six months ended July 31, 2003, as the effect would have been anti-dilutive.



6. Inventory



Inventory consists of the following (in thousands):



|                |  |              |       |                 |   |      
|--------------- |  | ------------ | ----- | --------------- | - | -----
|                |  | July 31,2004 |       | January 31,2004
|Raw materials   |  | $            | 5,435 |                 | $ | 4,022
|Work in process |  |              | 663   |                 |   | 599  
|Finished goods  |  |              | 2,367 |                 |   | 1,529
|                |  |              |       |                 |   |      
|                |  | $            | 8,465 |                 | $ | 6,150
|                |  |              |       |                 |   |      



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



7. Software Development Costs, Net



Software development costs consist of the following (in thousands):



|                                       |  |              |        |   |                 |   |        |  
|-------------------------------------- |  | ------------ | ------ | - | --------------- | - | ------ | -
|                                       |  | July 31,2004 |        |   | January 31,2004 |  
|Capitalized software development costs |  | $            | 8,978  |   |                 | $ | 8,978  |  
|Less: accumulated amortization         |  |              | (4,459 | ) |                 |   | (3,442 | )
|                                       |  |              |        |   |                 |   |        |  
|                                       |  | $            | 4,519  |   |                 | $ | 5,536  |  
|                                       |  |              |        |   |                 |   |        |  



Amortization of
software development costs for the three months ended July 31, 2004 and 2003 totaled $488,000 and $705,000, respectively. For the six months ended July 31, 2004 and 2003, amortization of software development costs totaled $1.0 million and $1.2
million, respectively. Amortization of software development costs has been reported in cost of revenue in the accompanying condensed consolidated financial statements. The amortization period for the software costs capitalized is the shorter of the
economic life of the related product or based on expected unit sales under the sales ratio method, typically two to four years.



8. Goodwill and Acquired Intangible Assets, Net



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



|                                  |  |              |       |   |                 |   |       |  
|--------------------------------- |  | ------------ | ----- | - | --------------- | - | ----- | -
|                                  |  | July 31,2004 |       |   | January 31,2004 |  
|Goodwill                          |  | $            | 2,394 |   |                 | $ | 2,394 |  
|                                  |  |              |       |   |                 |   |       |  
|Acquired intangible assets:       |  |              |       |   |                 |   |       |  
|Definite-lived intangible assets: |  |              |       |   |                 |   |       |  
|Software algorithms               |  | $            | 255   |   |                 | $ | 255   |  
|License rights                    |  |              | 1,037 |   |                 |   | 971   |  
|Intellectual property rights      |  |              | 950   |   |                 |   | 788   |  
|                                  |  |              |       |   |                 |   |       |  
|                                  |  |              | 2,242 |   |                 |   | 2,014 |  
|Less: accumulated amortization    |  |              | (762  | ) |                 |   | (526  | )
|                                  |  |              |       |   |                 |   |       |  
|                                  |  | $            | 1,480 |   |                 | $ | 1,488 |  
|                                  |  |              |       |   |                 |   |       |  



The following table
presents goodwill by reportable segment:



|                               |  |                      |     |                        |   |       |  |   |      
|------------------------------ |  | -------------------- | --- | ---------------------- | - | ----- |  | - | -----
|                               |  | WirelessApplications |     | Wireless TestSolutions |   | Total
|Balance as of July 31, 2004    |  | $                    | 496 |                        | $ | 1,898 |  | $ | 2,394
|                               |  |                      |     |                        |   |       |  |   |      
|Balance as of January 31, 2004 |  | $                    | 496 |                        | $ | 1,898 |  | $ | 2,394
|                               |  |                      |     |                        |   |       |  |   |      



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table presents the future expected amortization of the definite-lived intangible assets
(in thousands):



|                                     |  |                     |      
|------------------------------------ |  | ------------------- | -----
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |      
|2005                                 |  | $                   | 235  
|2006                                 |  |                     | 413  
|2007                                 |  |                     | 319  
|2008                                 |  |                     | 149  
|2009                                 |  |                     | 136  
|Thereafter                           |  |                     | 228  
|                                     |  |                     |      
|Total estimated amortization expense |  | $                   | 1,480
|                                     |  |                     |      



Amortization of
definite lived acquired intangible assets for the three months ended July 31, 2004 and 2003 totaled $128,000 and $54,000, respectively. For the six months ended July 31, 2004 and 2003, amortization of definite lived acquired intangible assets
totaled $236,000 and $142,000 respectively. The Company ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142, (Goodwill and Other Intangible Assets.)



9. 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
CWT call boxes are installed, the majority of which are serviced and maintained under long-term agreements, which expire at various times through February 2011.



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 July 31, 2004 |       |   | Three Months Ended July 31, 2003 |  
|                    |  | Wireless TestSolutions           |       |   | WirelessApplications             |   |       | Total |  |   | Wireless TestSolutions(Restated) |   |  | WirelessApplications |       |   | Total |  
|Revenue             |  | $                                | 3,543 |   |                                  | $ | 3,113 |       |  | $ | 6,656                            |   |  | $                    | 2,276 |   |       | $ | 3,045 |    |  | $ | 5,321 |  
|Cost of revenue     |  |                                  | 2,102 |   |                                  |   | 2,390 |       |  |   | 4,492                            |   |  |                      | 1,193 |   |       |   | 3,117 |    |  |   | 4,310 |  
|                    |  |                                  |       |   |                                  |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |    |  |   |       |  
|Gross profit (loss) |  | $                                | 1,441 |   |                                  | $ | 723   |       |  | $ | 2,164                            |   |  | $                    | 1,083 |   |       | $ | (72   | )  |  | $ | 1,011 |  
|                    |  |                                  |       |   |                                  |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |    |  |   |       |  
|Gross margin        |  |                                  | 40.7  | % |                                  |   | 23.2  | %     |  |   | 32.5                             | % |  |                      | 47.6  | % |       |   | (2.4  | )% |  |   | 19.0  | %
|                    |  |                                  |       |   |                                  |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |    |  |   |       |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                |  |                                |       |   |                                |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |   |  |   |        |  
|--------------- |  | ------------------------------ | ----- | - | ------------------------------ | - | ----- | ----- |  | - | -------------------------------- | - |  | -------------------- | ----- | - | ----- | - | ----- | - |  | - | ------ | -
|                |  | Six Months Ended July 31, 2004 |       |   | Six Months Ended July 31, 2003 |  
|                |  | Wireless TestSolutions         |       |   | WirelessApplications           |   |       | Total |  |   | Wireless TestSolutions(Restated) |   |  | WirelessApplications |       |   | Total |  
|Revenue         |  | $                              | 8,859 |   |                                | $ | 6,867 |       |  | $ | 15,726                           |   |  | $                    | 3,894 |   |       | $ | 7,647 |   |  | $ | 11,541 |  
|Cost of revenue |  |                                | 5,086 |   |                                |   | 5,199 |       |  |   | 10,285                           |   |  |                      | 2,430 |   |       |   | 5,883 |   |  |   | 8,313  |  
|                |  |                                |       |   |                                |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |   |  |   |        |  
|Gross profit    |  | $                              | 3,773 |   |                                | $ | 1,668 |       |  | $ | 5,441                            |   |  | $                    | 1,464 |   |       | $ | 1,764 |   |  | $ | 3,228  |  
|                |  |                                |       |   |                                |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |   |  |   |        |  
|Gross margin    |  |                                | 42.6  | % |                                |   | 24.3  | %     |  |   | 34.6                             | % |  |                      | 37.6  | % |       |   | 23.1  | % |  |   | 28.0   | %
|                |  |                                |       |   |                                |   |       |       |  |   |                                  |   |  |                      |       |   |       |   |       |   |  |   |        |  



|                                   |  |                        |        |                      |   |           |  |       |        |  |   |       
|---------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------- |  | ----- | ------ |  | - | ------
|                                   |  | Wireless TestSolutions |        | WirelessApplications |   | Corporate |  | Total
|Assets at July 31, 2004            |  | $                      | 17,521 |                      | $ | 6,355     |  | $     | 20,573 |  | $ | 44,449
|                                   |  |                        |        |                      |   |           |  |       |        |  |   |       
|Assets at July 31, 2003 (restated) |  | $                      | 13,195 |                      | $ | 10,053    |  | $     | 23,858 |  | $ | 47,106
|                                   |  |                        |        |                      |   |           |  |       |        |  |   |       



Revenue by geographic
area consists of the following (in thousands):



|              |  |                            |       |                          |   |       |  |                |        |  |   |       
|------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | -------------- | ------ |  | - | ------
|              |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31,
|              |  | 2004                       |       | 2003(Restated)           |   | 2004  |  | 2003(Restated)
|North America |  | $                          | 3,905 |                          | $ | 3,601 |  | $              | 8,363  |  | $ | 9,175 
|Europe        |  |                            | 1,845 |                          |   | 1,137 |  |                | 4,258  |  |   | 1,738 
|Asia          |  |                            | 1     |                          |   | 86    |  |                | 346    |  |   | 104   
|Latin America |  |                            | 905   |                          |   | 497   |  |                | 2,759  |  |   | 524   
|              |  |                            |       |                          |   |       |  |                |        |  |   |       
|              |  | $                          | 6,656 |                          | $ | 5,321 |  | $              | 15,726 |  | $ | 11,541
|              |  |                            |       |                          |   |       |  |                |        |  |   |       



10. 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 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



During fiscal 2001, the
Company sold a business which, among other things, provided airport management services. During the fourth quarter of fiscal 2004, the Company was sued by a tenant at an airport where the Company provided management services pursuant to a contract
with the County of Los Angeles (prior to the sale of this business during the 2001 fiscal year). The claimant seeks damages of $2.0 million in addition to other unspecified damages. The outcome of this matter is not determinable or estimable. No
provision has been made for losses, if any, which may result from the final outcome of this matter.



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 such
pending legal proceedings will not in the aggregate have a material adverse effect on our consolidated results of operations, financial position or cash flows.



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##### Table of Contents

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



The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes and
other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business,
including without limitation the disclosures made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, and disclosure made in our annual report on Form 10-K for the fiscal year
ended January 31, 2004 under the caption Risk Factors, Uncertainties and Other Factors that May Affect Results of Operations and Financial Condition, as well as the audited consolidated financial statements and notes thereto also
included in our annual report on Form 10-K for the fiscal year ended January 31, 2004.



Forward-Looking Statements



Some of the statements in this report and the documents incorporated herein by reference constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements relate to future
financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our businesss or our industrys actual results, levels of activity, performance, or achievements to be materially different from
those expressed or implied by any forward-looking statements. Such statements include, in particular, statements about our plans, strategies, prospects, changes and trends in our business and the markets in which we operate as described in this
report. In some cases, you can identify forward-looking statements by terminology such as may, will, could, would, should, expect, plan, anticipate,
intend, believe, estimate, forecast, predict, propose, potential, or continue or the negative of those terms or other comparable terminology. These
statements are only predictions.



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 we, nor any other person, assume responsibility for the
accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this report of Form 10-Q to conform such statements to actual results or to changes in our
expectations.



Overview



Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc.
(collectively, we, Comarco, or the Company), is a leading provider of wireless test solutions 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).



Our revenue is primarily derived from sales of our wireless test solutions and wireless applications products, and from
services related to the maintenance of emergency call box systems. We have two reportable operating segments: wireless test solutions (WTS) and wireless applications. See Business Segment Information in Note 10 of notes to
unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.



Critical Accounting Policies



We have identified the following as critical accounting policies to our company: revenue recognition, software development costs, accounts receivable, inventory, income taxes, valuation of goodwill, and valuation of long-lived assets.



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Revenue Recognition



We recognize product revenue upon shipment of products provided there are no uncertainties regarding customer acceptance, persuasive evidence of an
arrangement exists, the sales price is fixed or determinable, and collectibility is probable. For our wireless test solutions products that are integrated with embedded software, we recognize revenue using the residual method pursuant to
requirements of Statement of Position No. 97-2, Software Revenue Recognition, and other applicable revenue recognition guidance and interpretations. Under the residual method, we allocate revenue to the undelivered element, typically
maintenance, based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. We amortize the revenue allocated to the maintenance element evenly over the term of the maintenance
commitment made at the time of sale. We expense as incurred the costs associated with honoring the maintenance commitment.



We recognize service revenue as the services are performed. Maintenance revenue from extended warranty sales is deferred and recognized ratably over the
term of the maintenance agreement, typically 12 months.



Significant management judgments must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made
different judgments.



Software Development Costs



We capitalize software developed for sale or lease in accordance with SFAS
No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Software costs incurred subsequent to the determination of the technological feasibility of the software product are capitalized. Our policy is
to capitalize the costs associated with development of new products but expense the costs associated with new releases, which consist of enhancements or increased functionality of software embedded in our existing products. Significant management
judgment is required in determining whether technological feasibility has been achieved for a particular software project. Capitalization ceases and amortization of capitalized costs begins when the software product is available for general release
to customers. Capitalized software development costs, net of related amortization, are compared to managements estimate of projected revenues quarterly to determine if any impairment in value has occurred that would require an adjustment in
the carrying value or change in expected useful lives under the guidelines established under SFAS No. 86. We also continually evaluate the recoverability of software acquired through acquisition or by direct purchase of technology.



During the second quarter of fiscal 2005 and as more fully described in Note
2 of notes to unaudited consolidated financial statements included in Part I, Item 1 of this report, we concluded that the net deferred tax asset should be fully reserved and established a valuation allowance accordingly. As indicated by the results
of our net deferred tax asset assessment, we evaluated our capitalized software development cost for impairment and concluded no impairment charge was required as of July 31, 2004.



We had $4.5 million of capitalized software as of July 31, 2004, net of accumulated amortization of $4.5 million.
Capitalized software amortization expense is included in cost of revenue. The amortization period for the software costs capitalized is the shorter of the economic life of the related product or based on expected unit sales under the sales ratio
method, typically two to four years.



Accounts Receivable



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



Specifically, our management must make estimates of the collectibility of our accounts receivable. Management analyzes specific customer accounts,
historical bad debt, trends, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.



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Significant management judgments and estimates must be made and used in connection with establishing the allowance for
doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates.



Inventory



We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory (calculated on average
costs, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on our estimated forecast of product demand and
production requirements for the next twelve months. As demonstrated during prior periods, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of
inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development,
and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our forecasts of future product demand may prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete inventory. In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination.
Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory
and our operating results.



Income Taxes



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



Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. Our second quarter results were less than previously expected. As of
July 31, 2004, for the first time in recent history we have incurred cumulative losses, excluding certain non-recurring items, for a three year period. This event has been determined to be a significant element of negative evidence. While the
Company expects to be profitable in the future, the projections of future profitability, as is the case with most forecasts, can not be objectively verified. With this in mind, the negative evidence was considered to outweigh the positive evidence
and we concluded that the net deferred tax assets should be fully reserved at the conclusion of the second quarter of the 2005 fiscal year. Accordingly, during the second quarter of fiscal 2005, a valuation allowance was established totaling
approximately $2.9 million, or the entire deferred tax asset balance.



16



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Intangible Assets



We account for goodwill and intangible assets in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. Accordingly, the Company no longer amortizes goodwill from acquisitions, but continues to amortize other acquisition-related intangibles and costs. As of July 31, 2004, we had $2.4 million of goodwill, net recorded
in our unaudited condensed consolidated balance sheet.



We
performed our annual goodwill impairment analysis at January 31, 2004 and identified no impairment. The impairment review is based on a discounted cash flow approach that uses estimates of future market share and revenue and costs for the reporting
units, as well as appropriate discount rates. The estimates used are consistent with the plans and estimates that we use to manage the underlying businesses. However, if we fail to deliver new products for these groups, if the products fail to gain
expected market acceptance, or if market conditions in the related businesses are unfavorable, revenue and cost forecasts may not be achieved, and the Company may incur charges for impairment of goodwill.



During the second quarter of fiscal 2005 and as more fully described in Note
2 of notes to unaudited consolidated financial statements included in Part I, Item 1 of this report, we concluded that the net deferred tax asset should be fully reserved and established a valuation allowance accordingly. As indicated by the results
of our net deferred tax asset assessment, we evaluated our intangible assets for impairment and concluded no impairment charge was required as of July 31, 2004.



For intangible assets with definite useful lives, we amortize the cost over the estimated useful lives and assess any impairment by estimating the
future cash flow from the associated asset in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. As of July 31, 2004, we had $1.5 million of non-goodwill intangible assets recorded in intangible
assets, which includes $0.7 million of software rights and $0.8 million of intellectual property rights.



Valuation of Long-Lived Assets



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



During the second quarter of fiscal 2005 and as more fully described in Note 2 of notes to unaudited consolidated financial statements included in Part I, Item 1 of this report, we concluded that the net deferred tax asset should be fully
reserved and established a valuation allowance accordingly. As indicated by the results of our net deferred tax asset assessment, we evaluated our long-lived assets for impairment and concluded no impairment charge was required as of July 31, 2004.



Prior Year Restatement of Quarterly Results (Fiscal 2004):



The consolidated financial statements for the three and six months ended
July 31, 2003 were restated as of January 31, 2004 for various adjustments that are more fully described in Note 2 of notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this report. The net effect of the
restatement adjustments increased the Companys second quarter net loss by $17,000 and increased the year-to-date net loss by $76,000. Additionally, in the fourth quarter of fiscal 2004, the Company sold the net assets of EDX Engineering
(EDX) and therefore the EDX operations have been reclassified as discontinued operations for fiscal 2004.



Results of Operations  Continuing Operations



Wireless Test Solutions



Our WTS 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 tools to design, deploy, and optimize wireless networks, and to verify the performance of the wireless networks once deployed.



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##### Table of Contents

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



| |  | The wireless communications industry has historically experienced a dramatic rate of growth both in the United States and internationally. During the past several years, however,
many wireless carriers have re-evaluated their network deployment plans in response to downturns in the capital markets, changing perceptions regarding industry growth, the adoption of new wireless technologies, increasing price competition for
subscribers and a general economic slowdown in the United States and internationally. That trend appears to have just recently begun to change.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the first half of fiscal 2004, we completed the development of our Seven.Five hardware platform and various related software applications, and began shipping products to
customers in Europe, North America, and Latin America. Seven.Five is a hardware and software solution that is flexible, scalable, and modular allowing our customers to work with all 2G, 2.5G, and 3G technologies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Commencing during the second half of fiscal 2004 and continuing into fiscal 2005, and in response to consumer demand for improved network coverage, quality of service, and enhanced
data services, we believe domestic wireless carriers have begun to increase capital spending on their networks. It is likely that the increase in carrier spending patterns has resulted in increased demand for our WTS products. Currently, we expect
this trend to continue at least through the remainder of fiscal 2005. However, due to the timing and size of received and expected orders for our WTS products, revenue is expected to fluctuate quarter to quarter.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our European operation experienced year-over-year revenue growth primarily driven by sales of our Seven.Five product platform to European wireless carriers. We expect our European
operation to continue to experience year-over-year revenue growth at least through the remainder of fiscal 2005 based on the demand weve experienced during the first half of fiscal 2005, as well as planned technology deployments by wireless
carriers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The European marketplace is served by our exclusive reseller, SwissQual Holding Inc. (SwissQual). All sales to SwissQual are deferred until payment is received.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Our wireless applications business also includes the
ChargeSource family of mobile power products. Designed with the needs of the traveling professional in mind, our ChargeSource mobile power products provide a high level of functionality and compatibility in an industry-leading compact design. Our
current and planned product offering consists of universal AC/DC, AC, and DC power adapters designed for the right mix of power output and functionality for most retail, OEM, and enterprise customers. Our ChargeSource products are also universal
allowing those who use rechargeable electronic devices to carry just one power adapter. By simply changing the compact SmartTips connected to the end of the charging cable, our universal power adapters are capable of charging and powering multiple
target devices, including most notebook computers, cellular telephones, PDAs, and other handheld devices.



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



| |  | Several of our call box customers have indicated their intentions to upgrade their existing analog-based call box systems to digital or 2.5G wireless technologies. We currently
expect to be awarded several digital upgrade contracts during the second half of fiscal 2005, and commence upgrade activities during the fourth quarter of fiscal 2005.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During January 2004 we entered into a supply agreement with Belkin Corporation (Belkin) and began shipping a limited number of ChargeSource units to Belkin late in the
first quarter of fiscal 2005. For the first six months of fiscal 2005, the ramp-up of unit sales of the Belkin-branded ChargeSource products has not met our original expectations. Accordingly and subsequent to the second quarter of
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

fiscal 2005, we entered into another supply agreement with a national tier-one distributor of consumer
electronics to distribute certain of our ChargeSource products to Big Box retailers and other channels. We have received firm orders and currently expect to start shipping under this supply agreement during the fourth quarter of fiscal
2005. Due to certain terms of this supply agreement, our direct access to certain significant distribution channels may be limited.



The following table sets forth certain items as a percentage of revenue from our condensed consolidated statements of operations for the three and six
months ended July 31, 2004 and 2003. 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 Ended July 31, |    |  | Six Months Ended July 31, |   
|                                                    |  | 2004                        |    |  | 2003(Restated)            |    |  | 2004  |    |  | 2003(Restated) |   
|Revenue:                                            |  |                             |    |  |                           |    |  |       |    |  |                |   
|Products                                            |  | 80.5                        | %  |  | 74.2                      | %  |  | 83.1  | %  |  | 77.5           | % 
|Services                                            |  | 19.5                        |    |  | 25.8                      |    |  | 16.9  |    |  | 22.5           |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|                                                    |  | 100.0                       |    |  | 100.0                     |    |  | 100.0 |    |  | 100.0          |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Cost of revenue:                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Products                                            |  | 54.9                        |    |  | 65.9                      |    |  | 54.9  |    |  | 58.0           |   
|Services                                            |  | 12.6                        |    |  | 15.1                      |    |  | 10.5  |    |  | 14.0           |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|                                                    |  | 67.5                        |    |  | 81.0                      |    |  | 65.4  |    |  | 72.0           |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Gross Margin:                                       |  |                             |    |  |                           |    |  |       |    |  |                |   
|Products                                            |  | 25.6                        |    |  | 8.3                       |    |  | 28.2  |    |  | 19.5           |   
|Services                                            |  | 6.9                         |    |  | 10.7                      |    |  | 6.4   |    |  | 8.5            |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|                                                    |  | 32.5                        |    |  | 19.0                      |    |  | 34.6  |    |  | 28.0           |   
|Selling, general and administrative costs           |  | 29.9                        |    |  | 63.7                      |    |  | 29.4  |    |  | 48.9           |   
|Engineering and support costs                       |  | 28.5                        |    |  | 25.3                      |    |  | 23.9  |    |  | 24.3           |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Operating loss                                      |  | (25.9                       | )  |  | (70.0                     | )  |  | (18.7 | )  |  | (45.2          | ) 
|Other income, net                                   |  | 0.5                         |    |  | 1.1                       |    |  | 0.5   |    |  | 1.5            |   
|Minority interest                                   |  | 0.6                         |    |  | 0.5                       |    |  | 0.3   |    |  | 0.4            |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Loss from continuing operations before income taxes |  | (24.8                       | )  |  | (68.4                     | )  |  | (17.9 | )  |  | (43.3          | ) 
|Income tax (expense) benefit                        |  | (49.6                       | )  |  | 25.2                      |    |  | (18.3 | )  |  | 15.6           |   
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   
|Loss from continuing operations                     |  | (74.4                       | )% |  | (43.2                     | )% |  | (36.2 | )% |  | (27.7          | )%
|                                                    |  |                             |    |  |                           |    |  |       |    |  |                |   



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Comparison of the Three Months Ended July 31, 2004 to the Three Months Ended July 31, 2003



Consolidated



Revenue



Total revenue for the second quarter of fiscal 2005, which ended July 31, 2004, was $6.7 million compared to $5.3 million for the corresponding quarter of
the prior fiscal year, an increase of approximately $1.4 million or 25.1 percent. As discussed below, the increase is attributable to increased sales of our WTS products.



For the second quarter of fiscal 2005 as compared to the corresponding period of the prior fiscal year, revenue from product
sales increased 35.7 percent to $5.4 million while revenue from services decreased 5.3 percent to $1.3 million. The increase in product revenue is primarily attributable to increased sales of our WTS products, partially offset by decreased sales of
our ChargeSource products, which declined $0.2 million or 12.9 percent.



Cost of Revenue and Gross Margin



Total cost
of revenue for the second quarter of fiscal 2005 increased $0.2 million or 4.2 percent to $4.5 million. As discussed below, the increase in cost of revenue is attributable to increased sales of our WTS products. As a percentage of revenue, gross
margin for the second quarter of fiscal 2005 increased to 32.5 percent compared to 19.0 percent for the second quarter of fiscal 2004. The second quarter of fiscal 2004 included the costs of ramping-up production of newly released ChargeSource
products. We did not incur comparable costs during the second quarter of fiscal 2005.



Selling, General and Administrative Costs



Selling, general and administrative costs decreased $1.4 million or 41.3 percent to $2.0 million for the second quarter of fiscal 2005 in comparison to the corresponding quarter of fiscal 2004. During the second quarter of fiscal 2004 we
incurred approximately $1.7 million in legal, settlement, and related costs which were in excess of comparable costs incurred during the second quarter of fiscal 2005.



As a percentage of revenue, selling, general and administrative costs were 29.9 percent and 63.7 percent for the second
quarters of fiscal 2005 and 2004, respectively. Excluding the $1.7 million in legal, settlement, and related costs discussed above, selling, general and administrative costs as a percentage of revenue was 31.8 percent for the second quarter of
fiscal 2004.



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##### Table of Contents

Engineering and Support Costs



The Company capitalizes costs incurred for the development of software embedded in our WTS products subsequent to
establishing technological feasibility. 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 second quarter of fiscal 2005 and 2004 are as follows:



|                                       |  |                            |       |      |   |       |  
|-------------------------------------- |  | -------------------------- | ----- | ---- | - | ----- | -
|                                       |  | Three Months EndedJuly 31, |      
|                                       |  | 2004                       |       | 2003 |  
|                                       |  | (In thousands)             |      
|Engineering                            |  | $                          | 1,370 |      | $ | 1,975 |  
|Less: Capitalized software development |  |                            |      |      |   | (944  | )
|Support Costs                          |  |                            | 530   |      |   | 315   |  
|                                       |  |                            |       |      |   |       |  
|                                       |  | $                          | 1,900 |      | $ | 1,346 |  
|                                       |  |                            |       |      |   |       |  



Engineering and
support costs, net of capitalized software development costs, for the second quarter of fiscal 2005 were $1.9 million compared to $1.3 million for the corresponding quarter of the prior fiscal year, an increase of approximately $0.6 million. Gross
engineering, before reduction for capitalized software development costs, decreased $0.6 million in comparison to fiscal 2004 costs. The development of our Seven.Five product platform was substantially completed during fiscal 2004 and staffing and
consulting costs related to WTS engineering decreased accordingly. Additionally, as the primary development of the Seven.Five software is complete, we no longer incur engineering costs that qualify to be capitalized. The increase in product support
costs for the second quarter of fiscal 2005 is consistent with increased sales of our recently developed Seven.Five product platform.



Other Income, net



Other income, net, consisting primarily of interest income decreased approximately $28,000 to $30,000 for the three months ended July 31, 2004 compared to
the same period of last fiscal year. The decrease was primarily due to lower invested cash balances and reduced interest rates earned on invested cash balances.



Income Taxes



Our effective income tax rate for the second quarter of fiscal 2005 exceeded federal and state statutory rates as income tax expense for the second
quarter includes the $2.9 million valuation allowance attributable to the deferred tax assets. See Note 2 of notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for discussion of the valuation
allowance.



Wireless Test Solutions



|                |  |                            |       |   |                |   |       |  
|--------------- |  | -------------------------- | ----- | - | -------------- | - | ----- | -
|                |  | Three Months EndedJuly 31, |      
|                |  | 2004                       |       |   | 2003(Restated) |  
|                |  | (In thousands)             |      
|Revenue         |  | $                          | 3,543 |   |                | $ | 2,276 |  
|Cost of revenue |  |                            | 2,102 |   |                |   | 1,193 |  
|                |  |                            |       |   |                |   |       |  
|Gross profit    |  | $                          | 1,441 |   |                | $ | 1,083 |  
|                |  |                            |       |   |                |   |       |  
|Gross margin    |  |                            | 40.7  | % |                |   | 47.6  | %
|                |  |                            |       |   |                |   |       |  



Revenue



Wireless test solutions revenue for the second quarter of fiscal 2005 was
$3.5 million compared to $2.3 million for the corresponding quarter of the prior fiscal year, an increase of $1.2 million or 55.7 percent. The increase reflects sales of our Seven.Five product platform, which was released during the first half of
fiscal 2004.



The European marketplace for our WTS products is
served by our exclusive reseller SwissQual AG (SwissQual). All sales to SwissQual are deferred until payment is received. For the second quarter of fiscal 2005,



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##### Table of Contents

we received payments from SwissQual and recorded the corresponding revenue totaling $2.0 million. Additionally, as of
July 31, 2004, approximately $2.3 million of sales to SwissQual has been deferred pending cash collections, which we expect to receive during the third and fourth quarters of fiscal 2005.



Cost of Revenue and Gross Margin



Wireless test solutions cost of revenue for the second quarter of fiscal 2005 was $2.1 million compared to $1.2 million for the corresponding quarter of
the prior fiscal year, an increase of approximately $0.9 million or 76.2 percent. Gross margin for the second quarter of fiscal 2005 decreased to 40.7 percent from 47.6 percent for the second quarter of fiscal 2004. The decrease in gross margin is
attributable to change in the mix of revenue. As sales of our hardware and software products increase, higher-margin revenue attributable to software maintenance is expected to remain relatively flat quarter-to-quarter. WTS revenue attributable to
software maintenance totaled $0.6 million for the second quarter ending July 31, 2004 and 2003.



Wireless Applications



|                    |  |                            |       |   |      |   |       |   
|------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | --
|                    |  | Three Months EndedJuly 31. |      
|                    |  | 2004                       |       |   | 2003 |  
|                    |  | (In thousands)             |      
|Revenue             |  | $                          | 3,113 |   |      | $ | 3,045 |   
|Cost of revenue     |  |                            | 2,390 |   |      |   | 3,117 |   
|                    |  |                            |       |   |      |   |       |   
|Gross profit (loss) |  | $                          | 723   |   |      | $ | (72   | ) 
|                    |  |                            |       |   |      |   |       |   
|Gross margin        |  |                            | 23.2  | % |      |   | (2.4  | )%
|                    |  |                            |       |   |      |   |       |   



Revenue



Wireless applications revenue for the second quarter of fiscal 2005 was $3.1
million compared to $3.0 million for the second quarter of 2004, an increase of approximately $0.1 million or 2.2 percent. This increase was due to a $0.2 million increase in sales of our call box products and services offset by a $0.1 million
decrease in sales of our ChargeSource products. For the second quarter of fiscal 2005, call box revenue generated from product sales and maintenance services totaled $0.7 million and $1.2 million, respectively. Revenue attributable to sales of call
box products or upgrades to existing call box systems tend to fluctuate quarter-to-quarter while revenue from maintenance services provided under long-term contracts remain relatively comparable quarter-to-quarter.



Cost of Revenue and Gross Margin



Wireless applications cost of revenue for the second quarter of fiscal 2005
was $2.4 million compared to $3.1 million for the second quarter of fiscal 2004, a decrease of $0.7 million or 23.3 percent. Gross margin for the second quarter of fiscal 2005 increased to 23.2 percent from (2.4) percent for the second quarter of
fiscal 2004. The second quarter of fiscal 2004 included the costs of ramping-up production of newly released 120-watt ChargeSource products. We did not incur comparable costs during the second quarter of fiscal 2005.



Discontinued Operations



On January 6, 2004, we sold the net assets of the EDX reporting unit. This reporting unit was formerly reported as a
component of the WTS segment.



Additionally, during fiscal
2001, the Company sold its defense and commercial staffing businesses (the non-wireless businesses.)



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Net loss from discontinued operations was $5,000 for the second quarter of fiscal 2005, and related to
expenses incurred for the non-wireless businesses. The net income from discontinued operations for the second quarter of fiscal 2004 was $30,000, with revenue attributable to EDX totaling $229,000.



Comparison of the Six Months Ended July 31, 2004 to the Six Months Ended July 31, 2003



Consolidated



Revenue



Total revenue for the six months ended July 31, 2004, was $15.7 million compared to $11.5 million for the six months ended
July 31, 2003, an increase of approximately $4.2 million or 36.3 percent. As discussed below, the increase is attributable to a $5.0 million increase in sales of our wireless test solutions products partially offset by a $0.8 million decrease in
sales of our wireless applications products.



For the six
months ended July 31, 2004 as compared to the corresponding period of the prior fiscal year, revenue from product sales increased 46.1 percent to $13.1 million while revenue from services totaled approximately $2.7 million and increased $0.1
million. The increase in product revenue is primarily attributable to increased sales of our WTS products, partially offset by decreased sales of our ChargeSource products, which declined $0.9 million or 21.5 percent.



Cost of Revenue and Gross Margin



Total cost of revenue for the six months ended July 31, 2004, was $10.3
million compared to $8.3 million for the corresponding period of fiscal 2004, an increase of approximately $2.0 million or 23.7 percent. As a percentage of revenue, gross margin was 34.6 percent as compared to 28.0 percent for the six months ended
July 31, 2004 and 2003, respectively. As discussed below, the increase in gross margin is primarily attributable to increased absorption of manufacturing overhead expenses and decreased labor costs when viewed as a percentage of revenue, driven by
increased sales of our wireless test solutions products.



Selling, General
and Administrative Costs



Selling, general and
administrative costs for the six months ended July 31, 2004, decreased $1.0 million or 18.0 percent to $4.6 million. Selling, general and administrative costs for the six months ended July 31, 2004 includes a $0.4 million charge recorded for
settling a dispute with a significant WTS customer based in Latin America. Additionally, selling, general and administrative costs for the six months ended July 31, 2003 includes approximately $1.7 million in legal, settlement, and related costs
incurred which were in excess of comparable costs incurred during the corresponding period of the fiscal 2005.



As a percentage of revenue, selling, general and administrative costs were 29.4 percent and 48.9 percent for the six months ended July 31, 2004 and 2003,
respectively. Excluding both charges discussed above, selling, general and administrative costs as a percentage of revenue were 26.9 percent and 34.1 percent for the six months ended July 31, 2004 and 2003, respectively. The decrease is caused in
part due to the reversal of $250,000 of reserves established during fiscal 2004 for uncollectible accounts receivable, upon collection in fiscal 2005.



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Engineering and Support Costs



The Company capitalizes costs incurred for the development of software embedded in our WTS products subsequent to
establishing technological feasibility. 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 six months ended July 31, 2004 and 2003, are as follows (in thousands):



|                                             |  |                          |       |      |   |        |  
|-------------------------------------------- |  | ------------------------ | ----- | ---- | - | ------ | -
|                                             |  | Six Months EndedJuly 31, |      
|                                             |  | 2004                     |       | 2003 |  
|Engineering                                  |  | $                        | 2,635 |      | $ | 3,793  |  
|Less: Capitalized software development costs |  |                          |      |      |   | (1,726 | )
|Support Costs                                |  |                          | 1,121 |      |   | 737    |  
|                                             |  |                          |       |      |   |        |  
|                                             |  | $                        | 3,756 |      | $ | 2,804  |  
|                                             |  |                          |       |      |   |        |  



Engineering and
support costs, net of capitalized software development costs, for the six months ended July 31, 2004 were $3.8 million compared to $2.8 million for the corresponding period of the prior fiscal year, an increase of approximately $1.0 million. Gross
engineering and support costs, before reduction for capitalized software development costs, decreased $1.2 million in comparison to the corresponding period of fiscal 2004. The development of our Seven.Five product platform was substantially
completed during fiscal 2004 and staffing and consulting costs related to WTS engineering decreased accordingly. Additionally, as the primary development of the Seven.Five software is complete, we no longer incur engineering costs that qualify to be
capitalized. The increase in product support costs for the six months ended July 31, 2004 is consistent with increased sales of our recently developed Seven.Five product platform.



Other Income, net



Other income, net, consisting primarily of interest income, decreased approximately $88,000 to $78,000 for the six months ended July 31, 2004 compared to
the same period of the prior fiscal year. This decrease was primarily due to lower invested cash balances and reduced interest rates earned on invested cash balances.



Income Tax Benefit



Our effective income tax rate for the six months ended July 31, 2004 exceeded federal and state statutory rates as income tax expense for six month period
includes the $2.9 million valuation allowance attributable to the deferred tax assets. See Note 2 of notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for discussion of the valuation allowance.



Wireless Test Solutions



|                |  |                          |       |   |                |   |       |  
|--------------- |  | ------------------------ | ----- | - | -------------- | - | ----- | -
|                |  | Six Months EndedJuly 31, |      
|                |  | 2004                     |       |   | 2003(Restated) |  
|                |  | (Dollars in thousands)   |      
|Revenue         |  | $                        | 8,859 |   |                | $ | 3,894 |  
|Cost of revenue |  |                          | 5,086 |   |                |   | 2,430 |  
|                |  |                          |       |   |                |   |       |  
|Gross profit    |  | $                        | 3,773 |   |                | $ | 1,464 |  
|                |  |                          |       |   |                |   |       |  
|Gross margin    |  |                          | 42.6  | % |                |   | 37.6  | %
|                |  |                          |       |   |                |   |       |  



Revenue



Revenue from our wireless test solutions segment for the six months ended
July 31, 2004, was $8.9 million compared to $3.9 million for the six months ended July 31, 2003, an increase of 127.5 percent. This increase reflects sales of our Seven.Five product platform, which was released during the first half of fiscal 2004.



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##### Table of Contents

Cost of Revenue and Gross Margin



Cost of revenue from our wireless test solutions for the six months ended July 31, 2004, was $5.1 million compared to $2.4
million for the six months ended July 31, 2003, an increase of approximately $2.7 million or 109.3 percent. Gross margin for the six months ended July 31, 2004 increased to 42.6 percent from 37.6 percent for the corresponding period of the prior
fiscal year. The increase in gross margin was due to increased sales and a corresponding increase in absorption of fixed manufacturing overhead expenses and decreased labor costs when viewed as a percentage of revenue.



Wireless Applications



|                |  |                          |       |   |      |   |       |  
|--------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                |  | Six Months EndedJuly 31, |      
|                |  | 2004                     |       |   | 2003 |  
|                |  | (Dollars in thousands)   |      
|Revenue         |  | $                        | 6,867 |   |      | $ | 7,647 |  
|Cost of revenue |  |                          | 5,199 |   |      |   | 5,883 |  
|                |  |                          |       |   |      |   |       |  
|Gross profit    |  | $                        | 1,668 |   |      | $ | 1,764 |  
|                |  |                          |       |   |      |   |       |  
|Gross margin    |  |                          | 24.3  | % |      |   | 23.1  | %
|                |  |                          |       |   |      |   |       |  



Revenue



Wireless applications revenue for the six months ended July 31, 2004 was
$6.9 million compared to $7.6 million for the six months ended July 31, 2003, a decrease of approximately $0.7 million or 10.2 percent. This decrease was due to a $0.9 million decrease in sales of our ChargeSource products offset by a $0.2 million
increase in sales of our call box products and services.



For
the six months ended July 31, 2004, call box revenue generated from product sales and maintenance services totaled $1.1 million and $2.4 million, respectively. Revenue attributable to sales of call box products or upgrades to existing call box
systems tend to fluctuate quarter-to-quarter while revenue from maintenance services provided under long-term contracts remain relatively comparable quarter-to-quarter.



Cost of Revenue and Gross Margin



Wireless applications cost of revenue for the six months ended July 31, 2004 was $5.2 million compared to $5.9 million for the six months ended July 31,
2003, a decrease of $0.7 million or 11.6 percent. As a percentage of revenue, gross margin increased to 24.3 percent from 23.1 percent for the six months ended July 31, 2003. The six months ended July 31, 2003 included the costs of ramping-up
production of our newly released 120-watt ChargeSource products. We did not incur comparable costs during the six months ended July 31, 2004. Additionally, due to decreased sales of our ChargeSource products during the six months ended July 31, 2004
and the related decrease in absorption of manufacturing overhead, the gross margin for our wireless applications business decreased in comparison to the corresponding period of the prior fiscal year when the production ramp-up costs previously
discussed are excluded.



Discontinued Operations



On January 6, 2004, Comarco sold the net assets of the EDX reporting unit.
This reporting unit was formerly included in the WTS segment.



Additionally, during fiscal 2001, the Company sold its non-wireless businesses.



Net loss from discontinued operations was $9,000 for the six months ended July 31, 2004 and related to expenses incurred for the non-wireless businesses. The net income from discontinued operations for the six months
ended July 31, 2003 was $52,000 and related to the EDX reporting unit, with revenue attributable to EDX totaling $471,000.



Liquidity and Capital Resources



The Company has cash and cash equivalents of $13.8 million as of July 31, 2004 and no outstanding debt.



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Cash Flows from Operating Activities



Cash used in operating activities was $0.8 million for the six months ended July 31, 2004 compared to $3.5 million for the
corresponding period of the prior fiscal year. Our loss from continuing operations for the six months ended July 31, 2004 was $5.7 million and was offset by cash collections that reduced accounts receivable by $3.9 million as well as depreciation
and amortization expense of $2.3 million and the non-cash valuation allowance recorded to fully reserve our net deferred tax asset totaling $2.9 million at July 31, 2004. Inventory levels during the six month period increased by $2.3 million as we
purchased additional raw materials required for customer purchase orders that are scheduled to be delivered during the third and fourth quarters of fiscal 2005. Additionally, accounts payable and accrued liabilities decreased by $0.4 million and
$1.0 million, respectively, as we paid suppliers and others for accrued inventory and other expenses incurred as of the end of fiscal 2004.



Cash Flows from Investing Activities



Net cash used in investing activities was $0.6 million for the six months ended July 31, 2004 compared to $3.0 million for the corresponding period of the
prior fiscal year. For the first half of fiscal 2005, capital expenditures for property and equipment constituted substantially all of our cash used in investing activities. For the first half of the prior fiscal year and in addition to the $1.1
million expended for property and equipment, we invested $1.7 million in the development of software, which is critical to our products. As previously discussed, we have completed the development of our Seven.Five hardware and software product
platform and have entered the maintenance and enhancement phase of this products life cycle. Accordingly, no amounts related to the development of software have been capitalized during fiscal 2005. We currently have no specific plans that
would require us to capitalize software development costs during the balance of fiscal 2005.



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



| |  | Due to the uncertainties associated with the spending patterns of our customers and the corresponding demand for our wireless test solutions products, we have experienced and expect
to continue to experience significant fluctuations in demand. Such fluctuations have caused and may continue to cause significant reductions in revenue and operating results,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the event the distributors of our ChargeSource products are unable to perform under their non-cancelable commitments due to their inability to take delivery of the products
and/or pay for such products in a timely manner, we would be required to establish alternative distribution channels.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Currency Risk



From
time to time, we may be exposed to the risk of changes in currency exchange rates. As of July 31, 2004, 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.



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##### Table of Contents

Interest Rate Sensitivity



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



We do not hold any derivative financial instruments.



Our cash and cash equivalents have 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 and the related liability to the executives and directors on our balance sheet at 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 our disclosure controls and procedures, as of the end of the period covered by this report, 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, as of the end of the period covered by this report, our disclosure controls and procedures are effective.



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



During the period covered by this report, there were no significant changes in our internal control over financial reporting that have
materially affected, or were reasonably likely to materially affect, our disclosure control over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Pulsar v. Comarco, Inc., et al,

Case No. BC30638, Superior Court of California County of Los Angeles-Central
District



During fiscal 2001, the Company sold a business
which, among other things, provided airport management services. During the fourth quarter of fiscal 2004, the Company was sued by a tenant at an airport where the Company provided management services pursuant to a contract with the County of Los
Angeles (prior to the sale of this business during the 2001 fiscal year). The claimant seeks damages of $2.0 million in addition to other unspecified damages. The outcome of this matter is not determinable or estimable. No provision has been made
for losses, if any, which may result from the final outcome of this matter.



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 such pending legal proceedings will not in the aggregate have a
material adverse effect on our results of operations and financial position.



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



The Annual Meeting of Shareholders of Comarco was held on June 22, 2004. The holders of Comarcos stock were entitled to elect five directors to serve until 2005.



The following table sets forth the names of the five persons elected at the
Annual Meeting to serve as directors until 2005 and the number of votes cast for or withheld with respect to each person.



|                     |  |           |  |         
|-------------------- |  | --------- |  | --------
|                     |  | For       |  | Withheld
|Don M. Bailey        |  | 6,925,118 |  | 41,351  
|Thomas A. Franza     |  | 6,925,184 |  | 41,285  
|Gerald D. Griffin    |  | 6,904,434 |  | 62,035  
|Jeffrey R. Hultman   |  | 6,904,374 |  | 62,095  
|Erik H. van der Kaay |  | 6,904,368 |  | 62,101  



ITEM 5. OTHER INFORMATION



None.



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##### Table of Contents

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 furnished a Current Report to the SEC on Form 8-K on June 18, 2004, under Item 12, Results of Operations and Financial
Condition, the announcement of financial results for the fiscal quarter ended April 30, 2004 and a transcript of a conference call and simultaneous webcast presentation on June 15, 2004, relating to the Companys financial results for the first
quarter ended April 30, 2004.



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##### Table of Contents

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: September 20, 2004 |  |  |  | /s/ Thomas A. Franza                      
|                         |  |  |  | Thomas A. Franza                          
|                         |  |  |  | President and Chief Executive Officer     
|                         |  | 
|Date: September 20, 2004 |  |  |  | /s/ Daniel R. Lutz                        
|                         |  |  |  | Daniel R. Lutz                            
|                         |  |  |  | Vice President and Chief Financial Officer



30