UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended

January 31, 2003

OR

For the transition period from                    to                    

Commission file number 0-5449

COMARCO, INC.

(Exact name of registrant as specified in its charter)

2 Cromwell, Irvine, California 92618

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (949) 599-7400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of Class)

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. Yesxþ No¨

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x¨

Indicate by a check mark whether the registrant is an accelerated filersfiler (as defined in Rule 12b-2 of the Act) Yes¨ Noxþ

Common stockStock outstanding at April 22, 20032004 — 7,027,5657,284,374 shares.

The total number of shares held by non-affiliates on the last business day of the most recently completed second fiscal quarter (July 31, 2002)2003) was 6,794,858.7,002,526. This number was multiplied by $6.60$7.93 per share (the closing sale price of the Common Stock on July 31, 20022003 in the NASDAQ National Market System, as reported by NASDAQ) to determine the aggregate market value of non-affiliate shares set forth above. (The assumption is made, solely for purposes of the above computation, that all Officers and Directors of registrant are affiliates.)

DOCUMENTS INCORPORATED BY REFERENCE

The Company intends to file with the Securities and Exchange Commission by May 28, 200325, 2004 a definitive Proxy Statement (the “2003“2004 Proxy Statement”) relating to its 20032004 Annual Meeting of Stockholders, which meeting involves the election of directors and certain other matters.directors. The 20032004 Proxy Statement is incorporated by reference in Part III of this Form 10-K and shall be deemed to be a part hereof.

COMARCO, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 20032004

TABLE OF CONTENTSINDEX

iii

PART I

FORWARD-LOOKING STATEMENTS

All statements included or incorporated by reference in this annual report on Form 10-K (the “report”), other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected revenue, expenses, gross profit, gross margin, and income, manufacturing capacity, our accounting estimates, assumptions and judgments, the market acceptance and performance of our products, the status of evolving technologies and their growth potential, the cost and success of our development projects, the timing of new product introductions, our production capacity, and the need for additional capital and the success of pending litigation.capital. These forward-looking statements are based on our current expectations and estimates, management’s beliefs, and certain assumptions made by us. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” similar expressions, and variations or negatives of these words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements speak only as of the date of this report and are based upon the information availableknown to us at this time. Such information is subject to change, and we will not necessarily inform you of such changes. These statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section entitled “Risk Factors”Factors, Uncertainties and Other Factors that May Affect Results of Operations and Financial Condition” in Part I, Item 1 of this report, and other risks identified from time to time in our filings with the Securities and Exchange Commission (“SEC”), press releases, and other communications.

We file annual, quarterly, and specialcurrent reports, proxy statements, and other information with the SEC. Our SEC filings are available free of charge to the public over the Internet at the SEC’s website athttp://www.sec.gov. Our SEC filings are also available on our website athttp://www.comarco.com as soon as reasonably practical following the time that they are filed with or furnished to the SEC. Any document we file with the SEC can be read at the SEC’s public reference roomsroom in Washington, DC, New York, NY, and Chicago, IL.DC. For further information on the public reference rooms,room, call the SEC at (800) SEC-0330.

ITEM 1.    BUSINESS

OverviewGeneral

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. During October 1999, we embarked on a plan to divest our non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, our continuingOur operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

We have two primary businesses: wireless test solutions (“WTS”) and wireless applications. Our wireless test solutions business designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. 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.

References to “Fiscal”“fiscal” years in this report refer to our fiscal years ended January 31; for example, “fiscal 2003”2004” refers to our fiscal year ended January 31, 2003.2004.

Wireless Industry

Beginning in fiscal 2002 and after several years of robust growth, the wireless industry deteriorated, reflecting slowing subscriber growth, intensifying price competition, reduced access to capital and the need to manage cash flow. This trend continued through fiscal 2003 and there are few indications that this trend will not continue into fiscal 2004. Wireless carriers have responded to these challenges by reducing capital spending and focusing on projects that can most directly contribute to their revenue. Wireless carriers are now focused on satisfying customer demand for enhanced data services, seamless and comprehensive coverage, improved quality of service, and faster data transmission. Many of these initiatives require capital spending for additional network capacity and next-generation technologies, also referred to as 2.5G and 3G technologies. With reduced availability of capital and the transition to next-generation technologies, plans, projects, and capital spending are subject to frequent change as wireless carriers reevaluate and reorder their priorities. As a result, demand for our 2G wireless test solutions products has significantly decreased and the spending patterns of the wireless carriers continue to be volatile and difficult to predict.

We anticipate that over the longer-term capital spending growth will be driven by a number of factors, including a growing number of subscribers, increasing minutes of use, and the growing demand for the enhanced data services and improved quality promised by next-generation wireless technologies. The deployment of 2.5G and 3G technologies will require the timely development and manufacture of new or advanced infrastructure equipment, including mobile test and measurement tools specifically designed to address the needs of wireless carriers as they transition their existing 2G networks to next-generation technologies. With a product portfolio of test and measurement tools that currently supports 2.5G and 3G technologies, as well as legacy 2G technologies, and core competencies that include expertise in all current and emerging wireless technology standards, industrial hardware design, software development, and low cost manufacturing, we believe we are well positioned to capitalize on the capital spending cycle for next-generation technologies.

Wireless Technology Transition

Wireless networks have evolved from first generation analog technology, or 1G, to second-generation digital voice technology, or 2G. These digital systems provide improved network capacity and signal quality and are currently the dominant technology for most wireless networks. While the build-out of 2G networks continues, there is an increasing demand for next-generation technologies that provide additional data capacity and transmission speeds that permit wireless transmission of integrated voice, data, and Internet and video traffic. To meet this demand, many wireless carriers are either in the process of upgrading their existing 2G networks to 2.5G and 3G technologies or evaluating options to evolve their networks to these next-generation technologies.

Considered an interim step, 2.5G technologies enable wireless carriers to upgrade their existing 2G networks with software and hardware enhancements. These upgrades often require significant investment in software and equipment, but generally do not require the comprehensive new infrastructure equipment investment required for 3G networks. In addition, while these upgraded networks provide improvements in capacity, coverage and performance, they have significantly less bandwidth capacity and transmission speeds than 3G networks are expected to provide.

In order to address these future network requirements, many carriers are expected to ultimately spend a considerable amount of capital upgrading their wireless networks to 3G technologies. Once upgraded, wireless networks are expected to provide high capacity broadband wireless data services at speeds of up to two megabits per second, with the capacity and speed to support voice, data, mobile Internet access and full-motion video. The use of mobile wireless devices for Internet access and other data transmissions is expected to increase substantially over the next several years.

During the last two years, some major carriers in Europe and Asia began a limited initial build out of the first 3G networks. Regulatory agencies in most European counties, Japan and Korea have already licensed 3G frequencies. In the United States, the FCC is expected to award licenses for 3G frequencies in the next several years. As a result, predominately all of the current demand for 3G infrastructure equipment is driven by the rollout of 3G networks in Europe and Asia.

Our Business OperationsBusinesses

Wireless Test Solutions

Our wireless test solutionsWTS business designs and manufactures hardware and software tools used by wireless carriers, equipment vendors, and others. Radio frequency engineers, professionalnetwork improvement professionals and technicians, and others use these test tools to design, deploy, and optimize wireless networks, and to verify the performance and quality of service delivered by the wireless networks once deployed. As wireless carriers continue to deploy 2.5G and 3G technologies across their existing networks, the demand for next-generation wireless test solutionour WTS products is expected to increase.

Products

OurWTS’s product offering is based on Seven.Five, our newly developedSeven.Five product platform. Seven.Five is a true breakthrough in testing capability, performance,hardware and versatility. Its infinite flexibility, scalability,software solution that is flexible, scalable, and modularity enablesmodular allowing our customers to work with all 2G, 2.5G, and 3G technologies, andtechnologies. Seven.Five can be configured in virtually any combination of test mobiles and multi-band, multi-technology scanning receivers. Whether the test application involvesTest applications include; optimization orand benchmarking of wireless networks, in-building or in-vehicle testing, fixed or mobile, voice, data, or data, Seven.Five provides the necessary functionality and technology.video.

Services

Through June 2002,We ceased providing engineering services during the wireless test solutions business was a providersecond quarter of fiscal 2003. Prior to that, WTS provided engineering services that assisted wireless carriers, equipment vendors, and others deploy, optimize, and evaluate the performance of wireless networks. When engaged, we were able to provide and support skilled RFradio engineers and professional technicians and the test tools best suited for the engagement.

We began offering engineering services, which were complementary to our wireless test solutionsWTS products, to wireless carriers and equipment vendors during the fourth quarter of fiscal 2000. During the subsequent two years, we were awarded several profitable multi-million dollar contracts, as well as numerous smaller engagements. However, as wireless carriers continue to reducedramatically reduced their spending near the end of fiscal 2002 and the competition to provide engineering services had becomebecame more intense. Reduced contract pricing and fewer opportunities have resulted in reduced revenue and profitability for all engineering services providers. Accordingly, we decided to exitduring the engineering services business and eliminate all related costs. During the second quarterfirst half of fiscal 2003, we ceased our efforts to obtain additional service contracts, and completed our remaining contractual obligations, reduced head count, and sold a portion of the assets previously used in providing theseengineering services.

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 havethere are approximately 14,000 call boxes installed, the majority of which are servicedthat we service and maintainedmaintain under long-term agreements.

ChargeSource Products

TheOur 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 consist of a 70-wattare also universal ACallowing those who use rechargeable electronic devices to carry just one power adapter, our second-generation mobile power system.adapter. By simply changing the compact SmartTipsSmartTip connected to the end of the charging cable, theour universal AC power adapter isadapters are capable of charging and powering multiple target devices, including most notebook computers, cellular telephones, PDAs, and other handheld devices. During the third quarter of fiscal 2002, the ChargeSource product offering was expanded with the introduction of the 70-watt universal DC power adapter. This universal DC power adapter allows traveling professionals to use all their existing ChargeSource SmartTips on the road or in the air. This device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in automobiles. Targus Group International (“Targus”) currently distributes both of these products.

Until recently, most current notebook computers required no more than 70 watts of power to operate. However, the personal computer industry is currently transitioning to offer notebook computers with increasing power requirements. As the power requirements increase, so does the size of the original equipment of the manufacturer (“OEM”) AC chargerpower adapter sold with theeach notebook computer. To address this industry wide trend, we have developed a family of high-power ChargeSource products that are compatible with allmost legacy, current, and future laptops.planned notebook computers. These new ChargeSource products are able to deliver up to 120 watts of power in a very small form factor. The new ChargeSource family of products, whichWe believe our patented electrical designs will continue to be the basis for even higher-power universal power adapters that are expected to begin shipping duringmeet evolving global standards, including the second quarter of fiscal 2004, consistplanned standards of the following:European Union (“EU”), and the increasing power requirements of the notebook computer OEMs, and allow us to offer customers cutting edge technology without significantly increasing the size or weight of our products. We also expect these higher-power universal power adapters to continue to be significantly smaller and lighter than their OEM counterparts.

The ChargeSource product family consists of the following released (or to be released, as indicated) universal power adapters:

Our new ChargeSource products are compatible with existing Smart Tips and are backwards compatible with the 70-Watt adapters, which are expected to (To be phased out of productionreleased during the first halfsecond-half of fiscal 2004.2005.)

Marketing, Sales, and Distribution

Wireless Test Solutions. We market and sell our wireless test solutionsWTS products through a direct sales force of technically trained personnel and through independent sales representatives, and affiliated and unaffiliated resellers. Our North American sales are made thoughthrough our direct sales organizationand marketing organizations located in California. Sales to our customers in Latin and South America and Asia are generally made through our officesoffice located in SingaporeMexico City, assisted by the sales and Mexico.marketing organizations based in our California office. These international offices also coordinate the marketing, sales, and support efforts of a network of representatives and distributors typically locatedresponsible for sales to customers in the respectiveother geographic regions.

During fiscal 2002, we purchased an equity stake in Switzerland based SwissQual AG (“SwissQual”), a developer of speech qualityQuality of Service systems and software for measuring, monitoring, and optimizing the quality of mobile, fixed, and IP-based voice and data communications. Under this alliance, SwissQual is responsible for reselling and supporting our co-branded wireless test solutionWTS products in Europe, Middle East, and Africa.North Africa (“EMEA”).

Wireless Applications. Our currentHistorically, our ChargeSource mobile power products which includehave been distributed by Targus Group International (“Targus”). During the 70-watt universal AC power adapterfourth quarter of fiscal 2004 we terminated our relationship with Targus and entered into a strategic agreement with Belkin Corporation (“Belkin”). Under this agreement, Belkin granted exclusive worldwide distribution rights to distribute ChargeSource products in several strategic end-market categories including electronic retailers, specialty retailers, OEM third-party options, and Fortune 1000 corporate customers. We expect to make our final product sales to Targus, as well as our initial shipments to Belkin during the universal DC power adapter, are marketed and distributed exclusively by Targus.first half of fiscal 2005. We market and sell our call box systems through a direct sales force located in California.

Competition

Wireless Test Solutions. The market for our hardware and software test tools for the wireless industry is highly competitive and is served by numerous providers. Our primary competitors with respect to our wireless test solutionsWTS products are Agilent Technologies, Ascom, Ericsson, and Allen Telecom.Andrew Corporation. Many of our competitors are larger and have greater financial resources.

The wireless industry is characterized by rapid technological changes, frequent new product and service introductions, and evolving industry standards. To compete successfully in our market, we believe we must have the ability to:must:

Wireless Applications. The market for our emergency call box systems is also served by numerous providers, including Gaitronics, Talk-A-Phone, and other manufactures of wireless and wireline emergency and information telephones. Numerous providers, including Mobility Electronics Belkin and Fellowes, as well as the cellular telephone and personal computer OEMs, also serve the market for our ChargeSource mobile power products. Many of our competitors are larger and have greater financial resources. We believe that the patents that cover our wireless applications products provide us with a competitive advantage. However, our ability to compete in these markets depends on our ability to successfully commercialize new technologies in a timely manner, and manufacture and deliver our products in sufficient volumes.

Key Customers

We sell our products to wireless carriers, equipment vendors, and others located throughout the world. A limited numberIn 2004, we derived 84 percent of our revenues from customers have providedlocated in the United States and 16 percent from customers located in foreign countries. We derive a substantial portion of our revenue.revenue from a limited number of customers. In fiscal 2004, 2003, and 2002 Targus, the exclusiveformer distributor of our mobile power products, provided 4138 percent, of our revenue. In fiscal 2002, Targus provided43 percent, and 22 percent of our revenue, andrespectively. In fiscal 2002, Nortel Networks provided 12 percent of our revenue under an engineering services contract. In fiscal 2001, Verizon Wireless and AT&T Wireless Services, respectively, provided 13 percent

and 15 percent of our revenue. Both companies are wireless carriers and customers of our wireless test solutions business. The spending patterns of theseBelkin, our current exclusive distributor, or any of our other key customers can vary significantly during the year. Any elimination or change in the spending patterns of these customers could negatively affect our operating results.

Research and Development

We sell our products in markets that are characterized by rapid technology changes, frequent new product and service introductions, and evolving technology standards. Accordingly, we devote significant resources to design and develop new and enhanced products that can be manufactured cost effectively and sold at competitive prices. To focus these efforts, we strive to maintain close relationships with our customers and develop products that meet their needs.

As of April 22, 2003,2004, we employed approximately 4030 engineers and other technical personnel who are dedicated to our research and development efforts. Generally, our research and development and other engineering efforts are managed and focused on a product-by-product basis, and can generally be characterized as follows:

If we don’tfail to properly respond to the needs of our customers with the development of new or enhanced products in a timely manner, our portfolio of products is likely to become technologically obsolete over time. We are currently developingrecently developed a new wireless test solutionsWTS product platform, Seven.Five, in response to the needs of wireless carriers for flexible, scalable, and high-value mobile test and measurement tools. For additional information concerning research and development expenditures, see “Research and Development and Software Development Costs” in Notenote 2 of notes toour consolidated financial statements in Part II, Item 8 of this report.

Manufacturing and Suppliers

We maintain one manufacturing facility located in Irvine, California, which is ISO-9002:1994ISO-9001:2000 certified. Our manufacturing process involves the assembly of numerous individual component products by production technicians. The parts and materials used by us consist primarily of printed circuit boards, specialized subassemblies, fabricated housings and chassis, cellular telephones, and small electric circuit components, such as integrated circuits, semiconductors, resistors, and capacitors. Most of our components and sub-assemblies are made by third parties to our specifications and are generally delivered to us for final assembly and testing.

Patents and Intellectual Property

We hold patents that cover key technical aspects of the products in our wireless applications business. However, we generally rely on a combination of trade secrets, copyrights, and contractual rights to protect theour intellectual property embodied in the hardware and software products of our wireless test solutionsWTS business.

Industry Practices Impacting Working Capital

Existing industry practices that affect working capital and operating cash flow include the level of variability of customer orders relative to the volume of production, vendor lead times, materials availability for critical parts, inventory levels held to achieve rapid customer fulfillment, and provisions of extended payment terms to certain foreign customers.

Currently, we sell our products under purchase orders that are placed with short-term delivery requirements. As a result, we maintain significant levels of inventory and associated production and technical staff in order to meet

our obligations. Delays in planned customer orders could result in higher inventory levels and negatively impact our operating results.

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.

Employees

As of April 22, 2003,2004, we employed approximately 143140 employees. We believe our employee relations to be good. The majority of our employees are professional or technical personnel who possess training and experience in engineering, computer science, and management. Our future success depends in large part on our ability to retain key technical, marketing, and management personnel, and to attract and retain qualified employees, particularly those highly skilled radio, frequency, design, process, and test engineers involved in the development of new products. Competition for such personnel iscan be intense, and the loss of key employees, as well as the failure to recruit and train additional technical personnel in a timely manner, could have a material adverse effect on our operating results.

Our success depends to a significant extent upon the contribution of our executive officers and other key employees. We have an employee stock option plan whereby key employees can participate in our success.

Risk Factors, Uncertainties and UncertaintiesOther Factors that May Affect Results of Operations and Financial Condition

Described below and elsewhere in this report and in other documents we file with the SEC, press releases, and other communications are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.

Market and Industry Risk

A significant portion of our annual revenue is derived from customersthe sale of our WTS products to customers in the wireless test solutions business.communications industry, which has experienced significant problems during the past several years. If the wireless communications industry does not continue to improve, our operating results and financial condition could suffer.

Revenue from the sale of our WTS products to customers in the wireless communications industry accounted for 32.5 percent of our revenue in fiscal 2004. These customers include national and regional wireless carriers throughout the world, as well as equipment vendors, and others. The wireless communications industry has historically experienced a dramatic rate of growth both in the United States and internationally. During the past serveralseveral years, however, many wireless carriers experienced many challengeshave 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 as several large carriers in the U.S., Latin America, and South America have started to once again focus on network expansion and next-generation technology deployment. If the rate of growth slows in the wireless communications industry or wireless carriers reduce their capital investments in wireless infrastructure and related test tools offered by our WTS business, our revenue and operating results may be adversely affected.

A significant portion of our revenue is derived from the sale and maintenance of emergency call box systems to governmental customers that continue to experience severe budgetary constraints. If planned projects to install or upgrade call box systems continue to be delayed, our operating results and financial condition could suffer.

Revenue from the sale and maintenance of our emergency call box systems and upgrades accounted for 20.3 percent of our revenues in fiscal 2004. Approximately 78% of our call box revenue is derived from state and local governmental agencies in California, which are currently experiencing severe budgetary constraints. As a result, several of our planned projects to install or upgrade call box systems have resultedbeen delayed. If the current adverse budgetary conditions of state and local governmental agencies in a declineCalifornia persist, we expect significant reductions in both capital spending by our governmental customers, which would likely adversely affect our revenue and operating results.

Failure to adjust our operations due to changing market conditions or failure to accurately estimate demand for our wireless test solutions products. With reduced availability of capital andproducts could adversely affect our operating results.

During the transition to next-generation technologies, plans, projects, and capital spending are subject to frequent change as wireless carriers reevaluate and reorder their priorities. As a result, revenue from our wireless test solutions business for fiscal 2003 continued to be soft. Additionally,past several years, the spending patterns of many of our WTS customers are increasinglyhave been volatile and difficultunpredictable. In addition, consumer demand for our ChargeSource mobile power products has been subject to predict, which makesfluctuations as a result of market acceptance of our recently released products, the timing and size of customer orders and consumer demand for rechargeable mobile electronic devices. Accordingly, it veryhas been difficult for us to forecast the demand for these products. We also are limited in our ability to quickly adapt our manufacturing and related cost structures because a significant portion of our sales and marketing, design and other engineering, and manufacturing costs are fixed. If customer demand for our WTS products or for our ChargeSource mobile power products declines or if we otherwise fail to accurately forecast reduced customer demand, we will likely experience excess capacity, which could adversely affect our operating results. Conversely, if market conditions improve, our manufacturing capacity may not be adequate to fill increased customer demand. As a result, we might not be able to fulfill customer orders in a timely manner, which could adversely affect our customer relationships and operating results.

The products we make are complex and have short life cycles. If we are unable to rapidly and successfully develop and introduce new products, some of our products may become obsolete and our operating results could suffer.

The wireless test solution products.communications and consumer electronics industries are characterized by rapid technological changes, frequent new product introductions and evolving industry standards. Additionally, our ChargeSource mobile power products have short life cycles, and may become obsolete over relatively short periods of time. Our future success depends on our ability to develop, introduce, and deliver on a timely basis and in sufficient quantity new products, components, and enhancements. The extentsuccess of this downturnany new product offering will depend on several factors, including our ability to:

Development of new products requires high levels of innovation from both our engineers and our component suppliers. Development of a new product often requires a substantial investment before we can determine the commercial viability of the product. If we dedicate a significant amount of resources to the development of products that do not achieve broad market acceptance, our operating results may suffer. Our operating results may also be adversely affected due to the timing of product introductions by competitors, especially when a competitor introduces a new product before our own comparable product is ready to be introduced.

The wireless communications and consumer electronics industries are highly competitive, and our profitability will last is unknown. No assurancebe adversely affected if we are not able to compete effectively.

The wireless communications and consumer electronics industries in which we sell our products are highly competitive in many areas, including the timing of development and introduction of new products, technology, price, quality, and customer service and support. Our competitors range from some of the respective industries’ largest corporations to many relatively small and highly specialized firms. Many of our competitors possess advantages over us, including greater financial and marketing resources, greater name recognition and larger and more established customer and supplier relationships. Our competitors also may be able to respond more quickly to new or emerging technologies and changes in customer needs. If we do not have the resources or expertise or otherwise fail to develop successful strategies to address these competitive disadvantages, we could lose customers causing our revenue to decline.

The average selling prices of our products may decrease over their sales cycles, especially upon the introduction of new products, which may negatively affect our revenue and operating results.

Our products may experience a reduction in the average selling prices over their respective sales cycles. Further, as we introduce new or next-generation products, sales prices of legacy products may decline substantially. In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. There can be given thatno assurances we will be successful in our efforts to reduce these costs. In order to do so, we must carefully manage the price paid for components used in our products, as well as manage our inventory costs to reduce overall product costs. If we are unable to reduce the cost of legacy products as new products are introduced, our average gross margins may decline and adversely affect our operating results.

A significant portion of our revenue is dependent in part upon our relationships with our strategic distribution partners and their performance. If we are unable to successfully manage our relationships with the distributors of our mobile power products, our revenue and operating results could suffer.

Historically, our ChargeSource mobile power products have been distributed by Targus Group International (“Targus”). During the fourth quarter of fiscal 2004 we terminated our relationship with Targus and entered into a strategic agreement with Belkin Corporation (“Belkin”). Under this agreement Belkin is granted exclusive worldwide distribution rights to distribute our ChargeSource products in several strategic end-market categories including electronic retailers, specialty retailers, OEM third-party options and Fortune 1000 corporate customers. However, due to the exclusive nature of our agreement with Belkin, our direct access to certain significant distribution channels has been limited. Accordingly, our success will depend in part upon Belkin’s ability and willingness to effectively and widely distribute our ChargeSource products. If Belkin does not be further adversely affected bypurchase the current or future downturns in the wireless industryvolume of products that we anticipate, our revenue and the markets into which we sell our products.results of operations will suffer.

Worldwide A significant portion of our revenue is derived from a limited number of customers, and any loss of, cancellation or delay in purchases by these customers could cause a significant decrease in our revenue.

We have historically derived a significant portion of our revenue from a limited number of customers. Our three (3) key customers for the fiscal year just completed accounted for $17.8 million of our revenue, or 52.0 percent of our revenue for fiscal 2004. For example, Targus, the former distributor of our ChargeSource mobile power products, accounted for approximately $12.9 million, or 37.6 percent of our revenue in fiscal 2004 and $15.1 million, or 42.3 percent of our revenue in fiscal 2003. Our new distribution agreement with Belkin requires them to purchase minimum quantities from us during the first 18 months of the agreement, however, we cannot assure you that Belkin will be able to meet its purchase commitments, or meet or exceed our historical level of unit sales. If Belkin or any of our other key customers reduces, cancels, or delays orders from us, and we are not able to develop other customers who purchase products at comparable levels, our revenue could decrease significantly. In addition, any difficulty in collecting amounts due from one or more of our key customers would negatively impact our results of operations and financial condition. We expect that a limited number of customers will continue to represent a large percentage of our revenues.

We may experience quality or safety defects in our products that could cause us to institute product recalls, require us to provide replacement products and harm our reputation.

In the course of conducting our business, we experience and attempt to address various quality and safety issues with our products. Often product defects are identified during our design, development, and manufacturing processes, which we are able to correct timely. Sometimes, defects are identified after introduction and shipment of products. For example, in March 2003, we voluntarily initiated a product safety recall of our legacy 70-watt universal AC power adapters, and accrued $0.4 million in expenses related thereto in fiscal 2003 and accrued a $3.2 million credit to Targus recorded as a reduction of revenue in settlement of the recall. $1.1 million of which later was unused and recognized as revenue in fiscal 2004. If we are unable to timely fix defects or adequately address quality control issues, our relationships with our customers may be impaired, our reputation may suffer and we may lose customers. Any of the foregoing could adversely affect our business and results of operations.

Economic, political and Market Conditionsother risks associated with our international sales and operations could adversely affect our results of operations.

We currently maintain sales and support operations in the United States, Europe Asia, and Latin America. Our international operations accounted for approximately 15.8 percent of our revenue in fiscal 2004. Accordingly, our business is subject to the worldwide economic and market conditions and risks generally associated with doing business abroad, such as fluctuating foreign currency exchange rates, weaknesses in the economic conditions in particular countries or regions, the stability of international monetary conditions, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest and disruptions orand delays in shipments, and changes in other economic conditions.shipments. These factors, among others, could influenceadversely affect our ability to sellsales of products and services in international markets. A significant downturn in the global economy could adversely affect our operating results.

Additionally, we have limited experience selling our products and services in markets outside Norththe United States and Latin America. However, it is currently our intention to expand our international presenceoperations and establish additional sales

and support offices in primary international markets. There can be no assurance given thatIf our international sales efforts will be successful.are not successful, our results of operations and financial condition could suffer.

CompetitionOur failure to address laws and regulations governing our government contracts, could adversely affect our business and operating results.

We encounter aggressive competitiondepend on contracts with state and local governmental agencies for a significant portion of our revenue, and are subject to various laws and regulations that only apply to companies doing business with the government. For example, we supply call box products and provide system installation and long-term maintenance services to regional and municipal transit authorities and other governmental agencies. In fiscal 2004, we derived 20.3 percent of our revenue from contracts with these governmental customers. From time to time we are also subject to investigation for compliance with regulations governing our government contracts. Our failure to comply with any of these laws or regulations could result in suspension of these contracts, or subject us to administrative claims.

Disruptions in our relationships with our suppliers or in our suppliers’ operations could result in shortages of necessary components and adversely affect our operations.

We currently procure, and expect to continue to procure, certain components from single source manufacturers who provide unique component designs or who meet certain quality and performance requirements. In addition, we sometimes purchase customized components from single sources in order to take advantage of volume pricing discounts. The performance of these suppliers is largely outside our control. In the past, we have experienced, and may continue to experience, shortages of important single source components. Our suppliers may fail to timely deliver components or provide components of sufficient quality. If this occurs, we may need to adjust both product designs and production schedules, which could result in delays in the production and delivery of products to our customers. These delays or defects could harm our reputation and impair our customer relationships.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation, settlement or licensing costs and expenses or be prevented from selling certain products.

Third parties have claimed, and may in the future claim, that we are infringing their intellectual property rights. These intellectual property infringement claims, whether we ultimately are found to be infringing any third party’s intellectual property rights or not, are time-consuming, costly to defend and divert resources and management attention away from our operations. Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims. Additionally, claims of intellectual property infringement might require us to enter into royalty or license agreements. If we cannot or do not license the infringed technology on acceptable terms or substitute similar technology from other sources, we could be prevented from or restricted in selling our products containing, or manufactured with, the infringed technology.

Third parties may infringe our intellectual property rights, and we may be required to spend significant resources enforcing these rights or otherwise suffer competitive injury.

Our success depends in large part on our proprietary technology. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and rely on confidentiality agreements with our employees, customers, and partners to establish and maintain our intellectual proprietary rights in our proprietary technology. We are required to spend significant resources to monitor and enforce our intellectual property rights; however these rights might not necessarily provide us with a sufficient competitive advantage. Our intellectual proprietary rights could be challenged, invalidated, or circumvented by competitors or others. Our employees, customers or partners could breach our confidentiality agreements, for which we may not have an adequate remedy available. We also may not be able to timely detect the infringement of our intellectual property

rights, which could harm our competitive position. Finally, the rapid pace of technological change in the wireless test solutions business. communications and consumer electronics industries could make certain of our key proprietary technology obsolete or provide us with less of a competitive advantage.

If we suffer the loss of our manufacturing facility due to catastrophe, our operations would be adversely affected.

We have numerous competitorsone manufacturing facility, which is located in Irvine, California. Although we carry insurance for productsproperty damage, we do not carry insurance or financial reserves for all possible catastrophes, including interruptions or potential losses arising from some ofearthquakes or terrorism. Any significant disruption in our manufacturing operation at the world’s largest corporationsfacility, whether due to many relatively small and highly specialized firms. We compete primarily on the basis of technology, domain expertise, performance, price, quality, reliability, customer service, and support. Some of our competitors have greater resources to apply to each of these factors and in some cases have built significant reputations with the customer base in the markets in which we compete. If we are unable to successfully compete, it couldfire, natural disaster, or otherwise, would have a material adverse effect on our business, financial condition and operating results.

Quarterly FluctuationsWe depend upon the services of key personnel, and may not be able to attract and retain additional key personnel.

Our success depends to a significant extent on the continued services and experience of our key research, engineering, sales, marketing and executive personnel. If for any reason our key personnel left our employ and we failed to replace a sufficient number of these personnel, we might not be able to maintain or expand our business. Competition for such highly skilled personnel in Operating Resultsour wireless communications and consumer electronics industries is intense, and we cannot be certain that we will be able to hire or re-hire sufficiently qualified personnel in adequate numbers to meet the demand for our products and services. If we are unable to identify, hire and integrate these skilled personnel in a timely or cost-efficient manner, our operating results could suffer.

We may not be able to successfully integrate prior or future acquisitions, which could adversely affect our business, financial condition and results of operations.

We have acquired, and are likely to acquire in the future, businesses, products, and technologies that complement or expand our current operations. Acquisitions could require significant capital investments and require us to integrate with companies that have different cultures, management teams and business infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including:

If market conditions or other factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our acquisitions. Our failure to successfully integrate our acquisitions or realize the expected value from past or future acquisitions could harm our business, financial condition and results of operations.

We may need additional capital in the future to fund the growth of our businesses, which we may not be able to obtain or obtain on acceptable terms.

We currently anticipate that our available capital resources and operating income will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, we cannot assure you that such resources will be sufficient to fund the long-term growth of our business. In particular, we may experience a negative operating cash flow due to the timing of anticipated sales of our products. We may raise additional funds through public or private debt or equity financings if such financings become available on favorable terms. Or we may seek working capital financing under a revolving line of credit. We cannot assure you that any additional financing we may need will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities, develop new products or otherwise respond to competitive pressures. In any such case, our operating results and financial condition could be adversely affected.

Our quarterly operating results are subject to significant fluctuations and, if our operating results decline or are worse than expected, our stock price could fall.

We have experienced, and expect to continue to experience, significant quarterly fluctuations in revenue and operating results for our WTS business and wireless test solutionsapplications business. Our quarterly operating results are impacted by numerous factors,may fluctuate for many reasons, including:

Due to these and other factors, our past results are not reliable indicators of our future performance. FutureIn addition, a significant portion of our operating expenses is relatively fixed due to sales, engineering and manufacturing overhead. If we experience a decline in revenue, andwe may be unable to reduce our fixed costs quickly enough to compensate for the decline, which would magnify the adverse impact of such revenue shortfall on our results of operations. If our operating results may not meet thedecline or are below expectations of publicsecurities analysts or investors, the market analysts and investors. In either caseprice of our stock price could be materially adversely affected.may decline significantly.

Ability to Forecast Operating Results

Due to the downturn in the wireless industry, the spending patterns of our customers are increasingly volatileOur stock price has been and difficult to predict, which makes it very difficult for us to forecast the demand for our wireless test solutions products. Significant portions of our costs are fixed, due in part to our significant sales, engineering and product support, and manufacturing organizations. As a result, relatively small declines in revenue could disproportionately affect our operating results. Additionally, we have limited backlog and a limited view of when an order will be received and shipped, which may affect revenue in any given period.

Product Demand and Manufacturing Capacity

As we are limited in our ability to quickly adapt our production and related cost structures to rapidly changing market conditions, customer demand that does not meet our expectations will result in excess manufacturing capacity. The fixed costs associated with excess capacity will adversely affect our operating results. Conversely, if our manufacturing capacity does not keep pace with customer demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our operating results.

We maintain one manufacturing facility in Irvine, California. Any significant disruption in our manufacturing operation, whether due to fire, natural disaster, or otherwise, will have a material adverse effect on our financial condition and operating results.

Supplier Risk

We currently procure, and expect to continue to procure, certain components from single source manufacturers due to unique component designs, as well as certain quality and performance requirements. In addition, in order to take advantage of volume pricing discounts, we purchase certain customized components from single sources. We have experienced, and may in the future experience, shortages of single-source components. In such event, we may have to make adjustments to both product designs and production schedules that could result in delays in production and delivery of products. Such delays could have a material adverse effect on our financial condition and operating results.

New Product Introductions

We sell our products in the wireless industry, as well as the consumer electronics industry, which are characterized by rapid technological changes, frequent new product introductions, and evolving industry standards. Without the timely introduction of new products and enhancements, our products will likely become technologically obsolete over time, in which case our operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:

Development of new products may require a substantial investment before we can determine the commercial viability of these innovations. We would suffer competitive harm if we dedicate a significant amount of resources to the development of products that do not achieve broad market acceptance.

Product Defectsremain highly volatile.

Our products may have defects despite testing internally or by third-party labs. These defects could result in product returns or recalls and loss or delay in market acceptance, which could have a material adverse effect upon our business, operating results, or financial condition.

Early in fiscal 2004 and in cooperation with the U.S. Consumer Product Safety Commission (“CPSC”), we announced a voluntary product safety recall of approximately 125,000 detachable plugs used on our ChargeSource 70-watt universal AC power adapter. The detachable AC plug can crack if the plug’s swivel connector is extended beyond the 90 degrees of allowed rotation, creating the potential for electric shock. To date, no injuries have been reported. Approximately 75,000 units are believed to be in consumer’s hands, while another 50,000 are currently in the distribution channel. In conjunction with the product safety recall, the Company and Targus entered into an agreement addressing the impact of the recall action. Due to the recall action and the agreement with Targus, we have accrued a $3.2 million credit to Targus as a reduction of sales and additional recall costs of approximately $0.6 million classified in cost of revenue in the fourth quarter of fiscal 2003. Actual amounts may differ materially from our current estimates based on many factors, including the number of qualifying 70-watt universal adapters returned to Comarco by Targus and their customers, primarily consumer electronics retailers.

Short Product Life Cycles

The short life cyclesstock market in general, and the stock prices of many of our products pose a challenge for us to manage effectively the transition from existing products to new products. If we do not manage the transition effectively, our operating results could suffer. Among the factors that make a smooth transition from current products to new products difficult are delays in product development or manufacturing, variations in product costs, and delays in customer purchases of existing

products in anticipation of new product introductions. Our operating results could also suffer due to the timing of product introductions by our competitors. This is especially true when a competitor introduces a new product just before our own product introduction.

Intellectual Property

We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and agreements with our employees, customers, and partners to establish and maintain our proprietary rights in our technology and products. However, any of our intellectual proprietary rights could be challenged, invalidated,wireless communications companies in particular, have experienced fluctuations that have often been unrelated or circumvented. Our intellectual property may not necessarily provide significant competitive advantages. Also, because of the rapid pace of technological change in the wireless industry, certain of our products rely on key technologies developed by third parties and we may not be able to continue to obtain licenses from these third parties. Third parties may claim that we are infringing their intellectual property. Even if we do not believe that our products are infringing third parties’ intellectual property rights, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. If we cannot or do not license the infringed technology or substitute similar technology from another source, our business could suffer.

Integration Risks

In the normal course of business, we frequently engage in discussions with third parties relating to possible acquisitions, strategic alliances, and joint ventures. Although completion of any one transaction may not have a material effect on our financial position, results of operations, or cash flows taken as a whole, our financial results may differ from the investment community’s expectations in a given quarter. Acquisitions and strategic alliances may require us to integrate with a different company culture, management team, and business infrastructure. We may also have to develop, manufacture, and market products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including:

All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

Stock Price

Our stock price has exhibited significant volume and price fluctuations, which makes our stock unsuitable for many investors. In addition, the stock market has from time to time experienced significant price and volume fluctuations. The fluctuations in the stock market are often unrelateddisproportionate to the operating performance of particular companies,these companies. Broad market and the market prices for securities of technology companies have been especially volatile. These broad marketindustry stock price fluctuations may adversely affect the market price of shares of our Common Stock.common stock. The market price of our stock has exhibited significant price fluctuations, which makes our stock unsuitable for many investors. Our stock price may also be affected by the factors discussed above, as well as:following factors:

Our articles of incorporation and shareholder rights plan could make a potential acquisition that is not approved by our board of directors more difficult.

Provisions of our articles of incorporation and our shareholder rights plan could make it more difficult for a third party to acquire control of us. Our articles of incorporation prohibit the consummation of a merger, reorganization or recapitalization, sale or lease of a substantial amount of assets with, or issuance of equity securities valued at $2.0 million to, a stockholder that owns 10 percent or more of our common stock, unless certain requirements relating to board or shareholder approval are met. Our articles also prohibit shareholder action by written consent, which could make certain changes of control more difficult by requiring the holding of a special meeting of shareholders for purposes of taking shareholder action.

In addition, in February 2003 we adopted a shareholder rights plan whereby, for each outstanding share of common stock, we distributed a preferred stock purchase right entitling the holder to purchase one one-hundredth of a share of preferred stock at an exercise price of $75. If any person or group acquires or makes an offer to acquire 15 percent or more of our common stock, the preferred stock purchase right will become exercisable by persons other than the 15 percent or more person or group, unless our board of directors timely redeems the preferred stock purchase right or has approved the offer. As a result, the preferred stock purchase rights may cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our board of directors.

These provisions in our articles of incorporation and our shareholder rights plan could discourage takeover attempts which some shareholders might deem to be in their best interests or in which shareholders would receive a premium for their shares over the then existing market price of our common stock.

The trading volume of our common stock often has been limited and may depress the price for our common stock.

The trading volume of our common stock has been and may continue to be limited. Limited trading volume could depress the price for our common stock because fewer analysts may provide coverage for our stock and because investors might be unwilling to pay a higher market price for a stock which is less liquid. In addition, limited trading volume, along with market and industry stock price fluctuations and other factors affecting our operations, could result in greater volatility in the price of our common stock. A significant decline in our stock price, even if temporary, could result in substantial losses for individual shareholders and could subject us to costly and disruptive securities litigation.

Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. The Financial Accounting Standards Board

has announced its intention to require that companies record compensation expense in the statement of operations for employee stock options using the fair value method. Implementation of this requirement could have a significant negative effect on our reported results or impair our ability to use equity compensation to attract and retain skilled personnel. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, newly enacted SEC regulations, and Nasdaq Stock Market rules, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to invest appropriate resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management attention from revenue generating activities to compliance activities.

Our headquarters and primary manufacturing facility is located in Irvine, California. This leased facility consists of approximately 42,000 square feet of office space and approximately 8,000 square feet of manufacturing/ warehouse space. The lease for this facility expires in August 2004.2005. We also lease office space and, in some instances, warehouse space in California, Maryland, New York, Oregon, Texas, Mexico, and Singapore.Mexico. The leases on these facilities expire at various times through FebruaryJune 2007.

Mobility Electronics, Inc. v. Comarco, Inc. and Comarco Wireless Technologies, Inc.,Case No. CIV-01-1489-PHX-MHM, U.S. District Court for the District of Arizona (“Mobility Arizona Action”):

Mobility Electronics, Inc. (“Mobility”) commenced proceedings as to U. S. Patent No. 5,347,211 (“the ‘211 Patent”) for patent infringement againstDuring fiscal 2001, the Company and Comarco Wireless Technologies, Inc. (“CWT”) with respect to CWT’s ChargeSource power supply products. Thesold a business which, among other things, provided airport management services. During the fourth quarter of fiscal 2004, the Company was first served with Mobility’s amended complaint filed August 10, 2001. In addition to asserting thatsued by a tenant at an airport where the Company and CWT have infringed the ‘211 patent, the amended complaint seeks declaratory judgment that three of CWT’s power supply related patents are either invalid or not infringed by power supplies produced or to be produced by Mobility. The three CWT patents are U. S. Patent Nos. 6,091,611 (“the ‘611 Patent”), 6,172,884 (“the ‘884 patent”), and 5,838,554 (“the ‘554 patent”). The Company and CWT believe that they have meritorious defenses with respect to the ‘211 patent and Mobility’s declaratory judgment causes of actions.

A Scheduling Conference was held on December 18, 2002. Following that Conference, the Court entered its Scheduling Order granting the parties until June 15, 2004 to conduct discovery, and until June 30, 2004 to file dispositive motions. Following resolution of any dispositive motions, or following the deadline for filing if no such motions are filed, the Court will hold a status hearing for purposes of selecting a firm trial date and related pre-trial deadlines.

On October 28, 2002, the California District Court hearing the matter ofComarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo Corporation, former Case No. SACV 02-640 AHS (ANx) (discussed below), ordered the California Action transferred to the District of Arizona. The Arizona Court on January 31, 2003, further ordered the action consolidated with the Mobility Arizona Action for purposes of discovery.

Also, as discussed below, CWT recently filed a separate suit in Arizona against Mobility and two affiliated entities alleging infringement of Comarco’s ‘611 and ‘884 Patents (“CWT Arizona Action”). The CWT Arizona Action has been consolidated for purposes of discovery with the Mobility Arizona Action.

Comarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo Corporation,Case No. 02:2201 PHX MHM, U.S. District Court for the District of Arizona (formerly, SACV 02-640 AHS (ANx), U.S. District Court for the Central District of California, Southern Division):

On June 21, 2002, CWT filed this action for patent infringement against Xtend Micro Products, Inc. (“Xtend”) and its parent entity, iGo Corporation (“iGo”). CWT alleges that its ‘611 and ‘884 patents are infringed by Xtend’s PowerXtender^™ and AC Adapter power supply products as well as other power supply and power adapter products and related accessories. On July 15, 2002, Xtend and iGo answered the complaint denying the allegations in CWT’s complaint and asserting a number of affirmative defenses.

In September, 2002, Defendants moved to transfer this action to the Arizona District Court for purpose of consolidation with the Mobility Arizona Action because this case involved two overlapping patents, and because defendants iGo/Xtend were acquired by and merged into a wholly-owned subsidiary of Mobility. On October 28,

2002 the California District Court granted the Motion and Ordered that the case be transferred to the District of Arizona.

On January 31, 2003, the Arizona Court adopted its Scheduling Order for the case and separately ordered that the case be consolidated for purposes of discovery with the Mobility Arizona Action. Pursuant to the Scheduling Order, the parties have until June 15, 2004 to conduct discovery, and dispositive motions are to be filed by June 30, 2004. The Court will hold a status conference following resolution of any dispositive motions or, if none are filed, following the passing of the June 30, 2004 deadline. At that time, the Court will adopt a firm trial date and set related pre-trial deadlines.

Comarco Wireless Technologies, Inc. v. Mobility Electronics, Inc., Hipro Electronics Co., Ltd., and iGo Corporation,Case No. 03:202 PHX MHM, United States District Court, District of Arizona

On January 31, 2003, CWT filed this action for infringement of its ‘611 and ‘884 Patents with regardprovided management services pursuant to a universal power adapter, called “Juice.” Defendant Hipro manufactures Juice for Mobility, which in turn offers it for sale through its wholly owned subsidiary, iGo Corp. On February 27, 2003, Mobility and iGo answered the complaint while Hipro filed a motion to dismiss based on lack of personal jurisdiction and improper service.

On March 4, 2003, CWT filed a Motion for Preliminary Injunction seeking to enjoin Mobility, Hipro and iGo from making, using, selling or offering for sale the “Juice” product. The Court has set a June 12, 2003 hearing date for both CWT’s Motion for Preliminary Injunction and Hipro’s Motion to Dismiss. Additionally, the parties have agreed to participate in a settlement conference before a United States Magistrate Judge on May 20, 2003.

CWT believes that its case against Mobility, Hipro and iGo Corp is meritorious. As described above, this action has been consolidated for purposes of discoverycontract with the Mobility Arizona Action.

Los Angeles County Service Authority for Freeway Emergencies v. Comarco Wireless Technologies, Inc.,Case No. SACV 02-567 AHS (ANx), U.S. District Court for the Central District of California, Southern Division:

Los Angeles County Service Authority for Freeway Emergencies (“LASAFE”) filed this action against CWT on June 10, 2002, relating to two contracts between LASAFE and CWT concerning Call Box Systems manufactured by CWT, upgraded by CWT to comply with the Americans with Disabilities Act (“ADA”) and maintained by CWT until its contractual obligations to provide maintenance expired. On August 2, 2002, LASAFE filed a first amended complaint (hereafter, “the complaint”). The complaint includes eight counts. In the first five counts LASAFE alleges CWT breached its contractual obligations and implied warranties by failing to properly maintain and repair the call box system and failing to provide certain deliverables to LASAFE. In the last three counts LASAFE alleges that U.S. Patent No. 6,035,187 owned by CWT and entitled “Apparatus and Method for Improved Emergency Call Box” (“the ‘187 Patent”) should be assigned to LASAFE, and CWT should compensate LASAFE, because an LASAFE employee is the true inventor of the invention claimed in the ‘187 Patent. The complaint seeks an unspecified amount of actual and punitive damages, ownership of the ‘187 patent, an order that CWT specifically perform its obligations under the contracts, recovery of attorneys fees, and an audit to determine the number of allegedly infringing call boxes.

On August 16, 2002, CWT filed an answer and a motion to dismiss the first five counts founded in state contract and warranty law on the grounds that the Federal District Court lacks jurisdiction over the state law claims, which was subsequently granted. The Court has set a scheduling order and has set a trial date of February 3, 2004. CWT believes that it has meritorious defenses with respect to all of LASAFE’s claims.

Los Angeles County Service Authority for Freeway Emergencies v. Comarco Wireless Technologies, Inc.,Case No. No. BC 284897, California Superior Court for the County of Los Angeles: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. This matter is in the very early stages and 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.

On November 7, 2002, LASAFE filed a complaint in state court allegingIn addition to the five causes of action that were dismissed in the federal court action referenced in thematter discussed above, paragraph. Specifically, LASAFE alleges that CWT breached its contractual obligations and implied warranties by failing to properly maintain and repair the call box systems and failing to provide certain deliverables to LASAFE, and seeks over $1 million in damages. On January 9,

2003, CWT filed its answer and a cross-complaint asserting causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing based on LASAFE’s failure to pay CWT all monies due under a contract with LASAFE and LASAFE’s conduct during the course of the contract. LASAFE has not yet responded to CWT’s cross-complaint. The Court has set a trial date of April 5, 2004. CWT believes that it has meritorious defenses to LASAFE’s claims and believes that LASAFE will have significant difficulties proving causation and damages on its claims for breach of implied warranties.

Wewe are from time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all other such pending legal proceedings will not in the aggregate have a material adverse effect on our financial condition and operating results.

No matter was submitted during the fourth quarter ended January 31, 20032004 to a vote of our security holders.

PART II

Market Information

Our common stock is traded on the Nasdaq National Market^® under the symbol “CMRO.” The following table sets forth for the periods indicated the quarterly high and low closing prices per share as reported by the Nasdaq National Market. These prices represent actual reported sales transactions.

Holders

As of April 22, 2003,2004, there were approximately 405388 holders of record of our common stock.

Dividends

We have not paid any cash dividends on our common stock in the last two fiscal years. We anticipate that dividends on our common stock will not be paid for the foreseeable future and that all earnings will be retained for use in our business and for use in repurchasing our common stock repurchases.pursuant to our stock repurchase program.

Sales of Unregistered Securities

In connection withNone.

ITEM 6.    SELECTED FINANCIAL DATA

Note:

The net assets of the Company’s EDX reporting unit were sold during fiscal 2004. Accordingly, the results of operations for our acquisition of EDX Engineering, Inc. (“EDX”) on December 7, 2000, we issued 257,428 shares of common stockreporting unit for fiscal 2001 (the year the division was purchased) through 2003 have been reclassified and approximately $2.3 million in cashseparately presented as discontinued operations. Therefore, these amounts will not agree to the former sole shareholderpreviously filed amounts. Additionally, fiscal 2000 through 2003 have been restated for various adjustments as further described in note 2 of EDX in exchange for all of the outstanding shares of capital stock of EDX. These shares were issued in reliance on the exemption provision provided under Section 4(2) of the Securities Act of 1933, as amended.our accompanying consolidated financial statements.

		Years Ended January 31,
		2004			2003 (Restated)			2002 (Restated)			2001 (Restated)			2000 (Restated)
		(In thousands, except per share data)
Working capital		$	25,213		$	26,500		$	27,046		$	25,337		$	22,174
Total assets			52,621			50,315			67,069			67,319			44,694
Borrowing under line of credit			—			—			—			—			—
Long-term debt			—			—			—			—			—
Stockholders’ equity			38,891			38,186			47,937			43,653			31,925

		Years Ended January 31,
		2003			2002			2001			2000			1999
		(In thousands, except per share data)
Working capital		$	27,914		$	30,021		$	29,096		$	25,637		$	24,833
Total assets			50,955			65,942			66,051			44,694			43,001
Borrowing under line of credit			—			—			—			—			—
Long-term debt			—			—			—			—			—
Stockholders’ equity			37,421			47,587			43,495			31,754			31,202

The discussion that follows provides analysis and information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of this report, and the section entitled “Risk Factors, Uncertainties and Uncertainties”Other Factors that May Affect Results of Operations and Financial Condition” included in Part I, Item 1 of this report.

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. During October 1999, we embarked on a plan to divest our non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, our continuingOur operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

ResultsOur revenue is primarily derived from sales of Operations — Continuing Operations

our wireless test solutions and wireless applications products, and from services related to the maintenance of deployed emergency call box systems. We have two reportable operating segments: wireless test solutions (“WTS”) and wireless applications. See “Segment Reporting” in Note 2note 3 of Notesnotes to Consolidated Financial Statementsconsolidated financial statements included in Part II, Item 8 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.

Wireless Test SolutionsRevenue Recognition

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

Beginning in fiscal 2002 and after several years of robust growth, the wireless industry deteriorated, reflecting slowing subscriber growth, intensifying price competition, reduced access to capital and the need to manage cash flow. This trend continued through fiscal 2003 andproducts provided there are few indications that this trend will not continue into fiscal 2004. Wireless carriers have responded to these challenges by reducing capital spendingno uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and focusing on projects that can most directly contribute to their revenue. Wireless carriers are now focused on satisfying customer demand for enhanced data services, seamless and comprehensive coverage, improved quality of service, and faster data transmission. Many of these initiatives require capital spending for additional network capacity and next-generation technologies, also referred to as 2.5G and 3G technologies. With reduced availability of capital and the transition to next-generation technologies, plans, projects, and capital spending are subject to frequent change as wireless carriers reevaluate and reorder their priorities. As a result, demand forcollectibility is reasonably assured. For our 2G wireless test solutions products has significantly decreasedthat 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 spending patternsresidual 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 wireless carriers continuemaintenance commitment made at the time of sale. We expense as incurred the costs associated with honoring the maintenance commitment.

We recognize service revenue as services are performed. Maintenance revenue from extended warranty sales is deferred and recognized ratably over the term of the maintenance agreement, typically 12 months. Revenue for services under long-term contracts, for engineering services, which ceased operations in the second quarter of fiscal 2003, was recognized using the percentage-of-completion method on the basis of percentage of costs incurred to date on a contract, relative to the estimated total contract costs. Profit estimates on long-term contracts were revised periodically based on changes in circumstances and any losses on contracts were recognized in the period in which such losses became known.

Significant management judgments must be made and used in connection with the recognition of revenue 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 Statement of Financial Accounting Standard (“SFAS”) No. 86, “Accounting for Costs of Computer Software to be volatileSold, 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 subsequent maintenance releases, if any. Significant management judgment is required in determining whether technological feasibility has been achieved for a particular software project. Capitalization ceases and difficultamortization of capitalized costs begins when the software product is available for general release to predict.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.

In responseWe had $5.5 million of capitalized software at January 31, 2004, net of accumulated amortization of $3.4 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, typically two to these challenging market conditions, we restructured our wireless test solutions business to better addressfour years, or based on expected unit sales under the future needssales ratio method.

Accounts Receivable

We perform ongoing credit evaluations of our customers and improveadjust credit limits and related terms based upon payment history and our customers’ 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 performanceposition 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 uncollectibility 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. Significant management judgments and estimates must be made and used in markets currently under pressure. Key changesconnection 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 the current estimated market value of the

inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our wireless test solutions business inestimated forecast of product demand and production requirements for the next twelve months. As experienced during fiscal 2003, are as follows: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 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