UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended

~~APRIL 30,~~ July 31, 2002

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

For the transition period from to

Commission file number 0-5449

COMARCO, INC.

(Exact name of registrant as specified in its charter)

California		95-2088894
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer
~~of incorporation or organization)~~		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)

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 ~~wa s~~was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

The registrant had ~~6,976,596~~6,963,108 shares of common stock outstanding as of ~~June 10,~~September 12, 2002.

~~SCOMARCO,~~COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED ~~APRIL 30,~~JULY 31, 2002

TABLE OF CONTENTS

		Page

PART I —		FINANCIAL INFORMATION

ITEM 1.1	FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets as of ~~April 30,~~July 31, 2002 and January 31, 2002	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended ~~April 30,~~July 31, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~April 30,~~July 31, 2002 and 2001	5

	Notes to Condensed Consolidated Financial Statements	6

ITEM 2.2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1114

ITEM 3.3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	1623

PART II —	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	1724

ITEM 2.	CHANGES IN SECURITIES	1725

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	1725

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	1725

ITEM 5.	OTHER INFORMATION	1725

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	1725

	~~SIGNATURE~~SIGNATURES	1826

PART ~~I —~~ I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	April 30,		January 31,
	2002		2002		July 31, 2002		January 31, 2002
	(Unaudited)				(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	22,018	$	21,288	$	23,880	$	21,288
Short-term investments		3,184		3,325		2,637		3,325
Accounts receivable, net		5,558		9,694		6,079		9,694
Inventory		5,943		6,002		4,090		6,002
Deferred tax assets, net		1,432		1,475		2,455		1,475
Other current assets		959		922		721		922

Total current assets		39,094		42,706		39,862		42,706

Property and equipment, net		3,592		3,834		3,176		3,834
Software development costs, net		10,333		10,139		4,471		10,139
Goodwill and acquired intangible assets, net		8,030		8,118
Goodwill and other intangible assets, net						2,458		8,118
Other assets		1,147		1,145		1,148		1,145

	$	62,196	$	65,942	$	51,115	$	65,942

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	527	$	200	$	502	$	200
Deferred revenue		4,603		5,299		5,150		5,299
Accrued liabilities		4,406		7,186		4,845		7,186

Total current liabilities		9,536		12,685		10,497		12,685

Deferred compensation		3,184		3,325		2,637		3,325
Deferred tax liabilities, net		2,506		2,269		582		2,269
Minority interest		74		76		214		76
Stockholders’ equity		46,896		47,587
Stockholders’ Equity:
Common stock, $0.10 par value, 50,625,000 shares authorized, 6,971,146 and 6,978,014 shares outstanding at July 31, 2002 and January 31, 2002, respectively						697		698
Additional paid-in capital						10,601		10,813
Retained earnings						25,887		36,076

	$	62,196	$	65,942		37,185		47,587

					$	51,115	$	65,942

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

COMARCO, INC. AND SUBSIDIARIES

~~COMARCO, INC. AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share amounts)

	Three Months Ended April 30,						Three Months Ended July 31,						Six Months Ended July 31,
	2002			2001			2002			2001			2002			2001
Revenue	$	7,765		$	12,042		$	10,009		$	14,010		$	17,775		$	26,052
Cost of revenue		4,980			6,171			5,814			6,761			10,795			12,932

Gross profit		2,785			5,871			4,195			7,249			6,980			13,120
Selling, general and administrative costs		2,335			3,358			2,395			3,502			4,730			6,860
Asset impairment charges								9,810			—			9,810			—
Engineering and support costs		1,417			1,257			1,303			1,400			2,721			2,657

Operating income (loss)		(967	)		1,256			(9,313	)		2,347			(10,281	)		3,603
Other income, net		107			322			96			251			203			574
Minority interest in earnings of subsidiary		1			(1	)

Minority interest								70			(25	)		79			(26	)
Income (loss) before income taxes		(859	)		1,577			(9,147	)		2,573			(9,999	)		4,151
Income tax expense (benefit)		(314	)		570			(2,422	)		959			(2,736	)		1,530
Net income (loss) before cumulative effect of accounting change								(6,725	)		1,614			(7,263	)		2,621
Cumulative effect of accounting change								—			—			(2,926	)		—

Net income (loss)	$	(545	)	$	1,007		$	(6,725	)	$	1,614		$	(10,189	)	$	2,621

Earnings (loss) per share:
Basic	$	(0.08	)	$	0.14
Net income (loss) per share—basic:
Net income (loss) before cumulative effect of accounting change							$	(0.96	)	$	0.23		$	(1.04	)	$	0.37
Cumulative effect of accounting change							$	—		$	—		$	(0.42	)	$	—

Diluted	$	(0.08	)	$	0.13
Net income (loss) per share—basic							$	(0.96	)	$	0.23		$	(1.46	)	$	0.37

Weighted average common shares outstanding:
Basic		6,968			7,064
Net income (loss) per share—diluted:
Net income (loss) before cumulative effect of accounting change							$	(0.96	)	$	0.21		$	(1.04	)	$	0.35
Cumulative effect of accounting change							$	—		$	—		$	(0.42	)	$	—
Net income (loss) per share—diluted							$	(0.96	)	$	0.21		$	(1.46	)	$	0.35

Diluted		6,968			7,164

Common shares outstanding		6,969			7,061

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

COMARCO, INC. AND SUBSIDIARIES

~~COMARCO, INC. AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Three Months Ended April 30,						Six Months Ended July 31,
	2002			2001			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations	$	(545	)	$	1,007
Net income (loss)							$	(10,189	)	$	2,621
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		1,565			1,353			3,279			2,659
Tax benefit from exercise of stock options		11			—			133			615
Deferred income taxes		280			535			(2,667	)		696
Asset impairment charges								9,810			—
Loss on disposal of property and equipment								154			—
Cumulative effect of accounting change								2,926			—
Provision for doubtful accounts receivable		6			99			(6	)		18
Provision for obsolete inventory		(38	)		(105	)		(21	)		299
Minority interest in earnings of subsidiary		(1	)		1			(79	)		26
Changes in operating assets and liabilities:
Trading securities		141			168
Accounts receivable		4,130			418
Inventory		97			(411	)
Other assets		(40	)		749
Decrease in trading securities								688			122
Decrease (increase) in accounts receivable								3,573			(2,339	)
Decrease (increase) in inventory								530			(983	)
Decrease (increase) in other assets								(527	)		807
Deferred compensation		(141	)		(342	)		(688	)		(292	)
Current liabilities		(3,071	)		(3,101	)

Decrease in current liabilities								(1,763	)		(3,810	)
Net cash provided by operating activities		2,394			371			5,153			439


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments		—			72			—			72
Proceeds from sales of property and equipment								131			—
Purchases of property and equipment		(329	)		(697	)		(868	)		(1,354	)
Investment in SwissQual								—			(1,049	)
Cash paid for acquisition of minority interest								—			(118	)
Software development costs		(1,100	)		(1,341	)		(2,015	)		(2,833	)

Net cash used in investing activities		(1,429	)		(1,966	)		(2,752	)		(5,282	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		121			—			121			283
Purchase and retirement of common stock		(278	)		(76	)
Net proceeds from issuance of subsidiary common stock								78			134
Purchase of common stock								(353	)		(232	)

Net cash used in financing activities		(157	)		(76	)
Net cash provided by (used in) financing activities								(154	)		185

Net increase (decrease) in cash and cash equivalents – continuing operations		808			(1,671	)
Net decrease in cash and cash equivalents – discontinued operations		(78	)		(259	)
Net increase (decrease) in cash and cash equivalents—continuing operations								2,247			(4,658	)
Net increase (decrease) in cash and cash equivalents—discontinued operations								345			(780	)

Net increase (decrease) in cash and cash equivalents		730			(1,930	)		2,592			(5,438	)
Cash and cash equivalents, beginning of period		21,288			24,903			21,288			24,903

Cash and cash equivalents, end of period	$	22,018		$	22,973		$	23,880		$	19,465

Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$	—		$	10		$	—

Cash paid for income taxes	$	103		$	328		$	356		$	735

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

COMARCO, INC. AND SUBSIDIARIES

~~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 hardware and software products for the wireless industry. Comarco also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and handheld devices. Comarco is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. (“CWT”) was incorporated in the state of Delaware in September 1993. During October 1999, the Company embarked on a plan to divest its non-wireless businesses, which included the defense and commercial staffing businesses. The divestiture plan was completed during November 2000. Accordingly, the Company’s continuing operations consist solely of the operations of CWT.

2. Summary of Significant Accounting Policies

Basis of Presentation:

The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in accordance with generally accepted accounting principles for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended January 31, 2002 and the Company’s quarterly report on Form 10-Q for the first quarter ended April 30, 2002. The financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three and six months ended ~~April 30,~~July 31, 2002 are not necessarily indicative of the results to be expected for the year ended January 31, 2003.

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.~~operations in prior periods. All material intercompany balances, transactions, and profits have been eliminated.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates made in preparing the financial statements include the allowances for doubtful accounts, inventory reserves, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, warranty reserves, litigation, and other contingencies. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

Reclassifications:

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

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. ~~Recent Accounting Pronouncements~~Asset Impairment Charges

Due to significantly lower demand for existing wireless infrastructure products in the wireless marketplace and the Company’s strategy of investing available resources in the development of XPort, a new product platform, management has analyzed the carrying value of all assets attributable to the Company’s wireless infrastructure business. Based on this analysis, the Company recorded asset impairment charges totaling $9.8 million ($7.2 million net of tax) during the second quarter ended July 31, 2002. The following table sets forth the impaired assets and corresponding impairment charges (in thousands):


Property and equipment	$	205
Software development costs		5,619
Inventory		1,403
Intangible assets		2,583

	$	9,810

The above impaired assets are exclusively related to legacy 2G wireless infrastructure products and do not include any assets related to the Company’s engineering services business, which ceased operations during the second quarter of fiscal 2003.

4. Goodwill and Other Intangible Assets

Effective February 1, 2002, the Company implemented Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 establishes new standards for goodwill acquired in a business combination, eliminates amortization of goodwill, and sets forth methods for periodically evaluating goodwill for impairment. ~~Impairment losses that arise due~~

Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value as determined using a discounted cash flow methodology applied to the ~~initial application~~particular unit. This methodology differs from the Company’s previous policy, in accordance with accounting standards existing at that time, of ~~this standard will be reported~~using undiscounted cash flows on an enterprise-wide basis to determine recoverability. During the second quarter of fiscal 2003, the Company completed the required transitional impairment test under the new rules and recorded a non-cash charge of $2.9 million to write down fully the carrying value of the goodwill related to the Company’s EDX software reporting unit. This reporting unit is included in the Company’s wireless infrastructure segment for financial reporting purposes, and the related goodwill was generated through the Company’s acquisition of EDX Engineering, Inc. during December 2000. Such charge is non-operational in nature and is reflected as a cumulative effect of a change in accounting principle. ~~The first step~~

In calculating the impairment charge, the fair value of the impaired reporting unit underlying the wireless infrastructure segment was estimated using a discounted cash flow methodology. This charge writes off the entire carrying value of the recorded goodwill and accordingly, $2.9 million is recorded as a cumulative charge for the six months ended July 31, 2002. An annual impairment ~~test, which~~review will be performed during the fourth quarter of each year, commencing in the fourth quarter of fiscal 2003. Future impairments of intangible assets will be recorded as operating expenses.

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~(UNAUDITED)~~

~~must be completed by July 31, 2002, will identify potential impairment of goodwill~~Goodwill and other intangible assets ~~deemed to have indefinite lives. The second step~~consist of the ~~impairment test, which must be completed prior to~~following (in thousands):

	July 31, 2002			January 31, 2002
Purchased technology	$	—		$	1,790
Customer base		—			930
Goodwill		2,606			5,941
Other acquired intangible assets		1,000			1,450

	$	3,606		$	10,111
Less accumulated amortization		(1,148	)		(1,993	)

	$	2,458		$	8,118

Amortization of intangible assets for the ~~issuance~~three months ended July 31, 2002 and 2001 totaled $88,000 and $262,000, respectively. For the six months ended July 31, 2002 and 2001, amortization of ~~the Company’s fiscal 2003 annual financial statements, will measure the amount of impairment loss, if any.~~intangibles totaled $176,000 and $523,000, respectively.

As required by SFAS No. 142, the Company ceased amortizing goodwill and other intangible assets deemed to have indefinite lives ~~of $6.9 million~~ beginning February 1, 2002. The Company recorded $0.7 million of goodwill amortization in fiscal 2002 ~~thereby eliminating amortization of approximately $181,000 per quarter.~~that will not recur in future years.

The following supplemental pro forma information presents the Company’s net income (loss) and ~~earnings~~net income (loss) per share information as if the Company had been accounting for its goodwill under SFAS No. 142 for all periods presented (in thousands):

Three Months Ended April 30,

2002

2001
Net income (loss) — as reported    $ (545 )    $ 1,007
Adjustments:
Amortization of goodwill, net of tax    —      106
Net income (loss) — as adjusted    $ (545 )    $ 1,113


Adjusted basic earnings (loss) per share    $ (0.08 )    $ 0.16


Adjusted diluted earnings (loss) per share    $ (0.08 )    $ 0.15

	Three Months Ended April 30,					Six Months Ended July 31,
	2002			2001		2002			2001
Net income (loss)—as reported	$	(6,725	)	$	1,614	$	(10,189	)	$	2,621
Adjustments:
Amortization of goodwill, net of tax		—			111		—			220

Net income (loss)—as adjusted	$	(6,725	)	$	1,725	$	(10,189	)	$	2,841

Adjusted basic net income (loss) per share	$	(0.96	)	$	0.24	$	(1.46	)	$	0.40

Adjusted diluted net income (loss) per share	$	(0.96	)	$	0.23	$	(1.46	)	$	0.38

The Company has begun performing the first of the required impairment tests under the new rules but has not yet determined the effect, if any, the impairment tests will have on its results of operations and financial condition. The Company’s evaluation may result in an impairment under this new method of evaluating goodwill.5. Recent Accounting Pronouncements

Effective February 1, 2002, the Company implemented SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and ~~Transactions” (“APB 30”),~~Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). The adoption of SFAS No. 144 did not have a material impact on the Company’s results of operations or financial position.

In April 2002, the FASB issued Statement No. 145, “Rescission of the FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”). SFAS No. 145 eliminates the requirements to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15,

4.COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2002, with earlier adoption encouraged. Management does not believe that the adoption of this standard will have a material impact on the Company’s results of operation or financial position.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is in the process of evaluating the adoption of SFAS No. 146 and its impact on the Company’s results of operations or financial position.

6. Stockholders’ Equity

During 1992, our Board of Directors authorized a stock repurchase program of up to 3.0 million shares of our common stock. From program inception through ~~April 30,~~July 31, 2002, the Company has repurchased approximately 2.5 million shares for an average price of $8.23 per share. During the ~~first quarter~~three months ended ~~April 30,~~July 31, 2002, the Company repurchased ~~26,200~~9,705 shares of ~~our~~ common stock in the open market for an average price of ~~$10.62~~$7.72 per share.

~~5. Earnings~~7. Income (Loss) Per Share

The Company calculates net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Under SFAS No. 128, basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the ~~first~~second quarter and six months ended ~~April 30,~~July 31, 2002, basic and diluted net loss per share were the same because the inclusion of ~~the~~ dilutive securities would have been antidilutive. The following ~~tables present~~table presents reconciliations of the numerators and denominators of the basic and diluted ~~earnings~~income (loss) per share computations for net income (loss).

~~COMARCO, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(UNAUDITED)~~

In the tables below, “Income” or “Loss” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts):

	Three Months Ended April 30,						Three Months Ended July 31,					Six Months Ended July 31,
	2002			2001			2002			2001		2002			2001
Basic:
Net income (loss) before cumulative effect of accounting change							$	(6,725	)	$	1,614	$	(7,263	)	$	2,621
Weighted average shares outstanding								6,972			7,055		6,970			7,059

Basic income (loss) per share before cumulative effect of accounting change							$	(0.96	)	$	0.23	$	(1.04	)	$	0.37

Cumulative effect of accounting change							$	—		$	—	$	(2,926	)	$	—
Weighted average shares outstanding								6,972			7,055		6,970			7,059

Basic loss per share from cumulative effect of accounting change							$	—		$	—	$	(0.42	)	$	—

Net income (loss)	$	(545	)	$	1,007		$	(6,725	)	$	1,614	$	(10,189	)	$	2,621
Weighted average shares outstanding		6,968			7,064			6,972			7,055		6,970			7,059

Basic income (loss) per share	$	(0.08	)	$	0.14		$	(0.96	)	$	0.23	$	(1.46	)	$	0.37


Diluted:
Net income (loss)	$	(545	)	$	1,007
Effect of subsidiary options		21			(53	)

Net income used in calculation of diluted income (loss) per share	$	(524	)	$	954


Weighted average shares outstanding		6,968			7,064
Effect of dilutive securities — stock options		—			100

Weighted average shares used in calculation of diluted income (loss) per share		6,968			7,164

Diluted income (loss) per share	$	(0.08	)	$	0.13

	Three Months Ended July 31,						Six Months Ended July 31,
	2002			2001			2002			2001
Diluted:
Net income (loss) before cumulative effect of accounting change	$	(6,725	)	$	1,614		$	(7,263	)	$	2,621
Effect of subsidiary options		—			(77	)		—			(121	)

Net income used in calculation of diluted income (loss) per share before cumulative effect of accounting change	$	(6,725	)	$	1,537		$	(7,263	)	$	2,500

Weighted average shares outstanding		6,972			7,055			6,970			7,059
Effect of dilutive securities—stock options		—			103			—			102

Weighted average shares used in calculation of diluted income (loss) per share before cumulative effect of accounting change		6,972			7,158			6,970			7,161

Diluted income (loss) per share before cumulative effect of accounting change	$	(0.96	)	$	0.21		$	(1.04	)	$	0.35

Cumulative effect of accounting change	$	—		$	—		$	(2,926	)	$	—
Effect of subsidiary options		—			—			—			—

Net loss used in calculation of diluted loss per share from cumulative effect of accounting change	$	—		$	—		$	(2,926	)	$	—

Weighted average shares outstanding		6,972			7,055			6,970			7,059
Effect of dilutive securities—stock options		—			103			—			102

Weighted average shares used in calculation of diluted loss per share from cumulative effect of accounting change		6,972			7,158			6,970			7,161

Diluted loss per share from cumulative effect of accounting change	$	—		$	—		$	(0.42	)	$	—

Net income (loss)	$	(6,725	)	$	1,614		$	(10,189	)	$	2,621
Effect of subsidiary options		—			(77	)		—			(121	)
Net income used in calculation of diluted income (loss) per share	$	(6,725	)	$	1,537		$	(10,189	)	$	2,500

Weighted average shares outstanding		6,972			7,055			6,970			7,059
Effect of dilutive securities—stock options		—			103			—			102

Weighted average shares used in calculation of diluted income (loss) per share		6,972			7,158			6,970			7,161

Diluted income (loss) per share	$	(0.96	)	$	0.21		$	(1.46	)	$	0.35

6.8. Inventory

Inventory consists of the following (in thousands):

	April 30, 2002		January 31, 2002		July 31, 2002		January 31, 2002
Raw materials	$	4,525	$	4,657	$	3,201	$	4,657
Work in progress		245		420		374		420
Finished goods		1,173		925		515		925

	$	5,943	$	6,002	$	4,090	$	6,002

As discussed in Note 3, during the three months ended July 31, 2002, the Company recorded a non-cash inventory impairment charge totaling $1.4 million related to the Company’s legacy 2G wireless infrastructure products.

7.9. Software Development Costs, Net

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

	April 30, 2002			January 31, 2002			July 31, 2002			January 31, 2002
Capitalized software development costs	$	19,156		$	18,056		$	7,609		$	18,056
Less accumulated amortization		(8,823	)		(7,917	)		(3,138	)		(7,917	)

	$	10,333		$	10,139		$	4,471		$	10,139

Capitalized software development costs for the ~~quarters~~three months ended ~~April 30,~~July 31, 2002 and 2001 totaled ~~$1.1~~$0.9 million and ~~$1.3~~$1.5 million, respectively. Capitalized software development costs for the six months ended July 31, 2002 and 2001 totaled $2.0 million and $2.8 million, respectively. Amortization of software development costs for the quarters ended ~~April 30,~~July 31, 2002 and 2001 totaled ~~$906,000~~$1.2 million and ~~$612,000, respectively,~~$557,000, respectively. For the six months ended July 31, 2002 and ~~have~~2001, amortization of software development costs totaled $2.1 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.

~~COMARCO, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(UNAUDITED)~~

~~8. Goodwill and Acquired Intangible Assets~~

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

April 30, 2002

January 31, 2002

Purchased technology    $ 1,790    $ 1,790
Customer base    930    930
Goodwill    5,941    5,941
Other acquired intangible assets    1,450    1,450


   $ 10,111    $ 10,111
Less accumulated amortization    (2,081 )    (1,993 )


   $ 8,030    $ 8,118

~~Amortization of definite lived intangible assets for the quarters ended April 30, 2002 and 2001 totaled $88,000 and $261,000, respectively.~~ As discussed in Note 3, during the three months ended July 31, 2002, the Company ~~ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142.~~recorded a non-cash impairment charge totaling $5.6 million related to capitalized software development costs attributable to the Company’s legacy 2G wireless infrastructure products.

9.10. Business Segment Information

The Company has two reportable operating segments: wireless infrastructure and wireless applications. Wireless infrastructure designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio Frequency (“RF”) 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 remote voice systems and mobile power products for notebook computers, cellular telephones, and handheld devices. Remote voice systems currently include various call box products that provide emergency communication over existing wireless networks. In addition to the call box products, we provide 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.

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, and gross margin attributable to these segments are as follows (in thousands):

	Three Months Ended April 30, 2002									Three Months Ended July 31, 2002									Three Months Ended July 31, 2001
	Wireless Infrastructure			Wireless Applications			Total			Wireless Infrastructure			Wireless Applications			Total			Wireless Infrastructure			Wireless Applications			Total
Revenue	$	3,108		$	4,657		$	7,765		$	3,375		$	6,634		$	10,009		$	8,418		$	5,592		$	14,010
Cost of revenue		2,177			2,803			4,980			2,040			3,774			5,814			3,439			3,322			6,761

Gross profit	$	931		$	1,854		$	2,785		$	1,335		$	2,860		$	4,195		$	4,979		$	2,270		$	7,249

Gross margin		29.9	%		39.8	%		35.9	%		39.5	%		43.1	%		41.9	%		59.2	%		40.6	%		51.7	%

	Three Months Ended April 30, 2001									Six Months Ended July 31, 2002									Six Months Ended July 31, 2001
	Wireless Infrastructure			Wireless Applications			Total			Wireless Infrastructure			Wireless Applications			Total			Wireless Infrastructure			Wireless Applications			Total
Revenue	$	6,692		$	5,350		$	12,042		$	6,484		$	11,291		$	17,775		$	15,109		$	10,943		$	26,052
Cost of revenue		2,863			3,308			6,171			4,219			6,576			10,795			6,302			6,630			12,932

Gross profit	$	3,829		$	2,042		$	5,871		$	2,265		$	4,715		$	6,980		$	8,807		$	4,313		$	13,120

Gross margin		57.2	%		38.2	%		48.8	%		34.9	%		41.8	%		39.3	%		58.3	%		39.4	%		50.4	%

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

	Three Months Ended July 31,				Six Months Ended July 31,
	2002		2001		2002		2001
North America	$	8,334	$	12,943	$	15,414	$	24,670
Europe		945		—		1,317		16
Asia		246		830		369		854
Latin America		484		237		675		512

	$	10,009	$	14,010	$	17,775	$	26,052

11. Contingencies

On June 21, 2002, CWT filed an action for patent infringement against the Xtend Micro Products, Inc. (“Xtend”) and its parent entity, iGo Corporation (“iGo”). CWT alleges that certain patents owned by CWT 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. Xtend and iGo have indicated in court filings that they will seek to have this case transferred to and consolidated with the Mobility Action because

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~(UNAUDITED)~~

~~Revenue by geographic area consisted~~this case involves two of the ~~following (in thousands):~~patents involved in the Mobility Action, and Mobility and iGO have recently merged into a single corporate entity. CWT believes that its case against Xtend and iGo is meritorious and that CWT has valid grounds for opposing any motion to consolidate this case with the Mobility Action that may be filed by Xtend and/or iGo.

Three Months Ended April 30,

2002

2001
North America    $ 7,080    $ 11,727
Europe    372    16
Asia    122    275
Latin America    191    24


   $ 7,765    $ 12,042


Los Angeles County Service Authority for Freeway Emergencies (“LASAFE”) filed an 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. 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 systems and failing to provide certain deliverables to LASAFE. In the last three counts LASAFE alleges that a patent owned by CWT should be assigned to LASAFE, and CWT should compensate LASAFE because an LASAFE employee is the true inventor of the invention claimed in the patent. The complaint seeks an unspecified amount of actual and punitive damages, ownership of the 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.

~~10. Contingencies~~CWT believes that it has meritorious defenses with respect to all of LASAFE’s claims. In addition, 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.

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

position.

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

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Important factors which may cause actual results to differ materially from the forward-looking statements are described in the section entitled “Risk Factors” in Part I, Item 1 of ~~the~~ our report on Form 10-K for the year ended January 31, 2002, and other risks identified from time to time in our filings with the Securities and Exchange Commission, press releases, and other communications.

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

Overview

Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, “Comarco,” or the “Company”), is a leading provider of hardware and software products for the wireless industry. Comarco also designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and handheld devices. Comarco, Inc. is a California corporation that became a public company in 1971 when it was spun-off from Genge Industries, Inc. Comarco Wireless Technologies, Inc. (“CWT”) was incorporated in the State of Delaware in September 1993. 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 continuing operations consist solely of the operations of CWT.

Results of ~~Operations –~~ Operations—Continuing Operations

We have two reportable operating segments: wireless infrastructure and wireless applications.

Wireless Infrastructure

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

~~Wireless Applications~~

Our wireless applications business designs and manufactures remote voice systems and mobile power products for notebook computers, cellular telephones, and handheld devices. Remote voice systems currently include various call box products that provide emergency communication over existing wireless networks. In addition to the call box products, we provide 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.

traveling professionals to use all of their existing ChargeSource SmartTips on the road or in the air. The device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in cars today. The ChargeSource universal DC power adapter began shipping during the third quarter of fiscal 2002. Targus currently distributes these two products. We anticipate expanding the ChargeSource product offering with a 20-watt universal power adapter with both AC and DC inputs during the third quarter of fiscal 2003. This product is targeted at the users of cellular telephones, pocket PCs, handheld devices, and digital cameras and camcorders.

The following table sets forth certain items as a percentage of revenue from our condensed consolidated statements of operations for the three months ended April 30, 2002 and 2001. 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 April 30,


2002

2001

Revenue    100.0 %    100.0 %
Cost of revenue    64.1    51.2


Gross profit    35.9    48.8
Selling, general and administrative costs    30.1    27.9
Engineering and support costs    18.2    10.5


Operating income (loss)    (12.4 )    10.4
Other income, net    1.4    2.7
Minority interest in earnings of subsidiary    —      —


Income (loss) before income taxes    (11.0 )    13.1
Income tax expense (benefit)    (4.0 )    4.7


Net income (loss)    (7.0 )%    8.4 %

~~Consolidated~~

~~Revenue~~

Total revenue for the first quarter of fiscal 2003, which ended April 30, 2002, decreased 35.5 percent to $7.8 million compared to the first quarter of fiscal 2002, primarily due to significantly lower revenue generated by our wireless infrastructure business.

~~Cost of Revenue and Gross Margin~~

Total cost of revenue for the first quarter of fiscal 2003 decreased 19.3 percent to $5.0 million compared to the first quarter of fiscal 2002. As a percentage of revenue, gross margin decreased to 35.9 percent from 48.8 percent for the first quarter of the prior fiscal year. The decrease in gross margin was primarily attributable to significantly lower revenue generated by our wireless infrastructure business and reduced absorption of related fixed costs.

~~Selling, General and Administrative Costs~~

Selling, general, and administrative costs for the first quarter of fiscal 2003 were $2.3 million compared to $3.4 million for the first quarter of fiscal 2002, a decrease of $1.1 million or 30.5 percent. This decrease was due to reduced selling expenses and incentive compensation driven by significantly lower revenue generated by our wireless infrastructure business. Additionally, as of the first quarter of fiscal 2003, and in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill and other intangible assets

deemed to have indefinite lives. For the first quarter of fiscal 2002, selling, general and administrative costs included $0.1 million of amortization of goodwill and other intangible assets deemed to have indefinite lives. As a percentage of revenue, selling, general and administrative costs were 30.1 percent and 27.9 percent for the quarters ended April 30, 2002 and 2001, respectively.

~~Engineering and Support Costs~~

Engineering and support costs, net of capitalized software development costs, for the first quarter of fiscal 2003 increased 12.7 percent to 1.4 million as compared to the first quarter of fiscal 2002. Gross engineering and support costs for the first quarter of fiscal 2003 were flat in comparison to the corresponding period of the prior fiscal year, while capitalized software development costs decreased by approximately $0.2 million resulting in a net increase in engineering and support costs. For the first quarter of fiscal 2003 and 2002, gross engineering and support costs were offset by capitalized software development costs totaling $1.1 million and $1.3 million, respectively.

~~Other Income~~

~~Other income consists primarily of interest income.~~

~~Income Tax Expense~~

Due to the loss for the first quarter of fiscal 2003, we recognized an income tax benefit of $0.3 million based on the expected annual effective tax rate of 36.6 percent for the fiscal year ending January 31, 2003. The effective tax rate for the quarter ended April 30, 2001 was 36.1 percent.

~~Wireless Infrastructure~~

Three Months Ended
April 30,


2002

2001


(Dollars in thousands)

Revenue    $ 3,108      $ 6,692
Cost of revenue    2,177      2,863


Gross profit    $ 931      $ 3,829


Gross margin    29.9 %      57.2 %

~~Revenue~~

Revenue from our wireless infrastructure business for the first quarter of fiscal 2003 was $3.1 million compared to $6.7 million for the first quarter of fiscal 2002, a decrease of $3.6 million or 53.6 percent. Many of our customers, primarily wireless carriers, continue to be negatively impacted by a wireless industry experiencing slowing subscriber growth, intensifying price competition, reduced access to capital, and the need to manage cash flow. Coupled with a weakened economy, 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 now appear 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. 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, their spending patterns continue to be volatile and difficult to predict. The downturn in the wireless industry has reduced overall demand for our wireless infrastructure

products and services, and continues to make it difficult for us to forecast our wireless infrastructure operations for fiscal 2003.

In response to these challenging market conditions, significantly reduced demand for our existing 2G products, and the evolving requirements of our customers, we are in the process of transitioning our wireless infrastructure business to a newly developed product platform, the XPort. This new product platform is designed to provide wireless carriers with the flexible, scalable, and high-value tools necessary to address the complexities of transitioning existing networks from 2G to 2.5 and 3G wireless technologies. This new platform is also expected to allow us to transition our wireless infrastructure business to a significantly lower cost structure.

Additionally, the downturn in the wireless industry has caused us to reevaluate our strategy of providing engineering services. We began offering engineering services, which are complementary to our wireless

infrastructure 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 reduce their spending, the competition to provide engineering services has become more intense. Lower contract pricing and fewer opportunities ~~are resulting~~have resulted in reduced revenue and profitability for all engineering services providers. Accordingly, we decided to exit the engineering services business and eliminate all related costs. During the second quarter of fiscal 2003, we completed our remaining contractual obligations, reduced head count, and sold a portion of the assets used in providing these services. We expect there to be no significant additional costs related to our exit from the engineering services business.

Wireless Applications

The wireless applications business also includes the ChargeSource family of mobile power products. The 70-watt universal AC power adapter, our second-generation mobile power system, charges and powers most laptop computers, cellular telephones, handheld devices, and portable printers. The ChargeSource product offering has been expanded to include the ChargeSource universal DC power adapter. This universal DC power adapter allows traveling professionals to use all of their existing ChargeSource SmartTips on the road or in the air. The device connects to the in-seat power outlet available on most major airlines or the cigarette lighter plug found in cars. The ChargeSource universal DC power adapter began shipping during the third quarter of fiscal 2002. Targus currently distributes these two products. We anticipate expanding the ChargeSource product offering with a 20-watt universal power adapter with both AC and DC inputs during the fourth quarter of fiscal 2003. This product is targeted at the users of cellular telephones, pocket PCs, handheld devices, and digital cameras and camcorders.

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, 2002 and 2001. The table and discussion that follows provides information 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.

	Percentage of Revenue
	Three Months Ended July 31,				Six Months Ended July 31,
	2002		2001		2002		2001
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	58.1		48.3		60.7		49.6

Gross margin	41.9		51.7		39.3		50.4
Selling, general and administrative costs	23.9		25.0		26.6		26.4
Asset impairment charges	98.0		—		55.2		—
Engineering and support costs	13.0		10.0		15.3		10.2

Operating income (loss)	(93.0	)	16.7		(57.8	)	13.8
Other income, net	0.9		1.8		1.1		2.2
Minority interest in earnings of subsidiary	0.7		(0.2	)	0.4		(0.1	)

Income (loss) before income taxes	(91.4	)	18.3		(56.3	)	15.9
Income tax expense (benefit)	(24.2	)	6.8		(15.4	)	5.8

Net income (loss) before cumulative effect of Accounting change	(67.2	)%	11.5	%	(40.9	)%	10.1	%

Comparison of the Three Months Ended July 31, 2002 to the Three Months Ended July 31, 2001

Consolidated

Revenue

Total revenue for the second quarter of fiscal 2003, which ended July 31, 2002, was $10.0 million compared to $14.0 million for the second quarter of fiscal 2002, a decrease of approximately $4.0 million or 28.6 percent. As discussed below, the decrease is attributable to a significant decrease in sales of our wireless infrastructure products and services, partially offset by increased sales from our wireless applications segment.

Cost of Revenue and Gross Margin

Total cost of revenue for the second quarter of fiscal 2003 was $5.8 million compared to $6.8 million for the second quarter of fiscal 2002, a decrease of approximately $1.0 million or 14.0 percent. As a percentage of revenue, gross margin for the second quarter of fiscal 2003 was 41.9 percent as compared to 51.7 percent for the second quarter of the prior fiscal year. As discussed below, the decrease in gross margin is primarily attributable to decreased sales of our higher margin wireless infrastructure products and services, as well as decreased absorption of fixed costs attributable to our wireless infrastructure business partially offset by improved gross margin from increased sales from our wireless applications segment.

Selling, General and Administrative Costs

Selling, general and administrative costs for the second quarter of fiscal 2003 were $2.4 million compared to $3.5 million for the second quarter of fiscal 2002, a decrease of $1.1 million or 31.6 percent. This decrease was due to reduced staffing levels, selling expenses, and incentive compensation driven by significantly lower sales of

our wireless infrastructure products and services. Additionally, as of the first quarter of fiscal 2003, and in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill and other intangible assets deemed to have indefinite lives. For the second quarter of fiscal 2002, selling, general and administrative costs included $0.2 million of amortization of goodwill and other intangible assets deemed to have indefinite lives. As a percentage of revenue, selling, general and administrative costs were 23.9 percent and 25.0 percent for the quarters ended July 31, 2002 and 2001, respectively.

Asset Impairment Charges

Due to dramatically lower demand for existing wireless infrastructure products in the wireless marketplace and our strategy of investing available resources in the development of XPort, our new product platform, we have analyzed the carrying value of all assets attributable to our wireless infrastructure business. Based on this analysis, we recorded asset impairment charges totaling $9.8 million during the second quarter ended July 31, 2002. The following table sets forth the impaired assets and corresponding impairment charges (in thousands):


Property and equipment	$	205
Software development costs		5,619
Inventory		1,403
Intangible assets		2,583

	$	9,810

The above impaired assets are exclusively related to our legacy 2G wireless infrastructure products and do not ~~have a major contract~~include any assets related to ~~provide engineering services. Accordingly, we have reduced staffing and related costs to a level sufficient to meet~~ our ~~remaining customer commitments, which we expect to be completed by the end of June 2002. We currently do not anticipate providing~~ engineering services business, which ceased operations during the ~~balance~~second quarter of fiscal 2003.

Engineering and Support Costs

Engineering and support costs, net of capitalized software development costs, for the second quarter of fiscal 2003, decreased to $1.3 million compared to $1.4 million for the second quarter of fiscal 2002. This slight decrease is a result of our strategy of reducing the cost structure supporting our wireless infrastructure business and developing a single flexible product platform. Gross engineering and support costs decreased $0.7 million in comparison to the second quarter of fiscal 2002. Offsetting this cash savings, capitalized software development costs decreased $0.6 million resulting in a $0.1 million decrease in engineering and support costs, net of capitalized software development costs, for the second quarter of fiscal 2003 in comparison to the corresponding period of the prior fiscal year.

Other Income

Other income, consisting primarily of interest income, decreased $0.2 million to $0.1 million for the three months ended July 31, 2002 from $0.3 million for the three months ended July 31, 2001. This decrease was primarily due to lower interest rates during the second quarter of fiscal 2003.

Income Tax Expense

The effective tax rate for the quarters ended July 31, 2002 and 2001 was 26.5 percent and 37.3 percent, respectively. The decrease in the effective tax rate used to compute the income tax benefit relates to permanent differences in our taxable loss as a result of non-deductible asset impairment charges recorded during the second quarter of fiscal 2003.

Wireless Infrastructure

	Three Months Ended July 31,
	2002			2001
	(Dollars in thousands)
Revenue	$	3,375		$	8,418
Cost of revenue		2,040			3,439

Gross profit	$	1,335		$	4,979

Gross margin		39.5	%		59.2	%

Revenue

Revenue for our wireless infrastructure segment for the second quarter of fiscal 2003 was $3.4 million compared to $8.4 million for the second quarter of fiscal 2002, a decrease of 59.9 percent. This decrease reflects the continued dramatically lower demand for our existing 2G wireless infrastructure products, as well as the ramp-down of our engineering services business, which ceased operations during the second quarter of fiscal 2003. Revenue from engineering services for the second quarter of fiscal 2003 totaled ~~0.5~~$0.5 million in comparison to $3.0 million for the ~~first~~corresponding period of fiscal 2002.

Cost of Revenue and Gross Margin

Cost of revenue for our wireless infrastructure segment for the second quarter of fiscal 2003 was $2.0 million compared to $3.4 million for the second quarter of fiscal 2002, a decrease of approximately $1.4 million or 40.7 percent. As a percentage of revenue, gross margin decreased to 39.5 percent from 59.2 percent in the second quarter of the prior fiscal year. The decrease in gross margin is attributable to decreased sales of our higher margin test and measurement products and decreased absorption of fixed costs.

Wireless Applications

	Three Months Ended July 31,
	2002			2001
	(Dollars in thousands)
Revenue	$	6,634		$	5,592
Cost of revenue		3,774			3,322

Gross profit	$	2,860		$	2,270

Gross margin		43.1	%		40.6	%

Revenue

Revenue for our wireless applications segment for the second quarter of 2003 was $6.6 million compared to $5.6 million for the second quarter of 2002, an increase of approximately $1.0 million or 18.6 percent. This increase was due to increased sales of our call box systems, which tend to fluctuate quarter-to-quarter. Additionally, sales of our ChargeSource mobile power products increased approximately $0.4 million to $3.6 million for the second quarter of fiscal 2003. ~~For~~The second quarter reflects increased sell-through of our existing products, as well as replenishment of distributor inventory levels.

Cost of Revenue and Gross Margin

Cost of revenue for our wireless applications segment for the second quarter of fiscal 2003 ~~we expect~~was $3.8 million compared to $3.3 million for the second quarter of fiscal 2002, an increase of $0.5 million or 13.6 percent. As a percentage of revenue, gross margin increased to 43.1 percent from ~~engineering services~~40.6 percent in the second quarter of the prior fiscal year. The increases in cost of revenue and gross margin are attributable to ~~total~~increased sales of our ChargeSource DC adapter, which began shipping in the third quarter of fiscal 2002.

Comparison of the Six Months Ended July 31, 2002 to the Six Months Ended July 31, 2001

Consolidated

Revenue

Total revenue for the six months ended July 31, 2002, was $17.8 million compared to $26.0 million for the six months ended July 31, 2001, a decrease of approximately ~~$0.9~~$8.3 million or 31.8 percent. As discussed below, the decrease is attributable to a significant decrease in sales of our wireless infrastructure products and services, partially offset by increased sales from our wireless applications segment.

Cost of Revenue and Gross Margin

Total cost of revenue for the six months ended July 31, 2002 was $10.8 million compared to $12.9 million for the corresponding period of fiscal 2002, a decrease of approximately $2.1 million or 16.5 percent. As a percentage of revenue, gross margin was 39.3 percent as compared to 50.4 percent for the six months ended July 31, 2002 and 2001, respectively. As discussed below, the decrease in gross margin is primarily attributable to decreased sales of our higher margin wireless infrastructure products and services, as well as decreased absorption of fixed costs attributable to our wireless infrastructure business partially offset by improved gross margin contribution from increased sales from our wireless applications segment.

Selling, General and Administrative Costs

Selling, general and administrative costs for the six months ended July 31, 2002 were $4.7 million compared to $6.8 million for the corresponding period of the prior fiscal year, a decrease of $2.1 million or 31.1 percent. This decrease was due to reduced staffing levels, selling expenses, and incentive compensation driven by significantly lower sales of our wireless infrastructure products and services. Additionally, as of February 1, 2002 and in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill and other intangible assets deemed to have indefinite lives. For the six months ended July 31, 2002, selling, general and administrative costs included $0.3 million of amortization of goodwill and other intangible assets deemed to have indefinite lives. As a percentage of revenue, selling, general and administrative costs were 26.6 percent and 26.4 percent for the six months ended July 31, 2002 and 2001, respectively.

Engineering and Support Costs

Engineering and support costs, net of capitalized software development costs, remained flat at $2.7 million for the six months ended July 31, 2002 and July 31, 2001. Gross engineering and support costs decreased $0.8 million in comparison to ~~$7.5~~the six months ended July 31, 2001. As previously discussed, this decrease is a result of transitioning our wireless infrastructure business and developing a single flexible product platform. Capitalized software development costs, which totaled $2.0 million and $2.8 million for the six months ended July 31, 2002 and 2001, respectively, offset the gross engineering costs.

Other Income

Other income, consisting primarily of interest income, decreased $0.4 million to $0.2 million for the six months ending July 31, 2002 from $0.6 million for the six months ended July 31, 2001. The decrease was primarily due to lower interest rates during the first half of fiscal 2003.

Income Tax Expense

The effective tax rate for the six months ended July 31, 2002 and 2001 was 27.4 percent and 36.9 percent, respectively. The decrease in the effective tax rate used to compute the income tax benefit relates to permanent differences in our taxable loss as a result of non-deductible asset impairment charges.

Cumulative Effect of Accounting Change

As discussed in Note 4 of the accompanying financial statements, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” effective February 1, 2002. During the second quarter of fiscal 2003, we completed the required transitional impairment test under the new rules and recorded a non-cash charge of $2.9 million to write down fully the carrying value of the goodwill related to our EDX software reporting unit. This reporting unit is included in our wireless infrastructure segment for financial reporting purposes, and the related goodwill was generated through our acquisition of EDX Engineering, Inc. during December 2000. Such charge is reflected as a cumulative effect of change in accounting principle. In calculating the impairment charge, the fair value of the impaired reporting unit underlying the wireless infrastructure segment was estimated using a discounted cash flow methodology. This charge writes off the entire carrying value of the recorded goodwill and accordingly, $2.9 million is recorded as a cumulative charge for the six months ended July 31, 2002. No comparable charges were recorded during the six months ended July 31, 2001.

Wireless Infrastructure

	Six Months Ended July 31,
	2002			2001
	(Dollars in thousands)
Revenue	$	6,484		$	15,109
Cost of revenue		4,219			6,302

Gross profit	$	2,265		$	8,807

Gross margin		34.9	%		58.3	%

Revenue

Revenue from our wireless infrastructure segment for the six months ended July 31, 2002 was $6.5 million compared to $15.1 million for the six months ended July 31, 2001, a decrease of 57.1 percent. This decrease reflects continued lower demand for our existing 2G test and measurement products. As a response to the economic hardship facing many of our customers and the transitioning technologies in the wireless industry, we are transitioning our wireless infrastructure product offerings. We anticipate releasing to the market the new XPort product platform by the end of this fiscal year.

Cost of Revenue and Gross Margin

Cost of revenue from our wireless infrastructure ~~business for~~segment in the ~~first quarter of fiscal 2003~~six months ended July 31, 2002 was ~~$2.2~~$4.2 million compared to ~~$2.9~~$6.3 million for the ~~first quarter of fiscal 2002,~~six months ended July 31, 2001, a decrease of approximately ~~$0.7~~$2.1 million or ~~23.9~~33.1 percent. As a percentage of revenue, gross margin decreased to ~~29.9~~34.9 percent from ~~57.2~~58.3 percent for the corresponding period of the prior fiscal year. The decrease in cost of revenue was due to decreased sales volumes of our hardware and software tools partially offset by increased amortization of capitalized software development costs. Increased amortization of software development costs was primarily due the release of RAPcentral, the first application based on a newly developed stationary testing platform. This application, which consists of hardware and software, automates data collection, analysis, and delivery of revenue assurance information that is critical to wireless carriers in their efforts to capture and bill for all minutes of use. Amortization of software development costs for the first quartersix months ended ~~April 30, 2002 and 2001 totaled $0.9 million and $0.6 million.~~July 31, 2001. The decrease in gross margin ~~was primarily~~is attributable to ~~significantly lower revenue generated from the sale~~decreased sales of our ~~hardware~~higher margin test and ~~software tools~~measurement products and ~~engineering services and reduced~~decreased absorption of ~~related~~ fixed costs.

Wireless Applications

	Three Months Ended April 30,						Six Months Ended July 31,
	2002			2001			2002			2001
	(Dollars in thousands)						(Dollars in thousands)
Revenue	$	4,657		$	5,350		$	11,291		$	10,943
Cost of revenue		2,803			3,308			6,576			6,630

Gross profit	$	1,854		$	2,042		$	4,715		$	4,313

Gross margin		39.8	%		38.2	%		41.8	%		39.4	%

Revenue

Revenue from our wireless applications ~~business~~segment for the ~~first quarter of 2003~~six months ended July 31, 2002 was ~~$4.7~~$11.3 million compared to ~~$5.4~~$10.9 million for the ~~first quarter of 2002, a decrease~~six months ended July 31, 2001, an increase of approximately ~~$0.7~~$0.3 million or ~~13.0~~3.2 percent. ~~This decrease~~The increase was ~~due~~attributable to ~~a $1.2 million decrease in sales of our call box products, which tend to fluctuate quarter-to-quarter, partially offset by a $0.5 million~~an increase in sales of ~~our ChargeSource products. First quarter revenue included sales of our~~the ChargeSource universal DC power adapter, which went into production during the third quarter of fiscal 2002.

Cost of Revenue and Gross Margin

Cost of revenue from our wireless applications segment for the ~~first quarter of fiscal 2003~~six months ended July 31, 2002 and July 31, 2001, was ~~$2.8 million compared to $3.3 million for the first quarter of fiscal 2002, a decrease of $0.5 million or 15.3 percent. The decrease~~

~~in cost of revenue was due to decreased sales volumes of our callbox products partially offset by increased sales of our ChargeSource products.~~flat at $6.6 million. As a percentage of revenue, gross margin increased to ~~39.8~~41.8 percent from ~~38.2~~39.4 percent for the ~~corresponding period of the prior fiscal year.~~six months ended July 31, 2002. The increase in gross margin is attributable to sales of the ~~result~~universal DC power adapter, which went into production during the third quarter of ~~call box cost controls implemented in~~ fiscal 2002.

~~Discontinued Operations~~

~~As discussed above, 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.~~

Liquidity and Capital Resources

~~Our financial position remains strong, with cash~~Cash and cash equivalents ~~of $22.0~~were $23.9 million at ~~April 30, 2002.~~July 31, 2002 compared to $21.3 million at January 31, 2002, an increase of $2.6 million. Approximately $5.2 million was provided by operations for the six months ended July 31, 2002 and $0.4 million was provided from discontinued operations. Comarco received $560,000 as the final installment payment for the sale of our commercial staffing business. These proceeds were offset by payments of divestiture related accrued liabilities. During the six month period, the Company expended approximately $2.0 million for software development and $0.9 million for property and equipment.

Cash Flows from Operating Activities

~~We generated cash~~Cash provided by operating activities is primarily derived from ~~operations~~the sale of ~~$2.4~~the Company’s products and services. Cash provided by operating activities was $5.2 million ~~for the first quarter of fiscal 2003 compared to~~and $0.4 million for the ~~corresponding period~~six months ended July 31, 2002 and 2001, respectively.

Cash provided by operating activities during the six months ended July 31, 2002 was primarily a result of the ~~prior fiscal year. The increase in cash generation for the first quarter was primarily due to significant collections~~Company’s net income from continuing operations before non-cash charges (including asset impairment charges, cumulative effect of accounting change, and depreciation and amortization), and collection of $3.6 million of accounts receivable ~~partially~~ offset by a net change in deferred income taxes of $2.7 million and a decrease in current liabilities of $1.8 million. Cash provided by operating activities during the six months ended July 31, 2001 was primarily a result of the Company’s net ~~loss for the quarter. Accounts receivable decreased $4.1~~income from continuing operations before non-cash charges, a tax benefit on stock options exercised of $0.6 million, ~~to $5.6~~and a net change in deferred income taxes of $0.7 million, ~~at April 30, 2002 from $9.7 million at January 31, 2002, primarily due to significantly lower revenue generated~~offset by ~~our wireless infrastructure business for the first quarter of fiscal 2003.~~an increase in accounts receivable.

Cash Flows from Investing Activities

~~Net cash~~Cash used in investing activities was ~~$1.4~~$2.8 million and $5.3 million for the ~~first quarter of fiscal 2003 compared to $2.0 million~~six months ended July 31, 2002 and 2001, respectively. Investing activities for the ~~corresponding quarter~~six months ended July 31, 2002 and 2001 consisted primarily of ~~fiscal 2002. In both periods, capital expenditures~~cash paid for property and equipment and ~~software development constituted substantially all of our cash used in investing activities.~~

~~The~~for the development of software ~~is critical~~ to ~~our~~be used in products currently under development. ~~We intend~~Of the $0.9 million invested in property and equipment in the six months ended July 31, 2002, nearly $0.4 million relates to ~~invest aggressively~~the new manufacturing assembly line for the new 20-watt universal power adapter which is on schedule to be released in the fourth quarter of this fiscal year. The current year expenditures for software development ~~programs designed~~are less than the prior year due to ~~bring new products and services for~~ the ~~wireless communications industry to market in a timely manner. We are currently developing a new~~previously discussed transition of our wireless infrastructure product ~~platform, the XPort, which is in response~~offering. Our property and equipment purchases and software development program are expected to wireless carriers’ needs for flexible, scalable, and high-value mobile test and measurement tools. We currently anticipate completing the development of the XPort product platform by the end of fiscal 2003. We expect to fund software and hardware development programsbe funded with current cash balances and cash provided by operating activities.

On July 31, 2001, the Company acquired an 18% equity stake in SwissQual for $1.0 million in cash. Based in Zuchwil, Switzerland, SwissQual is a developer of Quality of Service (“QoS”) systems and software.

Cash Flows from Financing Activities

~~Net cash~~Cash used in financing activities for the ~~first quarter of fiscal 2003~~six months ended July 31, 2002 consisted of ~~$278,000 that was~~$0.4 million used to repurchase ~~26,200~~35,905 shares of the Company’s common stock from the open market, offset by $0.1 million from the sales of common stock issued through the Company’s employee and director stock option plans, and $0.1 million from the sales of common stock issued through the Company’s subsidiary stock option plan. Cash provided by financing activities for the six months ended July 31, 2001 consisted of $0.3 million from the sales of common stock issued through the Company’s employee and director stock option plans, and $0.1 million from the sales of common stock issued through the Company’s subsidiary stock option plan, offset by the repurchase of 16,100 shares of the Company’s common stock in the open market for ~~an average price~~approximately $0.2 million.

During 1992, the Company’s Board of ~~$10.62 per share under our share~~Directors authorized a stock repurchase ~~program.~~program of up to three million shares of common stock. From program inception ~~in 1992~~ through ~~April 30,~~July 31, 2002, the Company has repurchased approximately ~~2.5 million~~2,528,000 shares for an average per share price of $8.23 per share. ~~Proceeds from~~For the ~~sale of common stock issued through employee and director stock option plans generated $121,000 during~~six months ended July 31, 2002, 35,905 shares were repurchased. Subsequent to July 31, 2002, the ~~first quarter of fiscal 2003.~~

~~Net cash used in financing activities for the first quarter of fiscal 2002 consisted of $76,000 that was used to repurchase 5,700~~Company repurchased an additional 8,038 shares ~~of the Company’s common stock~~ in the open market, bringing the total number of shares repurchased to approximately 2,536,000 shares for an average per share price of ~~$13.38~~$8.22 per ~~share under our share repurchase program.~~share.

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 derive a portion of our liquidity from our cash flows from operations.~~ We currently expect fiscal 2003 revenue and operating results attributable to our wireless infrastructure business to be significantly less than fiscal 2002, and, as a result we expect fiscal 2003 cash flows from operations to also decrease in comparison to fiscal 2002. To address

this, 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.

Critical Accounting Policies

We have identified the following as critical accounting policies to our company: revenue recognition, capitalized software development costs, accounts receivable, inventory, income taxes, valuation of goodwill, and valuation of long-lived assets. These critical accounting policies have been applied during the ~~first~~second quarter of fiscal 2003 consistent with the prior periods and the year ended January 31, 2002, except as discussed in Note 34 with respect to goodwill amortization and impairment valuation.

For further information, refer to the discussion of critical accounting policies included in Management’s Discussion and Analysis in the Company’s annual report on Form 10-K for the year ended January 31, 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Risk

The Company is exposed to the risk of changes in currency exchange rates. As of ~~April 30,~~July 31, 2002, we had no material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Interest Rate Sensitivity

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

We do not hold any derivative financial instruments.

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

Equity Price Risk

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

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

PART ~~II —~~ II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Comarco, Inc. was named as a defendant in a lawsuit filed by~~ Mobility Electronics, Inc. ~~(“Mobility”). Mobility~~ v. Comarco, Inc. and Comarco Wireless Technologies, Inc.,

Case No. CIV-01-1489-PHX-MHM, U.S. District Court for the District of ~~Arizona~~Arizona:

Mobility Electronics, Inc. (“Mobility”) commenced proceedings for patent infringement against the Company and CWT with respect to CWT’s ChargeSource power supply products (the “Mobility Action”). The Company was first served with Mobility’s amended complaint on August 10, 2001. ~~This lawsuit alleges~~In addition to asserting that the Company ~~through~~and CWT have infringed a Mobility patent, the ~~manufacture~~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 Company and sale of its ChargeSource 70-Watt universal AC power adapter, infringed upon a patent purchased by Mobility on August 6, 2001. Mobility has amended its lawsuit to further seek declaratory judgments of non-infringement, patent invalidity, and/or patent unenforceability of three patents owned by us. Comarco hasCWT moved for dismissal of the amended complaint in its entirety. The motion ~~has been fully briefed~~was denied, but the Court indicated that based on the results of discovery the Court may grant a renewed motion to dismiss the declaratory judgment claim. The Company and ~~argued,~~CWT believe that they have meritorious defenses with respect to Mobility’s patent and ~~the parties are awaiting a ruling.~~declaratory judgment causes of actions.

~~We believe~~Comarco Wireless Technologies, Inc. v. Xtend Micro Products, Inc. and iGo Corporation,

Case No. SACV 02-640 AHS (ANx), U.S. District Court for the Central District of California, Southern Division:

On June 21, 2002, CWT filed an action for patent infringement against the Xtend Micro Products, Inc. (“Xtend”) and its parent entity, iGo Corporation (“iGo”). CWT alleges that ~~Mobility’s infringement claim,~~certain patents owned by CWT 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 ~~amended claims~~complaint denying the allegations in CWT’s complaint and asserting a number of affirmative defenses. Xtend and iGo have indicated in court filings that they will seek to have this case transferred to and consolidated with the Mobility Action because this case involves two of the patents involved in the Mobility Action, and Mobility and iGO have recently merged into a single corporate entity. CWT believes that its case against ~~us are without merit,~~Xtend and ~~we intend~~iGo is meritorious and that CWT has valid grounds for opposing any motion to ~~vigorously defend~~consolidate this case with the ~~lawsuit.~~Mobility Action that may be filed by Xtend and/or iGo.

~~We are from time~~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 an action against CWT on June 10, 2002, relating to ~~time involved~~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. 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 systems and failing to provide certain deliverables to LASAFE. In the last three counts LASAFE alleges that a patent owned by CWT should be assigned to LASAFE, and CWT should compensate LASAFE, because an LASAFE employee is the true inventor of the invention claimed in ~~various legal proceedings incidental~~the patent. The complaint seeks an unspecified amount of actual and punitive damages, ownership of the patent, an order that CWT specifically perform its obligations under the contracts, recovery of attorneys fees, and an audit to determine the ~~conduct~~number of ~~our business. We believe~~allegedly infringing call boxes.

CWT believes that it has meritorious defenses with respect to all of LASAFE’s claims. In addition, 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 ~~outcome of all other such pending legal proceedings will not in~~Federal District Court lacks jurisdiction over the ~~aggregate have a material adverse effect on our financial condition and operating results.~~state law claims.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

~~None.~~The Annual Meeting of Shareholders of Comarco was held on July 19, 2002. The holders of Comarco’s stock were entitled to elect six directors to serve until 2003.

The following table sets forth the names of the six persons elected at the Annual Meeting to serve as directors until 2003 and the number of votes cast for or against with respect to each person.

	For	Withheld
Don M. Bailey	5,129,395	325,280
Thomas A. Franza	5,423,945	30,730
General Wilbur L. Creech	4,867,141	587,534
Gerald D. Griffin	5,204,188	250,487
Jeffrey R. Hultman	5,205,888	248,787
Erik van der Kaay	5,209,238	245,437

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

	~~(a)~~

11		~~Exhibits:~~ Schedule of Computation of Net Income (Loss) Per Share

~~11 Schedule of Computation of Net Income (Loss) Per Share~~

~~(b)~~

(b) Report on Form 8-K:

None.

SIGNATURE

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, in the City of Irvine, State of California, on June 10, 2002.~~

authorized.

		~~COMARCO, INC.~~COMARCO, INC.

Date: September 12, 2002		/S/ THOMAS A. FRANZA Thomas A. Franza President and Chief Executive Officer

Date: September 12, 2002		/S/ DANIEL R. LUTZ Daniel R. Lutz Vice President and Chief Financial Officer

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Thomas A. Franza, Chief Executive Officer of Comarco, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:

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

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

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

Date: September 12, 2002


By:		~~/s/ D~~/~~ANIEL~~S/ THOMAS ~~R. L~~A. F~~UTZ~~RANZA
		~~Daniel R. Lutz~~ Thomas A. Franza Chief Executive Officer

Certification of Chief Executive Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Thomas A. Franza, Chief Executive Officer of Comarco, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: September 12, 2002


By:		/S/ THOMAS A. FRANZA
		~~Vice President and~~Thomas A. Franza Chief Executive Officer

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Daniel R. Lutz, Chief Financial Officer of Comarco, Inc., certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:

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

Date: September 12, 2002


By:		/S/ DANIEL R. LUTZ
		Daniel R. Lutz Chief Financial Officer

Certification of Chief Financial Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc. I, Daniel R. Lutz, Chief Financial Officer of Comarco, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: September 12, 2002


By:		/S/ DANIEL R. LUTZ
		Daniel R. Lutz Chief Financial Officer

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