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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                               -------------------

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                            For the fiscal year ended

                                JANUARY 31, 2001

                                       OR

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

         For the transition period from ______________ to ______________

                          Commission file number 0-5449

                                  COMARCO, INC.
             (Exact name of registrant as specified in its charter)

                               -------------------

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


                      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.      Yes  X       No
                                                   ---         ---

Indicate by a check mark if disclosure of delinquent fliers 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]

         COMMON STOCK OUTSTANDING AT APRIL 23, 2001 -- 7,060,758 SHARES.

                                                        AGGREGATE MARKET VALUE
                                                          OF SHARES HELD BY
  CLASS                                                     NON-AFFILIATES
  -----                                                 ----------------------
Common Stock...........................................      $85,568,110

     The total number of shares held by non-affiliates on April 23, 2001 was
6,679,790. This number was multiplied by $12.81 per share (the closing sale
price of the Common Stock on April 23, 2001 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 30, 2001 A DEFINITIVE PROXY STATEMENT (THE "2001 PROXY STATEMENT") RELATING
TO ITS 2001 ANNUAL MEETING OF STOCKHOLDERS, WHICH MEETING INVOLVES THE ELECTION
OF DIRECTORS AND CERTAIN RELATED MATTERS. THE 2001 PROXY STATEMENT IS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K AND SHALL BE DEEMED TO
BE A PART HEREOF.

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                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
PART I.....................................................................   1

         ITEM 1.  BUSINESS.................................................   1

         ITEM 2.  PROPERTIES...............................................   8

         ITEM 3.  LEGAL PROCEEDINGS........................................   8

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......   8

PART II....................................................................   9

         ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS......................................   9

         ITEM 6.  SELECTED FINANCIAL DATA..................................  10

         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITIONS AND RESULTS OF OPERATIONS.....................  11

         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                  MARKET RISK..............................................  16

         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............  17

         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE......................  42

PART III...................................................................  42

PART IV....................................................................  42

         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                  ON FORM 8-K..............................................  42


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                                     PART I

FORWARD-LOOKING STATEMENTS

     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 Item 1 in this report on Form 10-K, 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 we nor any other person
assume responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this report on Form 10-K to conform such
statements to actual results or to changes in our expectations.

ITEM 1. BUSINESS

OVERVIEW

     COMARCO, Inc., through its subsidiary Comarco Wireless Technologies, Inc.
("CWT"), is a leading provider of advanced technology tools and engineering
services for the wireless communications industry. COMARCO also designs and
manufactures remote voice systems and mobile power products for notebook
computers, cellular telephones, and personal organizers. COMARCO is a California
corporation that became a public company in 1971 when it was spun-off from Genge
Industries, 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.

     We have two primary businesses: wireless infrastructure and wireless
applications. Wireless infrastructure provides advanced technology tools and
engineering services to the wireless communications industry. Wireless
applications designs and manufactures remote voice systems and mobile power
products for notebook computers, cellular telephones, and personal organizers.

WIRELESS INDUSTRY

     Wireless networks are telecommunication systems built using radio
equipment. The lifecycle of a wireless network continually evolves and consists
of several phases including, planning, design, deployment, optimization, and
maturity. During the planning phase, decisions are made about the type of
equipment to be used, where it will be located, and how it will be configured.
These decisions are based on a number of analytical considerations, including
phone subscriber profiles and target markets, forecasts of call usage, radio
engineering analysis and financial modeling, and forecasting. The design phase
follows, and involves the coordinated efforts of radio engineers, site
development professionals, and other technical disciplines. Potential equipment
sites are identified, based on a range of variables including radio propagation
characteristics, economics, site access, and construction feasibility.

     Following acceptance of a network design, land or building rooftops must be
bought or leased for towers or telecommunication equipment, including radio base
stations, antennas, and supporting electronics. Detailed site location designs
are prepared and radio frequency engineers ("RF engineers") review interference
to or from co-located antennae. Construction and equipment installation then
must be performed and site performance verified after completion of


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construction. Finally, professional technicians commission the new radio
equipment, test it, integrate it with existing networks, and tune the components
to optimize performance.

     Once a wireless network becomes operational and the number of subscribers
increases, the system must be expanded to increase system coverage and capacity.
In addition, the wireless network must be continually updated, with performance
verified and optimized to address changes in traffic patterns and interference
from neighboring or competing networks or other radio sources. Verification and
optimization also involves data collection and competitive benchmarking, as well
as tuning the network to enable operators to compete more effectively in areas
where there are multiple network operators.

     Finally, as new technologies are continuously developed, wireless carriers
must determine whether to upgrade their existing networks or deploy new networks
utilizing the latest available technologies. Overlaying new technologies, such
as 2.5 generation or third generation protocols, commonly referred to as 2.5G
and 3G, respectively, with an existing network or deploying a new network
requires operators to reengage in the planning, design, deployment, and
optimization phases of a new cycle in the life of an existing or new network.

Challenges Confronting Wireless Carriers and Equipment Vendors

     Worldwide use of wireless networks has grown rapidly as cellular and other
emerging wireless communications services have become more widely available and
affordable for mass business and consumer markets. This rapid growth is driven
by the dramatic increase in wireless telephone usage, as well as strong demand
for wireless Internet and other data services. The demand for wireless Internet
and other data services is driving the adoption of new technologies to enable
wireless networks to deliver enhanced data capabilities.

     Due to an increasingly competitive environment, wireless carriers,
equipment vendors, and others are focused on satisfying customer demand for
enhanced services, seamless and comprehensive coverage, better quality of
service, more robust content and application offerings, faster data transition,
and lower prices. The proliferation of new wireless carriers and technologies
has created a competitive environment in which speed to market and client
acquisition and retention are key factors influencing a wireless carrier's
success. These challenges have led wireless carriers to focus on revenue
generating activities, such as sales and marketing, and to outsource technology
deployment and maintenance when they can do so effectively.

     Equipment vendors are also confronting multiple challenges as they
introduce new generations of equipment with increased features and
functionality. Vendors are required to provide equipment that is both compatible
with a carrier's existing network and can be integrated with equipment offered
by other vendors. As a result of rapid technological changes, equipment vendors
have increasingly focused on offering competitive product solutions while
outsourcing services such as network design, deployment, performance
verification, and optimization.

WIRELESS INFRASTRUCTURE

     Our wireless infrastructure segment designs and manufactures advanced
technology hardware and software tools for use by the wireless carriers,
equipment vendors, and others. These tools are used by RF engineers,
professional technicians, and others to design, deploy, and optimize wireless
networks, and to verify the performance of the wireless networks once deployed.
Our key product families include:

     o    The EDX portfolio of wireless network planning software includes EDX
          SignalPro(R), a comprehensive software package offering a complete set
          of planning tools that includes multi-site coverage and interference
          analysis, multiple point-to-point link analysis, a comprehensive set
          of propagation models, full mapping capabilities, and full access to
          terrain, groundcover, demographic, traffic, and other databases. These
          tools are utilized during the design though optimization phases of the
          wireless network lifecycle.

     o    The LT-series is used to monitor network performance during all phases
          of the wireless network lifecycle.


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     o    The X-series is used to solve complex engineering problems and is
          ideally designed to optimize wireless networks whether newly deployed,
          expanded or upgraded with new technology.

     o    The baseLINE(TM) product family is used to collect and analyze quality
          of service data from the wireless networks of multiple carriers. This
          technology enables wireless carriers to benchmark their quality of
          service against competing carriers.

     o    RAPcentral(TM) is 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.
          With the expansion of existing wireless networks and the deployment of
          new technologies, it is not uncommon for the billing records to be
          negatively impacted by corrupt or missing data, resulting in unbilled
          revenue. RAPcentral(TM), which is currently in beta test and expected
          to be released during the third quarter ending October 31, 2001, is
          ideally designed to reduce revenue leakage.

     The product families above are or will be compatible with all current air
interface technologies including CDMA, TDMA, GSM, and iDEN. Our product
families, excluding the LT-series, are expected to be compatible with GPRS and
1XRTT, commonly classified as 2.5G technologies that enable wireless networks to
deliver enhanced data capabilities, during the third quarter ending October 31,
2001.

     The wireless infrastructure segment is also a provider of value-added
engineering services that assist the wireless carriers, equipment vendors, and
others in all phases of the wireless network lifecycle. When engaged, we are
able to provide and support skilled RF engineers and professional technicians
and the tools best suited for the engagement. Our offering of engineering
services for wireless networks includes:

     o    Planning and design utilizing EDX SignalPro(R),

     o    Optimization utilizing the X-series products,

     o    Quality of service drive testing utilizing the baseLINE(TM)products,
          and

     o    Revenue assurance data collection and analysis utilizing our
          stationary testing platform and RAPcentral(TM).

     We focus on value-added engineering services and currently do not provide
feasibility planning, fixed network engineering, site development, installation
or on-going network management services.

WIRELESS APPLICATIONS

     Our wireless applications segment designs and manufactures remote voice
systems and mobile power products for notebook computers, cellular telephones,
and personal organizers. Remote voice systems currently include various call box
products that provide emergency communication via wireless networks. In addition
to the call box products, we provide system installation and long-term
maintenance services. Currently, there are approximately 18,000 installed call
boxes, the majority of which are serviced and maintained under long-term
agreements.

     The wireless applications segment also includes the ChargeSource 70-watt
universal AC power adapter, our second-generation mobile power system that
powers and charges most laptop computers, cellular telephones, handheld devices,
and portable printers. This product is distributed by Targus Group International
("Targus") and during the third quarter ended October 31, 2000, we went into
production and began delivering on a $10 million order from Targus. We
anticipate expanding the ChargeSource product offering with a companion product
to the universal AC power adapter during the third quarter ending October 31,
2001.


                                       3

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MARKETING, SALES, AND DISTRIBUTION

     We maintain our own worldwide sales and customer support organization,
staffed with technically trained personnel. All North American sales are made
though our direct sales organization located in California. International sales
are generally made through our offices located in Singapore and Mexico. The
international offices coordinate the marketing, sales, and support efforts of a
network of representatives and distributors located in Asia, and Latin and South
America. Currently, our North America sales organization is responsible for
coordinating the sales efforts of our European representatives and distributors.
We have limited experience selling our products and services into markets
outside North America. However, it is currently our intention to expand our
international presence and establish additional sales and support offices in
primary international markets. There can be no assurance that our international
sales efforts will be successful.

     Our wireless applications segment includes the ChargeSource 70-watt
universal AC power adapter, our second-generation mobile power system that
powers and charges most laptop computers, cellular telephones, handheld devices
and portable printers. This product is marketed and distributed by Targus.

COMPETITION

     Wireless Infrastructure. The market for our advanced technology tools and
engineering services for the wireless communications industry is highly
competitive and is served by numerous providers. Our primary competitors with
respect to advanced technology tools are Agilent Technologies, Ascom, and Allen
Telecom. In engineering services, our primary competitors are Wireless
Facilities, LCC International, and Marconi Communications. Many of our
competitors are larger and have greater financial resources.

     The wireless communications 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:

     o    Properly identify customer needs,

     o    Price our products and services competitively,

     o    Innovate and develop new technologies and applications,

     o    Successfully commercialize new technologies in a timely manner,

     o    Manufacture and deliver our products in sufficient volumes on time,
          and

     o    Differentiate our offerings from the competitors' offerings.

     Wireless Applications. The markets for our remote voice systems and mobile
power products are served by numerous providers, including Gaitronics, Motorola,
Ericsson, and Nokia. Many of our competitors are larger and have greater
financial resources. We believe that the patents that cover our wireless
applications products provide us a competitive advantage. However, our ability
to compete in these markets depend on our ability to successfully commercialize
new technologies in a timely manner and manufacture and deliver our products in
sufficient volumes.

CUSTOMER DEPENDENCY

     A limited number of customers have provided a substantial portion of our
revenue. In 2001, Verizon Wireless and AT&T Wireless services each provided
between 13 percent and 15 percent of our revenue. Both companies are wireless
carriers and customers of our wireless infrastructure business. In 2000, Targus,
the distributor of our mobile power products, provided 10 percent of our
revenue. The spending patterns of these customers can vary significantly during
the year. An elimination or change in the spending patterns of these customers
could negatively affect our operating results. Also in 2000, the transportation
authorities of Los Angeles and San Francisco each provided 12 percent of our
revenue. The revenue generated from these customers were primarily from
contracts for the sale and installation of large scale remote voice systems and
related upgrades. These types of contracts are generally non-recurring. There
were no significant customers for 1999.


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RESEARCH AND DEVELOPMENT

     We sell our products and services in the wireless communications industry,
which is characterized by rapid technology changes, frequent new product and
service introductions and evolving industry standards. Without the timely
introduction of new products, services, and enhancements, our products and
services are likely to become technologically obsolete over time, in which case
operating results would suffer. Currently, we are developing versions of our
wireless infrastructure products that are compatible with GPRS and 1XRTT,
commonly classified as 2.5G technologies. Also as previously discussed, we are
currently in beta test with RAPcentral(TM), a revenue assurance application
based on our newly developed stationary testing platform. There can be no
assurance that such new products and services, if and when introduced, will
achieve market acceptance. After the products and services are developed, we
must quickly manufacture and deliver such products and services in sufficient
volumes at acceptable costs to meet demand.

MANUFACTURING AND SUPPLIERS

     Our manufacturing operations depend on our suppliers' ability to deliver
quality components and products in time for us to meet critical manufacturing
and distribution schedules. We sometimes experience a short supply of certain
component parts as a result of strong demand in the industry for those parts. If
shortages or delays persist, our operating results could suffer until other
sources can be developed. We may not be able to secure enough components at
reasonable prices to build new products in a timely manner in the quantities and
configurations needed. Additionally, as we have one manufacturing facility, any
significant disruption in our manufacturing operation, whether due to fire,
natural disaster or otherwise, will have a material adverse effect on our
business.

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 the intellectual
property embodied in the hardware and software products of our wireless
infrastructure 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 and/or materials availability for critical
parts, inventory levels held to achieve rapid customer fulfillment and the
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.

SEASONALITY/FLUCTUATION IN QUARTERLY RESULTS

     Our revenues and earnings do not follow a consistent pattern and,
therefore, are not considered to be materially seasonal. However, over the past
several years, we have experienced a trend of revenue and earnings for the
second half of the year exceeding the same for the first half. This trend may or
may not continue. Our quarterly revenue and earnings are impacted by many
factors, including:

     o    Timing, cancellation, or delay in customer orders;

     o    Timing of our new product introductions, and those of our competitors;

     o    Capital expenditure plans of the wireless carriers;

     o    Economic factors that negatively impact our customers; and

     o    Availability and cost of components.


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     We often recognize a significant portion of our revenue in the last month
of any given quarter. Because a portion of our expenses are fixed, a short
timing delay in recognizing revenue could cause a significant fluctuation in
operating results from quarter-to-quarter. Accordingly, quarter-to-quarter and
period-to-period comparisons may not be meaningful.

EMPLOYEES

     As of April 23, 2001, we employed approximately 230 employees. We believe
our employee relations to be good. The majority of our employees are
professional or technical personnel and have 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 RF, design, process and test engineers involved in the
development of new products and the delivery of services. Competition for such
personnel is 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

     In addition to the discussions of risk set forth in the various preceding
sections in Item 1 in this report on Form 10-K, the following are additional
risk factors that may affect our business.

Wireless Communications Industry Risk

     The wireless communications industry has historically experienced a
dramatic rate of growth both in the United States and internationally. Recently,
however, many wireless carriers have been re-evaluating their network deployment
plans in response to downturns in the capital markets, changing perceptions
regarding industry growth and the adoption of new wireless technologies, and a
general economic slowdown in the United States. It is difficult to predict
whether these changes will result in a sustained downturn in the wireless
communications industry. If the rate of growth slows and wireless carriers
reduce their capital investments in infrastructure or fail to expand into new
geographies, the growth of our business could be significantly harmed.

Competition

     We encounter aggressive competition in our wireless infrastructure
business. We have numerous competitors for products and services from some of
the world's largest corporations 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 complete. Additionally, product life cycles are short. To
remain competitive, we must be able to develop new products, services and
support, as well as periodically enhance our existing products, services and
support. If we are unable to compete effectively on these and other factors, it
could have a material adverse affect on our operating results.

New Product and Service Introductions

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

     o    Properly identify customer needs,

     o    Price our products competitively,


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     o    Innovate and develop new technologies and applications,

     o    Successfully commercialize new technologies in a timely manner,

     o    Manufacture and deliver our products in sufficient volumes on time,
          and

     o    Differentiate our offerings from the competitors' offerings.

     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 and services that do not achieve broad market
acceptance.

Short Product Life Cycles

     The short life cycles 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 or service 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 or circumvented. Our
intellectual property may not necessarily provide significant competitive
advantages. Also, because of the rapid pace of technological change in the
wireless communications 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.

Worldwide Economic and Market Conditions

     We currently maintain sales and support operations in the United States,
Asia, and Latin America. Accordingly, our business is subject to the worldwide
economic and market conditions and risks generally associated with doing
business abroad, such as fluctuating exchange rates, the stability of
international monetary conditions, tariff and trade policies, domestic and
foreign tax policies, foreign governmental regulations, political unrest,
disruptions or delays in shipments, and changes in other economic conditions.
These factors, among others, could influence our ability to sell in
international markets. A significant downturn in the global economy could
adversely affect our business.

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


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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:

     o    The hiring and retention of key employees,

     o    Management of facilities and employees in separate geographic areas,
          and

     o    The integration or coordination of different research and development
          and product manufacturing facilities.

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

Stock Price

     Our stock price, like that of other technology companies, can be volatile.
Some of the factors that can affect our stock price are:

     o    Our, or a competitor's, announcement of new products, services or
          technological innovations;

     o    Quarterly increases or decreases in our earnings;

     o    Changes in revenue or earnings estimates by the investment community;
          and

     o    Speculation in the investment community about our financial condition
          or results of operations.

     General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect our stock price. For these
reasons, investors should not rely on recent trends to predict future stock
prices or financial results.

ITEM 2. PROPERTIES

     Our headquarters and primary manufacturing facility are 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. We also lease office
space and, in some instances, warehouse space in California, Maryland, New York,
Oregon, Mexico and Singapore. The leases on these facilities expire at various
times through August 2004.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, we become involved in various lawsuits and legal
proceedings that arise in the ordinary course of business. We are not currently
a party to any legal proceeding that we expect, in the event of an adverse
outcome, would have a material adverse effect on our business.

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

     No matter was submitted during the fourth quarter ended January 31, 2001 to
a vote of our security holders.


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                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 and reflect a 3-for-2
stock split distributed October 27, 2000 to shareholders of record on October 6,
2000.

<TABLE>
<CAPTION>
                                            HIGH        LOW
                                           ------     ------
<S>                                        <C>        <C>
Year ended January 31, 2001:
     First Quarter ................        $33.63     $17.25
     Second Quarter ...............         25.33      19.00
     Third Quarter ................         24.67      18.50
     Fourth Quarter ...............         19.31      13.50

Year ended January 21, 2000:
     First Quarter ................        $16.50     $13.33
     Second Quarter ...............         15.50      12.67
     Third Quarter ................         13.67      12.09
     Fourth Quarter ...............         17.59      11.33
</TABLE>

Holders

     As of April 23, 2001, there were approximately 620 holders of record of our
common stock.

Dividends

     The terms of our revolving credit facility generally prohibit the payment
of dividends. We anticipate that dividends will not be paid for the foreseeable
future and that all earnings will be retained for use in our business and for
stock repurchases.

Sales of Unregistered Securities

     In connection with our acquisition of EDX Engineering, Inc. ("EDX") on
December 7, 2000, we issued 257,428 shares and approximately $2.3 million in
cash to the former sole shareholder 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.


                                       9

<PAGE>   12

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                      YEARS ENDED JANUARY 31,
                                                 ---------------------------------------------------------------
                                                   2001           2000          1999         1998         1997
                                                 --------       --------       -------      -------      -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>            <C>            <C>          <C>          <C>
Revenue:
  Products ................................      $ 37,479       $ 33,499       $28,849      $25,586      $18,433
  Services ................................        11,985          5,725         5,155        3,938        1,086
                                                 --------       --------       -------      -------      -------
                                                   49,464         39,224        34,004       29,524       19,519
                                                 --------       --------       -------      -------      -------
Cost of sales:
  Products ................................        17,213         16,983        11,569        8,704        5,877
  Services ................................         7,605          3,811         3,473        2,751          748
                                                 --------       --------       -------      -------      -------
                                                   24,818         20,794        15,042       11,455        6,625
                                                 --------       --------       -------      -------      -------

Gross profit ..............................        24,646         18,430        18,962       18,069       12,894

Selling, general and administrative costs .        12,285          9,203         9,526        8,534        6,076
Engineering and support costs .............         4,758          3,808         3,480        3,592        2,536
                                                 --------       --------       -------      -------      -------

Operating income before severance costs ...         7,603          5,419         5,956        5,943        4,282
Severance costs ...........................         1,325             --            --           --           --
                                                 --------       --------       -------      -------      -------
Operating income ..........................         6,278          5,419         5,956        5,943        4,282
Other income, net .........................           762            274           298          404          559
Minority interest in earnings of subsidiary            (7)           (46)           --           --           --
                                                 --------       --------       -------      -------      -------
Income from continuing operations before
  income taxes ............................         7,033          5,647         6,254        6,347        4,841
Income tax expense ........................         2,483          2,061         2,283        2,317        1,622
                                                 --------       --------       -------      -------      -------
Net income from continuing operations .....         4,550          3,586         3,971        4,030        3,219
Net income (loss) from discontinued
  operations ..............................            (9)          (433)        1,712          845        1,446
                                                 --------       --------       -------      -------      -------
Net income ................................      $  4,541       $  3,153       $ 5,683      $ 4,875      $ 4,665
                                                 ========       ========       =======      =======      =======
Earnings per share:
  Continuing operations:
    Basic .................................      $   0.67       $   0.55       $  0.57      $  0.57      $  0.45
                                                 ========       ========       =======      =======      =======
    Diluted ...............................      $   0.61       $   0.49       $  0.51      $  0.48      $  0.39
                                                 ========       ========       =======      =======      =======
Earnings (loss) per share:
  Discontinued operations:
    Basic .................................      $     --       $  (0.07)      $  0.25      $  0.12      $  0.20
                                                 ========       ========       =======      =======      =======
    Diluted ...............................      $     --       $  (0.06)      $  0.24      $  0.11      $  0.18
                                                 ========       ========       =======      =======      =======
Earnings per share:
    Basic .................................      $   0.67       $   0.48       $  0.82      $  0.69      $  0.65
                                                 ========       ========       =======      =======      =======
    Diluted ...............................      $   0.61       $   0.43       $  0.75      $  0.59      $  0.57
                                                 ========       ========       =======      =======      =======
</TABLE>


                                       10

<PAGE>   13

<TABLE>
<CAPTION>
                                                                     JANUARY 31,
                                             -----------------------------------------------------------
                                               2001         2000         1999         1998         1997
                                             -------      -------      -------      -------      -------
<S>                                          <C>          <C>          <C>          <C>          <C>
Working capital ............................ $29,096      $25,637      $24,833      $23,763      $22,565
Total assets ...............................  66,051       44,694       43,001       40,494       36,754
Borrowing under line of credit .............      --           --           --           --           --
Long-term debt, including current maturities      --           --           --           --           --
Stockholders' equity .......................  43,495       31,754       31,202       30,470       26,977
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
        RESULTS OF OPERATIONS

     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 Item 1 in this report on Form 10-K, 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 we nor any other person
assume responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this report on Form 10-K to conform such
statements to actual results or to changes in our expectations.

     The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report on Form 10-K.

OVERVIEW

     COMARCO, Inc., through its subsidiary Comarco Wireless Technologies, Inc.
("CWT"), is a leading provider of advanced technology tools and engineering
services for the wireless communications industry. COMARCO also designs and
manufactures remote voice systems and mobile power products for notebook
computers, cellular telephones and personal organizers. COMARCO is a California
corporation that became a public company in 1971 when it was spun-off from Genge
Industries, 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 - CONTINUING OPERATIONS

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

Wireless Infrastructure

     This operating segment designs and manufactures advanced technology
hardware and software tools for use by the wireless carriers, equipment vendors
and others. These tools are used by RF engineers, professional technicians and
others to design, deploy and optimize wireless networks, and to test and measure
the quality of service once the wireless networks are deployed. The wireless
infrastructure segment is also a provider of value-added engineering services
that assist the wireless carriers, equipment vendors and others in all phases of
the wireless network lifecycle.


                                       11

<PAGE>   14

Wireless Applications

     This operating segment designs and manufactures remote voice systems and
mobile power products for notebook computers, cellular telephones and personal
organizers. Remote voice systems currently include various call box products
that provide emergency communication via wireless networks. In addition to the
call box products, we provide system installation and long-term maintenance
services. Currently, there are approximately 18,000 installed call boxes, the
majority of which are serviced and maintained under long-term agreements.

     The wireless applications segment also includes the ChargeSource 70-watt
universal AC power adapter, our second-generation mobile power system that
powers and charges most laptop computers, cellular telephones, handheld devices
and portable printers. This product is distributed by Targus Group International
("Targus") and during the third quarter ended October 31, 2000, we went into
production and began delivering on a $10 million order from Targus. We
anticipate expanding the ChargeSource product offering with a companion product
to the universal AC power adapter during the third quarter ending October 31,
2001.

     The following table sets forth certain items as a percentage of revenue
from our audited consolidated statements of income for 2001, 2000 and 1999. The
table and discussion which follows provide information which management believes
is relevant to an assessment and understanding of our consolidated results of
operations and financial condition. The discussion should be read in conjunction
with the consolidated financial statements and accompanying notes thereto
included elsewhere herein.

<TABLE>
<CAPTION>
                                                             YEARS ENDED JANUARY 31,
                                                           --------------------------
                                                            2001      2000       1999
                                                           -----     -----      -----
<S>                                                         <C>       <C>        <C>
Revenues:
  Products ............................................     75.8%     85.4%      84.8%
  Services ............................................     24.2      14.6       15.2
                                                           -----     -----      -----
                                                           100.0     100.0      100.0
                                                           -----     -----      -----
Cost of sales:
  Products ............................................     34.8      43.3       34.0
  Services ............................................     15.4       9.7       10.2
                                                           -----     -----      -----
                                                            50.2      53.0       44.2
                                                           -----     -----      -----
Gross profit:
  Products ............................................     41.0      42.1       50.8
  Services ............................................      8.8       4.9        5.0
                                                           -----     -----      -----
                                                            49.8      47.0       55.8
                                                           -----     -----      -----
Selling, general and administrative costs .............     24.8      23.5       28.0
Engineering and support costs .........................      9.6       9.7       10.3
                                                           -----     -----      -----
Operating income before severance costs ...............     15.4      13.8       17.5
Severance costs .......................................      2.7        --         --
                                                           -----     -----      -----
Operating income ......................................     12.7      13.8       17.5
Other income, net .....................................      1.5       0.7        0.9
Minority interest in earnings of subsidiary ...........       --      (0.1)        --
                                                           -----     -----      -----
Income from continuing operations before income taxes .     14.2      14.4       18.4
Income tax expense ....................................      5.0       5.3        6.7
                                                           -----     -----      -----
Net income from continuing operations .................      9.2%      9.1%      11.7%
                                                           =====     =====      =====
</TABLE>


                                       12

<PAGE>   15

CONSOLIDATED

Revenue

     Total revenue for 2001 increased 26.1 percent to $49.5 million compared
with 2000, due to an increase in sales from our wireless infrastructure segment,
partially offset by a decrease in sales from our wireless applications segment.
Total revenue for 2000 increased 15.4 percent to $39.2 million compared with
1999, due to an increase in sales from our wireless applications segment,
partially offset by a decrease in sales from our wireless infrastructure
segment.

     In 2001 compared to 2000, revenue from products increased 11.9 percent to
$37.5 million while revenue from services increased 109.3% to $12.0 million. The
product revenue growth was due to increased sales from our wireless
infrastructure segment, partially offset by a decrease in sales from our
wireless applications segment. The services revenue growth was due to increased
sales of engineering services from our wireless infrastructure segment. In 2000
compared to 1999, revenue from products increased 16.1 percent to $33.5 million
while revenue from services increased 11.1% to $5.7 million. The product revenue
growth was due to increased sales from both our segments. The services revenue
growth was due to sales of engineering services from our wireless infrastructure
segment that were initially offered during the quarter ended January 31, 2000.

Cost of Sales and Gross Margin

     Total cost of sales in 2001 increased 19.4 percent to $24.8 million
compared with 2000. As a percentage of revenue, gross margin increased to 49.8
percent from 47.0 percent in 2000. This increase was primarily due to increased
volume in our higher margin wireless infrastructure segment, including increased
sales of hardware and software tools and engineering services, partially offset
by decreased volumes and margins in our wireless applications segment. Total
cost of sales in 2000 increased 38.2 percent to $20.8 million compared with
1999. As a percentage of revenue, gross margin decreased to 47.0 percent from
55.8 percent in 1999. This decrease was primarily due to increased volumes and
lower margins in our wireless applications segment.

Selling, General and Administrative Costs

     Selling, general and administrative costs increased 33.5 percent in 2001
compared to 2000 and decreased 3.4 percent in 2000 compared to 1999. The
increase in 2001 was due to staffing increases in support of the engineering
services offering that commenced full operations during the first quarter of
2001, costs related to the marketing of the ChargeSource 70-watt universal AC
power adapter, and increased commissions on wireless infrastructure product
sales. The decrease in 2000 was due to decreased international selling expenses,
which was consistent with an economic downturn in a number of international
markets. As a percentage of revenue, selling, general and administrative costs
were 24.8 percent, 23.5 percent and 28.0 percent for 2001, 2000 and 1999,
respectively.

Engineering and Support Costs

     Engineering and support costs increased 24.9 percent in 2001 compared to
2000 and increased 9.4 percent in 2000 compared to 1999. These increases reflect
the ongoing efforts in developing new products and new technologies for the
wireless communications industry.

Severance Costs

     During the second quarter ended July 31, 2000 and in conjunction with the
disposition of our non-wireless businesses, we were required to record a $1.3
million charge to continuing operations for costs related to severance
agreements for outgoing corporate staff. No comparable costs were incurred
during 2000 and 1999.

Other Income

     Other income, consisting primarily of interest income, increased $0.5
million to $0.8 million in 2001 from $0.3 million in 2000. The increase in 2001
was primarily due to higher cash balances during the year.


                                       13

<PAGE>   16

Income Tax Expense

     The effective tax rate for 2001 was 35.3 percent and 36.5 percent for both
2000 and 1999. The decrease in 2001 was due to tax credits earned from increased
research and development activity during the year.

Wireless Infrastructure

<TABLE>
<CAPTION>
                                           YEARS ENDED JANUARY 31,
                                    -----------------------------------
                                      2001          2000          1999
                                    -------       -------       -------
                                               (IN THOUSANDS)
<S>                                 <C>           <C>           <C>
Revenue                             $34,678       $19,259       $23,670
Cost of sales                        14,315         7,575         8,058
                                    -------       -------       -------
Gross profit                        $20,363       $11,684       $15,612
                                    =======       =======       =======
Gross margin                           58.7%         60.7%         66.0%
                                    =======       =======       =======
</TABLE>

Revenue

     Revenue from our wireless infrastructure segment increased 80.1 percent to
$34.7 million in 2001 compared with 2000 and decreased 18.6 percent to $19.3
million in 2000 compared to 1999. The increase in 2001 was due to strong growth
in sales of our hardware and software tools and increased sales of engineering
services that were initially offered during the fourth quarter of 2000. The
decrease in 2000 was due to product transition issues and fourth quarter delays
in receiving orders from wireless carriers for existing products, which resulted
in decreased sales of our hardware and software tools. The resolution of both
these factors had a positive effect on revenue for 2001.

Cost of Sales and Gross Margin

     Cost of sales from our wireless infrastructure segment in 2001 increased
89.0 percent to $14.3 million compared with 2000. As a percentage of revenue,
gross margin decreased to 58.7 percent from 60.7 percent in 2000. The increase
in cost of sales was primarily due to increased sales volume of both hardware
and software tools and engineering services. The decrease in gross margin was
primarily due to increased sales volume of lower margin engineering services.
Cost of sales in 2000 decreased 6.0 percent to $7.6 million compared with 1999.
As a percentage of revenue, gross margin decreased to 60.7 percent from 66.0
percent in 1999. The decrease in cost of sales was consistent with the decrease
in sales volume of hardware and software tools. The decrease in gross margin was
primarily due to fourth quarter delays in receiving orders from wireless
carriers. As a portion of our costs are fixed, a short timing delay in
recognizing revenue could have a negative impact on our gross margins.

Wireless Applications

<TABLE>
<CAPTION>
                                          YEARS ENDED JANUARY 31,
                                    -----------------------------------
                                     2001          2000          1999
                                    -------       -------       -------
                                              (IN THOUSANDS)
<S>                                 <C>           <C>           <C>
Revenue                             $14,786       $19,965       $10,334
Cost of sales                        10,503        13,219         6,984
                                    -------       -------       -------
Gross profit                        $ 4,283       $ 6,746       $ 3,350
                                    =======       =======       =======
Gross margin                           29.0%         33.8%         32.4%
                                    =======       =======       =======
</TABLE>

Revenue

     Revenue from our wireless applications segment decreased 26.0 percent to
$14.8 million in 2001 compared with 2000 and increased 93.2 percent to $20.0
million in 2000 compared to 1999. The decrease in 2001 was primarily due to
decreased sales of upgrades to previously installed call box systems. Call box
systems are upgraded periodically based on the age of the technology, condition
of the call boxes and the needs of the respective


                                       14

<PAGE>   17

customers. System upgrades do not recur annually. The decrease in 2001 was
partially offset by a $1.0 million increase in sales of the ChargeSource 70-watt
universal AC power adapter, our second-generation mobile power system that went
into production during the fourth quarter of 2001. The increase in 2000 was due
to sales of upgrades of several call box systems as well as the ChargeSource
35-watt universal AC power adapter, our first-generation mobile power system
that went into production during the fourth quarter of 1999.

Cost of Sales and Gross Margin

     Cost of sales from our wireless applications segment in 2001 decreased 20.5
percent to $10.5 million compared with 2000. As a percentage of revenue, gross
margin decreased to 29.0 percent from 33.8 percent in 2000. The decrease in cost
of sales was consistent with the decrease in sales volume of call box systems
and upgrades. The decrease in gross margin was due to increased costs associated
with providing maintenance services for installed call box systems and costs
incurred transitioning to the ChargeSource 70-watt universal AC power adapter
from the 35-watt, a first-generation product. Cost of sales in 2000 increased
89.3 percent to $13.2 million compared with 1999. As a percentage of revenue,
gross margin increased to 33.8 percent from 32.4 percent in 1999. The increase
in cost of sales was consistent with the increase in sales volume of both call
box system upgrades and the ChargeSource 35-watt universal AC power adapter. The
increase in gross margin was primarily due to a favorable change in product mix.

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.

     Net loss from discontinued operations was $9,000 for 2001, which includes
net income during phase-out of $348,000 on revenue of $21.7 million, less an
after-tax loss of $357,000 on the disposition of our non-wireless businesses.
For 2000, the net loss from discontinued operations was $433,000 on revenue of
$51.7 million, compared with net income from discontinued operations of $1.7
million on revenue of $58.0 million for 1999. The decrease in revenue and the
loss from discontinued operations for 2000 were due to the sales of the various
non-wireless businesses and loss provisions established on fixed price
government contracts.

LIQUIDITY AND CAPITAL RESOURCES

     Our financial position remains strong, with cash and cash equivalents of
$24.9 million at January 31, 2001.

Cash Flows from Operating Activities

     We generated cash from operations of $20.8 million in 2001 compared to $9.9
million in 2000 and $6.3 million in 1999. In 2001, cash from operations was
primarily a result of net income from continuing operations adjusted for
non-cash charges for depreciation and amortization, a refund of a tax benefit on
stock options exercised of $2.4 million, an increase in current liabilities
primarily attributable to accrued costs related to discontinued operations,
partially offset by an increase in accounts receivable. In 2000 and 1999, cash
from operations was primarily a result of net income from continuing operations
adjusted for depreciation and amortization and changes in working capital.

Cash Flows from Investing Activities

     Net cash used in investing activities was $9.4 million in 2001 compared to
$5.3 million in 2000 and $2.5 million in 1999. In all periods, capital
expenditures for property and equipment, acquisitions and software development
partially offset by proceeds from sales and maturities of investments
constituted substantially all of our cash used in investing activities.

     The development of software is critical to our products currently under
development. We intend to invest aggressively in a software development program
designed to bring new products and services for the wireless


                                       15

<PAGE>   18

communications industry to market in a timely manner. Software and hardware
development programs are expected to be funded with current cash balances and
cash provided by operating activities.

     On December 7, 2000, we acquired all the outstanding common stock of EDX
Engineering, Inc. ("EDX") for 257,428 shares of our common stock, valued at $4.2
million on the day the transaction closed, and $2.3 million in cash.

Cash Flows from Financing Activities

     Net cash provided by financing activities was $0.5 million in 2001 as
compared to net cash used in financing activities of $4.0 million and $5.1
million in 2000 and 1999, respectively. In all periods, proceeds from the sales
of common stock issued through employee and director stock option plans, offset
by the repurchase of our common stock, constituted substantially all of our cash
provided by and used in financing activities.

     During 1992, our Board of Directors authorized a stock repurchase program
of up to three million shares of our common stock. From program inception
through January 31, 2001, the Company has repurchased approximately 2.3 million
shares for an average price of $7.78 per share. During 2001, we repurchased
approximately 100,000 shares in the open market for an average price of $16.74
per share.

     The Company maintains a $10.0 million unsecured revolving credit facility
(the "Credit Facility") which expires June 30, 2001. Borrowings under the Credit
Facility bear interest at the bank's prime rate or the London Interbank Offered
Rate plus 150 basis points, at the option of the Company. At January 31, 2001
and as of the date of this annual report on Form 10-K, there are no amounts
outstanding on the Credit Facility and the entire $10.0 million commitment is
available to the Company.

     Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
fluctuations related to domestic and global economies and markets. We believe
that cash generated from operations and our unused line of credit will be
sufficient to satisfy our working capital, capital expenditure and development
funding requirements for the foreseeable future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to market risk, including changes in currency exchange
rates. As of January 31, 2001, 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.


                                       16

<PAGE>   19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         COMARCO, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----
Independent Auditors' Report..............................................  18

Financial Statements:
     Consolidated Balance Sheets, January 31, 2001 and 2000...............  19
     Consolidated Statements of Income, Years Ended January 31, 2001,
       2000, and 1999.....................................................  20
     Consolidated Statements of Stockholders' Equity, Years Ended
       January 31, 2001, 2000, and 1999...................................  21
     Consolidated Statements of Cash Flows, Years Ended January 31,
       2001, 2000, and 1999...............................................  22
     Consolidated Statements of Comprehensive Income, Years Ended
       January 31, 2001, 2000, and 1999...................................  23
Notes to Consolidated Financial Statements, January 31, 2001, 2000,
  and 1999................................................................  24
Financial Statement Schedule - II Reserves, Years Ended January 31,
  2001, 2000, and 1999....................................................  47

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


                                       17

<PAGE>   20

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
COMARCO, Inc.:

     We have audited the consolidated financial statements of COMARCO, Inc. and
Subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of COMARCO,
Inc. and Subsidiaries as of January 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.


                                                 KPMG LLP


Orange County, California
March 15, 2001


                                       18

<PAGE>   21

                         COMARCO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                             JANUARY 31,  JANUARY 31,
                                                                 2001         2000
                                                             -----------  -----------
<S>                                                            <C>          <C>
ASSETS

Current Assets:
  Cash and cash equivalents ..............................     $24,903      $ 5,064
  Short-term investments .................................       3,819        3,721
  Accounts receivable, net ...............................       8,418        6,695
  Inventory ..............................................       5,277        4,852
  Deferred tax asset, net ................................       2,133        1,454
  Net assets of discontinued operations ..................          --        9,361
  Other current assets ...................................       1,746        2,651
                                                               -------      -------
    Total current assets .................................      46,296       33,798

Property and equipment, net ..............................       3,695        2,763
Software development costs, net ..........................       7,249        5,839
Goodwill and acquired intangible assets, net .............       8,381        2,222
Other assets .............................................         430           72
                                                               -------      -------
                                                               $66,051      $44,694
                                                               =======      =======
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable .......................................     $ 1,050      $   666
  Deferred revenue .......................................       6,786        3,077
  Accrued liabilities ....................................       9,364        4,418
                                                               -------      -------
    Total current liabilities ............................      17,200        8,161

Deferred compensation ....................................       3,918        3,634
Deferred tax liabilities, net ............................       1,406        1,145
Minority interest ........................................          32           --

Commitments and contingencies (Note 19)

Stockholders' Equity:
  Common stock, $0.10 par value, 50,625,000 shares
    authorized; 7,066,560 and 6,510,543 shares outstanding
    at January 31, 2001 and 2000, respectively ...........         707          651
  Additional paid-in capital .............................      11,619        4,475
  Accumulated other comprehensive income .................           3            3
  Retained earnings ......................................      31,166       26,625
                                                               -------      -------
    Total stockholders' equity ...........................      43,495       31,754
                                                               -------      -------
                                                               $66,051      $44,694
                                                               =======      =======
</TABLE>

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

                                       19

<PAGE>   22

                         COMARCO, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                       YEARS ENDED JANUARY 31,
                                                             -----------------------------------------
                                                               2001             2000             1999
                                                             --------         --------         -------
<S>                                                          <C>              <C>              <C>
Revenue:
  Products ..........................................        $ 37,479         $ 33,499         $28,849
  Services ..........................................          11,985            5,725           5,155
                                                             --------         --------         -------
                                                               49,464           39,224          34,004
                                                             --------         --------         -------
Cost of sales:
  Products ..........................................          17,213           16,983          11,569
  Services ..........................................           7,605            3,811           3,473
                                                             --------         --------         -------
                                                               24,818           20,794          15,042
                                                             --------         --------         -------
Gross profit ........................................          24,646           18,430          18,962
Selling, general and administrative costs ...........          12,285            9,203           9,526
Engineering and support costs .......................           4,758            3,808           3,480
                                                             --------         --------         -------
Operating income before severance costs .............           7,603            5,419           5,956
Severance costs .....................................           1,325               --              --
                                                             --------         --------         -------
Operating income ....................................           6,278            5,419           5,956
Other income, net ...................................             762              274             298
Minority interest in earnings of subsidiary .........              (7)             (46)             --
                                                             --------         --------         -------
Income from continuing operations before income taxes           7,033            5,647           6,254
Income tax expense ..................................           2,483            2,061           2,283
                                                             --------         --------         -------
Net income from continuing operations ...............           4,550            3,586           3,971

Discontinued operations (Note 5):
  Net income (loss) from discontinued operations,
    net of income tax expense (benefit) .............              --             (433)          1,712
  Loss on disposal of discontinued operations,
    including operating income during phase out
    period, net of income tax expense ...............              (9)              --              --
                                                             --------         --------         -------
Net income ..........................................        $  4,541         $  3,153         $ 5,683
                                                             ========         ========         =======

Earnings per share - continuing operations:
  Basic .............................................        $   0.67         $   0.55         $  0.57
                                                             ========         ========         =======
  Diluted ...........................................        $   0.61         $   0.49         $  0.51
                                                             ========         ========         =======
Earnings (loss) per share - discontinued operations:
  Basic .............................................        $     --         $  (0.07)        $  0.25
                                                             ========         ========         =======
  Diluted ...........................................        $     --         $  (0.06)        $  0.24
                                                             ========         ========         =======
Earnings per share:
  Basic .............................................        $   0.67         $   0.48         $  0.82
                                                             ========         ========         =======
  Diluted ...........................................        $   0.61         $   0.43         $  0.75
                                                             ========         ========         =======
</TABLE>

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

                                       20

<PAGE>   23

                         COMARCO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                    ACCUMULATED
                                                                     ADDITIONAL        OTHER
                                                     COMMON STOCK      PAID-IN     COMPREHENSIVE   RETAINED
                                                       PAR VALUE       CAPITAL         INCOME      EARNINGS      TOTAL
                                                     ------------    ----------    -------------   --------     --------
<S>                                                  <C>             <C>           <C>             <C>          <C>
Balance at January 31, 1998, 7,078,065 shares ...        $ 708         $  2,838         $ --       $ 26,924     $ 30,470
  Net income ....................................           --               --           --          5,683        5,683
  Exercise of stock options, 28,875 shares ......            3               84           --             --           87
  Tax benefit from exercise of stock options ....           --              140           --             --          140
  Purchase and retirement of common stock,
    422,250 shares ..............................          (43)            (489)          --         (4,662)      (5,194)
  Recognition of unrealized holding gain
    on available for sale securities ............           --               --           16             --           16
                                                         -----         --------         ----       --------     --------
Balance at January 31, 1999, 6,684,690 shares ...          668            2,573           16         27,945       31,202

  Net income ....................................           --               --           --          3,153        3,153
  Exercise of stock options, 125,438 shares .....           13              578           --             --          591
  Tax benefit from exercise of stock options ....           --              865           --             --          865
  Purchase and retirement of common stock,
    368,850 shares ..............................          (37)            (424)          --         (4,355)      (4,816)
  Minority interest resulting from exercise
    of subsidiary options .......................           --               --           --           (118)        (118)
  Issuance of common stock to acquire subsidiary
    minority interest, 69,265 shares ............            7              883           --             --          890
  Recognition of unrealized holding loss on
    available for sale securities ...............           --               --          (13)            --          (13)
                                                         -----         --------         ----       --------     --------
Balance at January 31, 2000, 6,510,543 shares ...          651            4,475            3         26,625       31,754

  Net income ....................................           --               --           --          4,541        4,541
  Exercise of stock options, 392,270 shares .....           39            2,039           --             --        2,078
  Tax benefit from exercise of stock options ....           --            2,413           --             --        2,413
  Purchase and retirement of common stock,
    99,597 shares ...............................          (10)          (1,657)          --             --       (1,667)
  Minority interest resulting from exercise
    of subsidiary options .......................           --               41           --             --           41
  Issuance of common stock to acquire subsidiary
    minority interest, 5,916 shares .............            1               87           --             --           88
  Issuance of common stock to acquire outstanding
    shares of EDX Engineering, 257,428 shares ...           26            4,221           --             --        4,247
                                                         -----         --------         ----       --------     --------
Balance at January 31, 2001, 7,066,560 shares ...        $ 707         $ 11,619         $  3       $ 31,166     $ 43,495
                                                         =====         ========         ====       ========     ========
</TABLE>

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

                                       21

<PAGE>   24

                         COMARCO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          YEARS ENDED JANUARY 31,
                                                                  ----------------------------------------
                                                                    2001            2000            1999
                                                                  --------         -------         -------
<S>                                                               <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations ....................        $  4,550         $ 3,586         $ 3,971
Adjustments to reconcile net income from continuing
  operations to net cash provided by operating activities:
  Depreciation and amortization ..........................           5,231           3,159           2,925
  Loss (gain) on disposal of property and equipment ......              (6)             85              (4)
  Tax benefit from exercise of stock options .............           2,413             865             140
  Deferred income taxes ..................................              54            (383)            (63)
  Provision for doubtful accounts receivable .............              24              24              24
  Minority interest in earnings of subsidiary ............               7              46              --
  Changes in operating assets and liabilities, net of
    acquisitions:
    Trading securities ...................................            (110)           (975)           (980)
    Accounts receivable ..................................          (1,464)          4,512          (2,189)
    Inventory ............................................            (425)           (695)          1,090
    Other assets .........................................           1,607          (2,293)             92
    Deferred compensation ................................             284             975             980
    Current liabilities ..................................           8,670             949             347
                                                                  --------         -------         -------
Net cash provided by operating activities ................          20,835           9,855           6,333
                                                                  --------         -------         -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sales and maturities of investments ......              12             542           2,407
  Purchases of property and equipment ....................          (2,505)         (1,876)           (995)
  Proceeds from sales of property and equipment ..........              14              29               4
  Software development costs .............................          (4,641)         (3,563)         (2,936)
  Cash paid for acquisition of minority interest .........              --            (433)             --
  Cash paid for acquisitions, net of cash acquired .......          (2,324)             --          (1,000)
                                                                  --------         -------         -------
Net cash used in investing activities ....................          (9,444)         (5,301)         (2,520)
                                                                  --------         -------         -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock .............           2,078             591              87
  Proceeds from issuance of subsidiary common stock ......              88             179              --
  Purchase and retirement of common stock ................          (1,667)         (4,816)         (5,194)
                                                                  --------         -------         -------
Net cash provided by (used in) financing activities ......             499          (4,046)         (5,107)
                                                                  --------         -------         -------

Net increase (decrease) in cash and cash equivalents -
  continuing operations ..................................          11,890             508          (1,294)
Net increase (decrease) in cash and cash equivalents -
  discontinued operations ................................           7,949           1,336            (742)
                                                                  --------         -------         -------
Net increase (decrease) in cash and cash equivalents .....          19,839           1,844          (2,036)
Cash and cash equivalents, beginning of period ...........           5,064           3,220           5,256
                                                                  --------         -------         -------
Cash and cash equivalents, end of period .................        $ 24,903         $ 5,064         $ 3,220
                                                                  ========         =======         =======
</TABLE>

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

                                       22

<PAGE>   25

                         COMARCO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           YEARS ENDED JANUARY 31,
                                                                  ----------------------------------------
                                                                    2001            2000            1999
                                                                  --------         -------         -------
<S>                                                               <C>              <C>             <C>
Net income................................................        $  4,541         $ 3,153         $ 5,683

Other comprehensive income:
  Unrealized holding gains (losses) on investments,
    net of income taxes...................................              --             (13)             16
                                                                  --------         -------         -------
Comprehensive income......................................        $  4,541         $ 3,140         $ 5,699
                                                                  ========         =======         =======
</TABLE>


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

                                       23

<PAGE>   26

                         COMARCO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

     COMARCO, Inc. through its subsidiary Comarco Wireless Technologies, Inc.
(collectively, "COMARCO" or the "Company") is a leading provider of advanced
technology tools and engineering services for the wireless communications
industry. COMARCO also designs and manufactures remote voice systems and mobile
power products for notebook computers, cellular telephones, and personal
organizers. 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

Principles of Consolidation:

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

Use of Estimates:

     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
period reported. Actual results could differ from those estimates.

Revenue Recognition:

     Revenue from product sales is generally recognized upon shipment of
products provided there are no uncertainties regarding customer acceptance,
persuasive evidence of an arrangement exists, the sales price is fixed and
determinable, and collectibility is deemed probable.

     Service revenue is recognized as the services are performed. Maintenance
revenue from customer support and product upgrades, including maintenance
bundled with original product sale, is deferred and recognized ratably over the
term of the maintenance agreement, typically 12 months.

     Estimated costs to repair or replace products that may be returned under
warranty are accrued at the time of shipment. The Company's warranty period
typically extends 12 months from the date of shipment.

     Revenue on long-term contracts is 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 are revised periodically based on changes in
circumstances and any losses on contracts are recognized in the period that such
losses become known.

Cash and Cash Equivalents:

     All highly liquid investments with original maturity dates of three months
or less are classified as cash and cash equivalents. The fair value of cash and
cash equivalents approximates the amounts shown in the financial statements.


                                       24

<PAGE>   27

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Short-Term Investments:

     Short-term investments consist primarily of balances maintained in a
non-qualified deferred compensation plan funded by Company executives and
directors. These investments are tradable at the discretion of the funding
executives and directors and are subject to claims by the Company's general
creditors. Accordingly, these investments are classified as trading securities.
Trading securities are recorded at market value based on current market quotes
and totaled $3.7 million and $3.6 million as of January 31, 2001 and 2000,
respectively. Unrealized holding gains (losses) on these short-term investments
recorded for the years ended January 31, 2001, 2000, and 1999 were ($574,000),
$173,000, and $281,000, respectively.

     Short-term investments also consist of investments in certain equity
securities. These short-term investments are classified as available-for-sale
securities and are carried at their estimated fair market value based on current
market quotes, which totaled $75,000 and $87,000 as of January 31, 2001 and
2000, respectively. The unrealized gain on the value of these investments
totaled $3,000 as of January 31, 2001 and 2000. Realized gains and losses on
sales of investment securities are included in the consolidated statements of
income and have not been material for any period presented.

Inventory:

     Inventories are valued at the lower of cost (calculated on average cost,
which approximates first-in, first-out basis) and net realizable value.

Property and Equipment:

     Property and equipment are stated at cost less accumulated depreciation.
Additions, improvements and major renewals are capitalized; maintenance, repairs
and minor renewals are expensed as incurred. Depreciation and amortization is
calculated on a straight-line basis over the expected useful lives of the
property and equipment. The expected useful lives of office furnishings and
fixtures are five to seven years, and of equipment and purchased software are
two to five years.

Research and Development and Software Development Costs:

     Research and development costs are charged to expense as incurred and have
been included in engineering and support costs. Costs incurred for the
development of software that will be sold are capitalized when technological
feasibility has been established. These capitalized costs are subject to an
ongoing assessment of recoverability based on anticipated future revenue and
changes in hardware and software technologies. Costs that are capitalized
include direct labor and related overhead.

     Amortization of software development costs begins when the product is
available for general release. Amortization is provided on a product-by-product
basis on either the straight-line method over periods not exceeding five years
or the sales ratio method that is based on expected unit sales and the estimated
life of the product. Unamortized software development costs determined to be in
excess of net realizable value of the product are expensed immediately.

Goodwill and Acquired Intangible Assets:

     Goodwill, which represents the excess of purchase price over fair value of
net assets acquired in a business combination, is recorded at cost less
accumulated amortization.

     Amortization of goodwill and intangible assets is provided on a
straight-line method over the estimated useful life of the asset, principally in
the range of five to fifteen years.

     The Company assesses the recoverability of goodwill and intangible assets
quarterly or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company will


                                       25

<PAGE>   28

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


determine whether the amortization of the asset balance over its remaining life
can be recovered through undiscounted future cash flows of the acquired
business. If the amortization cannot be fully recovered, the amount of
impairment is based on projected discounted future cash flows or appraised
values, depending on the nature of the asset. In addition, the Company
continually evaluates the periods of amortization associated with goodwill and
intangible assets not identified with an impaired asset to determine whether
events and circumstances warrant revised estimates of useful lives.

Long-Lived Assets:

     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. When such events or changes in circumstances are present, the
Company assesses the recoverability of long-lived assets by determining whether
the carrying value of such assets will be recovered through undiscounted
expected future cash flows. If the total of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of assets.

Income Taxes:

     Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Minority Interest:

     During the years ended January 31, 2001 and 2000, the Company issued 7,000
and 58,000 shares of CWT stock, respectively, from the exercise of CWT stock
options, which resulted in the creation of a minority interest. The option
holder is required to hold the CWT stock purchased from the exercise of the
stock options for at least six months.

     In 2001, the Company acquired an additional 3,000 minority shares of CWT by
the issuance of 5,916 shares of Company stock. In 2000, the Company acquired the
58,000 minority shares of CWT through the payment of $433,000 in cash and the
issuance of 69,265 shares of Company stock.

     Under the purchase method of accounting, the excess purchase price over
fair value of the CWT stock acquired from the minority stockholders has been
recorded as goodwill. During 2001 and 2000, the Company recognized goodwill of
$62,000 and $980,000, respectively.

Concentrations of Credit Risk and Major Customers:

     The Company's cash and cash equivalents are principally on deposit in a
short-term asset management account at a large financial institution. Accounts
receivable potentially subject the Company to concentrations of credit risk. The
Company's customer base is comprised primarily of large companies. The Company
generally does not require collateral for accounts receivable. When required,
the Company maintains allowances for credit losses, and to date such losses have
been within management's expectations.

     Two customers each accounted for between 13 percent and 15 percent of total
revenue in 2001. Three customers each accounted for between 10 percent and 12
percent of total revenue in 2000. No one customer accounted for more than 10% of
revenue in 1999.


                                       26

<PAGE>   29

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Segment Reporting:

     The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), for the year ended January 31, 2000. SFAS 131 establishes standards for
the manner in which public companies report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within a company for making
operating decisions and assessing financial performances.

     The Company's chief executive officer (CEO) is its chief operating
decision-maker. The financial information that the CEO reviews is similar to the
information presented in the accompanying statements of operations. The Company
operates in two business segments: wireless infrastructure and wireless
application products and services.

Net Income Per Common Share:

     Basic earnings per share is computed by dividing net earnings (numerator)
by the weighted average number of common shares outstanding (denominator) during
the period excluding the dilutive effect of potential common stock which
consists of stock options and convertible securities. Diluted net earnings per
share gives effect to all dilutive potential common stock outstanding during the
period. The effect of such potential common stock is computed using the treasury
stock method or the if-converted method, as applicable.

Stock-Based Compensation:

     Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides for companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based upon the fair value of the award at the date of
grant. However, SFAS 123 allows for companies to continue to measure
compensation costs as prescribed be Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected
to continue its current policy, which is to account for stock-based compensation
plans under APB 25.

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"), which
must be applied prospectively to new stock option awards, exchanges of awards in
a business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000. The Company adopted FIN 44
effective July 1, 2000 with no impact on its historical consolidated statements
and related disclosures.

Fair Value of Financial Instruments:

     The estimated fair values of the Company's financial instruments have been
determined using available market information. The estimates are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have an effect on the estimated fair value amounts. The fair
value of current financial assets, current liabilities, and other assets are
estimated to be equal to their carrying amounts.

Reclassifications:

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


                                       27

<PAGE>   30

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Comprehensive Income:

     Comprehensive income consists of net income and net unrealized gains on
available for sale securities, net of income tax, and is presented in the
consolidated statements of comprehensive income. Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.

Stock Split:

     In October 2000, the Company effected a stock split of three shares for
every two of common stock outstanding. All references in the consolidated
financial statements to the number of shares and to per share amounts have been
retroactively restated to reflect this stock split.

3. RECENT ACCOUNTING PRONOUNCEMENTS

     Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), the Company has reviewed its accounting policies for the recognition of
revenue. SAB 101 was required to be implemented in the fourth quarter ended
January 31, 2001. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's policies for revenue recognition are consistent with the views
expressed within SAB 101.

     On February 1, 2000, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("SFAS 138"). SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments. Specifically, SFAS 133 requires
an entity to recognize all derivatives as either assets or liabilities on the
balance sheet and to measure those instruments at fair value. Additionally, the
fair value adjustments will affect either stockholders' equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity. The adoption
of SFAS 133, as amended, had no effect on the Company's results of operations
and financial position because the Company does not have any derivative
instruments nor has the Company engaged in hedging activities.


                                       28

<PAGE>   31

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4. ACQUISITION

     On December 7, 2000, COMARCO acquired all of the outstanding shares of
stock of EDX Engineering, Inc. ("EDX"), a leading developer of system planning
tools for the wireless communications industry. Consideration for the
acquisition consisted of approximately $2.3 million in cash and 257,428 shares
of the Company's common stock. The excess purchase price paid over the fair
value of tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $3.2 million was recognized and is being amortized over
nine years. Acquired identifiable intangible assets of $3.4 million consist
primarily of completed technology and customer base and are being amortized over
nine years.

     The purchase price for the acquisition of EDX during the year ended January
31, 2001 was allocated to assets acquired and liabilities assumed based on fair
market value at the date of the acquisition. The total cost of the acquisition
during the year ended January 31, 2001 is summarized as follows (dollars in
thousands):

     Cash paid for acquisition, net..........................  $ 2,324
     Common stock issued.....................................    4,247
     Assumed liabilities.....................................      254
                                                               -------
       Purchase price........................................  $ 6,825
                                                               =======

     Unaudited pro forma statement of income information has not been presented
because the effects of the EDX acquisition were not significant.


                                       29

<PAGE>   32

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5. DISCONTINUED OPERATIONS

     In July 1999, COMARCO embarked on a plan to dispose of its non-wireless
businesses. This plan, which was formalized in October 1999, involved selling
the Company's defense and commercial staffing businesses. The disposition plan
was completed with the sixth and final disposition transaction closing on
November 17, 2000.

     Pursuant to Accounting Principles Board Opinion ("APB") 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"), the consolidated financial statements of COMARCO have
been reclassified to segregate the revenue, costs and expenses, assets and
liabilities, and cash flows of the non-wireless businesses. The net operating
results, net assets and net cash flows of the non-wireless businesses have been
reported as "discontinued operations." Gross proceeds from the disposition
transactions totaled $11.0 million.

     Following is summarized financial information for the discontinued
operations (dollars in thousands):

<TABLE>
<CAPTION>
                                                            YEARS ENDED JANUARY 31,
                                                        -------------------------------
                                                          2001        2000       1999
                                                        --------    --------    -------
<S>                                                     <C>         <C>         <C>
Revenue ..........................................      $ 21,700    $ 51,700    $58,000
Income (loss) from discontinued operations (net of
  income tax expense (benefit) of $249, ($128) and
  $1,200, respectively) ..........................           348        (433)     1,712
Loss on disposal of businesses (net of income tax
  expense of $427) ...............................          (357)         --         --
                                                        --------    --------    -------
Income (loss) from discontinued operations .......      $     (9)   $   (433)   $ 1,712
                                                        ========    ========    =======
</TABLE>

<TABLE>
<CAPTION>

                                                             JANUARY 31,
                                                                2000
                                                             -----------
<S>                                                          <C>
Current assets..............................................  $ 9,275
Total assets................................................   12,544
Current liabilities.........................................    3,183
Total liabilities...........................................    3,183
                                                              -------
Net assets of discontinued operations.......................  $ 9,361
                                                              =======
</TABLE>


                                       30

<PAGE>   33

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6. ACCOUNTS RECEIVABLE

     Accounts receivable consist of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                   JANUARY 31,
                                              -----------------------
                                               2001            2000
                                              -------         -------
<S>                                           <C>             <C>
Commercial ...........................        $ 8,502         $ 6,733
Other ................................             12              72
                                              -------         -------
                                                8,514           6,805
Less: Allowances for doubtful accounts            (96)           (110)
                                              -------         -------
                                              $ 8,418         $ 6,695
                                              =======         =======
</TABLE>

7. INVENTORY

     Inventory consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                   JANUARY 31,
                                              -----------------------
                                               2001            2000
                                              -------         -------
<S>                                           <C>             <C>
Raw materials .........................        $4,695         $4,122
Work-in-process........................           363            274
Finished goods.........................           219            456
                                               ------         ------
                                               $5,277         $4,852
                                               ======         ======
</TABLE>

8. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                        JANUARY 31,
                                                   -------------------
                                                    2001        2000
                                                   -------     -------
<S>                                                <C>         <C>
Office furnishings and fixtures ...............    $ 1,487     $ 1,362
Equipment .....................................      7,178       5,357
Purchased software ............................        281         281
                                                   -------     -------
                                                     8,946       7,000
Less: Accumulated depreciation and amortization     (5,251)     (4,237)
                                                   -------     -------
                                                   $ 3,695     $ 2,763
                                                   =======     =======
</TABLE>

9. SOFTWARE DEVELOPMENT COSTS

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

<TABLE>
<CAPTION>
                                                     JANUARY 31,
                                                -----------------------
                                                 2001            2000
                                                -------         -------
<S>                                             <C>             <C>
Capitalized software development costs........  $12,585          $ 7,944
Less: Accumulated amortization................   (5,336)          (2,105)
                                                -------          -------
                                                $ 7,249          $ 5,839
                                                =======          =======
</TABLE>

     Capitalized software development costs for the years ended January 31,
2001, 2000, and 1999 totaled $4.6 million, $3.6 million, and $2.9 million,
respectively. Amortization of software development costs for the years ended
January 31, 2001, 2000, and 1999 totaled $3.2 million, $1.9 million, and $1.9
million, respectively, and have been reported in cost of sales in the
accompanying consolidated financial statements.


                                       31

<PAGE>   34

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                               JANUARY 31,
                                        -----------------------
                                          2001            2000
                                        -------         -------
<S>                                     <C>             <C>
Purchased technology ...........        $ 1,790         $    --
Customer base ..................            930              --
Goodwill .......................          4,947           1,724
Other acquired intangible assets          1,650           1,000
                                        -------         -------
                                          9,317           2,724
Less: Accumulated amortization .           (936)           (502)
                                        -------         -------
                                        $ 8,381         $ 2,222
                                        =======         =======
</TABLE>

     Amortization of intangible assets for the years ended January 31, 2001,
2000, and 1999 amounted to $434,000, $303,000, and $149,000, respectively.

11. LINE OF CREDIT

     The Company maintains a $10 million unsecured revolving credit facility
(the "Credit Facility"), which expires June 30, 2001. Borrowings under the
Credit Facility bear interest at the bank's prime rate or the London Interbank
Offered Rate (LIBOR) plus 150 basis points, at the option of the Company. The
interest rates can be increased by the bank dependent upon the Company
maintaining certain financial ratios. The bank's prime rate was 9.0% at January
31, 2001. There were no borrowings under the Credit Facility at January 31, 2001
or 2000. At January 31, 2001, the Company was in compliance with such covenants.

12. ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
                                                         JANUARY 31,
                                                     -------------------
                                                      2001        2000
                                                     -------     -------
<S>                                                  <C>         <C>
Accrued payroll and related expenses................ $ 3,784     $ 2,161
Accrued divestiture liabilities.....................   2,359          --
Inventory received not yet invoiced.................   1,333         840
Other...............................................   1,888       1,417
                                                     -------     -------
                                                     $ 9,364     $ 4,418
                                                     =======     =======
</TABLE>


                                       32

<PAGE>   35

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. INCOME TAXES

     Income taxes from continuing operations consist of the following amounts
(dollars in thousands):

<TABLE>
<CAPTION>
                                                YEARS ENDED JANUARY 31,
                                          -------------------------------------
                                           2001          2000            1999
                                          ------        -------         -------
<S>                                       <C>           <C>             <C>
Federal:
  Current........................         $1,939        $ 1,906         $ 1,869
  Deferred.......................             45           (318)            (52)

State:
  Current........................            490            538             477
  Deferred.......................              9            (65)            (11)
                                          ------        -------         -------
                                          $2,483        $ 2,061         $ 2,283
                                          ======        =======         =======
</TABLE>

     The effective income tax rate or income before income taxes differs from
the United States statutory income tax rates for the reasons set forth in the
table below (dollars in thousands). The tax rate shown is for tax expense on
income from continuing operations.

<TABLE>
<CAPTION>
                                                              YEARS ENDED JANUARY 31,
                                         -------------------------------------------------------------------
                                                2001                   2000                    1999
                                         ------------------      ------------------      -------------------
                                                    PERCENT                 PERCENT                  PERCENT
                                                    PRETAX                  PRETAX                   PRETAX
                                         AMOUNT     INCOME       AMOUNT     INCOME       AMOUNT      INCOME
                                         -------    ------       -------    -------      -------     -------
<S>                                      <C>         <C>         <C>         <C>         <C>          <C>
Computed "expected" tax on income
  before income taxes ...........        $ 2,391     34.0%       $ 1,920     34.0%       $ 2,126      34.0%
State tax, net of federal benefit            329      4.7            312      5.5            308       4.9
Research credit .................           (297)    (4.2)           (67)    (1.2)          (113)     (1.8)
Other, net ......................             60      0.8           (104)    (1.8)           (38)     (0.6)
                                         -------     ----        -------     ----        -------      ----
Income tax expense ..............        $ 2,483     35.3%       $ 2,061     36.5%       $ 2,283      36.5%
                                         =======     ====        =======     ====        =======      ====
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at January 31, 2001 and 2000
are as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                          JANUARY 31,
                                                                     --------------------
                                                                      2001          2000
                                                                     ------        ------
<S>                                                                  <C>           <C>
Deferred tax assets:
  Accounts receivable .......................................        $  122        $  398
  Inventory .................................................           296           266
  Property and equipment, principally due to differing
    depreciation methods ....................................           113            19
  Employee benefits, principally due to accrual for financial
    reporting purposes ......................................         1,913         2,265
  Accrued liabilities for financial reporting purposes ......         1,258            51
  Other .....................................................           175           118
                                                                     ------        ------
  Total gross deferred tax assets ...........................         3,877         3,117
  Less valuation allowance ..................................            --            --
                                                                     ------        ------
  Net deferred tax assets ...................................        $3,877        $3,117
                                                                     ======        ======
</TABLE>


                                       33

<PAGE>   36

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>
                                                           JANUARY 31,
                                                       ------------------
                                                        2001        2000
                                                       ------      ------
<S>                                                    <C>         <C>
Deferred tax liabilities:
  Prepaid expenses ................................    $   --      $   91
  Software development costs ......................     2,900       2,452
  Other ...........................................       250         265
                                                       ------      ------
  Total deferred tax liabilities...................    $3,150      $2,808
                                                       ------      ------
    Net deferred tax asset ........................    $  727      $  309
                                                       ======      ======
</TABLE>

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. There was no valuation
allowance for deferred tax assets as of February 1, 2000, and no change in the
valuation allowance for the year ended January 31, 2001.

     During 2001, the U.S. Internal Revenue Service completed its audit of the
Company's income tax returns for the years ended January 31, 1997 and 1998. The
resolution of the audit did not result in a material effect on the Company's
financial condition or results of operations.

14. STOCK COMPENSATION

     COMARCO has stock-based compensation plans under which outside directors
and certain employees receive stock options. The employee stock option plans and
a director stock option plan provide that officers, key employees, and directors
may be granted options to purchase up to 2,704,337 shares of common stock of the
Company at not less than 100% of the fair market value at the date of grant,
unless the optionee is a 10% shareholder of the Company, in which case the price
must not be less than 110% of the fair market value. Figures for these plans
reflect a 3-for-2 stock split declared during the year ended January 31, 2001.
The options are exercisable in installments determined by the compensation
committee of the Company's Board of Directors, however no option may be
exercised prior to one year following the grant of the option. The options
expire as determined by the committee, but no later than ten years and one week
after the date of grant (five years for 10% shareholders). These plans expire
through December 2010. Transactions and other information relating to these
plans for the three years ended January 31, 2001 are summarized below:

<TABLE>
<CAPTION>
                                           OUTSTANDING OPTIONS
                                     --------------------------------
                                      NUMBER OF      WEIGHTED-AVERAGE
                                       SHARES         EXERCISE PRICE
                                     ----------      ----------------
<S>                                  <C>             <C>
Balance, January 31, 1998 ...           977,813           $ 6.88
  Options granted ...........            96,000            14.00
  Options canceled or expired           (12,750)           14.93
  Options exercised .........           (28,875)            2.99
                                     ----------

Balance, January 31, 1999 ...         1,032,188             7.55
  Options granted ...........           105,000            13.45
  Options canceled or expired           (23,250)           13.69
  Options exercised .........          (125,438)            4.24
                                     ----------

Balance, January 31, 2000 ...           988,500             8.45
  Options granted ...........           273,750            21.45
  Options canceled or expired           (20,810)           13.83
  Options exercised .........          (392,270)            5.30
                                     ----------
Balance, January 31, 2001 ...           849,170           $14.02
                                     ==========
</TABLE>


                                       34
<PAGE>   37

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The following table summarizes information about stock options
outstanding at January 31, 2001:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                            -----------------------------------------------       -------------------------------
                                           WEIGHTED-AVG.
       RANGE OF               NUMBER         REMAINING        WEIGHTED-AVG.          NUMBER         WEIGHTED-AVG.
   EXERCISE PRICES          OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE       EXERCISABLE      EXERCISE PRICE
--------------------        -----------   ----------------   --------------       -----------      --------------
<S>                         <C>           <C>                <C>                  <C>              <C>
  $ 3.04 to  4.17             95,775          2.6 years          $ 3.29               95,775           $ 3.29
    5.75 to  7.67             67,500          4.1                  6.18               67,500             6.18
    9.67 to 11.75            177,395          6.2                 10.78              138,769            10.54
   13.21 to 17.50            273,750          7.8                 14.85              124,944            14.67
   19.33 to 23.67            234,750          9.3                 22.13                   --                --
  ---------------            -------          ---                ------              -------           -------
  $ 3.04 to 23.67            849,170          7.0                $14.02              426,988           $ 9.43
                             =======                                                 =======
</TABLE>

     Stock options exercisable at January 31, 2001, 2000, and 1999 were 426,988,
676,875, and 648,188, respectively, at weighted-average exercise prices of
$9.43, $6.33, and $4.87, respectively. Shares available under the plans for
future grants at January 31, 2001, 2000, and 1999 were 333,188, 275,033, and
356,783, respectively.

     The per share weighted-average fair value of employee and director stock
options granted during the years ended January 31, 2001, 2000, and 1999 was
$10.36, $5.60, and $5.92, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                  YEARS ENDED JANUARY 31,
                                            ---------------------------------
                                              2001          2000        1999
                                            ------        ------       ------
<S>                                         <C>           <C>          <C>
Expected dividend yield...................     0.0%          0.0%         0.0%
Expected volatility.......................    39.1%         31.4%        32.5%
Risk-free interest rate...................     6.2%          5.5%         5.5%
Expected life.............................  6 years       6 years      6 years
</TABLE>

     Comarco Wireless Technologies, Inc. ("CWT"), also has a subsidiary stock
option plan. Figures for this plan reflect a 10-for-1 stock split declared
during the year ended January 31, 1998. Under this plan, officers and key
employees of CWT may be granted options to purchase up to 600,000 shares of
common stock of CWT at not less than 100% of the fair market value at the date
of grant.

     As of January 31, 2001, the Company owned 3,061,000 out of the 3,065,000
outstanding shares of CWT common stock. The fair market value of the shares and
the exercise dates of the options are determined by the Compensation Committee
of the Company's Board of Directors, however, no option may be exercised prior
to one year following the grant of the option. The options expire as determined
by the Committee, but not later than ten years and one week after the date of
grant.

     In years ended January 31, 2001, 2000, and 1999, no options were granted.
At January 31, 1999, there were 419,000 outstanding options at a
weighted-average exercise price of $5.33. In the year ended January 31, 2000,
58,000 options were exercised at a weighted-average exercise price of $3.08 per
share, and 5,000 options were canceled at a weighted-average exercise price of
$13.22 per share. In the year ended January 31, 2001, 7,000 options were
exercised at a weighted-average exercise price of $13.22. Stock options
exercisable at January 31, 2001, 2000, and 1999 were 346,250, 345,500, and
361,750, respectively, at weighted-average exercise prices of $5.34, $5.28, and
$4.53, respectively. Shares available under the plan for future grants at
January 31, 2001, 2000, and 1999 were 186,000, 186,000, and 181,000,
respectively.


                                       35


<PAGE>   38

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     The following table summarizes information about CWT stock options
outstanding at January 31, 2001:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                            -----------------------------------------------       -------------------------------
                                           WEIGHTED-AVG.
       RANGE OF               NUMBER         REMAINING        WEIGHTED-AVG.          NUMBER         WEIGHTED-AVG.
   EXERCISE PRICES          OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE       EXERCISABLE      EXERCISE PRICE
--------------------        -----------   ----------------   --------------       -----------      --------------
<S>                         <C>           <C>                <C>                  <C>              <C>
  $ 2.53 to  4.30            265,000         3.8 years          $ 3.07              265,000           $ 3.07
   11.97 to 13.22             73,000         4.9                 12.19               73,000            12.19
       17.62                  11,000         6.1                 17.62                8,250            17.62
  ---------------            -------         ---                ------              -------           -------
  $ 2.53 to 17.62            349,000         7.0                $ 5.43              346,250           $ 5.34
                             =======                                                =======
</TABLE>

     The Company applies APB 25 in accounting for its plans and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                  YEARS ENDED JANUARY 31,
                                             ----------------------------------
                                              2001          2000          1999
                                             ------        ------        ------
<S>                                          <C>           <C>           <C>
Net income: As reported .............        $4,541        $3,153        $5,683
            Pro forma ...............         3,885         2,634         5,150
Earnings per common share -- basic:
            As reported .............        $ 0.67        $ 0.48        $ 0.82
            Pro forma ...............          0.58          0.40          0.75
Earnings per common share -- diluted:
            As reported .............        $ 0.61        $ 0.43        $ 0.75
            Pro forma ...............          0.50          0.36          0.70
</TABLE>

     Pro forma net income and earnings per share reflect only options granted
since February 1, 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS 123 is not reflected in the pro forma net
income and earnings per share amounts presented above because compensation cost
is reflected over the options' vesting periods of four years and compensation
cost for options granted prior to February 1, 1995 is not considered.

15. NET INCOME PER SHARE

     The Company calculates net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under
SFAS 128, basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the reporting
period. Diluted net income per share reflects the effects of potentially
dilutive securities. The reconciliation of the basic and diluted earnings per
share computations is as follows (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JANUARY 31,
                                                           -----------------------------------
                                                            2001          2000           1999
                                                           -------       -------       -------
<S>                                                        <C>           <C>           <C>
BASIC:
Net income from continuing operations ...............      $ 4,550       $ 3,586       $ 3,971
Weighted average shares outstanding .................        6,751         6,572         6,912
                                                           -------       -------       -------
Basic income per share from continuing operations ...      $  0.67       $  0.55       $  0.57
                                                           =======       =======       =======

Net income (loss) from discontinued operations ......      $    (9)      $  (433)      $ 1,712
Weighted average shares outstanding .................        6,751         6,572         6,912
                                                           -------       -------       -------
Basic income (loss) per share from discontinued
     operations .....................................      $    --       $ (0.07)      $  0.25
                                                           =======       =======       =======

Net income ..........................................      $ 4,541       $ 3,153       $ 5,683
Weighted average shares outstanding .................        6,751         6,572         6,912
                                                           -------       -------       -------
Basic income per share ..............................      $  0.67       $  0.48       $  0.82
                                                           =======       =======       =======
</TABLE>

                                       36

<PAGE>   39

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JANUARY 31,
                                                           -----------------------------------
                                                            2001          2000           1999
                                                           -------       -------       -------
<S>                                                        <C>           <C>           <C>
DILUTED:
Net income from continuing operations ...............      $ 4,550       $ 3,586       $ 3,971
Effect of subsidiary options ........................         (307)         (216)         (267)
                                                           -------       -------       -------
Net income used in calculation of diluted income per
     share from continuing operations ...............      $ 4,243       $ 3,370       $ 3,704
                                                           =======       =======       =======

Weighted average shares outstanding .................        6,751         6,572         6,912
Effect of dilutive securities - stock options .......          254           265           306
                                                           -------       -------       -------
Weighted average shares used in calculation of
     diluted income per share from continuing
     operations .....................................        7,005         6,837         7,218
                                                           =======       =======       =======
Diluted income per share from continuing operations .      $  0.61       $  0.49       $  0.51
                                                           =======       =======       =======

Net income (loss) from discontinued operations ......      $    (9)      $  (433)      $ 1,712
Effect of subsidiary options ........................           --            --            --
                                                           -------       -------       -------
Net income (loss) used in calculation of diluted
     income per share from discontinued operations ..      $    (9)      $  (433)      $ 1,712
                                                           =======       =======       =======

Weighted average shares outstanding .................        6,751         6,572         6,912
Effect of dilutive securities - stock options .......          254           265           306
                                                           -------       -------       -------
Weighted average shares used in calculation of
     diluted income (loss) per share from
     discontinued operations ........................        7,005         6,837         7,218
                                                           =======       =======       =======
Diluted income (loss) per share from discontinued
     operations .....................................      $    --       $ (0.06)      $  0.24
                                                           =======       =======       =======

Net income ..........................................      $ 4,541       $ 3,153       $ 5,683
Effect of subsidiary options ........................         (307)         (216)         (267)
                                                           -------       -------       -------
Net income used in calculation of diluted income per
     share ..........................................      $ 4,243       $ 2,937       $ 5,416
                                                           =======       =======       =======

Weighted average shares outstanding .................        6,751         6,572         6,912
Effect of dilutive securities - stock options .......          254           265           306
                                                           -------       -------       -------
Weighted average shares used in calculation of
     diluted income per share .......................        7,005         6,837         7,218
                                                           =======       =======       =======
Diluted income per share ............................      $  0.61       $  0.43       $  0.75
                                                           =======       =======       =======
</TABLE>


                                       37


<PAGE>   40

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16. EMPLOYEE BENEFIT PLANS

     The Company has a Savings and Retirement Plan (the "Plan") which provides
benefits to eligible employees. Under the Plan, as amended effective January 1,
2000, employees who have been with the Company in excess of three months and are
at least 18 years of age may participate by contributing between 1% and 20% of
pre-tax earnings. Company contributions match employee contributions at levels
as specified in the Plan document. In addition, the Company may contribute a
portion of its net profits as determined by the Board of Directors. Company
contributions, which consist of matching contributions, with respect to the Plan
for the years ended January 31, 2001, 2000, and 1999 were approximately
$733,000, $904,000, and $812,000, respectively.

17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING AND
    FINANCING ACTIVITIES

<TABLE>
<CAPTION>
                                                 YEARS ENDED JANUARY 31,
                                             -------------------------------
                                              2001         2000        1999
                                             ------       ------      ------
                                                    (IN THOUSANDS)
<S>                                          <C>          <C>         <C>
Cash paid during the year for:
  Interest.................................  $  131       $   --      $   --
  Income taxes.............................   1,013        3,648       3,459
</TABLE>

     In January 2001, the Company issued 5,916 shares of the Company's common
stock in connection with the purchase of CWT shares held by minority interests.

     In December 2000, the Company acquired the outstanding stock of EDX
Engineering, Inc. for 257,428 shares of Company stock and approximately $2.3
million in cash (Note 4).

     The following is a supplemental disclosure of noncash transactions in
connection with the EDX acquisition for the year ended January 31, 2001 (dollars
in thousands):

     Fair value of assets acquired............................  $ 6,825
     Assumed liabilities......................................     (254)
     Common stock issued......................................   (4,247)
                                                                -------
       Cash paid for acquisition, net.........................  $ 2,324
                                                                =======

     In December 1999, the Company issued 69,265 shares of the Company's common
stock in connection with the purchase of CWT shares held by minority interests.

     In May 1998, the Company acquired certain intellectual property and related
software assets of Industrial Technology, Inc. for approximately $1.0 million.


                                       38

<PAGE>   41

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18. BUSINESS SEGMENT INFORMATION

     The Company has two operating segments: wireless infrastructure and
wireless applications. Wireless infrastructure provides advanced technology
tools and engineering services to the wireless communications industry. Wireless
applications designs and manufactures remote voice systems and advanced
technology products for notebook computers, cellular telephones, and personal
organizers.

     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 (dollars in thousands):

<TABLE>
<CAPTION>
                                            YEAR ENDED JANUARY 31, 2001
                                     ------------------------------------------
                                        WIRELESS      WIRELESS
                                     INFRASTRUCTURE  APPLICATIONS        TOTAL
                                     --------------  ------------       -------
<S>                                     <C>             <C>             <C>
Revenue ........................        $34,678         $14,786         $49,464
Cost of sales...................         14,315          10,503          24,818
                                        -------         -------         -------
Gross profit....................        $20,363         $ 4,283         $24,646
                                        =======         =======         =======
Gross margin....................           58.7%           29.0%           49.8%
                                        =======         =======         =======
</TABLE>

<TABLE>
<CAPTION>
                                            YEAR ENDED JANUARY 31, 2000
                                     ------------------------------------------
                                        WIRELESS      WIRELESS
                                     INFRASTRUCTURE  APPLICATIONS        TOTAL
                                     --------------  ------------       -------
<S>                                     <C>             <C>             <C>
Revenue...........................      $ 19,259       $ 19,965         $39,224
Cost of sales.....................         7,575         13,219          20,794
                                        --------       --------         -------
Gross profit......................      $ 11,684       $  6,746         $18,430
                                        ========       ========         =======
Gross margin......................          60.7%          33.8%           47.0%
                                        ========       ========         =======
</TABLE>

<TABLE>
<CAPTION>
                                            YEAR ENDED JANUARY 31, 1999
                                     ------------------------------------------
                                        WIRELESS        WIRELESS
                                     INFRASTRUCTURE    APPLICATIONS      TOTAL
                                     --------------    ------------     -------
<S>                                     <C>             <C>             <C>
Revenue............................... $ 23,670          $ 10,334       $ 34,004
Cost of sales.........................    8,058             6,984         15,042
                                       --------          --------       --------
Gross profit.......................... $ 15,612          $  3,350       $ 18,962
                                       ========          ========       ========
Gross margin..........................     66.0%             32.4%          55.8%
                                       ========          ========       ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                    YEARS ENDED JANUARY 31,
                                             ------------------------------------
                                               2001          2000           1999
                                             --------      --------      --------
<S>                                          <C>           <C>           <C>
United States..............................  $ 44,738      $ 35,280      $ 28,411
Canada.....................................        22           753         1,223
Europe.....................................       350           907         1,417
Asia.......................................       932           338           699
Latin America..............................     3,422         1,946         2,254
                                             --------     --------       --------
                                             $ 49,464      $ 39,224      $ 34,004
                                             ========      ========      ========
</TABLE>

     Long-lived assets outside of North America were insignificant at January
31, 2001, 2000, and 1999.


                                       39

<PAGE>   42

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


19. COMMITMENTS AND CONTINGENCIES

     Rental commitments under non-cancelable operating leases, principally on
the Company's office space, equipment and automobiles were $3.0 million at
January 31, 2001, payable as follows: $955,000, $866,000, $779,000, and $393,000
in the years ended January 31, 2002, 2003, 2004, and 2005, respectively. Certain
of the rental commitments are subject to increases based on the change in the
Consumer Price Index. Rental expense for the years ended January 31, 2001, 2000,
and 1999 was $1.7 million, $2.1 million, and $1.8 million, respectively.

     The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management and the Company's
legal counsel, the amount of ultimate liability with respect to these actions
will not materially affect the financial condition of the Company.

     Costs under cost-reimbursable contracts are subject to audit by the
customer upon contract completion. Therefore, all contract costs, including
direct and indirect costs, are potentially subject to adjustment prior to final
reimbursement. Audits have been completed through January 31, 1999.

     During 2001, the Company completed the divestiture of its non-wireless
businesses in six separate transactions. The agreements included normal
indemnification provisions. The indemnification provisions expire in May 2002.

     Management believes that sufficient reserves have been established for its
most probable assessment of the potential outcomes of the above open matters.


                                       40

<PAGE>   43

                         COMARCO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


20. QUARTERLY FINANCIAL DATA (UNAUDITED)

     Unaudited summarized financial data by quarter for 2001 and 2000 are as
follows (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                             FISCAL YEAR QUARTERS
                                                 ----------------------------------------------
YEAR ENDED JANUARY 31, 2001                       FIRST       SECOND        THIRD       FOURTH
                                                 -------      -------      -------      -------
<S>                                              <C>          <C>          <C>          <C>
Revenue from continuing operations ........      $10,097      $11,952      $13,153      $14,262
Gross profit from continuing operations ...        5,289        6,196        6,739        6,422
Operating income from continuing operations        1,299          636        2,264        2,079
Net income from continuing operations .....          865          473        1,643        1,569
Net income ................................      $ 1,063      $   774      $ 1,522      $ 1,182
                                                 =======      =======      =======      =======
Basic net income per share ................      $  0.16      $  0.12      $  0.22      $  0.17
                                                 =======      =======      =======      =======
Diluted net income per share ..............      $  0.15      $  0.10      $  0.20      $  0.16
                                                 =======      =======      =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                            FISCAL YEAR QUARTERS
                                                 ----------------------------------------------
YEAR ENDED JANUARY 31, 2000                      FIRST       SECOND       THIRD         FOURTH
                                                 ------      ------      --------       -------
<S>                                              <C>         <C>         <C>            <C>
Revenue from continuing operations ........      $7,842      $8,973      $ 11,959       $10,450
Gross profit from continuing operations ...       3,861       3,979         5,701         4,889
Operating income from continuing operations         879         815         2,315         1,410
Net income from continuing operations .....         609         580         1,482           915
Net income (loss) .........................      $  959      $1,012      $   (412)      $ 1,594
                                                 ======      ======      ========       =======
Basic net income (loss) per share .........      $ 0.15      $ 0.15      $  (0.06)      $  0.24
                                                 ======      ======      ========       =======
Diluted net income (loss) per share .......      $ 0.13      $ 0.14      $  (0.07)      $  0.23
                                                 ======      ======      ========       =======
</TABLE>


                                       41

<PAGE>   44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    PART III

     The information required by Part III is incorporated by reference from the
definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement")
for our Annual Meeting of Stockholders to be held June 26, 2001, which we intend
to file with the Securities and Exchange Commission by May 30, 2001.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS (SEE ITEM 8)


    2. FINANCIAL STATEMENT SCHEDULE:

    The following additional information for the years ended January 31, 2001,
    2000, and 1999 is submitted herewith:

          II -- Reserves

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

    3. EXHIBITS

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

         3.2        By-Laws. The By-Laws are incorporated by reference from the
                    Company's report on Form 10-Q for the quarter ended July 31,
                    1986.

    10. MATERIAL CONTRACTS

         10.1       1982 Stock Option Plan. The restated 1982 Stock Option Plan
                    is incorporated herein by reference from Exhibit C to the
                    Company's definitive Proxy Materials filed with the
                    Securities and Exchange Commission on June 25, 1986.

         10.2       Director Stock Option Plan dated July 1, 1987 is
                    incorporated by reference from the Company's report on Form
                    10-K for the year ended January 31, 1988.


                                       42

<PAGE>   45

         10.3       Contract dated January 22, 1991 between the Company and the
                    County of Los Angeles for the operation and maintenance of
                    County-owned general aviation airports is incorporated by
                    reference from the Company's report on Form 10-K for the
                    year ended January 31, 1991.

         10.4       Agreement dated April 16, 1991 between the Company and Don
                    M. Bailey, President and Chief Executive Officer, regarding
                    employment termination in the event of a change in control
                    of the Company is incorporated by reference from the
                    Company's report on Form 10-K for the year ended January 31,
                    1992.

         10.5       Agreement dated December 14, 1989 between the Company and
                    ManTech Engineering Corporation to establish the Interop
                    Joint Venture is incorporated by reference from the
                    Company's report on Form 10-K for the year ended January 31,
                    1992.

         10.6       Agreement dated January 4, 1993 between the Company,
                    DynCorp, and Electronic Warfare Associates to establish the
                    Tesco Joint Venture is incorporated by reference from the
                    Company's report on Form 10-K for the year ended January 31,
                    1993.

         10.7       Business Loan Agreement dated September 26, 1994 between the
                    Company and Bank of America, N.A. (formerly NationsBank of
                    Virginia, N.A.) to establish a $5,000,000 Guidance Line of
                    Credit and an $8,000,000 Master Line of Credit is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended October 30, 1994.

         10.8       Guidance Line of Credit Note for $5,000,000 dated September
                    26, 1994 between the Company and Bank of America, N.A.
                    (formerly NationsBank of Virginia, N.A.) is incorporated by
                    reference from the Company's report on Form 10-Q for the
                    quarter ended October 30, 1994.

         10.9       Master Line of Credit for $8,000,000 dated September 26,
                    1994 between the Company and Bank of America, N.A. (formerly
                    NationsBank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    October 30, 1994.

         10.10      Nonqualified Employee Stock Option Plan for Comarco Wireless
                    Technologies, Inc. dated August 1994 is incorporated by
                    reference from the Company's report on Form 10-Q for the
                    quarter ended October 30, 1994.

         10.11      Primary Stock Purchase Agreement among COMARCO, Inc. and the
                    prior shareholders of LCTI, Inc., dated August 9, 1994 is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended October 30, 1994.

         10.12      Second Stock Purchase Agreement among COMARCO, Inc. and the
                    prior shareholders of LCTI, Inc., dated August 9, 1994 is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended October 30, 1994.

         10.13      1995 Employee Stock Option Plan is incorporated by reference
                    from the Company's report on Form S-8 filed with the
                    Securities and Exchange Commission on October 5, 1995.

         10.14      First Amendment to Loan Agreement dated September 26, 1995
                    between the Company and Bank of America, N.A. (formerly
                    NationsBank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    October 29, 1995.


                                       43

<PAGE>   46

         10.15      Amended and Restated Master Line of Credit Note dated
                    October 31, 1995 between the Company and Bank of America,
                    N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended October 29, 1995.

         10.16      Amended and Restated Guidance Line of Credit Note dated
                    October 31, 1995 between the Company and Bank of America,
                    N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended October 29, 1995.

         10.17      Second Amendment to Loan Agreement dated August 30, 1996
                    between the Company and Bank of America, N.A. (formerly
                    NationsBank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    July 31, 1996.

         10.18      Second Amended and Restated Master Line of Credit Note dated
                    August 30, 1996 between the Company and Bank of America,
                    N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended July 31, 1996.

         10.19      Second Amended and Restated Guidance Line of Credit Note
                    dated August 30, 1996 between the Company and Bank of
                    America, N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended July 31, 1996.

         10.20      Asset Purchase Agreement among COMARCO, Inc., CoSource
                    Solutions, Inc. (now known as Comarco Staffing, Inc.),
                    R.A.L. Consulting and Staffing Services, Inc., and Robert A.
                    Lovingood dated July 23, 1996 is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    July 31, 1996.

         10.21      Employment Agreement between COMARCO, Inc., CoSource
                    Solutions, Inc. (now known as Comarco Staffing, Inc.), and
                    Robert A. Lovingood dated July 23, 1996 is incorporated by
                    reference from the Company's report on Form 10-Q for the
                    quarter ended July 31, 1996.

         10.22      Noncompetition and Confidentiality Agreement between
                    COMARCO, Inc., CoSource Solutions, Inc., (now known as
                    Comarco Staffing, Inc.) and Robert A. Lovingood dated July
                    23, 1996 is incorporated by reference from the Company's
                    report on Form 10-Q for the quarter ended July 31, 1996.

         10.23      Third Amendment to Loan Agreement dated August 15, 1997
                    between the Company and Bank of America, N.A. (formerly
                    NationsBank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    July 31, 1997.

         10.24      Third Amended and Restated Master Line of Credit Note dated
                    August 15, 1997 between the Company and Bank of America,
                    N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended July 31, 1997.

         10.25      Third Amended and Restated Guidance Line of Credit Note
                    dated August 15, 1997 between the Company and Bank of
                    America, N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended July 31, 1997.

         10.26      Fourth Amendment to Loan Agreement dated August 21, 1998
                    between the Company and Bank of America, N.A. (formerly
                    NationsBank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    July 31, 1998.


                                       44

<PAGE>   47

         10.27      Fourth Amended and Restated Master Line of Credit Note dated
                    August 21, 1998 between the Company and Bank of America,
                    N.A. (formerly NationsBank of Virginia, N.A.) is
                    incorporated by reference from the Company's report on Form
                    10-Q for the quarter ended July 31, 1998.

         10.28      Fifth Amended and Restated Master Line of Credit Note dated
                    June 30, 2000 between the Company and Bank of America, N.A.
                    (formerly Nations Bank of Virginia, N.A.) is incorporated by
                    reference from the Company's report on Form 10-Q for the
                    quarter ended July 31, 2000.

         10.29      Sixth Amendment to Loan Agreement dated June 30, 2000
                    between the Company and Bank of America, N.A. (formerly
                    Nations Bank of Virginia, N.A.) is incorporated by reference
                    from the Company's report on Form 10-Q for the quarter ended
                    July 31, 2000.

         10.30      Letter Agreement dated December 6, 2000 amending the Loan
                    Agreement between the Company and Bank of America, N.A.
                    (formerly Nations Bank of Virginia, N.A.) is incorporated by
                    reference from the Company's report on Form 10-Q for the
                    quarter ended October 31, 2000.

     11. COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK USED IN THE COMPUTATION
         OF EARNINGS PER SHARE

         SUBSIDIARIES OF THE COMPANY

         The following are the significant subsidiaries of the Company:

         o   Decisions and Designs, Inc. (DDI) incorporated in the Commonwealth
             of Virginia.

         o   International Business Services, Inc. (IBS) incorporated in the
             District of Columbia.

         o   Comarco Wireless Technologies, Inc. (CWT) incorporated in the State
             of Delaware.

         o   LCTI, Inc. incorporated in the State of Maryland.

         o   Comarco Wireless International, Inc. (formerly known as Comarco
             Wireless Europe, Inc.) incorporated in the State of Delaware.

         o   Comarco Staffing, Inc. (formerly known as CoSource Solutions,
             Inc.), incorporated in the State of California.

         o   Comarco Systems, Inc., incorporated in the State of California.

         o   Comarco Services, Inc. incorporated in the State of California.


     23.1  CONSENT OF INDEPENDENT AUDITORS


     99.2  UNDERTAKINGS OF REGISTRANT


(b) REPORTS ON FORM 8-K

     None.


                                       45

<PAGE>   48

                         COMARCO, INC. AND SUBSIDIARIES

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 23, 2001.


                                               COMARCO, INC.

                                               /s/ THOMAS A. FRANZA
                                               ---------------------------------
                                                   Thomas A. Franza
                                                   President and Chief Executive
                                                   Officer

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

<TABLE>
<CAPTION>

        Signature                                    Title                              Date
        ---------                                    -----                              ----
<S>                                  <C>                                           <C>
  /s/ THOMAS A. FRANZA               President and Chief Executive Officer         April 23, 2001
----------------------------------       (Principal Executive Officer)
      Thomas A. Franza


  /s/ DANIEL R. LUTZ                        Vice President and Chief               April 23, 2001
----------------------------------             Financial Officer
      Daniel R. Lutz               (Principal Financial and Accounting Officer)


  /s/ DON M. BAILEY                          Chairman of the Board                 April 23, 2001
----------------------------------
      Don M. Bailey


  /s/ WILBUR L. CREECH                              Director                       April 23, 2001
----------------------------------
      Wilbur L. Creech


  /s/ GERALD D. GRIFFIN                             Director                       April 23, 2001
----------------------------------
      Gerald D. Griffin


  /s/ JEFFREY R. HULTMAN                            Director                       April 23, 2001
----------------------------------
      Jeffrey R. Hultman
</TABLE>


                                       46

<PAGE>   49

                         COMARCO, INC. AND SUBSIDIARIES

                             SCHEDULE II - RESERVES

                       THREE YEARS ENDED JANUARY 31, 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            OTHER
                                            BALANCE AT      CHARGED TO                     CHANGES
                                            BEGINNING       COST AND                         ADD           BALANCE AT
                                             OF YEAR         EXPENSE      DEDUCTIONS       (DEDUCT)        END OF YEAR
                                            ----------      ----------    ----------       --------        -----------
<S>                                         <C>             <C>           <C>              <C>             <C>
Year ended January 31, 2001:
  Allowance for doubtful accounts and
    provision for unbilled
    receivables (deducted from
    accounts receivable) ............          $110            $24           $38(1)           $ --             $ 96

Year ended January 31, 2000:
  Allowance for doubtful accounts and
    provision for unbilled
    receivables (deducted from
    accounts receivable) ............          $ 96            $24           $10(1)           $ --             $110

Year ended January 31, 1999:
  Allowance for doubtful accounts and
    provision for unbilled
    receivables (deducted from
    accounts receivable) ............          $ 72            $24           $--              $ --             $ 96
</TABLE>

---------------
(1) Writeoff of uncollectible receivables.



                                       47

<PAGE>   50
                                EXHIBIT INDEX

  NUMBER                                DESCRIPTION
  ------                             -----------------

     11. COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK USED IN THE COMPUTATION
         OF EARNINGS PER SHARE

         SUBSIDIARIES OF THE COMPANY

         The following are the significant subsidiaries of the Company:

         o   Decisions and Designs, Inc. (DDI) incorporated in the Commonwealth
             of Virginia.

         o   International Business Services, Inc. (IBS) incorporated in the
             District of Columbia.

         o   Comarco Wireless Technologies, Inc. (CWT) incorporated in the State
             of Delaware.

         o   LCTI, Inc. incorporated in the State of Maryland.

         o   Comarco Wireless International, Inc. (formerly known as Comarco
             Wireless Europe, Inc.) incorporated in the State of Delaware.

         o   Comarco Staffing, Inc. (formerly known as CoSource Solutions,
             Inc.), incorporated in the State of California.

         o   Comarco Systems, Inc., incorporated in the State of California.

         o   Comarco Services, Inc. incorporated in the State of California.


     23.1  CONSENT OF INDEPENDENT AUDITORS


     99.2  UNDERTAKINGS OF REGISTRANT