SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             -----------------------
                                    FORM 10-K


[x] Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
    Act of 1934 for the fiscal year ended January 31, 1998 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 of
       incorporation or organization)       (I.R.S. Employer Identification No.)

     22800 Savi Ranch Parkway, Suite 214
           Yorba Linda, California                       92887
   ---------------------------------------             ---------
   (Address of principal executive office)             (Zip Code)

                                 (714) 282-3832
              ----------------------------------------------------
              (Registrant's telephone number, including area code)
           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 check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

            Common stock outstanding at February 27, 1998 - 4,718,710
                                     shares.

      
                                                     Aggregate market value of
              Class                               shares held by non-affiliates

    Common Stock......................................      $46,429,011

     The total number of shares held by  non-affiliates on February 27, 1998 was
2,146,510.  This number was  multiplied  by $21.63 per share (the  closing  sale
price of the Common  Stock on February  27, 1998 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,  Directors and holders of
more than 5% of the outstanding Common Stock of registrant are affiliates.)

                       DOCUMENTS INCORPORATED BY REFERENCE

     The Company intends to file with the Securities and Exchange  Commission by
May 30, 1998 a definitive Proxy Statement (the "1998 Proxy Statement")  relating
to its 1998 Annual Meeting of Stockholders,  which meeting involves the election
of  directors  and  certain  related  matters.   The  1998  Proxy  Statement  is
incorporated  by  reference in Part III of this Form 10-K and shall be deemed to
be a part hereof.



                              CROSS REFERENCE SHEET

     The  following  table  indicates  the headings in the 1998 Proxy  Statement
under which the information required in Part III of this Form 10-K may be found.
<TABLE>
Form
10-K
Item
 No.                      Item in Form 10-K                                  Item in 1998 Proxy Statement
 ---                      -----------------                                  ----------------------------
<S>                                                                     <C>
10. "Directors and Executive Officers of the Registrant"................"Election of Directors and Officers"
11. "Executive Compensation"..........................................  "Executive Compensation"
12. "Security Ownership of Certain Beneficial Owners
        and Management"...............................................  "Ownership of Securities"
13. "Certain Relationships and Related Transactions"..................  "Executive Compensation"
</TABLE>

     Copies of all documents  incorporated  by reference  other than exhibits to
such  documents  will be provided  without  charge to each person who receives a
copy of this Annual Report on Form 10-K upon written request.

<PAGE>


                                     PART I

Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking  statements within the meaning of Section 21E
of the  Securities  Exchange  Act of 1934,  as  amended,  and Section 27A of the
Securities Act of 1933, as amended,  that involve risks and  uncertainties.  The
actual  results  that  the  Company  achieves  may  differ  materially  from any
forward-looking  projections due to such risks and uncertainties.  Words such as
"believes,"   "anticipates,"   "expects,"   "future,"   "intends,"  and  similar
expressions are intended to identify forward-looking  statements but are not the
exclusive means of identifying such statements.


ITEM 1.  Business

COMARCO,   Inc.  and  its  subsidiaries  (the  "Company",   "COMARCO",   or  the
"registrant") is a California  corporation  whose common stock has been publicly
traded  since 1971 when it was  spun-off  from  Genge  Industries,  Inc.  Active
subsidiaries   other  than  the  parent  company   include:   Comarco   Wireless
Technologies,  Inc.  ("Comarco  Wireless"),  which was formed in January 1994 to
further  develop  the  Company's  wireless   communications  products  business;
Manufacturing  Technology  Training  Center,  Inc.  (MTTC),  which was formed in
January 1996 to further  develop the  Company's  technology  training  business;
Comarco Wireless  International Inc. (formerly known as Comarco Wireless Europe,
Inc.), a wholly-owned  subsidiary of Comarco Wireless Technologies,  Inc., which
was formed in April 1996 to market and provide  post-contract  customer  support
for the Company's wireless communications  products to international  customers;
Comarco Staffing,  Inc. which was formed in August 1996 to acquire the assets of
a commercial  outsourced staffing services company;  and Comarco Systems,  Inc.,
which was formed in January 1997 to further  develop the  Company's  information
technology and engineering services business.


BUSINESS AREAS

The  business  and  major  customer   information   provided  in  the  Company's
Consolidated  Financial  Statements  contained  in this report are  incorporated
herein by  reference.  In  particular,  see Note 1 of the Notes to  Consolidated
Financial Statements and Item 7, Management's Discussion and Analysis of Results
of Operations and Financial Condition.

The Company has historically  engaged in providing  outsourced staffing services
(engineering,  technical,  and  airport  management)  to  agencies of the United
States Government,  government prime contractors, and local government agencies.
To broaden its  existing  outsourced  staffing  services  business,  the Company
acquired a  commercial  outsourced  staffing  services  company in August  1996.
During  the past four  years,  the  Company,  through  its  subsidiary,  Comarco
Wireless  Technologies,  Inc.,  has invested more of its corporate  resources in
expanding its wireless  communications  products  business area. This effort has
resulted in COMARCO  realizing  the majority of its  operating  income from this
business area.

Summarized  financial  information by business  segment for the Company's Fiscal
Year 1998, which ended January 31, 1998, is as follows:

<TABLE>


                                                  
                             Wireless             Outsourced
                          Communications       Staffing Services
                             Products          and Other Revenue    Corporate and Other          Total
                          ----------------------------------------------------------------------------------------
                                                 (Dollars in Thousands)
<S>                    <C>                   <C>                   <C>                   <C>           
Revenues               $       29,524        $       55,615        $          ---        $       85,139
Operating income                6,733                   795                   (69)                7,459
Identifiable assets            18,884                10,148                14,862                43,894

</TABLE>

     o   Wireless Communications Products

The Company's wireless communications products business, through its subsidiary,
Comarco  Wireless  Technologies,  Inc., is presently  comprised of three product
families:  field measurement  products,  revenue assurance products and wireless
applications products.

          o    Field measurement  products provide a method for benchmarking and
               analyzing the performance of wireless system networks.  The field
               measurement  product  line  includes the  Generation  II cellular
               survey system,  the NES250  network  evaluation  system,  the NRS
               network readiness system,  the CDPD data survey product,  and the
               Company's  latest product  introductions,  the LT 100 and LT 200,
               which  permits  day-to-day  network  performance   monitoring  of
               cellular and PCS networks.

          o    The revenue  assurance  product line includes system products and
               services  that test the integrity of cellular  carriers'  billing
               systems.

          o    Wireless  applications  products  include ireless data  telemetry
               systems and emergency  roadside callbox systems.  The   Company's
               wireless data telemetry system is the Cellular Data Gateway  that
               is  used  to  transport  data  and  is  optimized  for wide area 
               applications.  In  October 1996,  the Company  purchased  certain
               callbox produc line assets from GTE. The installed base purchased
               from GTE consists of over 18,000  units,  of which  approximately
               11,000 are being serviced by the Company under long-term  mainte-
               nance  contracts.  In  addition, in  February  1997, the  Company
               acquired certain assets of the Cubic Communications, Inc. callbox
               product line. The installed base  purchased from Cubic Communica-
               tions consists of approximately 6,500 units. Management  believes
               that the combination of these two product lines  establishes  the
               Company as a major vendor to  this niche of the wireless applica-
               tion products marketplace.

Comarco Wireless  Technologies' revenues increased to 35% of the Company's total
revenue in Fiscal  Year 1998,  representing  an  increase  of 51% over the prior
fiscal year.  Operating  income  increased 28% year-to-year and represented over
80% of the  Company's  consolidated  operating  income  for  Fiscal  Year  1998.
Continued  growth in Comarco  Wireless  revenues and income is  predicated  on a
number of factors,  including  the continued  success of the  Company's  product
development efforts,  continued geographical expansion to international markets,
continued  growth and  increased  availability  of cellular  and other  wireless
communication services, including PCS, in the United States and internationally,
and continued  acceptance of the Company's  products by its  customers,  none of
which can be assured.

International  revenues in Fiscal Year 1998 totaled $8.9  million,  up from $5.4
million in the prior fiscal year.  The majority of these sales have been made to
Europe,  Asia-Pacific and Latin America.  The Company expects that international
revenues will continue to be a significant part of total revenues. Marketing and
post-contract  customer  support offices are opened and staffed in Singapore and
London, England.


PRODUCT DEVELOPMENT

The  Company  continues  its  product   development   program  in  its  wireless
communications business.  Because a common thread of technology runs through all
Comarco  Wireless  product lines,  the Company believes that it can leverage its
investment  and  maintain  the  focus and  concentration  of its  technical  and
marketing  resources,  although  there can be no assurance  in that regard.  The
Company in general has been developing and plans to continue to develop products
that  will  be  compatible  with  all  wireless  communications  air  interfaces
worldwide.  New  product  introductions  this  year  included  adding  other air
interfaces  to the Company's  line of field  measurement  and revenue  assurance
products including CDMA, GSM, PC 1800/1900,  and IS-136 and further expansion of
the  Company's  LT line  with  the  introduction  of the LT 200.  The  Company's
wireless  product life cycle is estimated to be two to five years,  depending on
the product.

The Company is also  continuing  its  development of a new product line, a power
adapter for laptop  computers  and cellular  telephones.  The  objective of this
product is to be smaller,  lighter and more versatile than existing  products on
the market and is based on the Company's patented power transfer technology. The
product has recently completed both FCC and UL testing,  but the Company has not
commenced  the sale of this  product.  Potential  customers  would include after
market and original equipment  manufacturers.  The Company's current strategy is
to initially  pursue after market  customers.  The power  requirements of laptop
computers   are   increasing   due  to  the   introduction   of  more   powerful
microprocessors.  This factor will  require the Company to continue  its product
development  program  to  increase  the  power  capacity  of its  power  adapter
products. The Company believes that the higher power adapter is the product that
may also appeal to original equipment  manufacturers.  There can be no assurance
that the Company will be successful  in bringing  this power adapter  product to
market,  or that this product will be successful.  The Company is aware that the
power supply market is extremely competitive.  If the Company is successful, the
production,  marketing,  and sale of this  product  will  require a  significant
amount of working capital for the financing of inventory and accounts receivable
arising from sales of the product.

The Company  plans to continue to invest  substantially  in product  development
efforts.  Its  products  are  characterized  by rapidly  changing  technologies,
evolving standards,  and continuous  improvements in products and services.  The
Company's  future  prospects  will  depend in part on its ability to enhance the
functionality of its existing products in a timely and cost-effective manner and
to identify, develop, and achieve market acceptance of new products that address
new  technologies  and  standards  and  meet  customer  needs  in  the  wireless
communications  marketplace.  There can be no assurance that the Company will be
able to respond to technological advances, changes in customer requirements,  or
changes in regulatory  requirements or industry  standards,  and any significant
delays in development,  introduction or shipment of products,  or achievement of
acceptable  product costs, could have a material adverse effect on the Company's
business, operating results and financial condition.

As part of its  product  development  program,  the  Company is  continuing  its
software product  development program in its wireless  communications  business.
During  Fiscal  Year  1998  and  Fiscal  Year  1997,   the  Company's   wireless
communications business capitalized  approximately $2.5 million and $2.2 million
of  software  product  development  costs,  respectively,   in  accordance  with
Statement of Financial  Accounting Standards No. 86, Accounting for the Costs of
Computer  Software to be Sold,  Leased,  or Otherwise  Marketed.  Of the amounts
capitalized,  $1.4 million and $1.0  million,  respectively,  were  amortized in
Fiscal Years 1998 and 1997 against  product sales in accordance  with  Statement
No. 86.

In addition,  during Fiscal Years 1998,  1997,  and 1996,  Comarco  Wireless had
expenditures of $1.5 million, $1.9 million and $1.8 million,  respectively,  for
research  and  development   expenses  (including   Company-sponsored   software
development costs prior to determination of technological feasibility).


BACKLOG

Unfilled  orders at Comarco  Wireless as of January  31, 1998 are  approximately
$17.7  million,  compared to $19.6  million as of January 31, 1997.  The current
year balance  includes $1.9 million of product orders for the field  measurement
and revenue  assurance  product lines,  and $1.5 million of deferred revenue for
basic and extended warranty commitments.  Management believes that substantially
all of this  backlog  amount (of $3.4  million)  will  result in revenue  during
Fiscal Year 1999. In general,  most of the Company's  product  orders are filled
within months from the receipt of the order.  The remaining  unfilled  orders of
$14.3  million are related to the callbox  product  line.  This backlog  balance
consists  of $0.7  million of new  product  orders,  $9.8  million of  long-term
maintenance  agreements,  and the  remaining  $3.8 million is to upgrade the Los
Angeles County  callbox  system to comply with the Americans  with  Disabilities
Act's  requirements  for use by hearing  and speech  impaired  individuals.  The
Company  currently  expects  the  majority  of the Los  Angeles  contract  to be
performed late in Fiscal Year 1999 and continue into Fiscal Year 2000.


SEASONALITY/FLUCTUATION IN QUARTERLY RESULTS

Comarco  Wireless has  experienced,  in each of the past four years,  a seasonal
fluctuation in wireless  communications products activity, with greater sales in
the latter half of its fiscal  year and lesser  amounts in the first half of the
fiscal year,  although this trend has been  declining  over the same four years.
This fluctuation may or may not continue due to a number of factors,  including:
the timing, cancellation, or delay of customer orders; the timing of new product
introductions by the Company or its competitors;  the size of customers' capital
budgets,  which are the traditional  source of customer funding for the purchase
of the Company's  products;  market acceptance of the Company and its customers'
products;  variations in manufacturing  capacities,  efficiencies and costs; the
availability  and  cost  of  components;  capacity  and  production  constraints
associated  with  single  source  component  suppliers;  and  other  competitive
factors.  Therefore, the nature of the wireless communications products business
is inherently unpredictable;  sales and profits may fluctuate significantly from
quarter to quarter; and therefore, period-to-period comparisons of its operating
results are not  necessarily  meaningful and such  comparisons  cannot be relied
upon as indicators of future performance.


MARKETING, SALES DISTRIBUTION, FOREIGN SALES

Comarco  Wireless  maintains its own internal  sales force for the marketing and
sales of the Company's product  offerings in the United States.  The Company has
established a network of agents and  distributors  for the coordination of sales
activity outside of the United States.  In addition,  the Company has opened and
staffed marketing and customer support offices in Singapore and London,  England
to service Asia-Pacific and Europe, respectively.  This expansion overseas faces
a number of inherent barriers,  including: the need for export licenses; tariffs
and other potential trade restrictions; changes in laws governing the imposition
of duties,  quotas,  taxes, or other charges relating to the import or export of
its  products;   political   and  economic   instability,   the   difficulty  of
administering business globally, longer accounts receivable cycles, and currency
exchange   fluctuations.   The  Company  currently  has  limited  experience  in
penetrating the foreign marketplace and, therefore,  companies having a presence
or already doing  business  overseas may have a competitive  advantage  over the
Company.  There  can be no  assurance  that the  Company's  international  sales
efforts will be successful.

The Company  currently  sells to its major  customers under purchase orders that
are usually placed with short-term delivery requirements. Therefore, the Company
maintains  significant  inventory levels and associated production and technical
staff  in order to  respond  to the  short-term  delivery  requirements.  If the
customer orders, as forecasted,  do not materialize or are delayed,  the Company
will have higher levels of inventory than otherwise needed,  increasing the risk
of  obsolescence.  The higher levels of inventory and  production  and technical
staffing would also reduce the Company's liquidity and profitability.

The Company's  standard terms require foreign customers to pay for the Company's
products  with U.S.  dollars.  As such, a  strengthening  of the U.S.  dollar as
compared to a foreign customer's local currency  effectively  increases the cost
of the  Company's  products  for that  customer,  thereby  making the  Company's
products  less  attractive to that  customer.  For those orders  denominated  in
foreign currencies,  the Company has limited its exposure to losses from foreign
currency  transactions  by the purchase of forward foreign  exchange  contracts.
Such activity to date has been  insignificant.  There can be no assurance that a
currency hedging strategy will be successful in avoiding exchange-related losses
in the future.

Significant weakness in foreign currency exchange rates can also create economic
uncertainty,  including  weakness in banking  systems and equity  markets.  Such
weaknesses  can impact  customers'  demand for the Company's  products and their
ability to pay for the Company's products with U.S. dollars.

Therefore,  any  significant  change  in a  foreign  country's  exchange  rates,
economy,  or a  deterioration  of  U.S.  trade  relations  or the  economies  or
political stability of foreign locations in which the Company sells its products
could  have a  material  adverse  effect on the  Company's  business,  operating
results, and financial condition.


CAPITAL REQUIREMENTS

Comarco  Wireless'  working capital needs  primarily  consist of the cost of the
upfront  product  development  effort  required to expand the Company's  product
offerings,  inventory requirements,  including long lead time materials, and the
financing of accounts  receivable,  which will generally  become longer upon the
Company's continued planned geographical expansion into Europe, Asia-Pacific and
Latin America.  Certain  components used by the Company in its existing products
are only  available  from single  sources,  and  certain  other  components  are
presently  available or acquired only from a limited  number of  suppliers.  The
radio interface  devices designed into the Company's  products are key purchased
components  whose lack of availability  could have a material  adverse impact on
sales and  profits.  In the event that any of its single  source  suppliers  are
unable to fulfill  Company  requirements or discontinue the manufacture of a key
component, the Company would be required to purchase a comparable component from
other sources and modify its products to function  properly with the replacement
component  or redesign  its  products to use other  components,  either of which
could result in delays in production and delivery.  Working capital requirements
are expected to be financed from  operations and the financial  resources of the
Company.

Comarco Wireless also operates from a single-site  manufacturing  operation. Any
material disruption in the manufacturing operations of Comarco Wireless, whether
due to fire,  natural  disasters,  or  otherwise,  will have a material  adverse
effect on the Company's business, operating results, and financial condition.


TECHNICAL REQUIREMENTS

Comarco  Wireless is selling its products into a market that is growing  rapidly
and  subject  to  technological  obsolescence,  and  market  timing  of  product
introductions  is critical for success.  In the  development  of new or expanded
product offerings, the Company's access to the technical design of air interface
devices is  essential  for the  Company to  anticipate  and  develop  compatible
wireless communications  products. The inability to obtain the technical designs
on a timely basis will have a direct  impact on product  design and schedule and
could  have a  material  adverse  effect on the  Company's  business,  operating
results, and financial condition.


EMPLOYEES

As of April 1, 1998, Comarco Wireless employed approximately 140 employees.  The
Company  believes  its  employee  relations  to be  good.  The  majority  of the
Company's  employees are professional or technical personnel having training and
experience in  engineering,  computer  science,  and  management.  The Company's
future  success  depends  in  large  part on the  continued  service  of its key
technical,  marketing,  and management personnel, and on its ability to continue
to attract and retain  qualified  employees,  particularly  those highly skilled
design, process, and test engineers involved in the development of new products.
The 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 the Company's  business,
operating  results,  and financial  condition.  Recognizing  this  reality,  the
Company has instituted a long-term  incentive  stock option plan for key Comarco
Wireless  employees,  whereby they will directly  participate  in the success of
Comarco   Wireless  (see  Note  11  of  the  Notes  to  Consolidated   Financial
Statements).  The  Company  obtains  its  employees  through a variety  of means
including  advertisements,  technical  job fairs,  engineering  recruiters,  and
engineering temporary staffing firms.


COMPETITION

Comarco Wireless competes in small niches (field measurement equipment,  revenue
assurance   equipment,   and  emergency  roadside  callboxes)  of  the  wireless
communications  marketplace.  The  business is  competitive  and there are other
companies,  many of which are larger and have greater financial  resources,  who
provide or could  provide the same type of products.  The ability of the Company
to compete successfully depends upon a number of factors,  including the rate at
which  customers  accept the  Company's  products in overseas  markets,  product
quality  and  performance,  experienced  sales and  marketing  personnel,  rapid
development of new products and features,  evolving industry standards,  and the
number and nature of the Company's  competitors.  The Company believes there are
companies  that  provide or have the ability to provide the products the Company
is planning for overseas  users.  Also,  companies  having a presence or already
doing  business  overseas may have an advantage in  penetrating  those  markets.
There can be no assurance that the Company will be able to compete  successfully
in the future, either domestically or internationally.


PROPRIETARY INFORMATION

The Company has one patent for its small power adapter for laptop  computers and
cellular  telephones,  and  patents  covering  its  emergency  roadside  callbox
product.  However,  the Company  currently  relies primarily on a combination of
trade secrets,  copyrights,  and contractual  rights to protect its intellectual
property in the wireless products area. There can be no assurance that the steps
taken by the  Company  will be  adequate  to deter  misappropriation  or  impede
third-party  development  of its  technology.  In addition,  the laws of certain
foreign countries in which the Company's products may be sold do not protect the
Company's  intellectual property rights to the same extent as do the laws of the
United States. The failure of the Company to protect its proprietary information
could  have a  material  adverse  effect on the  Company's  business,  operating
results, and financial condition.


     o   Outsourced Staffing Services and Other Revenue

     These services are primarily in the fields of:

         o    Information Technologies
         o    Intelligent Instrumentation and Automated Test Systems
         o    Ordnance and Weapon Systems Engineering Services
         o    Airport Management Services
         o    Commercial Staffing Services
         o    Manufacturing Training

     Approximately  $55.6  million  or  65%  of  the  Company's  revenues,   and
     approximately  $0.8 million of its  operating  income (after a $0.7 million
     non-recurring  charge for write-off of intangible  assets),  for the fiscal
     year ended January 31, 1998 were derived from  contracts  and  subcontracts
     for such services.


     Information Technologies
     ------------------------

     The Company  specializes in the application of information  technologies to
     support  agencies  of  the  U.S.  Department  of  Defense,   other  Federal
     Government agencies,  local governments,  and various commercial customers.
     This includes:

         o Creating and operating  computer-based  environments  that  simulate,
           emulate,  and  stimulate  communications  and  target  computer-based
           systems.
         o Designing, building, and employing instrumentation for testing infor-
           mation systems.
         o Designing,  engineering,  integrating,  testing,  administering,  and
           maintaining  local-  and  wide-area  network  and  office  automation
           systems.
         o Designing, populating, and maintaining complex databases.
         o Specifying,   developing,   testing,   integrating,   and  supporting
           communications protocols, links, and application software.
         o Developing and employing  data reduction and analysis  techniques and
           records management systems, including image processing systems.
         o Developing and integrating Geographic Information Systems.

     The Company also designs, specifies, acquires, integrates, tests, installs,
     operates, and maintains systems for its customers' uses.


     Intelligent Instrumentation and Automated Test Systems
     ------------------------------------------------------

     The  Company  also  specializes  in  the  development  and  application  of
     computer-based  test instruments and automated test systems with particular
     focus on:

         o Interoperability testing of communications and information systems;
         o Developmental  and  operational  testing of C4I,  ordnance,  tactical
           weapon and data systems; and o Automated Test Systems (ATS).

     The  Company  provides  engineering  and  testing  support  to assure  that
     communications  and  computer-based  systems  interoperate  effectively and
     reliably.

     The Company provides design and fabrication of special purpose test support
     software and hardware for testing aircraft,  missile  launchers,  missiles,
     gun and other complex  electronics-based  systems and their  subsystems and
     components.

     The Company develops test program sets (TPS's) and interface devices (ID's)
     for  operational   performance   verification  and  failure   diagnosis  of
     mission-critical electronic assemblies and subassemblies.

     Ordnance and Weapon Systems Engineering Services
     ------------------------------------------------

     The  Company  offers  U.S.  military  customers  a variety  of  specialized
     engineering services applicable to ordnance and weaponry, including:
         o System  engineering  for complex  C4I, ordnance,  weapon and  weapon-
           platform integration concepts.
         o Design and test engineering of embedded computers, avionics, software
           lasers, optics, seekers,   guidance  and  control  systems,  interior
           and exterior ballistics, airframes, electronics, energetic materials,
           propulsion, warheads, fuses, and insensitive munitions.
         o Quality  assurance,  reliability,   maintainability,  system  safety,
           productibility, logistics, and standard engineering.
         o Documentation, CAD/CAE (CALS and EDMICS compliant), configuration and
           data management, and records archiving and management services.

     The Company is providing environmental and safety engineering including:

         o Pollution prevention studies
         o Evaluation of site developments for environmental compliance
         o Air, water, and soil sampling and analysis
         o Waste system analysis
         o Permit renewal preparation
         o Other environmental support

     Current customers for information technologies, intelligent instrumentation
     and  automated  test systems and ordnance and weapons  systems  engineering
     services  include  agencies of the U.S.  Government  and  government  prime
     contractors.


     Airport Management Services
     ---------------------------

     The Company  provides  airport  management  services  for local  government
     agencies.  Current  significant  efforts include a contract  supporting the
     Metropolitan  Washington  Airports Authority at Reagan Washington  National
     Airport through September 30, 1998 and a long-term  contract to manage five
     general  aviation  airports  in Los  Angeles  County.  Support in this area
     includes  managing  airport  operations,  ground  transportation  services,
     computerized revenue collection,  and general management support functions.
     In  addition,  the  Company  began  work on a  long-term  airport  services
     contract in February 1997 for Riverside  County,  California and on another
     contract in May 1997 for Tacoma Narrows Airport, Tacoma, Washington.


     Commercial Staffing Services
     ----------------------------

     In August  1996 the  Company  acquired  the  assets of RAL  Consulting  and
     Staffing  Services,  Inc. This operation provides  engineering,  technical,
     light industrial,  and  administrative  staffing services to the commercial
     marketplace.  Specific  areas of expertise  include:  temporary  personnel,
     general recruitment,  substance abuse testing,  OSHA compliance,  and human
     resources  consulting.  The  main  office  is in  Victorville,  California,
     serving the Apple Valley area of the High Desert.  During Fiscal Year 1998,
     the Company opened an additional office in Corona, California.


     Manufacturing Training
     ----------------------

     Created under a Cooperative Research and Development Agreement (CRADA) with
     the Navy,  the  Company's  subsidiary,  MTTC,  Inc.,  operates  a school to
     provide training in world-class electronics manufacturing.  Specializing in
     both manual and automated electronics  interconnection methods, the Company
     offers   certification   and  operator  training  in  accordance  with  the
     commercial  standard,  IPC A-610.  The  Company is  currently  one of seven
     authorized IPC electronics manufacturing training centers in the country.


BACKLOG

The  Company's  backlog from  outsourced  staffing  services  and other  revenue
believed  to be firm as of January  31,  1998 was $35  million,  compared to $51
million as of January 31,  1997.  The source of backlog is  primarily  contracts
with the U.S. and local governments.  Government  contracts normally have a base
and option periods totaling three to five years in duration.  In many instances,
government  entities  must issue work orders,  delivery  orders,  or task orders
prior to the Company  commencing  work.  These  entities have the  discretion to
terminate any contract at their convenience,  and are normally obligated only to
pay for costs incurred to date under a contract. In addition, these entities may
elect to remove funding previously attached to a contract. Many of the Company's
contracts  are  multi-year,  with  options to provide  services  for  additional
periods of time.  There can be no assurances  that the government  entities will
exercise the options,  will not withdraw  funds already  committed,  or that the
entities  will fund the  unfunded  portions of the  Company's  contracts.  It is
estimated that  approximately 70% of the firm backlog will be realized in Fiscal
Year 1999.


GOVERNMENT CONTRACTS

A significant  portion of the Company's  total  revenues  (approximately  32% in
FY98,  39% in FY97,  and 51% in FY96) was derived from contracts with the United
States   Government,   principally   agencies  of  the  Department  of  Defense.
Significant  portions of the Company's  revenues are derived from contracts with
the U.S. military services: Department of Defense, 5%; U.S. Army, 9%; U.S. Navy,
11%;  and U.S.  Air  Force,  7%.  Should  changes  in  procurement  policies  or
reductions  in  government  expenditures  occur,  revenue  and net income of the
Company could be adversely affected (see Management's Discussion and Analysis of
Results  of  Operations  and  Financial  Condition).  The  Company's  government
contracts  business  is  not  seasonal;  however  variations  may  occur  at the
expiration of major  contracts until such contracts are renewed or new contracts
obtained.  Further,  the Federal  Government  is  increasing  its use of General
Services  Administration  multiple  award  schedules  (GSA MAS) and  other  very
broad-based   contract  vehicles  to  acquire  information   technology  related
services.  The Company  has  responded  to this shift in its Federal  Government
market by successfully  obtaining awards of its own GSA MAS in February 1998 and
teaming with other companies on similar vehicles they have obtained. As of April
1998, orders under these vehicles total  approximately  $600,000 since September
1997. In the course of the Company's  business,  its contracts are  periodically
opened for  competition.  In March 1998,  the Company  announced  the award of a
contract  with a value of $75  million to continue  to provide  engineering  and
management  services to the U.S. Navy at Crane,  Indiana.  This contract,  along
with  the  contract  awards  during  Fiscal  Year  1997  with  award  values  of
approximately $60 million,  were  recompetitions of work the Company was already
performing.  Contract  periods  are  generally  three to five  years,  including
options.  The Company's airport contract at Reagan  Washington  National Airport
ends at September 30, 1998.  The Company has decided not to pursue the recompete
of this contract.  This contract's annual revenues  approximate $8.8 million, it
has been marginally profitable, and it would be unprofitable if reawarded to the
Company.  Two other  multi-year  government  contracts  are  scheduled to end in
Fiscal Year 1999 with annual revenues of approximately $3.8 million. The Company
plans to aggressively compete for its existing work and selectively pursue other
high value Government  procurements.  There can be no assurance that the Company
will be selected and awarded work under any future proposals.


COMPETITION

Approximately  80% of the  Company's  outsourced  staffing  services  and  other
revenue  business  is  awarded  through  competitive  procurements.   Government
contracting services industries consist of thousands of companies, many of which
are  larger and have  greater  financial  resources  than the  Company,  who can
provide  the same type of  services.  The  business is highly  competitive.  The
Company obtains much of its business on the basis of submitted  proposals to new
and  existing   customers.   Competition   generally   centers  on  price,  past
performance,  technical capability,  management plan, and personnel. There is no
single  company that competes  directly with the Company on all of the Company's
services and products.


PROPRIETARY INFORMATION

The United States Government has certain proprietary rights in software programs
and  products  developed  by  the  Company  in  its  performance  of  government
contracts.


EMPLOYEES

As of April 1, 1998, the Company employed approximately 840 full-time employees,
of which 700 were part of the  outsourced  staffing  services  business area. In
addition, the Company has approximately 420 employees (on a full-time equivalent
basis) working as temporaries in its commercial  outsourced  staffing  business.
The Company  believes  its employee  relations  to be good.  The majority of the
Company's  employees are professional or technical personnel having training and
experience in engineering, computer science, and management. Approximately 65 of
the  Company's  employees in this business  area at Reagan  Washington  National
Airport are  represented by the  International  Brotherhood of Teamsters and are
covered by a collective bargaining agreement.


ITEM 2.  Properties

The   Company's   principal   facilities   on  January  31,  1998,   aggregating
approximately  113,000  square  feet,  are located in the cities of Yorba Linda,
Irvine, Camarillo,  Victorville, Corona, and Ridgecrest,  California; Vienna and
Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield,
Indiana;  Colorado  Springs,  Colorado;   Huntsville,   Alabama;   Gaithersburg,
Maryland;  Belton, Texas; London, England; and Singapore, and are occupied under
leases expiring prior to Fiscal Year 2004. With the exception of an 8,000 square
foot area used for  light  manufacturing,  all  facilities  are used for  office
space. The Company's  aggregate annual property rent during Fiscal Year 1998 was
approximately  $1.4  million.  The  aggregate  annual  property rent in the year
ending January 31, 1999 is expected to be approximately $1.3 million. Management
believes  that  all  facilities   currently  occupied  by  the  Company  provide
sufficient space for the Company's  present needs, and that suitable  additional
space will be available, if needed. Comarco Wireless operates from a single-site
manufacturing operation. Any material disruption in the manufacturing operations
of Comarco Wireless,  whether due to fire, natural disaster, or otherwise,  will
have a material adverse effect on the Company's business, operating results, and
financial condition.


ITEM 3.  Legal Proceedings

The  Company  is  subject  to legal  proceedings  and  claims  that arise in the
ordinary  course of its business.  In the opinion of  management,  the amount of
ultimate  liability with respect to these actions will not materially affect the
Company's operating results and financial condition. In particular,  see Note 19
of the Notes to Consolidated Financial Statements.


ITEM 4.  Submission of Matters to a Vote of Security Holders

Not applicable.

<PAGE>
                                     PART II


ITEM 5.  Market for the Company's Common Equity and Related Stockholder Matters

The Company's  Common Stock is traded in the  over-the-counter  market under the
NASDAQ  symbol CMRO.  The  following  table sets forth the range of high and low
closing prices in the NASDAQ National Market System for the Common Stock for the
periods indicated,  as reported by the National  Quotation Bureau  Incorporated.
Prices represent actual reported sale prices.

                                 Fiscal Years Ended January 31
<TABLE>
                                                                     Price
                                                            ------------------------
                                                             High            Low
                                                           --------       ---------
      <S>                                                   <C>            <C>
      1998
         First Quarter.................................     $ 18.13        $ 16.38
         Second Quarter................................       20.00          16.38
         Third Quarter.................................       24.00          19.38
         Fourth Quarter................................       24.00          20.13
      1997
         First Quarter.................................     $ 16.25        $ 13.00
         Second Quarter................................       22.50          14.88
         Third Quarter.................................       18.25          14.88
         Fourth Quarter................................       19.00          16.25
</TABLE>

The Company had approximately 594 shareholders of record on February 27, 1998.

The terms of the  Company's  current  bank loan  agreement  limit the payment of
dividends under certain  circumstances.  The Company  anticipates that dividends
will not be paid for the  foreseeable  future  and  that  all  earnings  will be
retained for use in the Company's business and for stock repurchases.


<PAGE>
ITEM 6.  Selected Financial Data

                             SELECTED FINANCIAL DATA
                (Figures in thousands, except per share amounts)
<TABLE>

                                                                       Years Ended January 31,
                                              --------------------------------------------------------------------------
                                                  1998           1997           1996           1995            1994
                                              --------------  ------------   ------------   ------------    ------------
<S>                                           <C>              <C>            <C>          <C>               <C>            
Revenues:
   Contract revenues......................    $       55,030   $    50,858    $    54,278  $      58,796     $    59,500
   Product sales..........................            30,109        20,556         15,563          9,520           6,808
                                               --------------  ------------   ------------   ------------    -----------
                                                      85,139        71,414         69,841         68,316          66,308
Direct costs:
   Contract costs.........................            37,960        35,599         36,540         39,276          39,553
    Cost of product sales..................           14,050         7,417          6,644          5,388           3,764
                                               --------------  ------------   ------------   ------------    ------------
                                                      52,010        43,016         43,184         44,659          43,317

Indirect costs............................            24,960        21,780         21,112         18,652          19,628
Intangible asset write-off................               710           ---            ---            ---             ---
                                               --------------  ------------   ------------   ------------    ------------
                                                      77,680        64,796         64,296         63,311          62,945
 
Operating income .........................             7,459         6,618          5,545          5,005           3,363
Interest expense..........................               ---           ---             44            231             333
Interest income...........................               404           559            541            298             349
                                               --------------  ------------   ------------   ------------    ------------
Income before income taxes ...............             7,863         7,177          6,042          5,072           3,379

Income tax expense .......................             2,988         2,512          2,157          1,743             980
                                              --------------  ------------   ------------   ------------    ------------

Net income ...............................    $        4,875     $   4,665    $     3,885    $     3,329     $     2,399
                                              ==============  ============   ============   ============    ============
Earnings per share:
     Basic:
         Net income.......................    $         1.03    $      .98   $        .84    $       .71     $       .46
                                              ==============  ============   ============   ============    ============
       Diluted:
         Net income.......................    $          .89    $      .86   $        .75    $       .68     $       .45
                                              ==============  ============   ============   ============    ============
Dividends declared per share..............          None            None          None           None            None
</TABLE>

<PAGE>



                             SELECTED FINANCIAL DATA
                                 (In thousands)
<TABLE>
                                                                           January 31,
                                              -----------------------------------------------------------------------

                                                  1998          1997           1996          1995           1994
                                              -------------  ------------  -------------  ------------  -------------
<S>                                           <C>            <C>           <C>            <C>           <C>       
Working capital ..........................    $    20,937    $    20,429   $    16,049    $    12,394   $    14,879
Total assets..............................         43,629         39,210        29,989         25,810        24,891
Borrowings under bank line of credit......             --             --            --             --            --
Long-term debt, including current maturities
   (1)....................................            ---            ---           ---            844         2,984
Stockholders' equity .....................         30,470         26,977        21,738         17,203        15,144

</TABLE>

(1) Includes Convertible Subordinated Debentures of $844,000 at January 31, 1995
    and $2,984,000 at January 31, 1994.


ITEM 7.  Management's  Discussion  and  Analysis  of Results  of Operations  and
         Financial Condition

Results of Operations

The following tables set forth, for the periods indicated,  the percentage which
certain items in the Consolidated Statements of Income bear to revenues, and the
percentage change from period to period of these items:


Percentage of Revenues
<TABLE>
                                                                   Years Ended January 31,
                                                     -----------------------------------------------------
                                                         1998                1997               1996
                                                     -------------       -------------      --------------
<S>                                                     <C>                 <C>                <C>        
Revenues.........................................       100.0%              100.0%             100.0%
Operating income.................................         8.8                 9.3                7.9
Interest expense.................................        --                  --                   .1
Interest income..................................          .5                  .8                 .8
Income tax expense...............................         3.5                 3.5                3.0
Net income.......................................         5.7                 6.5                5.6
</TABLE>

Percentage Increase (Decrease)
<TABLE>
                                                           Years Ended January 31,
                                                     -------------------------------------
                                                       1998-1997             1997-1996
                                                     ---------------       ---------------
<S>                                                      <C>                  <C>                   
Revenues.........................................         19.2%                  2.3%
Operating income.................................         12.7                  19.4
Interest expense.................................         --                  (100.0)
Interest income..................................        (27.7)                  3.3
Income tax expense...............................         18.9                  16.5
Net income.......................................          4.5                  20.1
</TABLE>
<PAGE>

FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997


Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking  statements within the meaning of Section 21E
of the  Securities  Exchange  Act of 1934,  as  amended,  and Section 27A of the
Securities Act of 1933, as amended,  that involve risks and  uncertainties.  The
actual  results  that  the  Company  achieves  may  differ  materially  from any
forward-looking  projections due to such risks and uncertainties.  Words such as
"believes,"   "anticipates,"   "expects,"   "future,"   "intends,"  and  similar
expressions are intended to identify forward-looking  statements but are not the
exclusive means of identifying such statements.

The  Company  is  involved  in two  distinct  business  areas:  development  and
manufacture  of wireless  communications  products and  services;  and providing
outsourced  staffing  services  including  engineering,  technical,  and airport
management services to government and commercial entities.

Fiscal Year 1998 revenues totaled $85.1 million, up 19% from the prior
year. Increased year-to-year revenue is primarily due to:

     o   sales of the  Company's  wireless  communications  products,  including
         various field measurement,  revenue  assurance,  and emergency roadside
         callbox systems
     o   full year versus one-half year in the prior  year from the  acquisition
         of a $10  million  per year commercial staffing business.

Operating  income for Fiscal  Year 1998  increased  to $7.5  million  (after the
effect of a $.7 million non-recurring,  non-cash charge for the write-off of the
remaining  intangible assets associated with the Company's  outsourced  staffing
services software  development  operation),  up 13% from $6.6 million last year.
Before this  non-recurring  charge,  operating  income was $8.2 million,  up 23%
compared to the same period last year.  Increased  operating income is primarily
due to increased sales of wireless communication systems as noted above.


Wireless Communications Products

Wireless  communications  products  revenues  increased 51% to $29.5 million for
Fiscal  Year 1998 from  $19.5  million  for the  comparable  period  last  year.
Wireless  communication product revenues comprised  approximately 34.7% of total
Company  revenues  during  Fiscal Year 1998,  up from 27.3% in the prior  fiscal
year.   This  increase  is  due  to  increased  sales  of  the  Company's  field
measurement,  revenue assurance, and emergency callbox systems. The rapid growth
of cellular and PCS markets and proliferation of numerous digital air interfaces
is driving demand for the Company's products worldwide. During Fiscal Year 1998,
the Company's product introductions  included adding other air interfaces,  such
as CDMA, GSM, PC 1800/1900,  and IS-136.  These product  introductions  fueled a
significant   increase  in   international   sales  for   Comarco   Wireless  to
approximately $8.9 million or 30% of Fiscal Year 1998 revenues.

Operating  income  from  wireless  communications  products  increased  to  $6.7
million,  up 28% year to year and comprised  approximately  90% of the Company's
total  operating  income for Fiscal  Year 1998.  Summary  operating  results for
Comarco  Wireless  Technologies,  Inc.,  the Company's  wireless  communications
products subsidiary, are as follows:

<PAGE>

<TABLE>

                                      January 31,              January 31,
                                   -------------------------------------------
                                         1998                     1997
                                   -------------------------------------------
   <S>                             <C>                      <C> 
   Product                         $   29,524,000           $    19,519,000
     sales.......................
   Cost of products sold.........      13,573,000                 7,065,000
                                      ------------------       ------------------

   Gross  margin.................      15,951,000                12,454,000
   Percentage....................          54.0%                    63.8%
   
   Indirect costs*...............       9,218,000                 7,204,000
                                    ==================       ==================

   Operating income..............  $    6,733,000           $     5,250,000
                                    ==================       ==================
</TABLE>

*Indirect costs include selling, general and administrative expenses, as well as
research and development expenses.

 The decreased gross margin percentage is due to the increased costs incurred to
 increase the capacity of the wireless communications  products business,  which
 included  additional  staffing,  moving  to a larger  facility  in  California,
 associated  costs to support future  anticipated  higher sales levels,  and the
 addition of the emergency roadside callbox product lines which have lower gross
 margins than the field measurement and revenue assurance product families.

 The increase in indirect costs is primarily due to the  additional  selling and
 general  administrative  costs associated with  international  expansion during
 Fiscal Year 1998. Selling and general and administrative  expenses totaled $7.7
 million  in Fiscal  Year 1998,  up 45% from the  comparable  period  last year.
 Research and development  expense totaled $1.5 million during Fiscal Year 1998,
 compared  to $1.9  million  in the prior  fiscal  year.  The  Company  plans to
 continue  to  invest  heavily  in  new  product  development.  There  can be no
 assurance that the Company will be successful in generating future revenue from
 such development efforts.

 Operating  income  increased  28% to $6.7 million in Fiscal Year 1998 from $5.2
 million in the prior fiscal year.  Operating income as a percentage of revenues
 is 22.8% for  Fiscal  Year 1998,  compared  to 26.9% for the  comparable  prior
 period.  The  year-to-year  decrease is primarily  due to the  increased  costs
 related to business  expansion  and the  addition of the lower  margin  callbox
 product line, as discussed above.

The  Company is  continuing  its  software  product  development  program in its
wireless   communications   products  business.  In  accordance  with  Financial
Accounting  Standard No. 86, Accounting for the Costs of Computer Software to be
Sold,  Leased,  or Otherwise  Marketed,  the Company's  wireless  communications
products  business  capitalized  and  amortized  $2.5 million and $1.4  million,
respectively,  during Fiscal Year 1998.  The Company's  wireless  communications
products  business  capitalized  and amortized  $2.2 million and $1.0 million in
Fiscal Year 1997,  respectively.  These  amounts are in addition to the research
and development expense discussed above.

The Company's orders for wireless  communications products totaled $27.6 million
for Fiscal  Year 1998,  compared  with $34.7  million  during  Fiscal Year 1997.
Included within the above totals are $4.1 million and $10.0 million of long-term
maintenance   service  business  associated  with  the  purchase  of  the  Cubic
Communications  and GTE callbox  product lines during Fiscal Year 1998 and 1997,
respectively.  Unfilled  orders at January 31, 1998 totaled  $17.7  million,  of
which $9.8 million is associated  with the long-term  maintenance  contracts and
$1.5 million is associated with post-contract customer support obligations which
has been recorded as deferred revenue.

In October 1997, the Accounting  Standards  Executive  Committee of the American
Institute of Certified  Public  Accountants  issued  Statement of Position (SOP)
97-2 entitled  Software  Revenue  Recognition.  This Statement  updates SOP 91-1
which was issued in 1991,  and it provides  guidance on when  revenue  should be
recognized and in what amounts for  licensing,  selling,  leasing,  or otherwise
marketing  computer  software.  The  provisions  of the new  Statement are to be
applied  prospectively  and are effective for Fiscal Year 1999.  The Company has
not completed its analysis of the impact on the financial  statements  that will
be caused by the adoption of this Statement.

In February 1997, the Company  acquired an additional  callbox product line from
Cubic Communications,  Inc. This acquisition, coupled with the prior acquisition
of the GTE callbox product line,  establishes  Comarco Wireless  Technologies as
one of the leading companies in the callbox niche of the wireless communications
industry.

The Company has  experienced  fluctuations in wireless  communications  products
activity in each of the past four years,  with greater  sales in the second half
of its fiscal year and lesser amounts in the first half, although this trend has
been declining  over the same four years.  This trend may or may not continue as
the  Company  broadens  its  product  offerings.  The  nature  of  the  wireless
communications products business is inherently unpredictable;  sales and profits
may   fluctuate   significantly   from   quarter  to  quarter;  and   therefore,
period-to-period  comparisons  of its  operating  results  are  not  necessarily
meaningful  and such  comparisons  cannot be relied upon as indicators of future
performance.



Outsourced Staffing Services and Other Revenue

Revenues provided by the outsourced staffing services business area increased in
Fiscal Year 1998,  totaling $55.6 million compared to $51.9 million in the prior
year. The increased  revenue of 7.1%  year-to-year  is due to the acquisition of
the commercial  outsourced staffing company on August 1, 1996, which contributed
$10.2 million of revenue in Fiscal Year 1998,  versus $5.1 million during Fiscal
Year  1997.  Sales  to the  U.S.  Government  as  well  as to  government  prime
contractors  were 30% and 32% of the Company's  total revenue  during the fourth
quarter and the fiscal year ended January 31, 1998, respectively.  In the course
of  the  Company's   business,   its  contracts  are  periodically   opened  for
competition.  In March 1998, the Company  announced the award of a contract with
an award value of $75 million to continue to provide  engineering and management
services  to the U.S.  Navy at Crane,  Indiana.  This  contract,  along with the
contract awards during Fiscal Year 1997 with award values of  approximately  $60
million, were recompetition of work the Company was already performing. Contract
periods are generally three to five years,  including options. In addition,  the
Company began work on a long-term airport services contract in February 1997 for
Riverside  County,  California  and on another  contract  in May 1997 for Tacoma
Narrows Airport,  Tacoma,  Washington.  The Company's airport contract at Reagan
Washington  National Airport ends on September 30, 1998. The Company has decided
not to pursue the recompete of this contract.  This  contract's  annual revenues
approximate  $8.8 million,  it has been marginally  profitable,  and it would be
unprofitable  if  reawarded  to the  Company.  Two other  multi-year  government
contracts  are  scheduled  to end in Fiscal  Year 1999 with  annual  revenues of
approximately $3.8 million.  The Company plans to aggressively  compete for this
other work opened for competition to the extent possible and selectively  pursue
certain high value Government  procurements.  There can be no assurance that the
Company will be selected and awarded the work  associated with any of its future
proposals.  In addition,  government  agencies may terminate  their contracts in
whole or in part at their  convenience.  Government  agencies may remove funding
previously provided or may not exercise option periods.  Therefore, there can be
no assurance  that the Government  will fund the portions of existing  contracts
that are unfunded, or that the governmental agencies will exercise any options.

In January 1998, the Company  recorded a $710,000  charge against  earnings from
the impairment of certain assets of its outsourced staffing software development
operation.  This charge was recorded in accordance  with  Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets to be  Disposed  of.  Based  upon  recent  marketing
initiatives  which  proved  unsuccessful  in the  fourth  quarter,  the  Company
determined  that the expected future cash flows were not sufficient to cover the
remaining unamortized intangible assets. Accordingly, the complete impairment of
these assets was recorded in the statement of income.

Operating income  (revenues less direct costs,  indirect costs, and depreciation
and amortization) for outsourced staffing services is down 43% year-to-year from
$1.4  million  in Fiscal  Year 1997 to $0.8  million in Fiscal  Year  1998.  The
decrease is due to the start-up costs of the two new long-term  airport services
contracts as discussed above, as well as a decrease in the  profitability of the
Reagan Washington National Airport contract due to a reduction in the management
fee effective October 1, 1996.

Net interest income  (interest  income,  less interest  expense) for Fiscal Year
1998  totaled  $404,000  compared to $559,000  for the prior  fiscal  year.  The
decrease is principally due to lower available investable balances  year-to-year
along with lower interest rates.

The Company's  effective tax rate is 38.0% for Fiscal Year 1998 versus 35.0% for
the previous fiscal year. The increased effective tax rate is principally due to
no curent year  adjustment  of  the income tax  valuation  allowance  as well as
lower levels of tax-exempt interest.

The overall  increase in net income from the prior year is primarily  due to the
significant  increase in sales of wireless  communications  products at slightly
lower  operating  income  margin;  partially  offset by the  decrease in airport
services contracts' operating income and a higher effective income tax rate.

<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1996


Fiscal Year 1997 revenues totaled $71.4 million, up 2% from the prior year.
Increased year-to-year revenue is primarily due to:

     o   sales of the  Company's  wireless  communications  products,  including
         various  field  measurement  and  revenue  assurance  systems  to major
         cellular carriers
     o   acquisition  as of October 1, 1996 of the cellular callbox product line
         from GTE o  acquisition as of August 1, 1996 of a commercial outsourced
         staffing company
   partially offset by:
     o    reduced revenue levels from  outsourced  staffing services,  primarily
          due  to  the Company's  contract  with  the Naval  Air  Warfare Center
          ("NAWC") which ended in the prior fiscal year.

Wireless Communications Products

Wireless  communications  products  revenues  increased 36% to $19.5 million for
Fiscal  Year 1997 from  $14.4  million  for the  comparable  period  last  year.
Wireless  communication product revenues comprised  approximately 27.3% of total
Company  revenues  during  Fiscal Year 1997,  up from 20.5% in the prior  fiscal
year. This increase is due to increased sales of the Company's field measurement
and revenue  assurance  systems to major  cellular  telephone  carriers  and the
acquisition  of the callbox  product line from GTE.  During the year the Company
continued to broaden its product  line with the  continued  introduction  of its
second generation of field measurement  equipment  including products supporting
the GSM and CDMA air interfaces. In addition, the Company introduced the LT-100,
the latest member of its field measurement product line.

Operating  income from  wireless communications  products increased 41% year-to-
year,  comprising 79% of the Company's total  operating  income for Fiscal  Year
1997.   Summary   operating results  for Comarco  Wireless Technologies,   Inc.,
the  Company's  wireless   communications  products  subsidiary, are as follows:

<TABLE>

                                      January 31,              January 31,
                                   -------------------------------------------
                                          1997                     1996
                                   -------------------------------------------
   <S>                             <C>                      <C>
   Product sales                   $    19,519,000          $    14,352,000
    Cost of products sold .......        7,065,000                5,679,000
                                   ------------------       ------------------

   Gross margin..................       12,454,000                8,673,000
     Percentage..................            63.8%                    60.4%
   
   Indirect costs*...............        7,204,000                4,964,000
                                   ==================       ==================

   Operating income..............  $     5,250,000          $     3,709,000
                                    ==================       ==================
</TABLE>

 *Indirect costs include selling,  general and administrative  expenses, as well
 as research and development expenses.

 Increased  gross  margin  percentage  is  due  to the  incremental  benefit  of
 spreading the fixed costs of operations over a larger activity base.

 The  increase in indirect  costs is due to the  additional  selling and general
 administrative costs associated with international expansion during Fiscal Year
 1997.  Research and development  expense totaled  $1,900,000 during Fiscal Year
 1997,  compared to  $1,800,000  in the prior fiscal year.  The Company plans to
 continue  to  invest  heavily  in  new  product  development.  There  can be no
 assurance that the Company will be successful in generating future revenue from
 such development efforts.

 Operating  income  increased  41% to $5.2 million in Fiscal Year 1997 from $3.7
 million in the prior fiscal year.  Operating income as a percentage of revenues
 is 26.9% for  Fiscal  Year 1997,  compared  to 25.8% for the  comparable  prior
 period. The increase is due to the improvement in gross margin percentage noted
 above,  which  was  partially  offset  by the  increased  selling  and  general
 administrative expenses.

 The Company is  continuing  its  software  product  development  program in its
 wireless   communications   products  business.  In  accordance  with Financial
 Accounting Standard No. 86, Accounting for the Costs of Computer Software to be
 Sold,  Leased, or Otherwise  Marketed,  the Company's  wireless  communications
 products  business  capitalized  and amortized  $2.2 million and $1.0  million,
 respectively,  during Fiscal Year 1997. The Company's  wireless  communications
 products  business  capitalized and amortized  $1.4 million and $1.1 million in
 Fiscal Year 1996,  respectively. These  amounts are in addition to the research
 and development expense discussed above.

 The Company's orders for wireless communications products totaled $34.7 million
 for Fiscal Year 1997, up from $17.1 million  during Fiscal Year 1996.  Included
 within  the  Fiscal  Year  1997  booking  total  is $10  million  of  long-term
 maintenance  service  business  associated with the purchase of the GTE callbox
 product line.  Unfilled  orders at January 31, 1997 totaled $19.6  million,  of
 which $9.3 million is associated with the long-term  maintenance  contracts and
 $2.3 million is associated  with  post-contract  customer  support  obligations
 which has been recorded as deferred revenue.

 In February  1997,  the Company  acquired  the callbox  product line from Cubic
 Communications,  Inc. This  acquisition,  coupled with the prior acquisition of
 the GTE callbox product line,  establishes Comarco Wireless Technologies as one
 of the leading  companies in the callbox  niche of the wireless  communications
 industry.

 The Company has experienced  fluctuations in wireless  communications  products
 activity in each of the past three years, with greater sales in the second half
 of its fiscal year and lesser amounts in the first half.  This trend may or may
 not continue as the Company broadens its product  offerings.  The nature of the
 wireless communications products business is inherently  unpredictable,  as the
 Company will normally not have a significant  amount of unfilled  orders at the
 end of a period.  Therefore,  sales levels and profits are difficult to predict
 and may fluctuate significantly from quarter to quarter.

 Outsourced Staffing Services and Other Revenue

 Revenues  provided by the outsourced  staffing services business area decreased
 from $55.5  million in Fiscal  Year 1996 to $51.9  million in Fiscal Year 1997.
 Revenues for outsourced staffing services for Fiscal Year 1997 comprised 73% of
 the Company's total revenues compared with 80% in the prior year. This decrease
 is primarily due to the completion of the Company's contract with the Naval Air
 Warfare Center at China Lake, California in the prior year, partially offset by
 the acquisition of a commercial staffing business as of August 1, 1996.

 Sales to the U.S.  Government as well as to government  prime  contractors were
 32% and 39% of the Company's  total revenue  during the fourth  quarter and the
 fiscal  year  ended  January  31,  1997,  respectively.  In the  course  of the
 Company's  business,  its  government  contracts  are  periodically  opened for
 competition.  During  Fiscal  Year 1997,  the  Company  announced  the award of
 several  contracts with a total estimated value over the lives of the contracts
 of $60  million to  provide  engineering  and  management  services  to various
 Government  agencies.  The majority of these contract awards were recompetition
 of work the Company  was already  performing.  Contract  periods are  generally
 three  to five  years,  including  options.  None of the  Company's  government
 contracts  is  scheduled  to end in Fiscal  Year  1998.  The  Company  plans to
 aggressively compete for all work opened for competition to the extent possible
 and selectively pursue certain high value Government procurements. There can be
 no assurance that the Company will be selected and awarded the work  associated
 with  any of  its  future  proposals.  In  addition,  government  agencies  may
 terminate their contracts in whole or in part at their convenience.  Government
 agencies may remove  funding  previously  provided or may not  exercise  option
 periods. Therefore, there can be no assurance that the Government will fund the
 portions of existing  contracts  that are  unfunded,  or that the  governmental
 agencies will exercise any options.

 Operating income (revenues less direct costs,  indirect costs, and depreciation
 and  amortization)  for outsourced  staffing  services is down 26% year-to-year
 from $1.9 million in Fiscal Year 1996 to $1.4 million in Fiscal Year 1997.  The
 reduced  operating  income is primarily due to the  completion of the Company's
 contract  with the Naval Air Warfare  Center at China Lake,  California  in the
 prior year,  partially offset by the contribution from the commercial  staffing
 business acquired as of August 1, 1996.

 Net interest income (interest  income,  less amortization of offering costs and
 interest  expense) for Fiscal Year 1997 totaled  $559,000  compared to $497,000
 for the prior fiscal year. The increase is principally due to higher  available
 investable balances year-to-year.

 The Company's effective tax rate is 35.0% for Fiscal Year 1997 versus 35.7% for
 the  previous  fiscal  year.  The  decreased  effective  tax  rate  is due to a
 reduction  in the income tax  valuation  allowance  and an  increased  level of
 current tax credits available to offset income taxes on current taxable income.

 The overall  increase in net income from the prior year is primarily due to the
 significant increase in sales of wireless  communications  products at a higher
 operating  income  margin,  increased  investment  net  earnings,  and a  lower
 effective income tax rate.

 Liquidity and Capital Resources

 The Company signed a loan  agreement with a bank effective  September 26, 1994,
 which was last amended  effective August 15, 1997. The loan agreement  consists
 of (1) an $8 million revolving credit facility, which expires May 31, 1999, and
 (2) a $5 million  guidance  line of credit,  which  expires May 31,  1998.  The
 revolving  credit  facility  and the  guidance  line of  credit  are  unsecured
 provided that the Company maintains certain  covenants.  Currently,  management
 anticipates that cash flow will remain at a level which will enable the Company
 to avoid  utilizing the credit facility except to support letters of credit and
 acquisition  financing,   and  that  the  Company  will  be  able  to  purchase
 investments  on a regular basis.  The Company's  cash and  investment  balances
 averaged  $8.1 million  (includes  highly  liquid  long-term  investments  with
 maturities of 12 to 36 months)  during the fourth  quarter of Fiscal Year 1998.
 However,   maintaining   such  cash  balances  is  predicated  on  the  Company
 maintaining  its  business  base and is  subject to the cost of  financing  new
 contracts,  acquisitions,  geographic  expansion,  software product development
 costs, and stock re-purchases.

 During  Fiscal  Year  1998,  the  Company's  average  days'  sales in  accounts
 receivable  have  increased,  primarily  due to  increased  sales  of  wireless
 communication  products,  including a  significant  increase  in  international
 sales. The Company's wireless  communications products revenues have a slightly
 longer collection cycle than the Company's outsourced staffing revenues.

 Several  additional key factors indicating the Company's  financial  condition
 include:

<TABLE>

                                    January 31,              January 31,
                                 -------------------------------------------
                                       1998                     1997
                                 -------------------------------------------
 <S>                              <C>                      <C>
 Current ratio.................              2.75                     2.87
  Working capital..............    $   20,937,000           $   20,429,000
  Book value per share.........    $         6.46           $         5.65
  
</TABLE>

 The Company  continued to  demonstrate  solid  financial  strength in the above
 financial factors during Fiscal Year 1998, primarily due to increased operating
 earnings from increased sales of wireless communications products.

 The Company has a significant  commitment for capital  expenditures  at January
 31, 1998 for Comarco Wireless Technologies,  Inc. The Company has developed and
 intends to continue to develop  numerous  new product line  extensions  for the
 wireless communications  industry. This software product development program is
 expected to be funded from the Company's  current working capital.  The amounts
 capitalized  and amortized in the Company's  wireless  communications  products
 business in accordance with Financial  Accounting  Standard No. 86,  Accounting
 for the Costs of Computer Software to be Sold,  Leased, or Otherwise  Marketed,
 totaled $2.5 million and $1.4 million, respectively, in Fiscal Year 1998.

 In February  1997, the Company's  subsidiary,  Comarco  Wireless  Technologies,
 Inc.,  completed the  acquisition  of another  callbox  product line from Cubic
 Communications, Inc. This acquisition, totaling approximately $1.7 million, was
 funded from the Company's available working capital.

 The Company's Board of Directors has authorized a stock  repurchase  program of
 up to 1,500,000 shares. As of January 31, 1998, the Company has repurchased and
 retired  approximately  929,000  shares.  The  average  price  paid  per  share
 repurchased under the program was $6.55.

 The  Company  is  subject to legal  proceedings  and  claims  that arise in the
 ordinary  course of  business.  In the  opinion  of  management,  the amount of
 ultimate liability with respect to these actions will not materially affect the
 financial  condition of the Company  (see Note 19 of the Notes to  Consolidated
 Financial Statements).

 The Company  believes that its cash flow from  operations  and  available  bank
 borrowings  will be sufficient to satisfy the current and  anticipated  capital
 requirements for operations during Fiscal Year 1999.

 Year 2000

 The Company's computer systems,  software and related technologies are affected
 by the Year  2000  compliance  issue.  The  Company  has been  identifying  and
 correcting  affected  applications to ensure that all key computer systems will
 be Year 2000  compliant by late 1998.  The Company is also working with vendors
 and  suppliers to ensure their  compliance.  Costs to modify such  applications
 have been, and are estimated to remain,  immaterial to the Company's results of
 operations and financial condition.


 New Accounting Pronouncements

In June 1997,  the  Financial  Accounting  Standards  Board  issued Statement of
Financial Accounting  Standards (SFAS) No. 130,  Reporting Comprehensive Income.
SFAS  No. 130  establishes standards for the  reporting  and  display of compre-
hensive income, requiring its components to be reported in a financial statement
that is displayed  with the  same prominence  as other financial statements. The
Company will adopt this Standard  in the first quarter of  fiscal year 1999. The
adoption  of  SFAS  No. 130  will  have no  impact on the Company's consolidated
results of operations, financial condition or cash flows.

In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 131,
Disclosures  about Segments of an Enterprise and Related  Information.  SFAS No.
131 establishes  standards for reporting  financial  information about operating
segments in annual  financial  statements  and  required  reporting  of selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services, geographic areas, and major customers. Operating segments
are  defined as  components  of an  enterprise  about which  separate  financial
information is available and evaluated regularly by the chief operating decision
makers in deciding how to allocate resources and in assessing  performance.  The
Company is in the process of  evaluating  segment  disclosures  for  purposes of
reporting  under SFAS No. 131.  The adoption of SFAS No. 131 will have no impact
on the Company's consolidated results of operations, financial condition or cash
flows.

<PAGE>

Item 8.  Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          Page
                                                                          ----

Independent Auditors' Report.............................................. 25
Financial Statements:
     Consolidated Balance Sheets, January 31, 1998 and 1997............... 26
     Consolidated Statements of Income, Years Ended 
     January 31, 1998, 1997, and 1996..................................... 27
     Consolidated Statements of Cash Flows, Years Ended
     January 31, 1998, 1997, and 1996..................................... 28
     Notes to Consolidated Financial Statements,
     January 31, 1998, 1997, and 1996..................................... 29
Financial Statement Schedule
     VIII  Reserves, Years Ended January 31, 1998, 1997,
     and 1996............................................................. 52

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.

<PAGE>

                          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  generally  accepted  auditing
standards.  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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  January 31,  1998,  in  conformity  with  generally  accepted  accounting
principles. 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 PEAT MARWICK LLP


McLean, Virginia
March 25, 1998



<PAGE>


                         COMARCO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE>
                                     ASSETS
                                                                    January 31,
                                                            ---------------------------------
                                                                1998               1997
                                                           -------------      --------------
<S>                                                         <C>                <C>                
Current assets:
   Cash and cash equivalents............................    $      5,256       $     12,711
   Short-term investments...............................           2,348              1,824
   Accounts receivable, net.............................          17,815             11,526
   Inventory............................................           5,247              3,042
   Deferred tax asset...................................           1,383              1,418
   Other current assets.................................             832                839
                                                            -------------      --------------

     Total current assets...............................          32,881             31,360

Long-term investments...................................           2,364              1,859 
Property and equipment, net.............................           2,240              1,408
Software development costs, net.........................           3,131              2,434
Intangible assets, net..................................           2,660              1,842
Other assets............................................             618                307
                                                            =============      ==============
                                                            $     43,894       $     39,210
                                                            =============      ==============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable.....................................    $       493        $       217
   Deferred revenue.....................................          1,914              2,678
   Accrued liabilities..................................          9,537              8,036
                                                             ------------       ------------

     Total current liabilities..........................         11,944             10,931
Deferred income taxes...................................          1,480              1,302

Stockholders' equity:
   Common stock, $.10 par value, 33,750,000 shares
   authorized; shares outstanding of 4,718,710 in 1998
   and 4,777,959 in 1997................................            472                478
   Paid-in capital......................................          3,074              4,450
   Retained earnings....................................         26,924             22,049
                                                             ------------       ------------

     Total stockholders' equity.........................         30,470             26,977

Commitments and contingencies (Notes  13 and 19)
                                                             ============      =============
                                                             $   43,894        $    39,210
                                                             ============      =============
</TABLE>
          See accompanying notes to consolidated financial statements.


<PAGE>
                        COMARCO, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                (Dollars in thousands, except per share amounts)

<TABLE>

                                                            Years Ended January 31,
                                              -----------------------------------------------------
                                                  1998                1997               1996
                                              -------------       -------------      --------------
<S>                                           <C>                 <C>                <C>          
Revenues:
   Contract revenues......................    $    55,030         $    50,858        $    54,278
   Product sales..........................         30,109              20,556             15,563
                                              -------------       -------------      -------------
                                                   85,139              71,414             69,841
                                              -------------       -------------      -------------

Direct costs:
   Contract costs.........................         37,960              35,599             36,540
   Cost of product sales..................         14,050               7,417              6,644
                                              -------------       -------------      -------------

                                                   52,010              43,016             43,184
Indirect costs............................         24,960              21,780             21,112
Intangible asset write-off................            710                 ---                ---
                                              -------------       -------------      -------------

                                                   77,680              64,796             64,296
                                              -------------       -------------      -------------

Operating income..........................          7,459               6,618              5,545
Interest expense..........................            ---                 ---                 44
Interest income...........................            404                 559                541
                                              -------------       -------------      -------------

Income before income taxes................          7,863               7,177              6,042
Income tax expense........................          2,988               2,512              2,157
                                              =============       =============      =============

Net income................................    $     4,875         $     4,665        $     3,885
                                              =============       =============      =============
Earnings per common share:
   Basic:
     Net income...........................    $      1.03         $       .98        $       .84
                                              =============       =============      =============
   Diluted:
     Net income...........................    $       .89         $       .86        $       .75
                                              =============       =============      =============
</TABLE>
          See accompanying notes to consolidated financial statements.

<PAGE>
                         COMARCO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)
<TABLE>

                                                                               Years Ended January 31,
                                                                ------------------------------------------------------
                                                                    1998                 1997               1996
                                                                -------------        -------------      -------------
<S>                                                             <C>                  <C>                <C>               
Cash flows from operating activities:
   Net income...............................................    $     4,875          $     4,665        $     3,885
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       Loss (gain) on disposal of property and equipment....            ---                   23                (26)
       Depreciation and amortization........................          3,164                2,263              2,117
       Provision for doubtful accounts receivable...........            123                   62                 30
       Intangible asset write-off...........................            710                  ---                ---
       Deferred income taxes................................            213                 (509)               247
       Changes in  operating  assets and  liabilities,  net of 
       effects  from the purchases of RAL, GTE & Cubic:
           Increases in investments.........................           (537)               (785)              (357)
         Decrease (increase) in accounts receivable.........         (6,862)              (2,308)             1,338
         Increase in inventory..............................         (1,644)                (470)              (826)
         Decrease (increase) in other current assets........            280                 (432)               147
         Decrease (increase) in other assets................           (311)                 (36)                14
         Increase (decrease) in accounts payable............            276                 (330)               (69)
         Increase (decrease) in deferred revenue............           (764)               1,243                366
         Increase (decrease) in accrued liabilities.........          1,408                1,693                (73)
                                                                -------------        -------------      -------------
   Net cash provided by operating activities................            658                5,079              6,793

Cash flows from investing activities:
   Purchases of investements................................          (1,204)              (1,572)            (1,903)
    Proceeds from sales of investments......................             712                2,172              1,724
   Purchases of property and equipment......................         (1,630)                (872)              (740)
   Proceeds from sales of property and equipment............             14                   13                 53
   Software development costs...............................         (2,506)              (2,210)            (1,900)
   Cost of acquisition of Cubic, net of cash acquired.......         (1,717)                 ---                ---
   Cost of acquisition of RAL, net of cash acquired.........           (400)              (1,198)               ---
   Cost of acquisition of GTE callbox, net of cash acquired.            ---               (1,076)               ---
                                                                -------------        -------------       -------------
   Net cash used in investing activities....................         (6,731)              (4,743)            (2,766)
Cash flows from financing activities:
   Purchase of convertible subordinated debentures..........            ---                  ---               (844)

   Proceeds from issuance of stock, including tax benefit...            453                1,052                650
   Purchase of common stock.................................         (1,835)                (478)               ---
                                                                -------------        -------------       -------------
   Net cash provided (used) by financing activities.........         (1,382)                 574               (194)
                                                                -------------        -------------       -------------

Net increase (decrease) in cash and cash equivalents........         (7,455)                 910              3,833

Cash and cash equivalents, beginning of year................         12,711               11,801              7,968
                                                                =============        =============       =============

Cash and cash equivalents, end of year......................    $     5,256          $    12,711        $    11,801
                                                                =============        =============       =============
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>
                         COMARCO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 31, 1998 AND 1997 AND 1996


1.   Significant Accounting Policies

     a.  The  Company--COMARCO,  Inc.  and  its  subsidiaries'  (the  "Company")
traditional  business  area  consists of  providing a broad range of  outsourced
staffing services to agencies of the United States Government,  government prime
contractors,  and local  governments,  primarily  in the  fields of  information
technologies;  intelligent  instrumentation and automated test systems; ordnance
and  weapon  system  engineering  services;  airport  management  services;  and
manufacturing training. The Company,  operating in a newer business area through
one of its  subsidiaries,  Comarco  Wireless  Technologies,  Inc.,  designs  and
develops products for the wireless communications  industry. Sales to the United
States  Government and government  prime  contractors  were 32%, 39%, and 51% of
revenues for the years ended  January 31, 1998,  1997,  and 1996,  respectively.
Sales to the Metropolitan Washington Airports Authority for a contract at Reagan
Washington  National  Airport  were 10%,  12%, and 12% of revenues for the years
ended January 31, 1998, 1997, and 1996, respectively.  This contract will end on
September  30, 1998,  and the Company has decided not to pursue the recompete of
this contract since, if reawarded,  it would be unprofitable.  In August 1996, a
newly formed subsidiary of COMARCO,  Comarco Staffing,  Inc.  (formerly known as
CoSource  Solutions,  Inc.),  acquired the assets of RAL Consulting and Staffing
Services, Inc. In October 1996, Comarco Wireless Technologies, Inc. acquired the
callbox assets of GTE Cellular Communications  Corporation.  The purchase prices
for these  transactions  could be  increased  in future  periods  based upon the
achievement  of certain  performance  objectives or completing  specified  sales
transactions. In February 1997, Comarco Wireless Technologies, Inc. acquired the
callbox assets of Cubic  Communications,  Inc. These acquisitions were accounted
for using the purchase method.  The difference between the estimated fair values
of the acquired net tangible and identifiable  intangible assets and the assumed
liabilities  has been recorded to goodwill for the RAL purchase.  The difference
between the estimated fair values of the acquired net tangible and  identifiable
intangible  assets and the  assumed  liabilities  has been  recorded to negative
goodwill for the GTE purchase.  The difference between  identified  tangible and
intangible assets and assumed liabilities was recorded as goodwill for the Cubic
purchase. The results of acquired operations have been included in the Company's
consolidated  results of operations since the respective  acquisition dates. The
acquisitions did not have a significant pro-forma impact on operations.

     b.  Principles  of  Consolidation--The  accompanying  financial  statements
include  the  accounts  of  the  Company  and  its  subsidiaries.  All  material
intercompany  balances,   transactions  and  profits  have  been  eliminated  in
consolidation.

     c. Use of Estimates--The  preparation of 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  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

     d.  Revenues--Substantially  all of the  Company's  contract  revenues  are
earned   under    long-term    agreements    and   are   recorded    using   the
percentage-of-completion  method.  Contract  revenue  is  recorded  as costs are
incurred, and profit is recognized on each contract based on the percentage that
the  incurred  costs bear to  estimated  total  costs.  The fees  under  certain
government  contracts may be increased or decreased in  accordance  with cost or
performance   incentive  provisions  that  measure  actual  performance  against
established  targets or other  criteria.  Such incentive fee awards or penalties
are  included  in contract  revenues  at the time the amounts can be  reasonably
determined. Costs to complete are reviewed periodically and revised as required.
Provisions  are made for the full amount of anticipated  losses,  if any, on all
contracts in the period in which they are first determinable.

     Revenues from product sales are primarily  recorded as products are shipped
or when customers have accepted the products,  depending on the contract  terms.
The estimated sales value of post contract customer support which is included as
part of an initial  warranty  period is deferred and amortized over the warranty
period.  Revenues from extended warranty  agreements are recognized ratably over
the term of the agreement.

     e. Cash and Cash  Equivalents--For  purposes of the consolidated  financial
statements,  the  Company  considers  all highly  liquid debt  instruments  with
original  maturities  of  three  months  or less to be  cash  equivalents.  Cash
equivalents  of $5.1  million  and $12.0  million at January  31, 1998 and 1997,
respectively, consist primarily of variable rate securities, money market funds,
and commercial paper, which are stated at cost, which approximates fair value.

     f.  Inventory--Inventory  is stated at the lower of cost or market. Cost is
determined using standard cost, which  approximates  actual costs on a first-in,
first-out (FIFO) method.

     g.  Property and  Equipment--Property  and equipment are stated at cost and
are depreciated using the straight-line  method. Office furnishings and fixtures
are  depreciated  over useful lives of five to seven years,  and  equipment  and
software are depreciated over useful lives of three to five years.

     h.  Software  Development  Costs--Capitalization  of  internally  developed
software  begins  upon  the   determination   by  the  Company  of  a  product's
technological feasibility.  Capitalized software development costs are amortized
over related sales on a per-unit basis based upon estimated total sales,  with a
minimum  amortization  based on a  straight-line  method over a two to five year
useful life. Capitalized software development costs and associated  amortization
expense were  approximately $2.5 million and $1.8 million  respectively,  in the
year  ended  January  31,  1998.  Capitalized  software  development  costs  and
associated  amortization  expense  were  approximately  $2.2  million  and  $1.2
million,  respectively,  in the year ended  January 1997.  Capitalized  software
development costs and associated  amortization  expense were  approximately $1.9
million and $1.2 million respectively, in the year ended January 31, 1996.

     i. Intangible Assets--Intangible assets are being amortized over periods of
five to thirty years. Costs in excess of net assets acquired are being amortized
over periods of ten to forty  years.  All such  amortization  is computed on the
straight-line basis.

     j. Taxes on Income--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.  Future tax  benefits
recognized as deferred tax assets must be reduced by a valuation allowance where
it is more likely than not that the benefits may not be realized.

     k. Per Share  Information--During  the year ended  January  31,  1998,  the
Company adopted  Statement of Financial  Accounting  Standards No. 128, Earnings
per Share,  and  computed  basic and  diluted  net income per share based on the
weighted  average  number of shares of common stock and  potential  common stock
outstanding  during  the  period.   Potential  common  stock,  for  purposes  of
determining  diluted earnings per share,  includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed  using  the  treasury  stock  method  or the  if-converted  method,  as
applicable.  Comparative  earnings  per share data have been  restated for prior
periods.  Consolidated  net income of the Company used for diluted  earnings per
share  purposes is diluted as a result of stock options  issued by the Company's
subsidiaries  which  enable  their  holders to obtain the  subsidiaries'  common
stock.

     l. Stock Option Plans--Prior to February 1, 1996, the Company accounted for
its  stock  option  plans  in  accordance  with  the  provisions  of  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  Accounting  for  Stock  Issued to
Employees, and related  interpretations.  As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On February 1, 1996, the Company adopted SFAS
No. 123,  Accounting for  Stock-Based  Compensation,  which permits  entities to
recognize as expense over the vesting  period the fair value of all  stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma  earnings per share  disclosures  for employee stock option
grants  made in the year  ended  January  31,  1996 and  future  years as if the
fair-value-based  method  defined in SFAS No. 123 had been applied.  The Company
has  elected to  continue  to apply the  provisions  of APB  Opinion  No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

     m. 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.

     n.  Reclassifications--Certain  reclassifications  of 1997 and 1996 amounts
have been made to conform to the 1998 presentation.

2.   Investments

Securities  classified  as available for sale are as follows at January 31, 1998
and 1997:
<TABLE>
                                           Gross            Gross
                                           Unrealized       Unrealized            Aggregate
            Security                       Holding          Holding               Fair
Year        Type             Cost          Gains            Losses                Value
----        --------         ----          ----------       ----------            --------- 
                                             (Dollars in thousands)
<S>         <C>              <C>           <C>              <C>                   <C>           
1998        Equity           $127          --               --                    $127
1997        Equity           $262          --               --                    $262

</TABLE>
Securities classified as held-to-maturity are as follows at January 31, 1998 and
1997:
<TABLE>

                                           Gross            Gross
                                           Unrealized       Unrealized            Aggregate
            Security         Amortized     Holding          Holding               Fair
Year        Type             Cost          Gains            Losses                Value
----        --------         ---------     -----------      -----------           ----------
                                     (Dollars in thousands)
<S>         <C>              <C>             <C>            <C>                   <C>     
1998        Debt             $2,905          $14            $ 22                  $2,897
1997        Debt             $2,278          $12            $  7                  $2,283
</TABLE>


Maturities of debt securities  classified as held-to  maturity are as follows at
January 31, 1998:
<TABLE>

                                                                      Aggregate
          Security                                                    Fair
          Type                             Cost                       Value
          --------                         ----                       ----------
                                                (Dollars in thousands)
          <S>                              <C>                         <C>
          Tax-exempt obligations:
                Within one year            $   541                     $   533
                One through five years     $ 2,364                     $ 2,364
</TABLE>

Proceeds  from the sales of  available-for-sale  securities  in the years  ended
January 31, 1998 and 1997 were  $135,000  and  $24,000,  respectively.  No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1998 and 1997.

Short-term  investments at January 31, 1998 and 1997 included restricted amounts
of $1.7 million and $1.1 million,  respectively,  related to balances maintained
in a  non-qualified  deferred  compensation  plan  for  Company  executives  and
directors.

The amount of net unrealized holding gains on trading securities recorded in the
years ended January 31, 1998 and 1997 were $92,000 and $82,000, respectively.


3.  Accounts Receivable

Accounts receivable consist of the following:
<TABLE>
                                                      January 31,
                                               ----------------------------
                                                  1998             1997
                                               -----------      -----------
                                                 (Dollars in thousands)
 <S>                                           <C>              <C>
 U.S. Government
    Billed...................................  $  3,277         $   3,027
    Unbilled.................................     3,081             1,457
 Commercial..................................    11,498             7,091
 Other ......................................       290               166
                                               -----------      -----------
                                                 18,146            11,741
 Less:  Allowances for doubtful                    (331)             (215)
 accounts.................................
                                               ===========      ===========
                                               $ 17,815         $  11,526
                                               ===========      ===========
</TABLE>

Included in unbilled  accounts  receivable are retainages due upon completion of
contracts  of  approximately  $750,000  and  $232,000 as of January 31, 1998 and
1997, respectively.  Of total accounts receivable at January 31, 1998, there are
approximately  $473,000 of unbilled  receivables which, based upon the Company's
experience, may not be collected within the next fiscal year.

Included in unbilled accounts receivable is approximately  $700,000 related to a
claim filed with the Armed Services Board of Contract Appeals  regarding certain
costs charged to a cost-reimbursable contract.

4.  Inventory

Inventory consists of the following:
<TABLE>
                                                           January 31,
                                                   ----------------------------
                                                      1998             1997
                                                   -----------      -----------
                                                     (Dollars in thousands)
<S>                                                <C>              <C>
Raw materials...................................   $   4,493        $   2,787

Work-in-process.................................         573              139
Finished goods..................................         181              116
                                                   -----------      -----------
                                                   $   5,247        $   3,042
                                                   ===========      ===========
</TABLE>
5.   Property and Equipment

Property and equipment consist of the following:
<TABLE>
                                                             January 31,
                                                     ----------------------------
                                                        1998             1997
                                                     -----------      -----------
                                                       (Dollars in thousands)
 <S>                                                 <C>              <C>
 Office furnishings and fixtures.................... $   1,518        $   1,148
 Equipment..........................................     4,117            2,892
 Software...........................................       296              254
                                                     -----------      -----------
                                                         5,931            4,294
 Less: Accumulated depreciation and amortization....    (3,691)          (2,886)
                                                     ===========      ===========
                                                     $   2,240        $   1,408
                                                     ===========      ===========
</TABLE>
6.  Intangible Assets

Intangible assets consist of the following:
<TABLE>
                                                                         January 31,
                                                                 ----------------------------
                                                                    1998             1997
                                                                 -----------      -----------
                                                                   (Dollars in thousands)
  <S>                                                            <C>              <C>          
  Costs in excess of net assets acquired......................   $   2,440        $   1,408
  Other intangible assets, based on allocated
     purchase price...........................................         852            1,845
                                                                 -----------      -----------
                                                                     3,292            3,253
  Less: Accumulated amortization..............................        (632)          (1,411)
                                                                 ===========      ===========
                                                                 $   2,660        $   1,842
                                                                 ===========      ===========
</TABLE>

Amortization  of intangible  assets for the years ended January 31, 1998,  1997,
and 1996 amounted to $451,000, $447,000, and $433,000, respectively.

7.  Bank Line of Credit

As a part  of a loan  agreement  with a  bank,  the  Company  has an $8  million
revolving credit facility, which expires May 31, 1999, and a $5 million guidance
line of credit,  which expires May 31, 1998. The revolving  credit  facility and
the guidance  line of credit are unsecured  provided  that the Company  complies
with certain covenants.  Outstanding loans under this agreement bear interest at
no less than the bank's prime rate or the London Interbank  Offered Rate (LIBOR)
plus 150 basis  points,  at the  Company's  option.  The  interest  rates can be
increased by the bank dependent upon the Company  maintaining  certain financial
ratios.  The  bank's  prime  rate was 8.5% at January  31,  1998.  There were no
borrowings  under the line of  credit  at  January  31,  1998 or 1997.  The loan
agreement also includes certain restrictive covenants.


8.  Accrued Liabilities

Accrued liabilities consist of the following:
<TABLE>
                                                         January 31,
                                                  ----------------------------
                                                     1998             1997
                                                  -----------      -----------
                                                    (Dollars in thousands)
 <S>                                               <C>              <C>
 Accrued payroll and related expenses.........     $   6,398        $   5,193
  Other.......................................         3,139            2,843
                                                   ==========       ==========
                                                   $   9,537        $   8,036
                                                   ==========       ==========
</TABLE>

9.  Stockholders' Equity

Changes in the  components of  stockholders'  equity for the years ended January
31, 1996, 1997, and 1998 were as follows:
<TABLE>

                                                 Common        Paid-in       Retained
                                                 Stock         Capital       Earnings        Total
                                              -------------  ------------  -------------  -------------
                                                               (Dollars in thousands)
  <S>                                         <C>            <C>           <C>            <C>            
  Balance at January 31, 1995..............   $      460     $    3,244    $   13,499     $    17,203
     Net income............................           --             --         3,885           3,885
     Exercise of stock options
       105,700 shares.......................          11            476            --             487
     Tax benefit from exercise of stock
       options.............................          ---            163            --             163
                                              -------------  ------------  -------------  -------------
  Balance at January 31, 1996..............          471          3,883        17,384          21,738
     Net income............................           --             --         4,665           4,665
     Exercise of stock options, 100,350
       shares..............................           10            326            --             336
     Tax benefit from exercise of stock
       options.............................           --            716            --             716
     Purchase and retirement of common
       stock 30,100 shares.................           (3)          (475)          ---            (478)
                                              -------------  ------------  -------------  -------------
  Balance at January 31, 1997..............          478          4,450        22,049          26,977
     Net income............................          ---            ---         4,875           4,875
     Exercise of stock options, 43,900
       shares..............................            4            214           ---             218
     Tax benefit from exercise of stock
     options...............................          ---            235           ---             235
      Purchase and retirement of common
       stock, 103,149 shares...............          (10)        (1,825)          ---          (1,835)
                                              =============  ============  =============  =============
  Balance at January 31, 1998..............   $      472     $    3,074    $   26,924     $    30,470
                                              =============  ============  =============  =============
</TABLE>

10.  Income Taxes

Income taxes consist of the following amounts:
<TABLE>

                                                        Years Ended January 31,
                                          -----------------------------------------------------
                                              1998               1997                1996
                                          -------------       -------------      --------------
                                                         (Dollars in thousands)
   <S>                                    <C>                 <C>                <C>            
   Federal income tax:
     Current..........................    $   2,146           $   2,358          $   1,415
     Deferred.........................          170                (421)               206
   State income taxes:
     Current..........................          629                 663                495
     Deferred.........................           43                 (88)                41
                                          =============       =============      ==============
                                          $   2,988           $   2,512          $   2,157
                                          =============       =============      ==============
</TABLE>

Deferred  income taxes reflect the impact of temporary  differences  between the
amount of assets and liabilities  recognized for financial  statement  reporting
purposes and such amounts  recognized  for tax filing  purposes.  The  principal
items making up the deferred tax  provision in the years ended January 31, 1998,
1997  and  1996  were  differing   depreciation  methods,  the  amortization  of
intangibles, accrued vacation, software development costs, and prepaid expenses.

The differences  between the effective income tax rate and the statutory federal
income tax rates for the years ended  January 31,  1998,  1997,  and 1996 are as
follows:
<TABLE>


                                                                    Years Ended January 31,
                                              ---------------------------------------------------------------------

                                                      1998                    1997                    1996
                                              ---------------------   ---------------------   ---------------------
                                                          Percent                 Percent                 Percent
                                                          Pretax                  Pretax                  Pretax
                                               Amount      Income       Amount     Income      Amount      Income
                                              ---------   ---------   ---------   ---------   ---------   ---------
                                                                     (Dollars in thousands)
<S>                                           <C>           <C>       <C>          <C>        <C>           <C>              
Computed "expected" tax on income before
   extraordinary items and income taxes...    $ 2,752       35.0%     $ 2,512       35.0%     $ 2,115       35.0%
Surtax exemption..........................        (79)      (1.0)         (72)      (1.0)         (60)      (1.0)
State tax, net of federal benefit.........        444        5.6          380        5.3          354        5.9
Change in valuation allowance.............        ---        ---         (530)      (7.4)        (170)      (2.8)
Other, net................................       (129)      (1.6)         222        3.1          (82)      (1.4)
                                              =========   =========   =========   =========   =========   =========
Taxes on income...........................    $ 2,988       38.0%     $ 2,512       35.0%     $ 2,157       35.7%
                                              =========   =========   =========   =========   =========   =========
</TABLE>


The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax  liabilities at January 31, 1998 and
1997 are presented below:
<TABLE>


                                                                              January 31,
                                                            --------------------------------------------

                                                                     1998                  1997
                                                                ---------------       ---------------

                                                                         (Dollars in thousands)
<S>                                                              <C>                   <C>             
Deferred tax assets:
   Accounts receivable....................................       $        289          $       527
   Property and equipment, principally due to differing
    depreciation methods..................................                133                   74
   Employee benefits, principally due to accrual for
    financial reporting purposes..........................              1,296                  971
   Other..................................................                 38                   75
                                                                 -------------         -------------
   Total gross deferred tax assets........................              1,756                1,647
   Less valuation allowance...............................                ---                  ---
                                                                 -------------         -------------
   Net deferred tax assets................................       $      1,756          $     1,647
                                                                 -------------         -------------

 Deferred tax liabilities:
   Prepaid expenses.......................................       $       258           $        135
   Property and equipment, principally due to differing
    depreciation methods..................................                42                    124
   Software development costs.............................             1,284                    998
   Other...........................................                      269                    274
                                                                 -------------         -------------
   Total gross deferred tax liabilities...................       $     1,853           $      1,531
                                                                 =============         =============

    Net deferred tax asset (liability)....................       $       (97)          $        116
                                                                 =============         =============
</TABLE>

There was no valuation allowance for deferred tax assets as of February 1, 1997,
and no change in the  valuation  allowance  for the year ended January 31, 1998.
The Company believes that deferred tax assets will be recoverable through normal
operations.

11.  Stock Options

The Company has two employee stock option plans and a director stock option plan
under which  officers,  key employees,  and directors may be granted  options to
purchase 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.  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). Transactions
and other information  relating to these plans for the three years ended January
31, 1998 are summarized below:
<TABLE>
                                                            Outstanding Options
                                               ----------------------------------------------

                                               Number of Shares          Weighted-Average
                                                                          Exercise Price
                                               ------------------   -----------------------------
<S>                                                <C>                       <C>
Balance, January 31, 1995...................        547,700                  $  3.75
   Options granted..........................        129,000                  $  9.07
   Options canceled or expired..............        (20,250)                 $  5.04
   Options exercised........................       (105,700)                 $  4.61
                                               ---------------

Balance, January 31, 1996...................        550,750                  $  4.78
   Options granted..........................        115,000                  $ 14.93
   Options canceled or expired..............        (13,500)                 $ 10.90
   Options exercised........................       (100,350)                 $  3.34
                                               ---------------

Balance, January 31, 1997...................        551,900                  $  7.01
   Options granted..........................        169,000                  $ 19.95
   Options canceled or expired..............        (25,125)                 $ 11.62
   Options exercised........................        (43,900)                 $  4.97
                                               ===============
Balance, January 31, 1998...................        651,875                  $ 10.32
                                               ===============
</TABLE>

The following table summarizes  information  about stock options  outstanding at
January 31, 1998:
<TABLE>
                                      Options Outstanding                               Options Exercisable
                   -----------------------------------------------------------  -------------------------------------
                          Number           Weighted-Avg.                               Number
      Range of          Outstanding          Remaining           Weighted-Avg.       Exercisable        Weighted-Avg.
   Exercise Prices      at 1/31/98        Contractual Life      Exercise Price       at 1/31/98        Exercise Price
--------------------------------------   -------------------   ------------------  ----------------   ------------------
  <S>                     <C>                <C>                   <C>                  <C>               <C> 
  $1.88 to 2.00           142,500            3.0 years              $1.94               142,500            $1.94
   4.56 to 6.25           148,375            5.2                     5.33               144,625             5.33
   8.63 to 11.50           95,000            7.1                     9.08                47,500             9.08
  14.50 to 17.50          190,000            8.6                    15.97                26,250            14.95
       23.25               76,000            9.8                    23.25                   ---              ---
                      ----------------                                             ----------------
  $1.88 to 23.25          651,875            6.5                   $10.32               360,875            $5.18
                      ================                                             ================
</TABLE>

Stock  options  exercisable  at January 31, 1998,  1997,  and 1996 were 360,875,
330,925, and 345,625, respectively.  Shares available under the plans for future
grants at January 31, 1998,  1997, and 1996 were 293,355,  437,230,  and 538,730
respectively.

One of the Company's  subsidiaries,  Comarco Wireless Technologies,  Inc. (CWT),
also has a 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, 1998, all 3,000,000  outstanding  shares of CWT
common stock are owned by the  Company.  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 the fiscal year ended January 31, 1996,  140,000 options were granted
at  exercise  prices  ranging  from  $4.30 to $11.97.  In the fiscal  year ended
January 31, 1997, 28,000 options were granted at an exercise price of $13.22. In
the fiscal year ended  January  31,  1998,  11,000  options  were  granted at an
exercise price of $17.62.  Stock options  exercisable at January 31, 1998,  1997
and 1996 were 257,000, 155,000, and 60,000 respectively.  Shares available under
the plan for future  grants at January  31,  1998,  1997 and 1996 were  181,000,
192,000, and 220,000 respectively.

The following table summarizes  information about CWT stock options  outstanding
at January 31, 1998:
<TABLE>
                                    Options Outstanding                                Options Exercisable
                 -----------------------------------------------------------  --------------------------------------
                     Number           Weighted-Avg.                                Number
       Range of    Outstanding          Remaining           Weighted-Avg.        Exercisable       Weighted-Avg.
   Exercise Prices at 1/31/98        Contractual Life      Exercise Price        at 1/31/98        Exercise Price
---------------------------------   -------------------   ------------------   ----------------  -------------------
  <S>                <C>                <C>                      <C>                <C>                <C> 
  $2.53 to 4.30      320,000            6.7 years                $2.97              220,000            $2.85
  11.97 to 13.22      88,000            7.9                      12.37               37,000            12.21
      17.62           11,000            9.1                      17.62                  ---              ---
                 ----------------   -------------------   ------------------   ----------------  -------------------
  $2.53 to 17.62     419,000            7.0                      $5.33              257,000            $4.20
                 ================   ===================   ==================   ================  ===================
</TABLE>
The per share weighted-average fair value of employee and director stock options
granted  during the years  ended  January 31, 1998 and 1997 was $8.93 and $7.73,
respectively,  on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
                                                    Years ended January 31,
                                                  ----------------------------
                                                     1998             1997
                                                  -----------      -----------
   <S>                                             <C>              <C>
   Expected dividend yield                           0.0%              0.0%
   Expected volatility                              34.2%             45.1%
   Risk-free interest rate                           6.1%              5.8%
   Expected life                                   6 years          6 years
</TABLE>

The per share  weighted-average  fair value of CWT stock options  granted during
the years ended January 31, 1998 and 1997 was $7.35, and $5.74, respectively, on
the  date of  grant  using  the  Black  Scholes  option-pricing  model  with the
following weighted-average assumptions:
<TABLE>

                                                  Years ended January 31,
                                                ----------------------------
                                                   1998             1997
                                                -----------      -----------
 <S>                                             <C>             <C>
 Expected dividend yield                           0.0%              0.0%
 Expected volatility                              35.6%             40.2%
 Risk-free interest rate                           6.2%              5.4%
 Expected life                                   5 years          5 years

</TABLE>


The  Company  applies  APB  Opinion  No.  25 in  accounting  for its  Plan  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 No. 123, the
Company's  net income and  earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>

                                                                  Years ended January 31,
                                                                ----------------------------
                                                                   1998             1997
                                                                -----------      -----------

                                                                  (Dollars in thousands,
                                                                 except per share amounts)
 <S>                                                             <C>              <C>      
 Net income: As reported.................................        $   4,875        $   4,665
             Pro forma...................................            4,481            4,414
 Earnings per common share - basic:
             As reported.................................        $    1.03        $     .98
             Pro forma...................................              .94              .93
 Earnings per common share - diluted:
             As reported.................................        $     .89        $     .86
             Pro forma...................................              .86              .85
   </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 No.  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  period of four years and  compensation
cost for options granted prior to February 1, 1995 is not considered.


12.   Earnings Per Share

The following tables present  reconciliations of the numerators and denominators
of the basic and diluted earnings per share  computations for net income. In the
tables below,  "Income"  represents  the numerator (in  thousands)  and "Shares"
represent the denominator (in thousands):
<TABLE>


                                    Year ended January 31, 1998
                                  ----------------------------------
                                                           $ Per
                                    Income     Shares      Share
                                  ----------- ---------- -----------
<S>                               <C>            <C>      <C>
Basic Earnings Per Share:
   Net income..................   $   4,875      4,744    $   1.03

Effect of subsidiary options           (372)       ---

Effect of dilutive securities:
   Stock options................        ---        332
                                  ----------- ---------- -----------
Diluted Earnings per Share:
   Net income..................   $   4,503       5,076   $    .89 
                                  =========== ========== ===========


                                     Year ended January 31, 1997
                                  ----------------------------------
                                                           $ Per
                                    Income     Shares      Share
                                  ----------- ---------- -----------
Basic Earnings Per Share:
   Net income..................   $   4,665     4,766     $    .98

Effect of subsidiary options           (267)      ---

Effect of dilutive securities:
   Stock options...............         ---       350
                                   ----------- ---------- -----------

Diluted Earnings per Share:
   Net income..................    $   4,398     5,116    $    .86
                                   =========== ========== ===========


                                    Year ended January 31, 1996
                                  ----------------------------------
                                                          $ Per
                                    Income     Shares      Share
                                  ----------------------------------
<S>                               <C>            <C>      <C>
Basic Earnings Per Share:
   Net income..................   $   3,885      4,627    $    .84

Effect of subsidiary options           (155)       ---

Effect of dilutive securities:
   Stock options...............         ---        351
   Convertible debentures......         ---         15
                                   ----------- ---------- -----------

Diluted Earnings per Share:
   Net income..................   $   3,730      4,993    $    .75
                                   =========== ========== ===========
</TABLE>


13.  Lease Commitments

Rental  commitments under  noncancelable  operating  leases,  principally on the
Company's office space, equipment and automobiles were $2,950,000 at January 31,
1998, payable as follows: $871,000, $719,000, $682,000, $634,000, and $44,000 in
the years ended January 31, 1999,  2000,  2001,  2002,  and 2003,  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,
1998, 1997, and 1996 was $1,593,000, $1,183,000, and $1,361,000, respectively.


14.  Employee Benefit Plans

The  Company  has a Savings  and  Retirement  Plan which  provides  benefits  to
eligible employees. Under the Plan, as amended effective July 1, 1997, 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 15% of earnings.
Employees at one Company  location  are  permitted  to  contribute  up to 20% of
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,  1998,  1997,  and 1996  were  approximately
$623,000, $542,000, and $560,000, respectively.


15.  Supplemental Disclosures of Cash Flow Information
<TABLE>

                                                         Years Ended January 31,
                                           -----------------------------------------------------
                                               1998               1997                1996
                                           -------------       -------------      --------------

                                                          (Dollars in thousands)
<S>                                           <C>                 <C>                <C>
Cash paid during the year for:
   Interest...........................        $  ---              $  ---             $   44
   Income taxes.......................        $2,656              $2,051             $2,209
</TABLE>

In August 1996,  the Company  acquired the assets of RAL Consulting and Staffing
Services, Inc. for $1,198,000. In connection with this acquisition,  the Company
acquired  tangible assets with a fair value of $777,000 and assumed  liabilities
of  $31,000.  An  additional  $400,000  was paid in October  1997 based upon the
achievement of certain performance objectives.

In October 1996, the Company acquired the assets of the callbox operation of GTE
Cellular   Communications   Corp.  for  $1,076,000.   In  connection  with  this
acquisition,  the  Company  acquired  tangible  assets  with  a  fair  value  of
$1,983,000, and assumed liabilities of $614,000.

In February  1997, the Company  acquired the assets of the callbox  operation of
Cubic Communications Inc., for approximately $1,717,000.


16.  Research and Development Costs

The Company incurred research and development costs (includes  Company-sponsored
software development costs prior to determination of technological  feasibility)
of  approximately  $2,000,000,  $2,800,000,  and $2,800,000,  in the years ended
January  31,  1998,   1997,   and  1996,   respectively,   related  to  wireless
communications  products and  development  of software  tools.  These costs were
expensed as incurred.


17.  Business Segment Information

The Company's operations have been classified into two business areas:  wireless
communications   products  and  outsourced   staffing  services.   The  wireless
communications  products  area  develops,  produces,  and  markets a variety  of
products  and  services  used  in  the  wireless  communications  industry.  The
outsourced  staffing  services  area  provides  services  to  Federal  and local
government and commercial customers pursuant to established contracts. Corporate
and other consists  primarily of cash and cash  equivalents,  fixed assets,  and
other assets.


Summarized financial  information by business segment for Fiscal Year 1998 is as
follows:
<TABLE>



                                                  Outsourced Staffing
                                Wireless           Services and Other    
                         Communications Products        Revenues          Corporate and Other             Total
                         -----------------------------------------------------------------------------------------------
                                                        (Dollars in thousands)
<S>                      <C>                        <C>                   <C>                       <C>

Revenues                 $         29,524           $      55,615                     ---           $     85,139
Intangible asset
   write-off                          ---                     710                     ---                    710
Operating income                    6,733                     795          $          (69)                 7,459
Identifiable assets                18,884                  10,148                  14,862                 43,894
Depreciation and
   amortization                     1,938                     711                     515                  3,164
Capital expenditures                1,273                     311                      46                  1,630

</TABLE>

Summarized financial  information by business segment for Fiscal Year 1997 is as
follows:
<TABLE>



                                                    Outsourced Staffing
                                  Wireless          Services and Other     
                          Communications Products       Revenues          Corporate and Other           Total
                         -----------------------------------------------------------------------------------------------
                                                        (Dollars in thousands)
<S>                          <C>                     <C>                     <C>                    <C>             
Revenues                     $     19,519            $     51,895                     ---           $     71,414
Operating income                    5,250                   1,396            $        (28)                 6,618
Identifiable assets                11,610                   7,123                  20,477                 39,210
Depreciation and
   amortization                     1,398                     365                     500                  2,263
Capital expenditures                  686                     179                       7                    872
</TABLE>


International  sales  totaled  $8.9  million and $5.4 million in the years ended
January 31, 1998 and 1997,  respectively.  The majority of these sales have been
made to Europe,  Asia-Pacific  and Latin America,  and are sales of the wireless
communications products segment.


18.   Intangible Asset Write-off

In January 1998, the Company  recorded a $710,000  charge against  earnings from
the impairment of certain assets of its outsourced staffing software development
operation.  This charge was recorded in accordance  with  Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets to be  Disposed  of.  Based  upon  recent  marketing
initiatives  which  proved  unsuccessful  in the  fourth  quarter,  the  Company
determined  that the expected future cash flows were not sufficient to cover the
remaining unamortized  intangible assets.  Accordingly,  the complete impairment
of these assets was recorded in the statement of income.


19.  Commitments and Contingencies

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, 1995. The Company
also has  filed a claim  with the  Armed  Services  Board  of  Contract  Appeals
regarding  certain costs charged to a  cost-reimbursable  contract.  The amounts
that are subject to this review by the Government total approximately  $700,000.
The Company  believes that it has meritorious  defenses,  and if necessary,  the
Company  intends  to  vigorously  defend its  positions  through  the  appellate
process.  Management  believes that sufficient  reserves are available to offset
any potential adjustments.


20.  Quarterly Financial Data (Unaudited)

Unaudited summarized financial data by quarter for Fiscal Years 1998 and 1997 is
as follows (in thousands, except per share data):
<TABLE>

Fiscal Year 1998                                                Quarter Ended
                                         ------------------------------------------------------------

                                           April 30        July 31       October 31      January 31
                                         --------------  -------------  -------------  --------------
<S>                                      <C>             <C>            <C>            <C>           
Revenues.............................    $      20,097   $     21,015   $     21,975   $     22,052
Operating income.....................            1,653          2,001          2,247          1,558
Net income...........................            1,109          1,315          1,443          1,008


                                         --------------  -------------  -------------  --------------
Basic earnings per common share......    $         .23   $        .28   $        .31   $        .21
                                         --------------  -------------  -------------  --------------


                                         --------------  -------------  -------------  --------------
Diluted earnings per common share....    $         .21   $        .24   $        .26   $        .18
                                         ==============  =============  =============  ==============



Fiscal Year 1997                                                Quarter Ended
                                         ------------------------------------------------------------

                                           April 30        July 31       October 31     January 31
                                         --------------  -------------  -------------  --------------

Revenues.............................    $    16,408     $     16,098   $    18,370    $    20,538
Operating income.....................          1,625            1,551         1,521          1,921
Net income...........................          1,102            1,088         1,089          1,386

                                         --------------  -------------  ------------   --------------
Basic earnings per common share......    $       .23     $       .23    $       .23    $       .29
                                         ==============  =============  =============  ==============

                                          -------------  -------------  -------------- --------------
Diluted earnings per common share....    $       .21     $       .20    $       .20    $       .25
                                         ==============  =============  =============  ==============
</TABLE>

ITEM  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure None.

                                    PART III


ITEM 10.  Directors and Executive Officers of the Registrant

Information  concerning  Directors  and  Executive  Officers  of the  Company is
incorporated  herein by reference from the Company's  definitive proxy statement
for the 1998 annual meeting of  shareholders,  which the Company expects to file
with the SEC by May 30, 1998.


ITEM 11.  Executive Compensation

Information  regarding executive  compensation is incorporated by reference from
the  Company's  definitive  proxy  statement  for the  1998  annual  meeting  of
shareholders, which the Company expects to file with the SEC by May 30, 1998.


ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

The information  regarding  Security Ownership is incorporated by reference from
the section entitled "Ownership of Securities" in the Company's definitive proxy
statement for the 1998 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 1998.


ITEM 13.  Certain Relationships and Related Transactions

The information concerning certain relationships and related transactions of the
Registrant is  incorporated  by reference from the section  entitled  "Executive
Compensation"  in the Company's  definitive  proxy statement for the 1998 annual
meeting of  shareholders,  which the Company expects to file with the SEC by May
30, 1998.

                                     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 fiscal years ended January
         31, 1998, 1997, and 1996 is submitted herewith:
         VIII  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 8 filed with the  Securities  and Exchange  Commission on
                  November 16, 1988.

         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     Lease relating to Bloomfield,  Indiana facility dated February
                  1,  1988   between  the   Company  and  Laverne   Rollison  is
                  incorporated  by reference  from the Company's  report on Form
                  10-K for the year ended January 31, 1988.

         10.3     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.

         10.4     United States Navy Contract  dated October 1, 1988 between the
                  Company and the Naval Weapons Center at China Lake, California
                  is incorporated by reference from the Company's report on Form
                  10-K for the year ended January 31, 1989.

         10.5     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.

         10.6     United  States Navy Contract  dated  February 21, 1991 between
                  the Company and the Pacific  Missile Test Center,  Point Mugu,
                  California  is  incorporated  by reference  from the Company's
                  report on Form 10-Q for the quarter ended May 5, 1991.

         10.7     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.

         10.8     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.

         10.9     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.

         10.10    Business Loan Agreement  dated  September 26, 1994 between the
                  Company and  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.

         10.11    Guidance Line of Credit Note for  $5,000,000  dated  September
                  26, 1994 between the Company and 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.

         10.12    Master Line of Credit for $8,000,000  dated September 26, 1994
                  between the  Company  and  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.

         10.13    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.

         10.14    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.

         10.15    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.

         10.16    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.

         10.17    First  Amendment to Loan  Agreement  dated  September 26, 1995
                  between the  Company  and  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.

         10.18    Amended and Restated  Master Line of Credit Note dated October
                  31, 1995 between the Company and 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.

         10.19    Amended  and  Restated  Guidance  Line of  Credit  Note  dated
                  October 31,  1995  between  the  Company  and  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.

         10.20    Second  Amendment  to Loan  Agreement  dated  August 30,  1996
                  between the  Company  and  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.

         10.21    Second  Amended and Restated  Master Line of Credit Note dated
                  August  30,  1996  between  the  Company  and  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.

         10.22    Second Amended and Restated Guidance Line of Credit Note dated
                  August  30,  1996  between  the  Company  and  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.

         10.23    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.

         10.24    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.

         10.25    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.

         10.26    Third  Amendment  to Loan  Agreement  dated  August  15,  1997
                  between the  Company  and  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.

         10.27    Third  Amended and  Restated  Master Line of Credit Note dated
                  August  15,  1997  between  the  Company  and  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.

         10.28    Third Amended and Restated  Guidance Line of Credit Note dated
                  August  15,  1997  between  the  Company  and  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.

         11.      Computation  of  Number of  Shares  of  Common  Stock  used in
                  the Computation of Earnings Per Share.

         21.1     Subsidiaries of the Company. The following are the significant
                  subsidiaries of the Company:
                  Decisions and  Designs, Inc. (DDI) incorporated in the Common-
                     wealth of Virginia.
                  International  Business  Services, Inc. (IBS) incorporated  in
                     the District of Columbia.
                  Comarco Wireless Technologies, Inc. (CWT) incorporated in the
                     State of Delaware.
                  LCTI, Inc. incorporated in the State of Maryland.
                  Manufacturing  Technology Training  Center, Inc. (MTTC) incor-
                     porated in the State of Delaware.
                  Comarco  Wireless  International,   Inc.  (formerly  known  as
                     Comarco  Wireless  Europe,  Inc.) incorporated in the State
                     of Delaware.
                  Comarco Staffing,  Inc. (formerly known as CoSource Solutions,
                     Inc.),  incorporated in the State of California.
                  Comarco Systems, 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.


<PAGE>



                         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 22, 1998.

                                                       COMARCO, INC.

                                                      /s/ DON M.BAILEY
                                               _____________________________
                                                       Don M. Bailey
                                                         President,
                                            Chief Executive Officer and Director

     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.



          Signature                         Title                     Date



                                    Chairman of the Board
    /s/ GERALD D. GRIFFIN               and Director             April 22, 1998

-----------------------------
      Gerald D. Griffin

                                 President, Chief Executive
                                    Officer and Director
                                    (Principal Executive
      /s/ DON M. BAILEY                   Officer)               April 22, 1998

-----------------------------
      Don M. Bailey

                                       Vice President
                                            and
                               Treasurer (Principal Financial
     /s/ THOMAS P. BAIRD           and Accounting Officer)       April 22, 1998

-----------------------------
       Thomas P. Baird




    /s/ WILBUR L. CREECH                  Director               April 22, 1998

-----------------------------
      Wilbur L. Creech




<PAGE>


                         COMARCO, INC. AND SUBSIDIARIES
                                   SIGNATURES


         Signature                      Title                       Date





  /s/ WESLEY L. MCDONALD              Director                 April 22, 1998
 --------------------------

    Wesley L. McDonald




   /s/ PAUL G. YOVOVICH               Director                 April 22, 1998
 --------------------------

     Paul G. Yovovich





<PAGE>


                         COMARCO, INC. AND SUBSIDIARIES

                            SCHEDULE VIII - RESERVES

                       Three Years Ended January 31, 1998

                             (Dollars in thousands)

<TABLE>

                                                                                             Other
                                            Balance at      Charged to                      Changes
                                            Beginning        Cost and                         Add           Balance at End
                                             of Year         Expense       Deductions      (Deduct)            of Year
                                           ------------    ------------   ------------    ------------   ------------------
<S>                                        <C>             <C>            <C>             <C>            <C>              
Year ended January 31, 1998:
   Allowance for doubtful accounts and
     provision for unbilled receivables
     (deducted from accounts
     receivable).......................    $      215      $      123     $     7(1)      $       --     $      331

Year ended January 31, 1997:
   Allowance for doubtful accounts and
     provision for unbilled receivables
     (deducted from accounts
     receivable).......................    $      256      $       62     $   103(1)      $       --     $      215
   Income tax valuation allowance......           530              --         530(1)              --             --

Year ended January 31, 1996:
   Allowance for doubtful accounts and
     provision for unbilled receivables
     (deducted from accounts
     receivable).......................    $      336      $       30     $   110(1)      $       --     $      256
   Income tax valuation allowance......           700              --         170(1)              --            530

</TABLE>

(1) Write off of uncollectible receivables and reduction in income tax valuation
allowance.