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

----------
(Mark One)
[x]  Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended January 31, 1997 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    (I.R.S. Employer Identification No.)
   incorporation or organization) 

   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 28, 1997 - 4,780,959
                                     shares.

                                            Aggregate market value of
     Class                                  shares held by non-affiliates
     
   Common Stock..................................... $42,541,408

     The total number of shares held by  non-affiliates on February 28, 1997 was
2,447,722.  This number was  multiplied  by $17.38 per share (the  closing  sale
price of the Common  Stock on February  28, 1997 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, 1997 a definitive Proxy Statement (the "1997 Proxy Statement")  relating
to its 1997 Annual Meeting of Stockholders,  which meeting involves the election
of  directors  and  certain  related  matters.   The  1997  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 1997 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 1997 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

This Annual Report on Form 10-K contains  forward-looking  statements within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934. These are in paragraphs 6-10, 13-20, 35 and 36
of  Business,  and  paragraphs  6, 10,  11, 13, 22, 26, 28, 33, 37, 40 and 41 of
Management's  Discussion  and Analysis of Results of  Operations  and  Financial
Condition.   Actual   results   may  differ  from  those   identified   in  such
forward-looking 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.  Two
subsidiaries,  Decisions and Designs, Inc. and International  Business Services,
Inc.,  were  acquired in late 1985 and early 1986. A third  subsidiary,  Comarco
Wireless Technologies,  Inc. ("Comarco Wireless"), was formed in January 1994 to
further  develop the Company's  wireless  communications  products  business.  A
fourth  subsidiary,  LCTI,  Inc.,  was  acquired in August 1994.  LCTI  develops
special  purpose  software  for military and  commercial  applications.  A fifth
subsidiary, Manufacturing Technology Training Center, Inc. (MTTC), was formed in
January 1996 to further develop the Company's  technology  training business.  A
sixth  subsidiary,  Comarco  Wireless Europe Inc., a wholly-owned  subsidiary of
Comarco  Wireless  Technologies,  Inc.,  was  formed in April 1996 to market and
provide post-contract customer support for the Company's wireless communications
products to international  customers.  A seventh  subsidiary,  Comarco Staffing,
Inc. (formerly known as CoSource Solutions,  Inc.), was formed in August 1996 to
acquire the assets of a commercial  outsourced  staffing  services  company.  An
eighth subsidiary,  Comarco Systems, Inc., was formed in January 1997 to further
develop the Company's outsourced engineering and technical 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 three  years,  the  Company,  through  its  subsidiary,  Comarco
Wireless  Technologies,  Inc.,  has invested more of its resources in developing
products for the wireless  communications  industry. This effort has resulted in
COMARCO realizing over 75% of its operating income from this business area.

Summarized  financial  information by business  segment for the Company's Fiscal
Year 1997, which ended January 31, 1997, is as follows:

<TABLE>

                                                 
                            Wireless             Outsourced
                         Communications       Staffing Services         Corporate
                            Products          and Other Revenue         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


</TABLE>

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  introduction,  the LT 100, 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 wireless data telemetry systems and
     emergency 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 product 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 maintenance contracts. In addition,
     in February 1997, the Company  acquired certain callbox product line assets
     of Cubic  Communications,  Inc. The  installed  base  purchased  from Cubic
     Communications  consists of  approximately  6,500 units. The combination of
     the two product  lines  establishes  the Company as a major  vendor to this
     niche of the  wireless  application  products  marketplace.  

Comarco Wireless  Technologies' revenues increased to 27% of the Company's total
revenue  in  Fiscal  Year  1997,  a 36%  increase  over the prior  fiscal  year.
Operating income increased 41% year-to-year and represented 79% of the Company's
consolidated  operating income for Fiscal Year 1997. 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,  a continued
geographical  expansion to international markets and continued acceptance of the
Company's products by its customers, none of which can be assured.

International  sales in Fiscal Year 1997  totalled  $5.4  million,  up from $1.4
million in the prior  fiscal  year.  The  Company  expects  this  segment of its
business to continue  to grow.  Marketing  and  post-contract  customer  support
offices have recently been opened and staffed in Singapore and London, England.


PRODUCT DEVELOPMENT

As part of its  product  development  program,  the  Company is  continuing  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
continues to plan to develop  products that will be compatible with all wireless
communications air interfaces worldwide. New products this year included GSM and
CDMA air interface  products and the  introduction of our LT-100 platform to our
field  measurement  product line. 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
rechargeable  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 is currently in FCC and UL testing.  Potential
customers would include after market and original equipment manufacturers. There
can be no assurance that the Company will be successful in bringing this product
to  market,  or  that  this  product  will  be  successful.  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.

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  1997  and  Fiscal  Year  1996,   the  Company's   wireless
communications business capitalized  approximately $2.2 million and $1.4 million
of  software  product  development  costs,  respectively,   in  accordance  with
Statement of Financial  Accounting Standards Number 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise  Marketed.  Of the amounts
capitalized,  $1.0 million and $1.1  million,  respectively,  were  amortized in
Fiscal Years 1997 and 1996 against  product sales in accordance  with  Statement
No. 86.

In addition,  during Fiscal Years 1997,  1996,  and 1995,  Comarco  Wireless had
expenditures  of $1.9  million,  $1.8 million and  $340,000,  respectively,  for
research  and  development   expenses   (includes   Company-sponsored   software
development  costs  prior to  determination  of  technological  feasibility)  on
current and anticipated products.


BACKLOG

The value of  unfilled  orders at Comarco  Wireless  as of January  31,  1997 is
approximately  $19.6  million,  compared to $4.4 million as of January 31, 1996.
The current year balance  includes $3.9 million of product  orders for the field
measurement and revenue  assurance  product lines,  and $2.3 million of deferred
revenue for basic and extended warranty  commitments.  Management  believes that
approximately  90% of this  backlog  amount  (of $6.2  million)  will  result in
revenue  during  Fiscal Year 1998. In general,  most of the  Company's  products
orders are filled  within  months from the receipt of the order.  The  remaining
value of  unfilled  orders of $13.4  million is related to the  callbox  product
line.  This backlog  balance  consists of $9.3 million of long-term  maintenance
agreements and a $4.1 million contract 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  in the latter half of
Fiscal Year 1998.


SEASONALITY

Comarco  Wireless  has  experienced  in each of the past three  years a seasonal
fluctuation in wireless  communications products activity, with greater sales in
the third and fourth quarters of its fiscal year and lesser amounts in the first
and second quarters. 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;  and other competitive factors.  Therefore,
the  nature of the  wireless  communications  products  business  is  inherently
unpredictable and sales and profits may fluctuate  significantly from quarter to
quarter.


MARKETING, SALES DISTRIBUTION

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 and Europe, respectively. This expansion overseas faces a number
of inherent barriers, including: the need for export licenses; tariffs and other
potential  trade  restrictions;  and changes in laws governing the imposition of
duties,  quotas, taxes, or other charges relating to the import or export of its
products.  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 operations will be successful.


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 planned  geographical  expansion into Europe,  Asia 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. 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 may experience an
interruption  in  production.  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.   Working  capital
requirements  are  expected to be financed  from  operations  and the  financial
resources of the Company.


TECHNICAL REQUIREMENTS

Comarco  Wireless is selling its products into a market that is growing  rapidly
and  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, 1997, Comarco Wireless employed approximately 100 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
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 a small niche (field measurement  equipment) 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  knowing  how to
penetrate 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  portable  computing
devices and cellular  telephones,  and patents  covering its  emergency  callbox
product.  However,  the Company  currently  relies primarily on a combination of
trade secrets,  copyrights,  trademarks,  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.


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 $51.9 million or 73% of the Company's revenues,  and approximately
$1.4 million,  or 21% of its operating income, for the fiscal year ended January
31, 1997 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. 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 information
   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.

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
hardware such as aircraft  subsystems,  missile launchers,  missile guidance and
control interface electronics, and gun system platforms.

Through the Company's  software  products  business and its  LEXSYS(TM)  product
line, it offers  computer-aided  software  engineering  tools for engineering of
computer-based test program sets (TPSs) and related  documentation.  The Company
also applies ATS to develop test program sets (TPSs) and interface devices (IDs)
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,
   producibility, 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 Washington  National  Airport 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 aviation services
contract in February 1997 for Riverside County, California.


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.


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

Created under a Cooperative Research and Development  Agreement (CRADA) with the
Navy, the Company's  subsidiary,  MTTC, 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 three  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,  1997 was $51  million,  compared to $31
million as of January 31, 1996. The primary reason for the increase year-to-year
is due to the  award  of a TPS  contract  by the Air  Force to  support  the B-2
program, and the award of the Riverside County airports contract, as well as the
exercise  of a two-year  option  extending  work on the  Company's  contract  at
Washington  National  Airport until September 30, 1998. The source of backlog is
primarily  contracts with the U.S. and local governments.  Government  contracts
normally  have a base  and  option  periods  totalling  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,  nor that the entities will fund the unfunded portions of the
Company's contracts.  It is estimated that approximately 64% of the firm backlog
will be realized in Fiscal Year 1998.


GOVERNMENT CONTRACTS

A significant  portion of the Company's  total  revenues  (approximately  39% in
FY97,  51% in FY96, and 58% in FY95) were derived from contracts with the United
States   Government,   principally   agencies  of  the  Department  of  Defense.
Significant  portions of the Company's  revenue are derived from  contracts with
the U.S.  Army and U.S.  Navy,  18% and 16%,  respectively.  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.  In the course of the Company's business,  its contracts
are periodically opened for competition.  None of the Company's Fiscal Year 1997
government contracts are scheduled to end in Fiscal Year 1998. 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, 1997, the Company employed approximately 970 full-time employees,
of which 870 were part of the  outsourced  staffing  services  business area. In
addition,  the Company has approximately 260 employees 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  75 of the Company's  employees in this
business area 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,  1997,   aggregating
approximately  107,000  square  feet,  are located in the cities of Yorba Linda,
Irvine, Camarillo, Anaheim, Victorville, and Ridgecrest,  California; Vienna and
Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield,
Indiana;  Colorado  Springs,  Colorado;   Huntsville,   Alabama;   Gaithersburg,
Maryland; London; 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 1997 was approximately $1.0 million. The
aggregate  annual  property rent in the year ending January 31, 1998 is expected
to be  approximately  $1.1  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  manufacturying  operations  of  Comarco  Wireless,
whether  due to fire,  natural  disaster,  or  otherwise,  could 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  which  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
financial condition of the Company.  In particular,  see Note 17 of the Notes to
Consolidated Financial Statements.


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

Not applicable.


                                     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>
      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
      1996
         First Quarter.........................     $ 11.50        $  8.13
         Second Quarter........................       11.75           8.88
         Third Quarter.........................       11.63           8.88
         Fourth Quarter........................       15.75           9.88
</TABLE>

The Company had approximately 648 shareholders of record on February 28, 1997.

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,
                                             -----------------------------------------------------------------------
                                                 1997          1996           1995          1994           1993
                                             -------------  ------------  -------------  ------------  -------------
<S>                                          <C>            <C>           <C>            <C>           <C> 
Revenues:
   Contract revenues......................   $     50,858   $    54,278   $    58,796    $    59,500   $    79,051
   Product sales..........................         20,556        15,563         9,520          6,808         5,655
                                             -------------  ------------  -------------  ------------  -------------
                                                  71,414         69,841        68,316         66,308        84,706
                                             -------------  ------------  -------------  ------------  -------------
Direct costs:
   Contract costs.........................        35,599         36,540        39,271         39,553        53,188
   Cost of product sales..................         7,417          6,644         5,388          3,764         3,320
                                             -------------  ------------  -------------  ------------  -------------

                                                  43,016         43,184        44,659         43,317        56,508
Indirect costs............................        21,780         21,112        18,652         19,628        23,856
                                             -------------  ------------  -------------  ------------  -------------
                                                  64,796         64,296        63,311         62,945        80,364
                                             -------------  ------------  -------------  ------------  -------------

Operating income .........................         6,618          5,545         5,005          3,363         4,342
Interest expense..........................            __             44           231            333           436
Interest income...........................           559            541           298            349           284
                                             -------------  ------------  -------------  ------------  -------------

Income before income taxes and
   extraordinary item.....................         7,177          6,042         5,072          3,379         4,190

Income tax expense .......................         2,512          2,157         1,743            980           922
                                             -------------  ------------  -------------  ------------  -------------

Income before extraordinary item..........         4,665          3,885         3,329          2,399         3,268
Extraordinary item - gain on extinguishment
   of subordinated debentures, net of
   income tax expense.....................            --             --            --             --             4
                                             -------------  ------------  -------------  ------------  -------------
Net income ...............................   $     4,665    $     3,885   $     3,329    $     2,399   $     3,272
                                             =============  ============  =============  ============  =============
 Earnings per share:
   Primary:
     Before extraordinary item............   $       .86    $       .75   $       .68    $       .45   $       .60
     Extraordinary item...................            --             --            --             --           ---
                                             -------------  ------------  -------------  ------------  -------------
     Net income...........................   $       .86    $       .75   $       .68    $       .45   $       .60
                                             =============  ============  =============  ============  =============
   Fully diluted:
     Before extraordinary item............   $       .85    $       .73   $       .66    $       .45   $       .60
     Extraordinary item...................            --             --            --             --           ---
                                             -------------  ------------  -------------  ------------  -------------
      Net income..........................    $       .85    $       .73   $       .66    $       .45   $       .60
                                             =============  ============  =============  ============  =============

Dividends declared per share..............          None           None          None           None          None
</TABLE>
<PAGE>
                             SELECTED FINANCIAL DATA
                                 (In thousands)

<TABLE>

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

                                                 1997          1996           1995          1994           1993
                                             -------------  ------------  -------------  ------------  -------------
<S>                                          <C>            <C>           <C>            <C>           <C>     
Working capital ..........................   $    20,429    $    16,049   $    12,394    $    14,879   $    13,829
Total assets..............................        39,210         29,989        25,810         24,891        25,147
Borrowings under bank line of credit......            --             --            --             --           ---
Long-term debt, including current
   maturities (1).........................           ---            ---           844          2,984         3,384
Stockholders' equity .....................        26,977         21,738        17,203         15,144        14,406

</TABLE>

(1) Includes Convertible Subordinated Debentures of $844,000 at January 31,
    1995, $2,984,000 at January 31, 1994, and $3,384,000 at January 31, 1993.


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,
                                         -----------------------------------------------------
                                             1997                1996               1995
                                         -------------       -------------      --------------
<S>                                         <C>                 <C>                <C>
Revenues..............................      100.0%              100.0%             100.0%
Operating income......................        9.3                 7.9                7.3
Interest expense......................       --                    .1                 .3
Interest income.......................         .8                  .8                 .4
Income tax expense....................        3.5                 3.0                2.6
Net income............................        6.5                 5.6                4.9

</TABLE>

Percentage Increase (Decrease)
<TABLE>

                                               Years Ended January 31,
                                         -------------------------------------
                                           1997-1996             1996-1995
                                         ---------------       ---------------
<S>                                         <C>                    <C>
Revenues..............................         2.3%                  2.2%
Operating income......................        19.4                  10.8
Interest expense......................      (100.0)                (81.0)
Interest income.......................         3.3                  81.5
Income tax expense....................        16.5                  23.8
Net income............................        20.1                  16.7
</TABLE>
<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED 
JANUARY 31, 1996

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 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  government  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  network
 evaluation 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
 business capitalized and amortized $2.2 million and $1.0 million, respectively,
 during  Fiscal  Year  1997.  The  Company's  wireless  communications  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.  The value of unfilled  orders at January 31, 1997 totaled $19.6
 million,  of which $9.3 million is associated  with the  long-term  maintenance
 contracts. An additional $2.3 million of deferred revenue has been recorded for
 anticipated customer warranty obligations.

 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  are  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.

<PAGE>

FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1995

Fiscal Year 1996 revenues totaled $69.8 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 telephone companies,
o    increased  efforts  providing  testing of C4I systems and field test
     instrumentation  for the U.S. Armed Forces at various locations, and
o    increased  efforts  in support of the Naval  Surface  Warfare  Center at
     Crane, Indiana;
partially offset by:
o    substantial  completion  as of September  30, 1995,  of the  Company's
     contract  with the Naval Air  Warfare  Center  ("NAWC") at China Lake,
     California, and
o    reduction in activity as a  subcontractor  in support of the Army's 
     Software  Development  Center at Ft. Lee, Virginia.

 Wireless Communications Products

 Wireless  communications  products revenues  increased 58% to $14.4 million for
 Fiscal  Year  1996  from  $9.1   million   for  Fiscal   Year  1995.   Wireless
 communications products revenues comprised approximately 20.5% of total Company
 revenues  during Fiscal Year 1996, up from 13.3% in the prior fiscal year. This
 increase is due to increased  sales of the  Company's  network  evaluation  and
 revenue assurance systems to major cellular telephone carriers. During the year
 the Company  continued to broaden its product line with the introduction of its
 second generation of field measurement equipment, including products supporting
 the AMPS,  TDMA,  NAMPS,  ETACS and GSM air interfaces.  Revenues from sales of
 callboxes were minimal during Fiscal Year 1996 as states other than  California
 have not yet progressed past the field testing stage of these units.

 Operating   income  from  wireless   communications   products   increased  91%
 year-to-year, comprising 67% of the Company's total operating income for Fiscal
 Year 1996. Summary operating results for Comarco Wireless  Technologies,  Inc.,
 the Company's wireless communications products subsidiary, are as follows:

<TABLE>

                                      January 31,              January 31,
                                   -------------------------------------------
                                         1996                     1995
                                   -------------------------------------------
   <S>                             <C>                      <C> 
   Product sales.................  $    14,352,000          $     9,089,000
    Cost of products sold........        5,679,000                4,882,000
                                     ------------------       ------------------

   Gross margin..................        8,673,000                4,207,000
   Percentage....................             60.4%                    46.3%
   
   Indirect costs*...............        4,964,000                2,264,000
                                     ==================       ==================

   Operating income..............  $     3,709,000          $     1,943,000
                                     ==================       ==================
</TABLE>

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

 The  increased  gross margin  percentage is due to the  incremental  benefit of
 spreading  the fixed costs of  operations  over a larger  activity base and the
 ability to obtain economic order buys on component materials.

 The increase in indirect costs,  excluding  research and development  expenses,
 are in line with the increase in revenues.  Research  and  development  expense
 totaled $1.8 million during Fiscal Year 1996, compared to $340,000 in the prior
 fiscal year. The substantial increase year-to-year is due to a concerted effort
 by the Company in Fiscal Year 1996,  to  accelerate  the  expansion of both its
 product  development  program and its efforts to upgrade its  existing  product
 line.  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 revenues from such development efforts.

 Operating  income  increased  91% to $3.7 million in Fiscal Year 1996 from $1.9
 million in the prior fiscal year.  Operating income as a percentage of revenues
 is 25.8% for  Fiscal  Year 1996,  compared  to 21.4% for the  comparable  prior
 period. The increase is due to the improvement in gross margin percentage noted
 above,  which was  partially  offset  by an  increase  in  indirect  costs,  as
 discussed above.

 As part of its  product  development  program,  the Company is  continuing  its
 software product  development  program in it 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   capitalized   and  amortized  $1.4  million  and  $1.1  million,
 respectively,  during Fiscal Year 1996. The Company  capitalized  and amortized
 $1.4 million and $900,000 in Fiscal Year 1995, respectively.  These amounts are
 in addition to the research and development expense discussed above.

 The Company's orders for wireless communications products totaled $17.1 million
 for Fiscal Year 1996, up from $9.6 million  during Fiscal Year 1995.  The value
 of unfilled orders at January 31, 1996 totaled $3.1 million. An additional $1.3
 million of deferred revenue has been recorded for anticipated customer warranty
 obligations.

 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 less predictable (than
 the Company's traditional  Government contracting business) 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 more difficult to predict and
 may fluctuate significantly from quarter to quarter.

 Government Contracting and Other Revenue

 Revenues provided by the Company's traditional  Government contracting services
 business area decreased from $59.2 million in Fiscal Year 1995 to $55.5 million
 in Fiscal Year 1996.  Revenues for Government  contracting  services for Fiscal
 Year 1996 comprised 80% of the Company's  total  revenues  compared with 87% in
 the prior year.  This decrease is primarily due to the reduced  activity in the
 Company's contracts with the Naval Air Warfare Center at China Lake, California
 and the Army's Software Development Center at Ft. Lee, Virginia. The China Lake
 contract   substantially   ended  on  September  30,  1995  and  accounted  for
 approximately  11% of the Company's  total  revenues and  approximately  14% of
 total  Government  contracting  revenues  during  Fiscal Year 1996 and will not
 generate any revenue in Fiscal Year 1997.  This  contract  also  accounted  for
 approximately 11% of the Company's total operating income and approximately 21%
 of total Government contracting operating income during Fiscal Year 1996.

 Sales to the U.S.  Government as well as to government  prime  contractors were
 43% and 51% of the Company's  total revenue  during the fourth  quarter and the
 fiscal  year  ended  January  31,  1996,  respectively.  In the  course  of the
 Company's  business,  its  government  contracts  are  periodically  opened for
 competition.  Approximately 29% of the Company's current Government contracting
 services revenues will either end or will be open for competition during Fiscal
 Year 1997.  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 these outstanding  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 Government  contracting services is down 37% year-to-year
 from $3.0 million in Fiscal Year 1995 to $1.9 million in Fiscal Year 1996.  The
 reduced operating income is primarily due to the operating loss of $1.1 million
 incurred by the Company's software products line in Fiscal Year 1996.

 Net interest income (interest  income,  less amortization of offering costs and
 interest expense) for Fiscal Year 1996 totaled $497,000 compared to $67,000 for
 the prior fiscal year. The increase is principally due to the retirement of the
 Company's  remaining  convertible   subordinated   debentures  and  accelerated
 amortization  of  offering  costs  related  to the  Company's  purchase  of its
 convertible  subordinated  debentures during the first quarters of Fiscal Years
 1996 and 1995, as well as higher available  investable  balances  year-to-year.
 The Company  recorded  accelerated  offering cost  amortization  of $23,000 and
 $64,000 in Fiscal Years 1996 and 1995,  respectively.  The Company  retired the
 remaining  $844,000 of its  convertible  subordinated  debentures  on April 15,
 1995, leaving no outstanding debt as of January 31, 1996.

 The Company's effective tax rate is 35.7% for Fiscal Year 1996 versus 34.4% for
 the previous fiscal year. The increased  effective tax rate is due to a reduced
 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 and increased investment net earnings, partially offset
 by the operating loss incurred by the Company's  software products business and
 a higher 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 30, 1996. The loan agreement  consists
 of (1) an $8 million  revolving credit  facility,  which expires June 30, 1998,
 and (2) a $5 million guidance line of credit,  which expires June 30, 1997. 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  $13  million  (includes  highly  liquid  long-term  investments  with
 maturities of 12 to 36 months)  during the fourth  quarter of Fiscal Year 1997.
 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.

At the end of Fiscal Year 1997,  the  Company's  average days' sales in accounts
receivable  increased to approximately  59 days,  compared with 38 days from the
prior fiscal year's levels.  The increase is due to increased  sales of wireless
communications  products in the latter part of the fourth quarter of Fiscal Year
1997,  which  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,
                                 -------------------------------------------
                                      1997                     1996
                                 -------------------------------------------
 <S>                               <C>                     <C>
 Current ratio.................             2.87                     3.09
 
 Working capital...............    $  20,429,000           $   16,049,000
 Book value per share.........     $        5.65           $         4.62
   
</TABLE>

 The Company  continued to  demonstrate  solid  financial  strength in the above
 financial factors during Fiscal Year 1997, 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, 1997 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 $2.2 million and $1.0 million, respectively, in Fiscal Year 1997.

 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,  totalling  approximately $1.7 million,
 was funded from the Company's available working capital.

 The Company's Board of Directors has authorized a stock re-purchase  program of
 up to 1,000,000 shares. As of January 31, 1997, the Company has repurchased and
 retired  approximately  826,000  shares.  The  average  price  paid  per  share
 re-purchased  under the program was $5.15. As of April 25, 1997,  subsequent to
 year-end,  the  Company  had  re-purchased  an  additional  38,000  shares  for
 approximately $644,000 under the stock re-purchase program.

 The  Company is  subject to legal  proceedings  and claims  which  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 17 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 1998.


<PAGE>

Item 8.  Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                          Page
                                                                          ----
                                                                          
Independent Auditors' Report.............................................. 19
Financial Statements:
     Consolidated Balance Sheets, January 31, 1997 and 1996............... 20
     Consolidated Statements of Income, Years Ended
     January 31, 1997, 1996, and 1995..................................... 21
     Consolidated Statements of Cash Flows, Years
     Ended January 31, 1997, 1996, and 1995............................... 22
     Notes to Consolidated Financial Statements,
     January 31, 1997, 1996, and 1995..................................... 23
Financial Statement Schedule:
     VIII  Reserves, Years Ended January 31, 1997, 
       1996, and 1995..................................................... 43

 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  January 31,  1997,  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, 1997



<PAGE>


                         COMARCO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE>
                                     ASSETS


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

                                                                                       1997               1996
                                                                                 -------------      --------------
<S>                                                                                <C>                <C>              
Current assets:
   Cash and cash equivalents....................................................   $     12,711       $     11,801
   Short-term investments.......................................................          1,824              2,657
   Accounts receivable, net.....................................................         11,526              7,335
   Inventory....................................................................          3,042              1,361
   Other current assets.........................................................          2,257                573
                                                                                   -------------      --------------
     Total current assets.......................................................         31,360             23,727

Long-term investments...........................................................          1,859                841
Property and equipment, net.....................................................          1,408              1,174
Software development costs, net.................................................          2,434              1,401
Intangible assets, net..........................................................          1,842              2,578
Other assets....................................................................            307                268
                                                                                   -------------      --------------
                                                                                   =============      ==============
                                                                                   $     39,210       $     29,989
                                                                                   =============      ==============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable.............................................................   $       217        $       547
   Deferred revenue.............................................................         2,678              1,410
   Accrued liabilities..........................................................         8,036              5,721
                                                                                   -------------      --------------

     Total current liabilities..................................................        10,931              7,678
Deferred income taxes...........................................................         1,302                573

Stockholders' equity:
   Common stock, $.10 par value, 33,705,000 shares authorized; shares outstanding
     of 4,777,959 in 1997 and 4,707,709 in 1996.................................           478                471
   Paid-in capital..............................................................         4,450              3,883
   Retained earnings............................................................        22,049             17,384
                                                                                   -------------      --------------

     Total stockholders' equity.................................................        26,977             21,738

Commitments and contingencies (Notes  12 and 17)
                                                                                   =============      ==============
                                                                                   $    39,210        $    29,989
                                                                                   =============      ==============
</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,
                                         -----------------------------------------------------

                                             1997                1996               1995
                                         -------------       -------------      --------------
<S>                                      <C>                 <C>                <C>
Revenues:
   Contract revenues..................   $    50,858         $    54,278        $    58,796
   Product sales......................        20,556              15,563              9,520
                                         -------------       -------------      --------------
                                              71,414              69,841             68,316
                                         -------------       -------------      --------------

Direct costs:
   Contract costs.....................        35,599              36,540             39,271
   Cost of product sales..............         7,417               6,644              5,388
                                         -------------       -------------      --------------

                                              43,016              43,184             44,659
Indirect costs........................        21,780              21,112             18,652
                                         -------------       -------------      --------------

                                              64,796              64,296             63,311
                                         -------------       -------------      --------------

Operating income......................         6,618               5,545              5,005
Interest expense......................           ---                  44                231
Interest income.......................           559                 541                298
                                         -------------       -------------      --------------

Income before income taxes............         7,177               6,042              5,072
Income tax expense....................         2,512               2,157              1,743
                                         -------------       -------------      --------------

Net income............................   $     4,665         $     3,885        $     3,329
                                         =============       =============      ==============
 
Earnings per common share:
   Primary:
     Net income.......................   $       .86         $       .75        $       .68
                                         =============       =============      ==============
   Fully diluted:
     Net income.......................   $       .85         $       .73        $       .66
                                         =============       =============      ==============
 </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,
                                                               ------------------------------------------------------

                                                                   1997                 1996               1995
                                                               --------------       -------------      --------------
<S>                                                            <C>                  <C>                <C>
Cash flows from operating activities:
   Net income...............................................   $     4,665          $     3,885        $     3,329
   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........................         2,263                2,117              1,728
       Provision for doubtful accounts receivable...........            62                   30                 12
       Deferred income taxes................................          (509)                 247                 83
       Changes in  operating  assets and  liabilities,  net of 
       effects  from the purchases of LCTI, RAL, and GTE:
           Increases in investments.........................          (785)                (357)               ---
         Decrease (increase) in accounts receivable.........        (2,308)               1,338                513
         Increase in inventory..............................          (470)                (826)               (71)
         Decrease (increase) in other current assets........          (432)                 147                130
         Decrease (increase) in other assets................           (36)                  14                 86
         Decrease in accounts payable.......................          (330)                 (69)              (215)
         Increase in deferred revenue.......................         1,243                  366                442
         Increase (decrease) in accrued liabilities.........         1,693                  (73)                47
                                                               --------------       -------------      --------------
   Net cash provided by operating activities................         5,079                6,793              6,084
 
Cash flows from investing activities:
   Purchases of                                                     (1,572)              (1,903)            (3,038)
   investments.............................................
   Proceeds from sales of investments.......................         2,172                1,724                 76
   Purchases of property and equipment......................          (872)                (740)              (588)
   Proceeds from sales of property and equipment............            13                   53                  1
   Software development costs...............................        (2,210)              (1,900)            (1,597)
   Cost of acquisition of LCTI, net of cash acquired........           ---                  ---                (65)
   Cost of acquisition of RAL, net of cash acquired.........        (1,198)                 ---                ---
   Cost of acquisition of GTE callbox, net of cash acquired.        (1,076)                 ---                ---
                                                               -------------          ------------     ---------------

   Net cash used in investing activities....................        (4,743)              (2,766)            (5,181)
Cash flows from financing activities:
   Principal payments on long-term debt.....................           ---                  ---               (821)
   Purchase of convertible subordinated debentures..........           ---                 (844)            (2,140)

   Proceeds from issuance of common stock,
     including tax benefit..................................         1,052                  650                122
   Purchase of common stock.................................          (478)                 ---             (1,392)
                                                               --------------       -------------      --------------
   Net cash provided (used) by financing activities.........           574                 (194)            (4,231)
                                                               --------------       -------------      --------------

Net increase (decrease) in cash and cash equivalents........           910                3,833             (3,328)

Cash and cash equivalents, beginning of year................        11,801                7,968             11,296
                                                               --------------       -------------      --------------

Cash and cash equivalents, end of year......................   $    12,711          $    11,801        $     7,968
                                                               ==============       =============      ==============
</TABLE>

          See accompanying notes to consolidated financial statements.
<PAGE>

                         COMARCO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 31, 1997 AND 1996 AND 1995



1.   Significant Accounting Policies

a. The Company--COMARCO,  Inc. and its subsidiaries' (the "Company") traditional
business  area  consists  of  providing  a broad  range of support  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 39%,  51%, and 58% of revenues for the
years ended January 31, 1997, 1996, and 1995, respectively.  In August 1994, the
Company acquired all of the outstanding  stock of LCTI, Inc. As negotiated under
the purchase agreement, the Company was not required to pay any consideration to
the former owners of LCTI at the  acquisition  date, but may be required to make
payments to these former owners based upon the results of LCTI's operations over
a five-year period from the date of acquisition.  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. These
acquisitions  were  accounted  for  using  the  purchase  method.  There  was no
difference  between the  estimated  fair values of the acquired net tangible and
identifiable  intangible  assets  and  the  assumed  liabilities  for  the  LCTI
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 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 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.  In
February  1997,  Comarco  Wireless  Technologies,  Inc.  acquired an  additional
callbox product line from Cubic Communications,  Inc. This acquisition, totaling
approximately $1.7 million, will be accounted for using the purchase method, and
the difference  between  identified  tangible and intangible  assets and assumed
liabilities  will be recorded as goodwill.  This acquisition was funded from the
Company's working capital.

     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  which  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  statements
of cash flows,  the Company  considers all highly liquid debt  instruments  with
original  maturities  of  three  months  or less to be  cash  equivalents.  Cash
equivalents  of $12.0  million  and $10.9  million at January 31, 1997 and 1996,
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,  over useful lives of three to
seven 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 $2.2 million and $1.2 million  respectively,  in the
year  ended  January  31,  1997.  Capitalized  software  development  costs  and
associated  amortization  expense  were  approximately  $1.9  million  and  $1.2
million,  respectively,  in the year ended  January 1996.  Capitalized  software
development costs and associated  amortization  expense were  approximately $1.6
million and $921,000 respectively, in the year ended January 31, 1995.

     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--The  outstanding  shares used for  earnings  per
share  calculations for all years presented  include the weighted average effect
of common  shares  and common  share  equivalents  outstanding  during the year.
Common share  equivalents  include dilutive stock options and warrants  computed
using the treasury  stock method.  Convertible  subordinated  debentures are not
considered common stock equivalents and are not considered in the computation of
fully  diluted  earnings  per share  since  the  effect  would be  antidilutive.
Consolidated  net income of the Company used for 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  Plan--Prior to February 1, 1996, the Company accounted for
its stock option plan 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.  Reclassifications-Certain  reclassifications  of 1995 and 1996  amounts
have been made to conform with the 1997 presentation.


2.   Investments

Effective   February  1,  1994,  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 115,  Accounting  for Certain  Investments in Debt and
Equity Securities. Statement 115 prescribes how companies are to account for and
report  investments in equity  securities  that have readily  determinable  fair
values and for all investments in debt securities. The adoption of Statement 115
had no material impact on the Company's consolidated statement of income for the
years ended January 31, 1995, 1996 and 1997.


Securities  classified  as available for sale are as follows at January 31, 1997
and 1996:
<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>
1997        Equity           $262          --               --                    $262
1996        Equity           $286          --               --                    $286


</TABLE>

Securities classified as held-to-maturity are as follows at January 31, 1997 and
1996:
<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>
1997        Debt             $2,278          $12            $ 7                   $2,283
1996        Debt             $2,855          $17            $ 5                   $2,867

</TABLE>

Maturities of debt securities  classified as held-to  maturity are as follows at
January 31, 1997:
<TABLE>

                                                                 Aggregate
 Security                                                        Fair
 Type                             Cost                           Value
---------                         ----                           ---------
                                          (Dollars in thousands)
<S>                             <C>                              <C>
 Tax-exempt obligations:
     Within one year            $  419                           $  420
     One through five years     $1,859                           $1,863

</TABLE>

Proceeds  from the sales of  available-for-sale  securities  in the years  ended
January 31,  1997 and 1996 were  $24,000 and  $363,000,  respectively.  No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 1997 and 1996.

Short-term  investments at January 31, 1997 and 1996 included restricted amounts
of $1.1 million and $357,000, respectively,  related to balances maintained in a
non-qualified deferred compensation plan for Company executives.

The amount of net unrealized holding gains on trading securities recorded in the
years ended January 31, 1997 and 1996 were $82,000 and $25,000, respectively.


3.   Accounts Receivable

Accounts receivable consist of the following:
<TABLE>

                                                          January 31,
                                                 ----------------------------
                                                    1997             1996
                                                 -----------      -----------
                                                     (Dollars in thousands)
<S>                                              <C>              <C>
U.S. Government
  Billed......................................   $  3,027         $  3,096
  Unbilled....................................      1,457            1,566
Commercial....................................      7,091            2,490
  Other ......................................        166              439
                                                 -----------      -----------
                                                   11,741            7,591
Less:  Allowances for doubtful accounts.......       (215)            (256)
                                                 -----------      -----------
                                                 $ 11,526         $  7,335
                                                 ===========      ===========
</TABLE>

Included in unbilled  accounts  receivable are retainages due upon completion of
contracts  of  approximately  $232,000  and  $154,000 as of January 31, 1997 and
1996, respectively.  Of total accounts receivable at January 31, 1997, there are
approximately  $838,000 of unbilled  receivables which, based upon the Company's
experience, may not be collected within the next fiscal year.


4.  Inventory

Inventory consists of the following:
<TABLE>

                                                       January 31,
                                                ----------------------------
                                                    1997             1996
                                                -----------      -----------
                                                    (Dollars in thousands)
<S>                                             <C>              <C>
Raw materials................................   $   2,787        $     830
Work-in-process..............................         139              278
Finished goods...............................         116              253
                                                -----------      -----------
                                                $   3,042        $   1,361
                                                ===========      ===========
</TABLE>


5.   Property and Equipment

Property and equipment consist of the following:
<TABLE>

                                                          January 31,
                                                ----------------------------
                                                    1997             1996
                                                -----------      -----------
                                                    (Dollars in thousands)
<S>                                              <C>              <C>
Office furnishings and fixtures...............   $   1,148        $   1,056
Equipment.....................................       2,892            2,281
Software......................................         254              225
                                                 -----------      -----------
                                                     4,294            3,562
Less: Accumulated depreciation and
  amortization................................      (2,886)          (2,388)
                                                 -----------      -----------
                                                 $   1,408        $   1,174
                                                 ===========      ===========
</TABLE>

6.  Intangible Assets

Intangible assets consist of the following:

<TABLE>

                                                         January 31,
                                                ----------------------------
                                                     1997             1996
                                                 -----------      -----------
                                                    (Dollars in thousands)
<S>                                              <C>              <C>
Costs in excess of net assets acquired........   $   1,408        $   1,697
Other intangible assets, based on allocated
   purchase price.............................       1,845            1,845
                                                 -----------      -----------
                                                     3,253            3,542
Less: Accumulated amortization................      (1,411)            (964)
                                                 -----------      -----------
                                                 $   1,842        $   2,578
                                                 ===========      ===========
</TABLE>

Amortization  of intangible  assets for the years ended January 31, 1997,  1996,
and 1995 amounted to $447,000, $433,000, and $341,000, 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  June 30,  1998,  and a $5  million
guidance  line of credit,  which  expires June 30, 1997.  The  revolving  credit
facility and the guidance line of credit are unsecured provided that the Company
maintains  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 8.25% at January 31,  1997.  There
were no  borrowings  under the line of credit at January 31,  1997 or 1996.  The
loan agreement also includes certain restrictive covenants.


8.  Accrued Liabilities

Accrued liabilities consist of the following:

<TABLE>

                                                     January 31,
                                             ----------------------------
                                                 1997             1996
                                             -----------      -----------
                                                (Dollars in thousands)
<S>                                            <C>              <C>
Accrued payroll and related expenses........   $   5,193        $   4,247
Other.......................................       2,843            1,474
                                              -----------      -----------
                                               $   8,036        $   5,721
                                              ===========      ===========
</TABLE>


9.  Stockholders' Equity

Changes in the  components of  stockholders'  equity for the years ended January
31, 1995, 1996, and 1997 were as follows:
<TABLE>

                                                Common        Paid-in       Retained
                                                Stock         Capital       Earnings        Total
                                             -------------  ------------  -------------  -------------
                                                              (Dollars in thousands)
<S>                                          <C>            <C>           <C>            <C>
Balance at January 31, 1994................  $      485     $    4,489    $   10,170     $    15,144
   Net income..............................          --             --         3,329           3,329
   Exercise of stock options, and debenture
     conversions, 35,271 shares............           3             72            --              75
    Tax benefit from exercise of stock
     options...............................         ---             47            --              47
   Purchase and retirement of common stock,
     282,364 shares........................         (28)        (1,364)           --          (1,392)
                                             -------------  ------------  -------------  -------------
                                                                                         
Balance at January 31, 1995................         460          3,244        13,499          17,203
   Net income..............................          --             --         3,885           3,885
   Exercise of stock options, 105,700                11
     shares................................                        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
                                             =============  ============  =============  =============
</TABLE>


10.  Income Taxes

Income taxes consist of the following amounts:
<TABLE>
                                                         Years Ended January 31,
                                            -----------------------------------------------------
                                                1997               1996                1995
                                            -------------       -------------      --------------
                                                        (Dollars in thousands)
   <S>                                      <C>                 <C>                <C>           
   Federal income tax:
     Current............................    $    2,358          $   1,415          $   1,160
     Deferred...........................          (421)               206                 80
   State income taxes:
     Current............................           663                495                500
     Deferred...........................           (88)                41                  3
                                            -------------       -------------      --------------
                                            $    2,512          $   2,157          $   1,743
                                            =============       =============      ==============
</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, 1997,
1996  and  1995  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,  1997,  1996,  and 1995 are as
follows:
<TABLE>

                                                                     Years Ended January 31,
                                               --------------------------------------------------------------------
                                                      1997                    1996                    1995
                                               --------------------    --------------------   ---------------------
                                                           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...     $ 2,512       35.0%     $ 2,115      35.0%     $ 1,775      35.0%
Surtax exemption..........................         (72)      (1.0)         (60)     (1.0)         (51)     (1.0)
State tax, net of federal benefit.........         380        5.3          354       5.9          332       6.5
Change in valuation allowance.............        (530)      (7.4)        (170)     (2.8)        (300)     (5.9)         
Other, net................................         222        3.1          (82)     (1.4)         (13)      (.2)
                                               --------    --------    --------   ---------   ---------   ---------

Taxes on income...........................     $ 2,512       35.0%     $ 2,157      35.7%     $ 1,743       34.4%
                                               ========    ========    ========   =========   =========   =========

</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, 1997 and
1996 are presented below:
<TABLE>


                                                                               January 31,
                                                             --------------------------------------------
                                                                      1997                  1996
                                                             --------------------------------------------
                                                                         (Dollars in thousands)
  <S>                                                                 <C>                     <C>             
  Deferred tax assets:
     Accounts receivable....................................            $ 527                 $ 328
     Property and equipment, principally due to differing
      depreciation methods..................................               74                    70
     Employee benefits, principally due to accrual for
      financial reporting purposes..........................              971                   409
     Other..................................................               75                    35
                                                                  -------------         -------------
     Total gross deferred tax assets........................            1,647                   842
     Less valuation allowance...............................              ---                   530
                                                                  -------------         -------------
     Net deferred tax assets................................           $1,647                 $ 312
                                                                  -------------         -------------
    
   Deferred tax liabilities:
     Prepaid expenses.......................................            $ 135                 $ 110
     Property and equipment, principally due to differing
      depreciation methods..................................              124                    73
     Software development costs.............................              998                   530
     Other..................................................              274                   ---
                                                                  -------------         -------------
     Total gross deferred tax liabilities...................           $1,531                 $ 713
                                                                  -------------         -------------
     Net deferred tax asset (liability).....................             $116                 ($401)
                                                                  =============         =============
</TABLE>

The  valuation  allowance  for  deferred  tax assets as of  February 1, 1996 was
$530,000.  The net change in the valuation  allowance for the year ended January
31, 1997 was a decrease of $530,000.

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, 1997 are summarized below:
<TABLE>

                                                     Outstanding Options
                                            -----------------------------------
                                            Number of         Weighted-Average
                                               Shares           Exercise Price
                                            -------------     -----------------
<S>                                              <C>              <C>
Balance, January 31, 1994...............         570,825          $  3.59
   Options granted......................          25,000          $  5.13
   Options canceled or expired..........         (13,375)         $  4.08
   Options exercised....................         (34,750)         $  1.99
                                            -------------       -------------

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
                                            =============       =============
</TABLE>


The following table summarizes  information  about stock options  outstanding at
January 31, 1997:


<TABLE>

                                      Options Outstanding                               Options Exercisable
                   -----------------------------------------------------------  -------------------------------------
                          Number           Weighted-Avg.                               Number
      Range of          Outstanding          Remaining           Weighted-Avg.       Exercisable        Weighted-Avg.
   Exercise Prices      at 1/31/97        Contractual Life      Exercise Price       at 1/31/97        Exercise Price
--------------------------------------   -------------------   ------------------  ----------------   ------------------
<S>                       <C>                 <C>                   <C>                 <C>                <C>              
  $1.88 to 2.00           154,375             4.0 years             $1.94               154,375            $1.94     
   4.56 to 6.25           175,525             6.3                    5.23               148,550             5.31     
   8.63 to 11.50          112,000             8.1                    9.01                28,000             9.01     
  14.50 to 16.96          110,000             9.2                   14.93                   -               -        
                      ----------------                                             ----------------
  $1.88 to 16.96          551,900             6.6                   $7.01               330,925            $4.05    
                      ================                                             ================
</TABLE>

Stock  options  exercisable  at January 31, 1997,  1996,  and 1995 were 330,925,
345,625, and 387,825, respectively.  Shares available under the plans for future
grants at January 31, 1997, 1996, and 1995 were 437,230,  538,730,  and 297,605,
respectively.

One of the Company's  subsidiaries,  Comarco Wireless Technologies,  Inc. (CWT),
also has a stock option plan under which  officers and key  employees of CWT may
be granted options to purchase up to 60,000 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,
1997,  all  300,000  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, 1995,  24,000  options  were granted at an exercise  price of
$25.33.  In the fiscal year ended January 31, 1996,  14,000 options were granted
at exercise  prices  ranging  from  $43.00 to $119.73.  In the fiscal year ended
January 31, 1997,  2,800  options were granted at an exercise  price of $132.16.
Stock options exercisable at January 31, 1997, 1996 and 1995 were 15,500,  6,000
and none,  respectively.  Shares  available  under the plan for future grants at
January 31, 1997, 1996 and 1995 were 19,200, 22,000 and 36,000, respectively.

The following table summarizes  information about CWT stock options  outstanding
at January 31, 1997:


<TABLE>

                                    Options Outstanding                                Options Exercisable
                 -----------------------------------------------------------  --------------------------------------
                     Number           Weighted-Avg.                                Number
       Range of    Outstanding          Remaining           Weighted-Avg.        Exercisable       Weighted-Avg.
   Exercise Prices at 1/31/97        Contractual Life      Exercise Price        at 1/31/97        Exercise Price
---------------------------------   -------------------   ------------------   ----------------  -------------------
<S>                   <C>                <C>                   <C>                  <C>              <C>         
  $25.33 to 43.00     32,000             7.7 years             $29.75               14,000           $27.85   
 119.73 to 132.16      8,800             8.9                   123.69                1,500           119.73   
                 ----------------                                               ----------------
 $25.33 to 132.16     40,800             8.0                   $50.01               15,500           $36.75   
                 ================                                               ================
                                                  
</TABLE>
                                       

The per share weighted-average fair value of employee and director stock options
granted  during the years ended January 31, 1997 and 1996 was $7.73,  and $4.75,
respectively,  on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:


                                          Years ended January 31,
                                        ----------------------------
                                           1997             1996
                                        -----------      -----------
      Expected dividend yield              0.0%              0.0%
      Expected volatility                 45.1%             42.8%
      Risk-free interest rate              5.8%              7.3%
      Expected life                      6 years          6 years


The per share  weighted-average  fair value of CWT stock options  granted during
the years ended January 31, 1997 and 1996 was $57.38, and $36.68,  respectively,
on the date of grant  using  the Black  Scholes  option-pricing  model  with the
following weighted-average assumptions:


                                        Years ended January 31,
                                      ----------------------------
                                        1997             1996
                                      -----------      -----------
     Expected dividend yield             0.0%             0.0%
     Expected volatility                40.2%            45.1%
     Risk-free interest rate             5.4%             6.6%
     Expected life                     5 years          5 years


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,
                                                   ----------------------------
                                                      1997             1996
                                                   -----------      -----------

                                                      (Dollars in thousands,
                                                     except per share amounts)
   <S>                                              <C>              <C>      
   Net income:  As reported.......................  $   4,665        $   3,885
                Pro forma.........................      4,414            3,794
   Earnings per common share - primary:
                As reported......................   $     .86        $     .75
                Pro forma........................         .82              .73
   Earnings per common share - fully diluted:
                As reported......................   $     .85        $     .73
                Pro  forma.......................         .81              .72
     
</TABLE>

Pro forma net income and earnings per share reflect only options  granted in the
years ended January 31, 1997 and 1996. 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.  Lease Commitments

Rental  commitments under  noncancelable  operating  leases,  principally on the
Company's office space, equipment and automobiles were $3,086,000 at January 31,
1997, payable as follows: $779,000,  $722,000,  $616,000, $505,000, and $464,000
in the years ended January 31, 1998, 1999,  2000, 2001, and 2002,  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,
1997, 1996, and 1995 was $1,183,000, $1,361,000, and $1,456,000, respectively.


13.  Employee Benefit Plans

The  Company  has a Savings  and  Retirement  Plan which  provides  benefits  to
eligible  employees.  Under the Plan,  as  amended  effective  January  1, 1996,
employees  who have been with the  Company in excess of three  months and are at
least 20 1/2 years of age may participate by contributing  between 1% and 15% 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,  1997,  1996,  and 1995  were  approximately
$542,000, $560,000, and $553,000, respectively.


14.  Supplemental Disclosures of Cash Flow Information
<TABLE>

                                                     Years Ended January 31,
                                       -----------------------------------------------------
                                           1997               1996                1995
                                       -------------       -------------      --------------
                                                      (Dollars in thousands)
<S>                                       <C>                 <C>                <C>
Cash paid during the year for:
   Interest........................       $  ---              $   44             $  212
   Income taxes....................       $2,051              $2,209             $1,468

</TABLE>

In August 1994,  the Company  acquired all of the common stock of LCTI,  Inc. No
cash was  paid  for the  acquisition  of the  stock.  In  connection  with  this
acquisition,  the Company acquired tangible assets with a fair value of $615,000
and assumed liabilities of $1,059,000.  The difference between the fair value of
the tangible assets acquired and the liabilities assumed was assigned to certain
intangible assets.

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.

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.

Subsequent to year-end, in February 1997, the Company acquired the assets of the
callbox operation of Cubic Communications Inc., for approximately $1.7 million.


15.  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  $2,800,000,  $2,800,000,  and  $520,000,  in the years  ended
January  31,  1997,   1996,   and  1995,   respectively,   related  to  wireless
communications  products and  development  of software  tools.  These costs were
expensed as incurred.


16.  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 1997 is as
follows:
<TABLE>

                               Wireless           Outsourced Staffing
                        Communications Products    Services and Other     Corporate and Other
                                                        Revenues                                        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>


Summarized financial  information by business segment for Fiscal Year 1996 is as
follows:
<TABLE>

                               Wireless           Outsourced Staffing
                        Communications Products    Services and Other     Corporate and Other
                                                        Revenues                                        Total
                        -----------------------------------------------------------------------------------------------
                                                     (Dollars in thousands)
<S>                         <C>                     <C>                     <C>                    <C>
Revenues                    $     14,352            $     55,489                     ---           $     69,841
Operating income                   3,709                   1,885            $        (49)                 5,545
Identifiable assets                4,472                   6,510                  19,007                 29,989
Depreciation and
   amortization                    1,258                     512                     347                  2,117
Capital expenditures                 470                     221                      49                    740

</TABLE>

International  sales in Fiscal Year 1997  totalled  $5.4  million,  up from $1.4
million in the prior fiscal year.  The majority of these sales have been made to
Europe.


17.  Commitments and Contingencies

The  Company is  subject to legal  proceedings  and  claims  which  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.  Based on the results of audits conducted,  the Company currently
has open issues regarding certain costs charged to  cost-reimbursable  contracts
on which the Company is awaiting final decisions from contracting officers.  The
amounts which are subject to this review by the Government  total  approximately
$600,000.  The  Company  believes  that  it  has  meritorious  defenses,  and if
necessary,  the Company intends to vigorously  defend its positions  through the
appeals and claims process.  Management  believes that  sufficient  reserves are
available to offset any potential adjustments.


18.  Quarterly Financial Data (Unaudited)

     Unaudited  summarized  financial  data by quarter for Fiscal Years 1997 and
1996 is as follows (in thousands, except per share data):
<TABLE>

Fiscal Year 1997                                                               Quarter Ended
                                                        ------------------------------------------------------------
                                                          April 30        July 31       October 31     January 31
                                                        --------------  -------------  -------------  --------------
<S>                                                     <C>             <C>            <C>            <C>         
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

                                                        --------------  -------------  -------------  --------------
Primary earnings per common share....................   $       .21     $       .20    $       .20    $       .25
                                                        ==============  =============  =============  ==============

                                                        --------------  -------------  -------------  --------------
Fully diluted earnings per common share..............   $       .21     $       .20    $       .20    $       .24
                                                        ==============  =============  =============  ==============



Fiscal Year 1996                                                               Quarter Ended
                                                        ------------------------------------------------------------
                                                          April 30        July 30       October 29     January 31
                                                        --------------  -------------  -------------  --------------

Revenues.............................................   $    17,329     $    17,245    $    18,486    $    16,781
Operating income.....................................         1,306           1,210          1,417          1,612
Net income...........................................           838             838          1,020          1,189

                                                        --------------  -------------  -------------  --------------
Primary earnings per common share....................   $       .17     $       .16    $       .20    $       .22
                                                        ==============  =============  =============  ==============
 
                                                        --------------  -------------  -------------  --------------
Fully diluted earnings per common share..............   $       .17     $       .16    $       .20    $       .20
                                                        ==============  =============  =============  ==============

</TABLE>



<PAGE>



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 1997 annual meeting of  shareholders,  which the Company expects to file
with the SEC by May 30, 1997.


ITEM 11.  Executive Compensation

Information  regarding executive  compensation is incorporated by reference from
the  Company's  definitive  proxy  statement  for the  1997  annual  meeting  of
shareholders, which the Company expects to file with the SEC by May 30, 1997.


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 1997 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 1997.


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 1997 annual
meeting of  shareholders,  which the Company expects to file with the SEC by May
30, 1997.


                                     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, 1997,  1996,  and 1995 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.

         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 Commonwealth 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) incorporated in the State of Delaware. 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, 1997.

                                            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, 1997
-----------------------
   Gerald D. Griffin

                              President, Chief Executive
                                 Officer and Director
                                 (Principal Executive
   /s/ DON M. BAILEY                   Officer)                 April 22, 1997
-----------------------
   Don M. Bailey

                                    Vice President
                                         and
                            Treasurer (Principal Financial
  /s/ THOMAS P. BAIRD           and Accounting Officer)         April 22, 1997
-----------------------
    Thomas P. Baird




 /s/ WILBUR L. CREECH                  Director                 April 22, 1997
-----------------------
   Wilbur L. Creech



 /s/ WESLEY L. MCDONALD                Director                April 22, 1997
-----------------------
   Wesley L. McDonald




  /s/ PAUL G. YOVOVICH                 Director                April 22, 1997
 ----------------------
   Paul G. Yovovich
<PAGE>


                         COMARCO, INC. AND SUBSIDIARIES

                            SCHEDULE VIII - RESERVES
                       Three Years Ended January 31, 1997
                             (Dollars in thousands)

<TABLE>

                                                                                            Other
                                           Balance at      Charged to                      Changes
                                          Beginning of      Cost and                         Add         Balance at
                                              Year          Expense       Deductions      (Deduct)      End of Year
                                          -------------   ------------   ------------    ------------   ------------
<S>                                       <C>             <C>            <C>             <C>            <C>
Year ended January 31, 1997:
   Allowance for doubtful accounts and
     provision for unbilled receivables
     (deducted from accounts receivable),
     and income tax valuation
     allowance.........................   $      786      $       62     $   633(1)      $      --     $      215

Year ended January 31, 1996:
   Allowance for doubtful accounts and
     provision for unbilled receivables
     (deducted from accounts receivable),
     and income tax valuation
     allowance.........................   $    1,036      $       30     $   280(1)     $       --     $      786

Year ended January 31, 1995:
   Allowance for doubtful accounts
     and provision for unbilled
     receivables (deducted from accounts
     receivable) and income tax
     valuation allowance...............   $    1,388      $       12     $   364(1)      $     --      $    1,036

</TABLE>


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