##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended APRIL 30, 2006

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)



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|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|California                                                    |  | 95-2088894                          
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. Employer Identification No.)

2 Cromwell, Irvine, California 92618

(Address of principal executive offices and zip code)

(949) 599-7400

(Registrants telephone number, including area code)



---

Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

The registrant had 7,384,317 shares of common stock outstanding as of June 12, 2006.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED APRIL 30, 2006

TABLE OF CONTENTS



|                               |  |                                                                                                    |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                    |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                   
|                               |  |                                                                                                   
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                   |  |     
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Balance Sheets as of April 30, 2006 and January 31, 2006                    |  | 3   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2006 and 2005 |  | 4   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2006 and 2005 |  | 5   
|                               |  |                                                                                                   
|                               |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6   
|                               |  |                                                                                                   
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS              |  | 17  
|                               |  |                                                                                                   
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                         |  | 30  
|                               |  |                                                                                                   
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                            |  | 31  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                   
|                               |  |                                                                                                   
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                  |  | 32  
|                               |  |                                                                                                   
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                        |  | 32  
|                               |  |                                                                                                   
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                    |  | 32  
|                               |  |                                                                                                   
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                |  | 32  
|                               |  |                                                                                                   
|ITEM 5.                        |  | OTHER INFORMATION                                                                                  |  | 32  
|                               |  |                                                                                                   
|ITEM 6.                        |  | EXHIBITS                                                                                           |  | 32  
|                               | 
|SIGNATURES                     |  | 33                                                                                                



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

COMARCO, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)



|                                                                                                                                                                        |  |               |        |                     |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------------- | - | ------
|                                                                                                                                                                        |  | April 30,2006 |        | January 31,2006 (A)
|ASSETS                                                                                                                                                                  |  |               |        |                     |   |       
|Current Assets:                                                                                                                                                         |  |               |        |                     |   |       
|Cash and cash equivalents                                                                                                                                               |  | $             | 23,177 |                     | $ | 26,017
|Short-term investments                                                                                                                                                  |  |               | 832    |                     |   | 1,166 
|Accounts receivable, net of reserves of $78                                                                                                                             |  |               | 9,232  |                     |   | 9,285 
|Accounts receivable subject to litigation, net of reserves of $480                                                                                                      |  |               | 500    |                     |   | 500   
|Inventory, net of reserves of $2,192 and $1,910                                                                                                                         |  |               | 8,604  |                     |   | 8,749 
|Other current assets                                                                                                                                                    |  |               | 389    |                     |   | 423   
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total current assets                                                                                                                                                    |  |               | 42,734 |                     |   | 46,140
|Property and equipment, net                                                                                                                                             |  |               | 1,657  |                     |   | 1,595 
|Software development costs, net                                                                                                                                         |  |               | 1,035  |                     |   | 1,361 
|Acquired intangible assets, net                                                                                                                                         |  |               | 1,125  |                     |   | 1,257 
|Goodwill                                                                                                                                                                |  |               | 2,394  |                     |   | 2,394 
|Other assets                                                                                                                                                            |  |               | 58     |                     |   | 58    
|                                                                                                                                                                        |  |               |        |                     |   |       
|                                                                                                                                                                        |  | $             | 49,003 |                     | $ | 52,805
|                                                                                                                                                                        |  |               |        |                     |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |               |        |                     |   |       
|Current Liabilities:                                                                                                                                                    |  |               |        |                     |   |       
|Accounts payable                                                                                                                                                        |  | $             | 1,411  |                     | $ | 727   
|Deferred revenue                                                                                                                                                        |  |               | 5,705  |                     |   | 5,480 
|Deferred compensation                                                                                                                                                   |  |               | 832    |                     |   | 1,166 
|Accrued liabilities                                                                                                                                                     |  |               | 5,438  |                     |   | 9,324 
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total current liabilities                                                                                                                                               |  |               | 13,386 |                     |   | 16,697
|                                                                                                                                                                        |  |               |        |                     |   |       
|Commitments and Contingencies                                                                                                                                           |  |               |        |                     |   |       
|                                                                                                                                                                        |  |              
|Stockholders Equity:                                                                                                                                                   |  |               |        |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at April 30, 2006 and January 31,
2006, respectively                       |  |               |       |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized; 7,430,067 and 7,422,542 shares issued and outstanding at April 30, 2006
and January 31, 2006, respectively |  |               | 743    |                     |   | 742   
|Additional paid-in capital                                                                                                                                              |  |               | 14,137 |                     |   | 14,054
|Retained earnings                                                                                                                                                       |  |               | 20,737 |                     |   | 21,312
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total stockholders equity                                                                                                                                              |  |               | 35,617 |                     |   | 36,108
|                                                                                                                                                                        |  |               |        |                     |   |       
|                                                                                                                                                                        |  | $             | 49,003 |                     | $ | 52,805
|                                                                                                                                                                        |  |               |        |                     |   |       



|(A) | Derived from the audited consolidated financial statements as of January 31, 2006.
|--- | ----------------------------------------------------------------------------------

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedApril 30, |       
|                                                    |  | 2006                        |        |   | 2005 |  
|Revenue                                             |  | $                           | 10,555 |   |      | $ | 7,962  |  
|Cost of revenue                                     |  |                             | 7,024  |   |      |   | 5,525  |  
|                                                    |  |                             |        |   |      |   |        |  
|Gross profit                                        |  |                             | 3,531  |   |      |   | 2,437  |  
|                                                    |  |                            
|Selling, general, and administrative expenses       |  |                             | 2,517  |   |      |   | 2,198  |  
|Engineering and support expenses                    |  |                             | 1,879  |   |      |   | 1,814  |  
|                                                    |  |                             |        |   |      |   |        |  
|Operating loss                                      |  |                             | (865   | ) |      |   | (1,575 | )
|Other income, net                                   |  |                             | 229    |   |      |   | 57     |  
|Gain on sale of investment in SwissQual, net        |  |                             | 61     |   |      |   |       |  
|                                                    |  |                             |        |   |      |   |        |  
|Loss from continuing operations before income taxes |  |                             | (575   | ) |      |   | (1,518 | )
|Income tax expense                                  |  |                             |       |   |      |   |       |  
|                                                    |  |                             |        |   |      |   |        |  
|Loss from continuing operations                     |  |                             | (575   | ) |      |   | (1,518 | )
|Loss from discontinued operations                   |  |                             |       |   |      |   | (3     | )
|                                                    |  |                             |        |   |      |   |        |  
|Net loss                                            |  | $                           | (575   | ) |      | $ | (1,521 | )
|                                                    |  |                             |        |   |      |   |        |  
|Basic and diluted loss per share:                   |  |                             |        |   |      |   |        |  
|Loss from continuing operations                     |  | $                           | (0.08  | ) |      | $ | (0.20  | )
|Loss from discontinued operations                   |  |                             |       |   |      |   |       |  
|                                                    |  |                             |        |   |      |   |        |  
|Net loss                                            |  | $                           | (0.08  | ) |      | $ | (0.20  | )
|                                                    |  |                             |        |   |      |   |        |  
|Weighted average common shares outstanding:         |  |                             |        |   |      |   |        |  
|Basic                                               |  |                             | 7,429  |   |      |   | 7,422  |  
|                                                    |  |                             |        |   |      |   |        |  
|Diluted                                             |  |                             | 7,429  |   |      |   | 7,422  |  
|                                                    |  |                             |        |   |      |   |        |  
|Common shares outstanding                           |  |                             | 7,430  |   |      |   | 7,422  |  
|                                                    |  |                             |        |   |      |   |        |  

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



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COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                            |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended April 30, |       
|                                                                            |  | 2006                         |        |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                              |        |   |      |   |        |  
|Net loss                                                                    |  | $                            | (575   | ) |      | $ | (1,521 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                              | 751    |   |      |   | 1,008  |  
|Gain on sale/retirement of property and equipment                           |  |                              | (9     | ) |      |   |       |  
|Gain on sale of investment in SwissQual                                     |  |                              | (82    | ) |      |   |       |  
|Stock based compensation expense                                            |  |                              | 84     |   |      |   |       |  
|Provision for doubtful accounts receivable                                  |  |                              |       |   |      |   | 63     |  
|Provision for obsolete inventory                                            |  |                              | 282    |   |      |   | 16     |  
|Changes in operating assets and liabilities:                                |  |                              |        |   |      |   |        |  
|Accounts receivable                                                         |  |                              | 53     |   |      |   | (668   | )
|Amounts due from affiliate                                                  |  |                              |       |   |      |   | (81    | )
|Inventory                                                                   |  |                              | (138   | ) |      |   | 528    |  
|Other assets                                                                |  |                              | 34     |   |      |   | 210    |  
|Accounts payable                                                            |  |                              | 684    |   |      |   | 91     |  
|Deferred revenue                                                            |  |                              | 225    |   |      |   | (853   | )
|Accrued liabilities                                                         |  |                              | (3,885 | ) |      |   | (293   | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                              | (2,576 | ) |      |   | (1,500 | )
|                                                                            |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                         |  |                              | (357   | ) |      |   | (347   | )
|Acquired intangible assets                                                  |  |                              |       |   |      |   | (51    | )
|Proceeds from sale of equipment                                             |  |                              | 11     |   |      |   |       |  
|Proceeds from sale of investment in SwissQual                               |  |                              | 82     |   |      |   |       |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                       |  |                              | (264   | ) |      |   | (398   | )
|                                                                            |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                              |       |   |      |   |       |  
|                                                                            |  |                              |        |   |      |   |        |  
|                                                                            |  |                             
|Net decrease in cash and cash equivalents                                   |  |                              | (2,840 | ) |      |   | (1,898 | )
|Cash and cash equivalents, beginning of period                              |  |                              | 26,017 |   |      |   | 12,270 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                            | 23,177 |   |      | $ | 10,372 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                          |  |                              |        |   |      |   |        |  
|Cash paid for interest                                                      |  | $                            |       |   |      | $ |       |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash paid for income taxes                                                  |  | $                            | 119    |   |      | $ | 2      |  
|                                                                            |  |                              |        |   |      |   |        |  

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | Organization
|-- | ------------

Comarco, Inc., through its subsidiary
Comarco Wireless Technologies, Inc. (collectively, Comarco or the Company), is a leading provider of wireless test solutions for the wireless industry. Comarco also designs, manufactures, and maintains emergency call box
systems and designs mobile power products for notebook computers, cellular telephones, PDAs, and other handheld devices. The Companys operations consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT), which
was incorporated in the State of Delaware in September 1993.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Basis of
Presentation:

The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in
accordance with accounting principles generally accepted in the United States of America for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited
consolidated financial statements included in the Companys annual report on Form 10-K for the year ended January 31, 2006. The financial information presented herein reflects all adjustments, consisting only of normal recurring accruals,
which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three months ended April 30, 2006 are not necessarily indicative of the results to be expected for
the year ending January 31, 2007.

Principles of Consolidation:

The condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits and losses have been eliminated.

Use of Estimates:

The preparation of condensed
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the period reported. Actual results could materially differ from those estimates.

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly,
a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation of long-lived assets,
allowance for doubtful accounts, reserves for inventory obsolescence, and valuation allowances for deferred tax assets.



|3. | Stock-Based Compensation
|-- | ------------------------

The Company grants stock
options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Prior to January 31, 2006, the Company accounted for stock option grants using the intrinsic method in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its stock-based compensation plans. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. Accordingly, no compensation expense was recognized for
the stock option grants. Had compensation cost for the Companys stock option plans been determined based on the fair value at the grant date for awards during the quarter ended April 30, 2005, consistent with the



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



provisions of SFAS No. 123, the Companys net loss, basic loss per share, and diluted loss per share would have been reduced to the pro forma
amounts as follows (in thousands except per share amounts):



|                                                                                                                                            |  |                                   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | -
|                                                                                                                                            |  | Three Months Ended April 30, 2005 |       
|Net loss:                                                                                                                                   |  |                                   |        |  
|As reported                                                                                                                                 |  | $                                 | (1,521 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                   | (97    | )
|                                                                                                                                            |  |                                   |        |  
|Pro forma                                                                                                                                   |  | $                                 | (1,618 | )
|                                                                                                                                            |  |                                   |        |  
|Loss per common share  basic:                                                                                                              |  |                                   |        |  
|As reported                                                                                                                                 |  | $                                 | (0.20  | )
|Pro forma                                                                                                                                   |  |                                   | (0.22  | )
|Loss per common share  diluted:                                                                                                            |  |                                   |        |  
|As reported                                                                                                                                 |  | $                                 | (0.20  | )
|Pro forma                                                                                                                                   |  |                                   | (0.22  | )

As of February 1, 2006, the Company adopted SFAS No. 123R, Share-Based
Payment, (SFAS No. 123R) using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for
awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Companys valuation techniques previously utilized for options in footnote disclosures required under
SFAS No. 123, and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the expected term), the estimated
volatility of our common stock price over the expected term, and the number of options that will ultimately not complete their vesting requirements (forfeitures). Changes in these subjective assumptions can materially affect the estimate
of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each
grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the vesting period,
net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Companys current estimates. Prior periods have not been
restated to incorporate the stock-based compensation charge.

The compensation expense recognized in connection with the adoption of SFAS
No. 123R increased the Companys loss from continuing operations before income taxes and net loss by $83,000, respectively, and decreased earnings per share by $0.01 for the first quarter of fiscal 2007. There was no impact on cash flows
from operating, investing, or financing activities in connection with the adoption of SFAS No. 123R. The total compensation cost related to nonvested awards not yet recognized is approximately $535,000, which will be expensed over a weighted
average remaining life of 18.3 months.

For the first quarter of fiscal 2007, no stock options were granted. The fair value of options
granted under the Companys stock option plans during the three months ended April 30, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|                                         |  |                                   |  
|---------------------------------------- |  | --------------------------------- | -
|                                         |  | Three Months Ended April 30, 2005 |  
|Weighted average risk-free interest rate |  | 3.9                               | %
|Expected life (in years)                 |  | 6                                 |  
|Expected stock volatility                |  | 50.3                              | %
|Dividend yield                           |  | None                              |  
|Expected forfeitures                     |  | 10                                | %

Comarco, Inc. has stock-based compensation plans under which outside directors and certain
employees receive stock options. The employee stock option plans and a director stock option plan provide that officers, key employees, and directors may be granted options to purchase shares of common stock of the Company at not less than
100 percent of the fair market value at the date of grant, unless the optionee is a 10 percent shareholder of the Company, in which case the price must not be less than 110 percent of the fair market value. The total number of shares
that may be granted under these plans is 2,704,337. Figures for these plans reflect a 3-for-2 stock split declared during the year ended January 31, 2001.

The director stock-based compensation plan expires in December 2010, and the employee stock option plan expired during May 2005. During December 2005, the Board of Directors approved and adopted a new equity incentive
plan (the 2005 Plan) covering 450,000 shares of our common stock. The adoption of the 2005 Plan is subject to shareholder approval and is being put to a vote at the Companys annual shareholders meeting in June 2006. Under
both plans, the options are exercisable in installments determined by the compensation committee of the Companys Board of Directors; however, no employee 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 percent shareholders).



|                            |  |                     |   |  |                                 |      
|--------------------------- |  | ------------------- | - |  | ------------------------------- | -----
|                            |  | Outstanding Options
|                            |  | Number of Shares    |   |  | Weighted-Average Exercise Price
|Balance, January 31, 2006   |  | 861,520             |   |  | $                               | 12.43
|Options granted             |  |                    |   |  |                                 |     
|Options canceled or expired |  | (500                | ) |  |                                 | 6.91 
|Options exercised           |  | (45,000             | ) |  |                                 | 9.72 
|                            |  |                     |   |  |                                 |      
|Balance, April 30, 2006     |  | 816,020             |   |  |                                 | 12.58
|                            |  |                     |   |  |                                 |      

No options were granted during the three months ended April 30, 2006. The following table
summarizes information about the Companys stock options outstanding at April 30, 2006:



|                         |                    |                     |                                          |                     |                              |   |                    |  |                              |  |   |      
|------------------------ | ------------------ | ------------------- | ---------------------------------------- | ------------------- | ---------------------------- | - | ------------------ |  | ---------------------------- |  | - | -----
|Range of Exercise Prices |                    | Options Outstanding |                                          | Options Exercisable
|                         | Number Outstanding |                     | Weighted-Avg. Remaining Contractual
Life |                     | Weighted-Avg. Exercise Price |   | Number Exercisable |  | Weighted-Avg. Exercise Price
|$  6.91 to 9.89          |                    | 343,500             |                                          | 7.6                 |                              | $ | 7.91               |  | 156,750                      |  | $ | 7.96 
|10.92 to 12.41           |                    | 107,645             |                                          | 3.4                 |                              |   | 11.59              |  | 107,645                      |  |   | 11.59
|13.21 to 17.50           |                    | 222,375             |                                          | 3.0                 |                              |   | 14.49              |  | 222,375                      |  |   | 14.49
|19.33 to 23.67           |                    | 142,500             |                                          | 4.1                 |                              |   | 21.63              |  | 142,500                      |  |   | 21.63
|                         |                    |                     |                                          |                     |                              |   |                    |  |                              |  |   |      
|6.91 to 23.67            |                    | 816,020             |                                          | 5.2 years           |                              |   | 12.58              |  | 629,270                      |  |   | 13.98
|                         |                    |                     |                                          |                     |                              |   |                    |  |                              |  |   |      

Stock options exercisable at April 30, 2006 were 629,270 at a weighted-average exercise price
of $13.98. At April 30, 2006, shares available for future grants under the 2005 Plan (subject to shareholder approval) were 400,500 and under the director stock option plan were 8,125.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



CWT also has a subsidiary stock option plan. Under this plan, officers and key employees of CWT may
be granted options to purchase up to 600,000 shares of common stock of CWT at not less than 100 percent of the fair market value at the date of grant.

As of April 30, 2006, the Company owned all of the 3,353,000 outstanding shares of CWT common stock. The fair market value of the shares and the exercise dates of the options are determined by the compensation
committee of the Companys Board of Directors; however, no option may be exercised prior to one year following the grant of the option. The options expire as determined by the compensation committee, but not later than ten years and one week
after the date of grant.

During the three months ended April 30, 2006, no options were granted or exercised under the CWT option
plan. Stock options exercisable at April 30, 2006 were 3,000 at an exercise price of $17.62, with a remaining contractual life of 0.8 years. Shares available under the plan for future grants at April 30, 2006 were 198,000.

The following table summarizes information about CWT stock options outstanding at April 30, 2006:



|                         |  |                     |  |                                          |  |                              |       |                    |       |                              |   |      
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ---------------------------- | ----- | ------------------ | ----- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                     
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted-Avg. Remaining Contractual
Life |  | Weighted-Avg. Exercise Price |       | Number Exercisable |       | Weighted-Avg. Exercise Price
|$    17.62               |  | 3,000               |  | 0.8 years                                |  | $                            | 17.62 |                    | 3,000 |                              | $ | 17.62
|                         |  |                     |  |                                          |  |                              |       |                    |       |                              |   |      
|                         |  | 3,000               |  | 0.8 years                                |  |                              |       |                    | 3,000 |                              |   |      
|                         |  |                     |  |                                          |  |                              |       |                    |       |                              |   |      



|4. | Recent Accounting Pronouncements
|-- | --------------------------------

In February 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Instruments, which amends SFAS No. 133 and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or
issued in fiscal years beginning after September 15, 2006. The Company will adopt this pronouncement beginning in fiscal year 2008 and such adoption is not expected to have a significant impact on the Companys financial position or
results of operations.



|5. | Gain on Sale of Investment in SwissQual
|-- | ---------------------------------------

During
fiscal 2002, the Company purchased an 18 percent equity stake in Switzerland based SwissQual AG (SwissQual) for approximately $1.1 million. SwissQual is a developer of quality of service systems and software for measuring,
monitoring, and optimizing the quality of mobile, fixed, and IP-based voice and data communications. Under this alliance, SwissQual is responsible for reselling and supporting Comarcos co-branded Seven.Five products in Europe, the Middle East,
and North Africa (the Companys European region). The Company has a revenue sharing agreement in place that determines how much revenue Comarco earns from SwissQual sales and, conversely, how much revenue SwissQual earns from the
Companys sales to customers located outside the European region.

During January 2006, Spirent plc (Spirent) acquired
100 percent of the outstanding shares of SwissQual for consideration totaling up to approximately $71.3 million. Approximately $37.6 million in cash was paid at the close of the transaction, which is net of $2.5 million of
transaction costs, with an additional $9.1 million put into escrow to secure certain indemnification obligations. The escrowed consideration is expected to be released within 24 months of the close. In addition, up to $22.1 million in
contingent consideration may be paid within 24 months upon satisfaction of certain performance and other requirements. Upon the closing of the transaction, the Company received approximately $6.8 million of the closing consideration, which
is net of $0.5 million of transaction costs, for its 18 percent ownership



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



interest in SwissQual and may receive up to an additional $5.4 million of any escrow distribution and contingent consideration. During the year ended
January 31, 2006, the Company recorded a gain on sale of investment totaling $6.1 million, which was based on cash consideration received by the Company. Due to uncertainty as to timing and amount of any escrow distribution and contingent
consideration, the Company expects to record an additional gain as the contingency lapses and the funds are probable of receipt. During the first quarter of fiscal 2007, the Company recorded a net gain on sale of investment in the amount of $61,000,
which represents $82,000 in proceeds received from the escrowed consideration, less $21,000 in foreign jurisdiction withholding taxes, which are non-refundable.



|6. | Stockholders Equity
|-- | --------------------

During 1992, the
Companys Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through April 30, 2006, the Company repurchased approximately 2.6 million
shares for an average price of $8.22 per share. During the quarter ended April 30, 2006, the Company did not repurchase any shares of common stock.



|7. | Earnings (Loss) Per Share
|-- | -------------------------

The Company calculates
basic net earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. Since the
Company incurred a net loss for the quarters ended April 30, 2006 and 2005, basic and diluted net loss per share were the same because the inclusion of 73,229 and 17,161 potentially dilutive securities related to outstanding stock options,
respectively, would have been antidilutive.



|8. | Related Party Transactions
|-- | --------------------------

On July 31, 2001,
the Company acquired an 18 percent equity stake in SwissQual for $1.1 million in cash. Based in Zuchwil, Switzerland, SwissQual is a developer of voice quality systems and software for measuring, monitoring, and optimizing the quality of
mobile, fixed, and IP-based voice and data communications. As previously discussed (see Note 5), this investment was sold in January, 2006.

Until the first quarter of fiscal 2006, when the Company changed its accounting for SwissQual revenue to the full accrual basis, revenue attributable to sales to SwissQual was deferred until receipt of payment. Commencing with the first
quarter of fiscal 2006, the Company changed its accounting for sales to SwissQual based upon SwissQuals financial strength and past payment history and the lack of the Companys ability to assert financial influence over the operations of
SwissQual. The table below reflects the impact that change had on revenue, operating loss, and earnings (loss) per share for the quarter ended April 30, 2005 (in thousands except earnings (loss) per share).



|                                            |  |                                        |        |   |                                              |   |      
|------------------------------------------- |  | -------------------------------------- | ------ | - | -------------------------------------------- | - | -----
|                                            |  | Comarco, Inc.As reportedApril 30, 2005 |        |   | Effect ofSwissQualAdjustment toAccrual Basis
|Revenue                                     |  | $                                      | 7,962  |   |                                              | $ | 1,049
|Operating income (loss)                     |  |                                        | (1,575 | ) |                                              |   | 653  
|Basic and diluted earnings (loss) per share |  |                                        | (0.20  | ) |                                              |   | 0.09 



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|9. | Customer Concentrations
|-- | -----------------------

A significant portion of
the Companys revenue is derived from a limited number of customers. The customers providing 10 percent or more of the Companys revenues for the quarters ended April 30, 2006 and 2005 are listed below.



|                            |  |                              |        |  |      |   |  |   |       |  |     |  
|--------------------------- |  | ---------------------------- | ------ |  | ---- | - |  | - | ----- |  | --- | -
|                            |  | Three Months Ended April 30, |       
|                            |  | 2006                         |        |  | 2005 |  
|                            |  | (in thousands)               |       
|Total revenue               |  | $                            | 10,555 |  | 100  | % |  | $ | 7,962 |  | 100 | %
|Customer concentration:     |  |                              |        |  |      |   |  |   |       |  |     |  
|Kensington Technology Group |  |                              | 4,105  |  | 39   | % |  |   | 1,802 |  | 22  | %
|San Bernardino County SAFE  |  |                              |       |  |     |   |  |   | 877   |  | 11  | %
|SwissQual                   |  |                              |       |  |     |   |  |   | 2,048 |  | 26  | %
|Verizon Wireless            |  |                              | 2,517  |  | 24   | % |  |   |      |  |    |  
|                            |  |                              |        |  |      |   |  |   |       |  |     |  
|                            |  | $                            | 6,622  |  | 63   | % |  | $ | 4,727 |  | 59  | %
|                            |  |                              |        |  |      |   |  |   |       |  |     |  

The Company derived 24 percent and 28 percent of its revenue from governmental agencies
in the quarters ended April 30, 2006, and 2005, respectively.

The customers comprising 10 percent or more of the Companys
gross accounts receivable are listed below (in thousands).



|                                |  |               |       |  |                 |   |  |   |       |  |     |  
|------------------------------- |  | ------------- | ----- |  | --------------- | - |  | - | ----- |  | --- | -
|                                |  | April 30,2006 |       |  | January 31,2006 |  
|Total gross accounts receivable |  | $             | 9,310 |  | 100             | % |  | $ | 9,363 |  | 100 | %
|Customer concentration:         |  |               |       |  |                 |   |  |   |       |  |     |  
|SwissQual                       |  |               |      |  |                |   |  |   | 2,335 |  | 25  | %
|Kensington Technology Group     |  |               | 3,497 |  | 37              | % |  |   | 3,292 |  | 35  | %
|Verizon Wireless                |  |               | 1,188 |  | 13              | % |  |   |      |  |    |  
|                                |  |               |       |  |                 |   |  |   |       |  |     |  
|                                |  | $             | 4,685 |  | 50              | % |  | $ | 5,627 |  | 60  | %
|                                |  |               |       |  |                 |   |  |   |       |  |     |  



|10. | Inventory
|--- | ---------

Inventory consists of the following (in
thousands):



|                |  |               |       |                 |   |      
|--------------- |  | ------------- | ----- | --------------- | - | -----
|                |  | April 30,2006 |       | January 31,2006
|Raw materials   |  | $             | 3,953 |                 | $ | 4,359
|Work in process |  |               | 1,183 |                 |   | 915  
|Finished goods  |  |               | 3,468 |                 |   | 3,475
|                |  |               |       |                 |   |      
|                |  | $             | 8,604 |                 | $ | 8,749
|                |  |               |       |                 |   |      



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(UNAUDITED)



|11. | Software Development Costs, Net
|--- | -------------------------------

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



|                                       |  |               |        |   |                 |   |        |  
|-------------------------------------- |  | ------------- | ------ | - | --------------- | - | ------ | -
|                                       |  | April 30,2006 |        |   | January 31,2006 |  
|Capitalized software development costs |  | $             | 8,444  |   |                 | $ | 8,444  |  
|Less: accumulated amortization         |  |               | (7,409 | ) |                 |   | (7,083 | )
|                                       |  |               |        |   |                 |   |        |  
|                                       |  | $             | 1,035  |   |                 | $ | 1,361  |  
|                                       |  |               |        |   |                 |   |        |  

Capitalized software development costs for the quarters ended April 30, 2006 and 2005 totaled
$0. Amortization of software development costs for the quarters ended April 30, 2006 and 2005 totaled $326,000 and $488,000, respectively, and have been reported in cost of revenue in the accompanying condensed consolidated financial
statements. The amortization period for the software costs capitalized is the shorter of the economic life of the related product or based on expected unit sales under the sales ratio method, typically two to four years.



|12. | Goodwill and Acquired Intangible Assets, Net
|--- | --------------------------------------------

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



|                                  |  |               |        |   |                 |   |        |  
|--------------------------------- |  | ------------- | ------ | - | --------------- | - | ------ | -
|                                  |  | April 30,2006 |        |   | January 31,2006 |  
|Goodwill                          |  | $             | 2,394  |   |                 | $ | 2,394  |  
|                                  |  |               |        |   |                 |   |        |  
|Acquired intangible assets:       |  |               |        |   |                 |   |        |  
|Definite-lived intangible assets: |  |               |        |   |                 |   |        |  
|Software algorithms               |  | $             |       |   |                 | $ |       |  
|License rights                    |  |               | 1,355  |   |                 |   | 1,355  |  
|Intellectual property rights      |  |               | 1,244  |   |                 |   | 1,244  |  
|                                  |  |               |        |   |                 |   |        |  
|                                  |  |               | 2,599  |   |                 |   | 2,599  |  
|Less: accumulated amortization    |  |               | (1,474 | ) |                 |   | (1,342 | )
|                                  |  |               |        |   |                 |   |        |  
|                                  |  | $             | 1,125  |   |                 | $ | 1,257  |  
|                                  |  |               |        |   |                 |   |        |  

During the first quarter of fiscal 2006, fully amortized software algorithms in the amount of
$255,000 were retired.

The following table presents goodwill by reportable segment (in thousands):



|                               |  |                        |       |         |   |                      |  |       |   |  |   |      
|------------------------------ |  | ---------------------- | ----- | ------- | - | -------------------- |  | ----- | - |  | - | -----
|                               |  | Wireless TestSolutions |       | CallBox |   | Mobile PowerProducts |  | Total
|Balance as of April 30, 2006   |  | $                      | 1,898 |         | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |         |   |                      |  |       |   |  |   |      
|Balance as of January 31, 2006 |  | $                      | 1,898 |         | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |         |   |                      |  |       |   |  |   |      



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



The following table presents the future expected amortization of the definite-lived intangible assets
(in thousands):



|                                     |  |                     |      
|------------------------------------ |  | ------------------- | -----
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |      
|2007                                 |  |                     | 375  
|2008                                 |  |                     | 225  
|2009                                 |  |                     | 178  
|2010                                 |  |                     | 178  
|2011                                 |  |                     | 126  
|Thereafter                           |  |                     | 43   
|                                     |  |                     |      
|Total estimated amortization expense |  | $                   | 1,125
|                                     |  |                     |      

Amortization of definite-lived acquired intangible assets for the quarters ended April 30,
2006 and 2005 totaled $132,000 and $130,000, respectively. The Company ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142.



|13. | Warranty Arrangements
|--- | ---------------------

Standard Warranty

The Company records an accrual for estimated warranty costs as products are sold. Warranty costs are estimated based on periodic analysis of historical
experience. Changes in the estimated warranty accruals are recorded when the change in estimate is identified. A summary of the standard warranty accrual activity is shown in the table below (in thousands):



|                                                 |  |           |      |   |      |   |      |  
|------------------------------------------------ |  | --------- | ---- | - | ---- | - | ---- | -
|                                                 |  | April 30, |     
|                                                 |  | 2006      |      |   | 2005 |  
|Beginning balance                                |  | $         | 172  |   |      | $ | 177  |  
|Accruals for warranties issued during the period |  |           | 155  |   |      |   | 513  |  
|Utilization                                      |  |           | (104 | ) |      |   | (163 | )
|                                                 |  |           |      |   |      |   |      |  
|                                                 |  | $         | 223  |   |      | $ | 527  |  
|                                                 |  |           |      |   |      |   |      |  

During the first quarter of fiscal 2006, the Company made an additional warranty accrual in the
amount of $0.3 million, to accrue for estimated costs related to a limited number of ChargeSource 70-watt AC adapters that may fail prematurely. The Company completed replacing all of the units returned relating to this issue in the fourth
quarter of fiscal 2006, and eliminated the unused portion of the accrual, totaling $150,000.

Extended Warranty

Revenue for the Companys extended warranty contracts is deferred and recognized on a straight line basis over the contract period. Costs incurred
under separately priced extended warranty arrangements are expensed as incurred. A summary of the extended warranty activity is shown in the table below (in thousands):



|                                      |  |           |       |   |      |   |       |  
|------------------------------------- |  | --------- | ----- | - | ---- | - | ----- | -
|                                      |  | April 30, |      
|                                      |  | 2006      |       |   | 2005 |  
|Beginning balance                     |  | $         | 2,239 |   |      | $ | 1,108 |  
|Recognition of revenue                |  |           | (205  | ) |      |   | (243  | )
|Deferral of revenue for new contracts |  |           | 460   |   |      |   | 66    |  
|                                      |  |           |       |   |      |   |       |  
|                                      |  | $         | 2,494 |   |      | $ | 931   |  
|                                      |  |           |       |   |      |   |       |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|14. | Supplemental Disclosures of Cash Flow Information and Noncash Investing and Financing Activities
|--- | ------------------------------------------------------------------------------------------------

In the first quarter of fiscal 2007, 45,000 stock options were exercised as net exercises and therefore no cash was received upon exercise. The
number of shares of Company common stock issued totaled 7,525.



|15. | Business Segment Information
|--- | ----------------------------

The Company has three
reportable operating segments: wireless test solutions, call box, and mobile power products.

The wireless test solutions segment designs
and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others. Radio frequency engineers, professional technicians, and others use these tools to design, deploy, and optimize wireless networks, and to
verify the performance of the wireless networks once deployed.

The call box segment designs and manufactures call box systems that provide
emergency communication over existing wireless networks. In addition, the call box segment provides system installation and long-term maintenance services. Currently, the Company services and maintains approximately 12,300 call boxes under long-term
agreements.

The mobile power products segment designs mobile power products for notebook computers, cellular telephones, PDAs, and other
handheld devices.

Performance measurement and resource allocation for the reportable segments are based on many factors. The primary
financial measures used are revenue and gross profit. The revenue, gross profit, gross margin, income (loss) from continuing operations before income taxes, and total assets attributable to these segments are as follows (in thousands):



|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |     |  |   |        |  
|------------------------------------------------------------ |  | --------------------------------- | ----- | - | -------- | - | ----- | -------------------- |  | - | --------- | - | ----- | - | --- |  | - | ------ | -
|                                                             |  | Three Months Ended April 30, 2006 |      
|                                                             |  | Wireless TestSolutions            |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Corporate |   | Total |  
|Revenue                                                      |  | $                                 | 3,572 |   |          | $ | 2,834 |                      |  | $ | 4,149     |   |       | $ |    |  | $ | 10,555 |  
|Cost of revenue                                              |  |                                   | 1,925 |   |          |   | 2,130 |                      |  |   | 2,969     |   |       |   |    |  |   | 7,024  |  
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |     |  |   |        |  
|Gross profit                                                 |  | $                                 | 1,647 |   |          | $ | 704   |                      |  | $ | 1,180     |   |       | $ |    |  | $ | 3,531  |  
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |     |  |   |        |  
|Gross margin                                                 |  |                                   | 46.1  | % |          |   | 24.8  | %                    |  |   | 28.4      | % |       |   |    |  |   | 33.5   | %
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |     |  |   |        |  
|Income (loss) from continuing operations before income taxes |  | $                                 | (827  | ) |          | $ | 151   |                      |  | $ | (128      | ) |       | $ | 229 |  | $ | (575   | )
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |     |  |   |        |  



|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |    |  |   |        |  
|------------------------------------------------------------ |  | --------------------------------- | ----- | - | -------- | - | ----- | -------------------- |  | - | --------- | - | ----- | - | -- |  | - | ------ | -
|                                                             |  | Three Months Ended April 30, 2005 |      
|                                                             |  | Wireless TestSolutions            |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Corporate |   | Total |  
|Revenue                                                      |  | $                                 | 3,719 |   |          | $ | 2,410 |                      |  | $ | 1,833     |   |       | $ |   |  | $ | 7,962  |  
|Cost of revenue                                              |  |                                   | 2,161 |   |          |   | 1,531 |                      |  |   | 1,833     |   |       |   |   |  |   | 5,525  |  
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |    |  |   |        |  
|Gross profit                                                 |  | $                                 | 1,558 |   |          | $ | 879   |                      |  | $ |          |   |       | $ |   |  | $ | 2,437  |  
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |    |  |   |        |  
|Gross margin                                                 |  |                                   | 41.9  | % |          |   | 36.5  | %                    |  |   |          |   |       |   |   |  |   | 30.6   | %
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |    |  |   |        |  
|Income (loss) from continuing operations before income taxes |  | $                                 | (947  | ) |          | $ | 464   |                      |  | $ | (1,092    | ) |       | $ | 57 |  | $ | (1,518 | )
|                                                             |  |                                   |       |   |          |   |       |                      |  |   |           |   |       |   |    |  |   |        |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|-------------------------- |  | ---------------------- | ------ | -------- | - | -------------------- |  | --------- | ----- | ----- | - | ------ |  | - | ------
|                           |  | Wireless TestSolutions |        | Call Box |   | Mobile PowerProducts |  | Corporate |       | Total
|Assets at April 30, 2006   |  | $                      | 10,487 |          | $ | 8,693                |  | $         | 5,814 |       | $ | 24,009 |  | $ | 49,003
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|Assets at January 31, 2006 |  | $                      | 13,775 |          | $ | 6,834                |  | $         | 5,013 |       | $ | 27,183 |  | $ | 52,805
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       

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



|              |  |                             |        |      |   |      
|------------- |  | --------------------------- | ------ | ---- | - | -----
|              |  | Three Months EndedApril 30,
|              |  | 2006                        |        | 2005
|North America |  | $                           | 8,939  |      | $ | 4,695
|Europe        |  |                             | 1,388  |      |   | 2,175
|Asia          |  |                             | 5      |      |   | 10   
|Latin America |  |                             | 223    |      |   | 1,082
|              |  |                             |        |      |   |      
|              |  | $                           | 10,555 |      | $ | 7,962
|              |  |                             |        |      |   |      



|16. | Commitments and Contingencies
|--- | -----------------------------

Purchase Commitments with
Suppliers

The Company generally issues purchase orders to its suppliers with delivery dates from four to six weeks from the purchase
order date. In addition, the Company regularly provides significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. The Company is committed to
accepting delivery of materials pursuant to its purchase orders subject to various contract provisions that allow it to delay receipt of such order or allow it to cancel orders beyond certain agreed lead times. Such cancellations may or may not
include cancellation costs payable by the Company. In the past, the Company has been required to take delivery of materials from its suppliers that were in excess of its requirements and the Company has previously recognized charges and expenses
related to such excess material. If the Company is unable to adequately manage its suppliers and adjust such commitments for changes in demand, it may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could
have a material adverse effect on the Companys business, results of operations, and financial position.

Employer Matching Contribution to the
Companys Savings and Retirement Plan

The Company has obligations to match employee contributions made to the Companys
savings and retirement plan. Generally, the Companys obligation is equal to 100 percent of up to 5 percent of employees contributed earnings. If the Company is unable to meet the requisite matching, the Companys Savings
and Retirement Plan may need to be amended.

Executive Severance Commitments

During fiscal 2004, the Company entered into severance compensation agreements with four key executives. These agreements require the Company to pay these
executives, in the event of a termination of employment following a change of control of the Company, approximately up to twice the amount of their then current annual base salary and up to twice the amount of any bonus amount the executive would
have achieved for the current year. The exact amount of this contingent obligation is not known and accordingly has not been recorded in the condensed consolidated financial statements.



15



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



Letter of Credit

In May 2006, the Company obtained a $500,000 letter of credit from US Bank pursuant to a lease provision for its new corporate offices which the Company expects to relocate in September 2006. The letter of credit is
secured by a certificate of deposit with a 6-month maturity.

Legal Contingencies

On April 4, 2006, CWT and Targus, Inc. (Targus), the Companys former ChargeSource distributor, attended a voluntary mediation to
resolve a long-standing dispute and executed a stipulation for settlement agreement whereby Targus agreed to pay CWT $500,000 and both parties agreed to a release and discharge of all claims and causes of actions brought by each party. Subsequent to
April 30, 2006, both parties entered into a settlement agreement and Targus paid the Company $500,000. All complaints filed by both parties were also dismissed.

In addition to the matter discussed above, the Company is from time to time involved in various legal proceedings incidental to the conduct of its business. The Company believes that the outcome of all such pending
legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes and
other financial information appearing elsewhere in this quarterly report on Form 10-Q.

Forward-Looking Statements

This report, including the following discussion and analysis, contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Words such as expects, anticipates, intends, plans, believes, seeks, and estimates, and similar expressions or variations of such words are
intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements included in this report. Additionally, statements concerning future matters are forward-looking
statements.

These forward-looking statements reflect current views about our plans, strategies, and prospects, but can only be based on
facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by
the forward-looking statements. Among the important factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specially addressed under the heading Risk Factors in our annual
report on Form 10-K for the year ended January 31, 2006.

Readers are urged not to place undue reliance on any forward-looking
statements, which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

Basis of Presentation

The financial information
presented in this report is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, or cash flow. Our fiscal year ends on January 31 and our fiscal quarters end on April 30,
July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

Executive Summary

Comarco, Inc., through its subsidiary Comarco Wireless Technologies, Inc. (collectively, we, Comarco, or the Company),
is a leading provider of wireless test solutions for the wireless industry. Comarco also designs, manufactures, and maintains emergency call box systems and designs mobile power products for notebook computers, cellular telephones, PDAs, and other
handheld devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT).

Comarcos
business segments are organized according to how the Companys management reviews the business: wireless test solutions (WTS), emergency call box systems (call box), and mobile power products (also referred to as
ChargeSource).



17



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##### Table of Contents

The following table sets forth our revenue for the business segments for the three months ended
April 30, 2006 and 2005:



|             |  |                             |        |      |   |          |  |     |   
|------------ |  | --------------------------- | ------ | ---- | - | -------- |  | --- | --
|             |  | Three Months EndedApril 30, |        |      |  
|             |  | 2006                        |        | 2005 |   | % Change | 
|             |  | (in thousands)              |        |      |  
|Revenue:     |  |                             |        |      |   |          |  |     |   
|WTS          |  | $                           | 3,572  |      | $ | 3,719    |  | (4  | %)
|Call Box     |  |                             | 2,834  |      |   | 2,410    |  | 18  | % 
|ChargeSource |  |                             | 4,149  |      |   | 1,833    |  | 126 | % 
|             |  |                             |        |      |   |          |  |     |   
|             |  | $                           | 10,555 |      | $ | 7,962    |  | 33  | % 
|             |  |                             |        |      |   |          |  |     |   

Management currently considers the following events, trends, and uncertainties to be important to
understanding our three business segments and corresponding operating results for the first quarter of fiscal 2007.

Wireless Test Solutions



| |  |  | Our North American Region experienced significant year-over-year growth in the first quarter of fiscal 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | On a sequential basis, WTS revenue for the first quarter of fiscal 2007 was down significantly compared to the fourth quarter of fiscal 2006. We believe that the demand for our WTS
products will increase during the second half of fiscal 2007 as wireless carriers deploy their capital expenditure budgets in support of next-generation technology deployments, enhanced data services, and improved network quality of service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SwissQual, which was acquired by Spirent Communications during January 2006, serves as the exclusive reseller of our WTS products in our European region. We currently expect
SwissQual to continue as our exclusive reseller until January 2007. We are establishing a direct sales and support organization for our European region to replace SwissQual once the current reseller agreement expires. Additionally, we are exploring
other potential strategic alliances that could enhance our technologies, positioning, and global footprint for sales and support. However, we are unsure as to what long term effect, if any, the sale of SwissQual to Spirent will have on future sales
of our products. Our success will depend in part upon our ability to replace SwissQual as the provider of sales and support services and upon our ability to compete with Spirent and others.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the three months ending April 30, 2006 and 2005, revenue derived from SwissQual totaled approximately $0.7 million and $2.0 million, respectively. Through the end
of fiscal 2005, revenue attributable to sales to SwissQual was deferred until receipt of payment. Commencing with the first quarter of fiscal 2006, we changed our accounting for sales to SwissQual by recognizing revenue on a full accrual basis. This
change was made based upon SwissQuals financial strength and payment history and the lack of our ability to assert financial influence over the operations of SwissQual. WTS revenue for the first quarter of fiscal 2006 was increased by
approximately $1.0 million due to this change.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing of receiving and delivering on purchase orders from SwissQual and our other WTS customers, as well as the size of certain anticipated orders, tends to fluctuate
quarter-to-quarter and could impact any one quarter positively or negatively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Emergency Call Box Systems



| |  |  | During the first quarter of fiscal 2007, we continued to execute on a contract previously awarded by the San Diego SAFE to upgrade approximately 1,400 call boxes with digital
and text-telephony (TTY) technologies and retrofit approximately 1,000 call box sites to improve accessibility for persons with mobility limitations. We recorded approximately $0.7 million in revenue during the first quarter of
fiscal 2007 and we currently expect to complete the project during the third quarter of fiscal 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | During the first quarter of fiscal 2007, we commenced work in Santa Barbara County to upgrade approximately 332 call boxes with digital and text-telephony (TTY)
technologies and retrofit certain call box sites to improve accessibility for persons with mobility limitations. We recorded approximately $0.5 million in revenue during the first quarter of fiscal 2007 and we currently expect to complete the
project during the second quarter of fiscal 2007. Additionally, we were delayed in starting a significant upgrade project, as well as impacted by unfavorable weather. However, we expect to make up the revenue through the balance of the fiscal year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During fiscal 2006, we were awarded multiple projects from various California SAFEs to upgrade existing call boxes systems with a mix of digital and/TTY technologies and to perform
other site mitigation and retrofit services. During the second quarter of fiscal 2007, we expect to commence work on the call box systems located in the California counties of Riverside, Merced, Monterey, San Benito, and Orange. We also expect to
commence work on the call box systems owned by the Metropolitan Transportation Commission SAFE, which service the nine counties of the San Francisco Bay Area, during the second quarter of fiscal 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of April 30, 2006, there are approximately 12,300 call boxes that we maintain under long-term agreements. Certain of our SAFE customers have indicated that they intend
to remove up to 1,600 call boxes to reduce the density of the systems and to make funds available for the necessary digital upgrades. We currently expect that as of January 31, 2007, there will be approximately 10,700 call boxes which
we maintain under long-term agreements. Service revenue attributable to maintenance of existing call box systems totaled approximately $1.1 million in the first quarter of fiscal 2007 and is expected to total approximately $4.2 million in
fiscal 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mobile Power Products (ChargeSource)



| |  |  | Kensington, the retail channel distributor of our ChargeSource products, continues to penetrate the retail marketplace. Currently, Kensington is shipping or will be shipping into
approximately 6,800 outlets in North America and Europe, which include CompUSA, Circuit City, Staples, Office Max, Dixons, PC World, and others.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The current level of ChargeSource sales is insufficient to fully absorb our fixed overheard. Our ability to continue to penetrate the retail channels and the OEM after-market
accessories market is dependent upon the retailers and our OEM partners and the timing of their respective initiatives. Accordingly, it has been difficult for us to predict when our ChargeSource sales would reach sufficient levels to support our
current cost structure. However, we are encouraged by our current level of retail penetration and product placement and continue to believe that our ChargeSource business can break even with quarterly revenue of approximately $5.0 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subsequent to the first quarter of fiscal 2006, we identified a manufacturing process performed by the contract manufacturer of our ChargeSource products that may cause certain of
our 70-watt AC power adapters to fail prematurely. This manufacturing process has been successfully remediated and the limited number of affected units has been identified. During the first quarter of fiscal 2006, we made an additional warranty
accrual of $0.3 million to accrue for the estimated cost to replace these units. We completed replacing all of the units returned relating to this issue and, during the fourth quarter of fiscal 2006, eliminated the unused portion of the
accrual, totaling $150,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical



19



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##### Table of Contents

experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. No events
occurred or circumstances changed during the period ended April 30, 2006 that required us to test goodwill for impairment. Management believes there have been no significant changes during the three months ended April 30, 2006 to the items
that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2006.

Results of Operations  Continuing Operations

Consolidated



|                                |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  
|------------------------------- |  | ---------------------------- | ------ | - | ---------------------- | --- | - |  | - | ------ | ----------- |  | --- | - |  | -- | -
|                                |  | Three Months Ended April 30, |        |   | 2006 over 2005% Change |    
|                                |  | 2006                         |        |   | 2005                   |     |  
|                                |  | (in thousands)               |        |   |                        |    
|                                |  |                              |        |   | % ofRevenue            |     |   |  |   |        | % ofRevenue |  |     |   | 
|Revenue:                        |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  
|Products                        |  | $                            | 9,387  |   |                        | 89  | % |  | $ | 6,791  |             |  | 85  | % |  | 38 | %
|Services                        |  |                              | 1,168  |   |                        | 11  | % |  |   | 1,171  |             |  | 15  | % |  |   |  
|                                |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  
|                                |  | $                            | 10,555 |   |                        | 100 | % |  | $ | 7,962  |             |  | 100 | % |  | 33 | %
|                                |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  
|Operating loss                  |  | $                            | (865   | ) |                        |     |   |  | $ | (1,575 | )           |  |     |   |  |    |  
|                                |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  
|Loss from continuing operations |  | $                            | (575   | ) |                        |     |   |  | $ | (1,518 | )           |  |     |   |  |    |  
|                                |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |    |  



|               |  |                             |        |                        |   |       |  |     |   
|-------------- |  | --------------------------- | ------ | ---------------------- | - | ----- |  | --- | --
|               |  | Three Months EndedApril 30, |        | 2006 over 2005% Change |  
|               |  | 2006                        |        | 2005                   |  
|               |  | (in thousands)              |        |                        |  
|Revenue:       |  |                             |        |                        |   |       |  |     |   
|Americas:      |  |                             |        |                        |   |       |  |     |   
|North America  |  | $                           | 8,939  |                        | $ | 4,695 |  | 90  | % 
|Others         |  |                             | 223    |                        |   | 1,082 |  | (79 | %)
|Europe         |  |                             | 1,388  |                        |   | 2,175 |  | (36 | %)
|Asia  Pacific |  |                             | 5      |                        |   | 10    |  | (50 | %)
|               |  |                             |        |                        |   |       |  |     |   
|               |  | $                           | 10,555 |                        | $ | 7,962 |  | 33  | % 
|               |  |                             |        |                        |   |       |  |     |   

Revenue

Revenue in the first quarter of fiscal 2007 increased by $2.6 million, or 33 percent, compared to the first quarter of fiscal 2006, reflecting increased revenue from our ChargeSource and call box product
sales, $2.3 million and $0.4 million, respectively, partially offset by a $0.1 million decrease in revenue from our WTS product sales.



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##### Table of Contents

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2006 over 2005% Change |  
|                                             |  | 2006                         |       |                     | 2005                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 5,877 |                     | 63                     | % |  | $ | 4,182               |  | 62 | % |  | 41  | % 
|Amortization  software development products |  |                              | 321   |                     | 3                      | % |  |   | 482                 |  | 7  | % |  | (33 | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 6,198 |                     | 66                     | % |  |   | 4,664               |  | 69 | % |  | 33  | % 
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Services                                     |  |                              | 821   |                     | 70                     | % |  |   | 855                 |  | 73 | % |  | (4  | %)
|Amortization  software development services |  |                              | 5     |                     | 1                      | % |  |   | 6                   |  |   |   |  |    |   
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 826   |                     | 71                     | % |  |   | 861                 |  | 73 | % |  | (4  | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 7,024 |                     | 67                     | % |  | $ | 5,525               |  | 69 | % |  | 27  | % 
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



|                      |  |                             |   |  |                          |   |  |  
|--------------------- |  | --------------------------- | - |  | ------------------------ | - |  | -
|                      |  | Three Months EndedApril 30, |   |  | 2006 over 2005ppt Change
|                      |  | 2006                        |   |  | 2005                     |   | 
|Gross margin:         |  |                             |   |  |                          |   |  |  
|Products              |  | 34                          | % |  | 31                       | % |  | 3
|Services              |  | 29                          | % |  | 27                       | % |  | 2
|Combined gross margin |  | 33                          | % |  | 31                       | % |  | 2

Cost of revenue in the first quarter of fiscal 2007 increased by $1.5 million, or
27 percent, compared to the first quarter of fiscal 2006, driven by increased product sales of our ChargeSource and call box products, partially offset by decreased amortization of capitalized software development costs attributable to our WTS
business. As a percentage of revenue, cost of product revenue in the first quarter of fiscal 2007 decreased by 3 percentage points to 66 percent. Excluding amortization of software development costs, cost of product revenue as a percentage
of revenue in the first quarter of fiscal 2007 and 2006 was comparable at 63 percent and 62 percent, respectively.

Operating Costs and
Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | -- | -
|                                                                            |  | Three Months Ended April 30, |       |             | 2006 over 2005% Change |  
|                                                                            |  | 2006                         |       |             | 2005                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 1,270 |             | 12                     | % |  | $ | 1,170       |  | 14 | % |  | 9  | %
|Allocated corporate overhead                                                |  |                              | 1,247 |             | 12                     | % |  |   | 1,028       |  | 13 | % |  | 21 | %
|Gross engineering and support expenses                                      |  |                              | 1,879 |             | 18                     | % |  |   | 1,814       |  | 23 | % |  | 4  | %
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|                                                                            |  | $                            | 4,396 |             | 42                     | % |  | $ | 4,012       |  | 50 | % |  | 10 | %
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  

Selling, general and administrative expenses in the first quarter of fiscal 2007 increased
$0.1 million, or 9 percent, compared to the first quarter of fiscal 2006. The increase was primarily due to increased legal fees incurred to collect amounts due from Targus, Inc., the former exclusive retail distributor of our ChargeSource
products. Selling, general and administrative expenses for the first quarter of fiscal 2006 included a $0.1 million charge for an uncollectible account. No such charge was incurred during the first quarter of fiscal 2007.



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##### Table of Contents

Allocated corporate overhead consists of salaries and other personnel-related expenses of our accounting
and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors fees, and other costs and expenses attributable to being a public company. These costs are typically allocated to our three
segments based on each businesss percentage share of total Company costs and expenses. Allocated corporate overhead for the first quarter of fiscal 2007 increased $0.2 million, or 21 percent, compared to the first quarter of fiscal
2006. The increase is due to salary increases of corporate personnel, as well as increased legal fees. As a percentage of revenue, allocated corporate overhead for the first quarter of fiscal 2007 and 2006 remained stable at 12 percent and
13 percent, respectively.

Other Income, net

Other income, net, consists primarily of interest income earned on invested cash balances. Other income, net, for the first quarter of fiscal 2007 increased approximately $0.2 million compared to the first
quarter of fiscal 2006. The increase in other income is due to increased interest rates earned on higher invested cash balances.

Income Tax Expense
(Benefit)

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities, and any required valuation allowance. During the second quarter of fiscal 2005, we established a valuation allowance totaling approximately $2.9 million, or the entire deferred tax asset balance existing as of the beginning of
fiscal 2005, as reclassified. In addition, a full valuation allowance has been provided on all net deferred tax asset additions during fiscal 2006, resulting in a fully reserved net tax asset. This valuation allowance was established based on
managements overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses, carry forward temporary differences, and future
tax deductions resulting from certain types of stock option exercises. Due to the losses of the first quarter, the adjusted net deferred tax assets remain fully reserved as of April 30, 2006.

Wireless Test Solutions (WTS)

Revenue



|               |  |                              |       |   |                        |     |   |  |   |       |             |  |     |   |  |    |   
|-------------- |  | ---------------------------- | ----- | - | ---------------------- | --- | - |  | - | ----- | ----------- |  | --- | - |  | -- | --
|               |  | Three Months Ended April 30, |       |   | 2006 over 2005% Change |    
|               |  | 2006                         |       |   | 2005                   |     |  
|               |  | (in thousands)               |       |   |                        |    
|               |  |                              |       |   | % ofRevenue            |     |   |  |   |       | % ofRevenue |  |     |   | 
|Revenue:       |  |                              |       |   |                        |     |   |  |   |       |             |  |     |   |  |    |   
|Products       |  | $                            | 3,536 |   |                        | 99  | % |  | $ | 3,699 |             |  | 99  | % |  | (4 | %)
|Services       |  |                              | 36    |   |                        | 1   | % |  |   | 20    |             |  | 1   | % |  | 80 | % 
|               |  |                              |       |   |                        |     |   |  |   |       |             |  |     |   |  |    |   
|               |  | $                            | 3,572 |   |                        | 100 | % |  | $ | 3,719 |             |  | 100 | % |  | (4 | %)
|               |  |                              |       |   |                        |     |   |  |   |       |             |  |     |   |  |    |   
|Operating loss |  | $                            | (888  | ) |                        |     |   |  | $ | (947  | )           |  |     |   |  |    |   
|               |  |                              |       |   |                        |     |   |  |   |       |             |  |     |   |  |    |   



|               |  |                             |       |                        |   |       |  |     |   
|-------------- |  | --------------------------- | ----- | ---------------------- | - | ----- |  | --- | --
|               |  | Three Months EndedApril 30, |       | 2006 over 2005% Change |  
|               |  | 2006                        |       | 2005                   |  
|               |  | (in thousands)              |       |                        |  
|Revenue:       |  |                             |       |                        |   |      
|Americas:      |  |                             |       |                        |   |       |  |     |   
|North America  |  | $                           | 2,563 |                        | $ | 450   |  | 470 | % 
|Others         |  |                             | 223   |                        |   | 1,082 |  | (79 | %)
|Europe         |  |                             | 781   |                        |   | 2,175 |  | (64 | %)
|Asia  Pacific |  |                             | 5     |                        |   | 12    |  | (58 | %)
|               |  |                             |       |                        |   |       |  |     |   
|               |  | $                           | 3,572 |                        | $ | 3,719 |  | (4  | %)
|               |  |                             |       |                        |   |       |  |     |   



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##### Table of Contents

Revenue in the first quarter of fiscal 2007 decreased by $0.1 million, or 4 percent, compared
to the first quarter of fiscal 2006. Revenue derived from our customers in North America in the first quarter of fiscal 2007 increased by $2.1 million, or 470 percent, to $2.6 million. This increase was primarily due to sales of our
Seven.Five voice and data products to Verizon Wireless. Revenue derived from sales to Verizon Wireless accounted for approximately $2.5 million, or 70 percent, of total WTS revenue for the first quarter of fiscal 2007. Revenue in fiscal
2007 derived from our customers in Latin America/South America decreased 79 percent compared to fiscal 2006. This decrease highlights that the wireless industry is composed of a relatively small number of wireless carriers and equipment
vendors, which can lead to volatility in our results and that our business is characterized by sales to a limited set of customers in each region where we do business. The timing and size of customer orders can vary greatly making it difficult to
forecast our results from period to period. Consequently, our WTS business is affected in any single region by the priorities of a small group of customers.

During January 2006, Spirent purchased 100 percent of the outstanding stock of SwissQual, which included our 18 percent equity investment. We currently expect SwissQual to continue as the exclusive reseller
of our Seven.Five product platform in our European region through January 2007. As previously discussed, revenue attributable to sales to SwissQual was deferred until receipt of payment through the end of fiscal 2005. Commencing with the first
quarter of fiscal 2006, we changed our accounting for sales to SwissQual by recognizing revenue on a full accrual basis. This change was made based upon SwissQuals financial strength and payment history, and the lack of our ability to assert
financial influence over the operations of SwissQual. WTS revenue for the first quarter of fiscal 2006 was increased by approximately $1.0 million due to this change. Revenue derived from sales to SwissQual for the first quarter of fiscal 2007
decreased $1.4 million, or 68 percent. SwissQual has informed us that they expect demand of our Seven.Five products to be soft for the first half of fiscal 2007 with demand increasing during the second half of fiscal 2007.

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2006 over 2005% Change |  
|                                             |  | 2006                         |       |                     | 2005                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 1,587 |                     | 45                     | % |  | $ | 1,664               |  | 45 | % |  | (5  | %)
|Amortization  software development products |  |                              | 321   |                     | 9                      | % |  |   | 482                 |  | 13 | % |  | (33 | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 1,908 |                     | 54                     | % |  |   | 2,146               |  | 58 | % |  | (11 | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Services                                     |  |                              | 17    |                     | 47                     | % |  |   | 15                  |  | 75 | % |  | 13  | % 
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 1,925 |                     | 54                     | % |  | $ | 2,161               |  | 58 | % |  | (11 | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



|                      |  |                             |   |  |                          |   |  |   
|--------------------- |  | --------------------------- | - |  | ------------------------ | - |  | --
|                      |  | Three Months EndedApril 30, |   |  | 2006 over 2005ppt Change
|                      |  | 2006                        |   |  | 2005                     |   | 
|Gross margin:         |  |                             |   |  |                          |   |  |   
|Products              |  | 46                          | % |  | 42                       | % |  | 4 
|Services              |  | 53                          | % |  | 25                       | % |  | 28
|Combined gross margin |  | 46                          | % |  | 42                       | % |  | 4 

Cost of revenue in the first quarter of fiscal 2007 decreased by $0.2 million, or
11 percent, compared to the first quarter of fiscal 2006 primarily due to decreased amortization of capitalized software development costs. Currently, we expect to continue to amortize previously capitalized software development costs at a rate
of approximately $0.3 million per quarter through the third quarter of fiscal 2007, and subsequent to that, reduced rates of amortization as some engineering projects become fully amortized through the end of fiscal 2008. As a percentage of
revenue, cost of product revenue in the first quarter of fiscal 2007 decreased by 4 percentage points to 54 percent. Excluding amortization of software development costs, cost of product revenue as a percentage of revenue in the first
quarter of both fiscal 2007 and 2006 was 45 percent and was consistent with the level of product sales for both quarters.



23



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##### Table of Contents

Operating Costs and Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | --- | --
|                                                                            |  | Three Months Ended April 30, |       |             | 2006 over 2005% Change |  
|                                                                            |  | 2006                         |       |             | 2005                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 737   |             | 21                     | % |  | $ | 831         |  | 22 | % |  | (11 | %)
|Allocated corporate overhead                                                |  |                              | 483   |             | 13                     | % |  |   | 511         |  | 14 | % |  | (5  | %)
|Gross engineering and support expenses                                      |  |                              | 1,315 |             | 37                     | % |  |   | 1,163       |  | 31 | % |  | 13  | % 
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|                                                                            |  | $                            | 2,535 |             | 71                     | % |  | $ | 2,505       |  | 67 | % |  | 1   | % 
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   

Selling, general and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our sales, marketing and support personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our WTS business. Selling,
general, and administrative expenses decreased approximately $0.1 million, or 11 percent, in the first quarter of fiscal 2007 compared to the corresponding quarter of fiscal 2006. Selling, general, and administrative expenses for the first
quarter of fiscal 2006 included a $0.1 million charge for an uncollectible account. No such charge was incurred during the first quarter of fiscal 2007. Excluding this charge, selling, general, and administrative expenses for the first quarter
of fiscal 2007 were comparable to the first quarter of fiscal 2006.

See the section above entitled Consolidated under the
caption Operating Costs and Expenses for a discussion of allocated corporate overhead.

Gross engineering and support expenses
generally consist of salaries, employer paid benefits, and other personnel related costs of our hardware and software design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab
costs, material usages, and travel and related costs incurred in the development and support of our WTS business. Engineering and support expenses increased approximately $0.2 million, or 13 percent, in the first quarter of fiscal 2007
compared to first quarter of fiscal 2006. This increase is due to increased engineering expenses, consisting of salaries and third-party design fees, in support of our on-going efforts to replace Seven.Five software content currently provided by
SwissQual. Also, during the first quarter of fiscal 2007 our product support department incurred increased travel and personnel related expenses in support of our product installation and commissioning efforts compared to the first quarter of fiscal
2006.

We capitalize costs incurred for the development of software embedded in our WTS products subsequent to establishing technological
feasibility. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead.
We did not capitalize any software development costs in the first quarter of fiscal 2007 or 2006 as we completed the development of the software embedded in our Seven.Five product platform prior to such periods.



24



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##### Table of Contents

Emergency Call Box Systems



|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |    |   
|---------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | --- | - |  | -- | --
|                 |  | Three Months Ended April 30, |       |             | 2006 over 2005% Change |  
|                 |  | 2006                         |       |             | 2005                   |   | 
|                 |  | (in thousands)               |       |             |                        |  
|                 |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |     |   | 
|Revenue:         |  |                              |       |             |                        |   |  |   |             |  |     |   |  |    |   
|Products         |  | $                            | 1,702 |             | 60                     | % |  | $ | 1,259       |  | 52  | % |  | 35 | % 
|Services         |  |                              | 1,132 |             | 40                     | % |  |   | 1,151       |  | 48  | % |  | (2 | %)
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |    |   
|                 |  | $                            | 2,834 |             | 100                    | % |  | $ | 2,410       |  | 100 | % |  | 18 | % 
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |    |   
|Operating income |  | $                            | 151   |             |                        |   |  | $ | 465         |  |     |   |  |    |   
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |    |   



|               |  |                             |       |                        |   |       |  |    |  
|-------------- |  | --------------------------- | ----- | ---------------------- | - | ----- |  | -- | -
|               |  | Three MonthsEnded April 30, |       | 2006 over 2005% Change |  
|               |  | 2006                        |       | 2005                   |  
|               |  | (in thousands)              |       |                        |  
|Revenue:       |  |                             |       |                        |   |      
|Americas:      |  |                             |       |                        |   |       |  |    |  
|North America  |  | $                           | 2,834 |                        | $ | 2,410 |  | 18 | %
|Others         |  |                             |      |                        |   |      |  |   |  
|Europe         |  |                             |      |                        |   |      |  |   |  
|Asia  Pacific |  |                             |      |                        |   |      |  |   |  
|               |  |                             |       |                        |   |       |  |    |  
|               |  | $                           | 2,834 |                        | $ | 2,410 |  | 18 | %
|               |  |                             |       |                        |   |       |  |    |  

Revenue

Revenue in the first quarter of fiscal 2007 increased by $0.4 million, or 18 percent, compared to the first quarter of fiscal 2006. The increase in revenue is due to the number of upgrade projects active
during the respective fiscal quarters. For the first quarter of fiscal 2007, we recorded revenue totaling $0.7 million and $0.5 million attributable to the San Diego and Santa Barbara upgrade projects, respectively. During the first
quarter of fiscal 2006, we recorded revenue attributable to the San Bernardino upgrade project totaling approximately $0.7 million.

Cost of
Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2006 over 2005% Change |  
|                                             |  | 2006                         |       |                     | 2005                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 1,321 |                     | 78                     | % |  | $ | 685                 |  | 54 | % |  | 93  | % 
|Services                                     |  |                              | 804   |                     | 71                     | % |  |   | 840                 |  | 73 | % |  | (4  | %)
|Amortization  software development products |  |                              | 5     |                     | 1                      | % |  |   | 6                   |  |   |   |  | (17 | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 809   |                     | 72                     | % |  |   | 846                 |  | 73 | % |  | (4  | %)
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 2,130 |                     | 75                     | % |  | $ | 1,531               |  | 64 | % |  | 39  | % 
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



25



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##### Table of Contents

|                      |  |                             |   |  |                         |   |  |     |  
|--------------------- |  | --------------------------- | - |  | ----------------------- | - |  | --- | -
|                      |  | Three Months EndedApril 30, |   |  | 2006 over2005ppt Change |  
|                      |  | 2006                        |   |  | 2005                    |   | 
|Gross margin:         |  |                             |   |  |                         |   |  |     |  
|Products              |  | 22                          | % |  | 46                      | % |  | (24 | )
|Services              |  | 28                          | % |  | 27                      | % |  | 1   |  
|Combined gross margin |  | 25                          | % |  | 36                      | % |  | (11 | )

Cost of revenue in the first quarter of fiscal 2007 increased by $0.6 million, or
39 percent, compared to the first quarter of fiscal 2006 due to increased product sales as well as other factors. During the first quarter of fiscal 2007 and due to the requirements of the San Diego and Santa Barbara upgrade projects, we
incurred approximately $0.2 million in costs paid to subcontractors to perform certain site mitigation and retrofit work. Additionally, cost of product revenue for the first quarter of fiscal 2007 includes a charge totaling $0.1 million to
write off excess and obsolete inventory. There were no corresponding subcontractor costs and inventory charges incurred in the first quarter of the prior fiscal year.

Operating Costs and Expenses



|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |    |  
|--------------------------------------------------------------------------- |  | ---------------------------- | --- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | -- | -
|                                                                            |  | Three Months Ended April 30, |     |             | 2006 over 2005% Change |  
|                                                                            |  | 2006                         |     |             | 2005                   |   | 
|                                                                            |  | (in thousands)               |     |             |                        |  
|                                                                            |  |                              |     | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |     |             |                        |   |  |   |             |  |    |   |  |    |  
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 109 |             | 4                      | % |  | $ | 69          |  | 3  | % |  | 57 | %
|Allocated corporate overhead                                                |  |                              | 294 |             | 10                     | % |  |   | 213         |  | 9  | % |  | 38 | %
|Gross engineering and support expenses                                      |  |                              | 150 |             | 5                      | % |  |   | 132         |  | 5  | % |  | 13 | %
|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |    |  
|                                                                            |  | $                            | 553 |             | 19                     | % |  | $ | 414         |  | 17 | % |  | 33 | %
|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |    |  

Selling, general, and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our management, inside sales, and administrative personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our call box
business. Due to increased personnel costs, selling, general, and administrative expenses increased by 57 percent, in the first quarter of fiscal 2007 compared to the corresponding quarter of fiscal 2006.

See the section above entitled Consolidated under the caption Operating Costs and Expenses for a discussion of allocated
corporate overhead.

Mobile Power Products (ChargeSource)



|               |  |                              |       |   |                        |     |   |  |   |        |             |  |     |   |  |     |  
|-------------- |  | ---------------------------- | ----- | - | ---------------------- | --- | - |  | - | ------ | ----------- |  | --- | - |  | --- | -
|               |  | Three Months Ended April 30, |       |   | 2006 over 2005% Change |    
|               |  | 2006                         |       |   | 2005                   |     |  
|               |  | (in thousands)               |       |   |                        |    
|               |  |                              |       |   | % ofRevenue            |     |   |  |   |        | % ofRevenue |  |     |   | 
|Revenue:       |  |                              |       |   |                        |     |   |  |   |        |             |  |     |   |  |     |  
|Products       |  | $                            | 4,149 |   |                        | 100 | % |  | $ | 1,833  |             |  | 100 | % |  | 126 | %
|Services       |  |                              |      |   |                        |    |   |  |   |       |             |  |    |   |  |     |  
|               |  |                              |       |   |                        |     |   |  |   |        |             |  |     |   |  |     |  
|               |  | $                            | 4,149 |   |                        | 100 | % |  | $ | 1,833  |             |  | 100 | % |  | 126 | %
|               |  |                              |       |   |                        |     |   |  |   |        |             |  |     |   |  |     |  
|Operating loss |  | $                            | (128  | ) |                        |     |   |  | $ | (1,093 | )           |  |     |   |  |     |  
|               |  |                              |       |   |                        |     |   |  |   |        |             |  |     |   |  |     |  



26



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##### Table of Contents

|               |  |                             |       |      |                        |       |   |  |     |  
|-------------- |  | --------------------------- | ----- | ---- | ---------------------- | ----- | - |  | --- | -
|               |  | Three MonthsEnded April 30, |       |      | 2006 over 2005% Change |      
|               |  | 2006                        |       | 2005 |                        |      
|               |  | (in thousands)              |       |      |                        |      
|Revenue:       |  |                             |       |      |                        |       |   |  |     |  
|Americas:      |  |                             |       |      |                        |       |   |  |     |  
|North America  |  | $                           | 3,542 |      | $                      | 1,835 |   |  | 93  |  
|Others         |  |                             |      |      |                        |      |   |  |    |  
|Europe         |  |                             | 607   |      |                        |      |   |  |    |  
|Asia  Pacific |  |                             |      |      |                        | (2    | ) |  |    |  
|               |  |                             |       |      |                        |       |   |  |     |  
|               |  | $                           | 4,149 |      | $                      | 1,833 |   |  | 126 | %
|               |  |                             |       |      |                        |       |   |  |     |  



|           |  |                             |       |                        |   |       |  |     |  
|---------- |  | --------------------------- | ----- | ---------------------- | - | ----- |  | --- | -
|           |  | Three Months EndedApril 30, |       | 2006 over 2005% Change |  
|           |  | 2006                        |       | 2005                   |  
|           |  | (in thousands)              |       |                        |  
|Revenue:   |  |                             |       |                        |   |       |  |     |  
|Kensington |  | $                           | 4,015 |                        | $ | 1,802 |  | 123 | %
|Other      |  |                             | 134   |                        |   | 31    |  | 332 | %
|           |  |                             |       |                        |   |       |  |     |  
|           |  | $                           | 4,149 |                        | $ | 1,833 |  | 126 | %
|           |  |                             |       |                        |   |       |  |     |  

Revenue in the first quarter of fiscal 2007 increased by $2.3 million, or 126 percent,
compared to the first quarter of fiscal 2006. This increase was primarily driven by the success of Kensington and their ability to penetrate the Big Box retailers and place our ChargeSource products. Currently, Kensington is shipping or
will be shipping into approximately 6,800 outlets in North America and Europe, which include CompUSA, Circuit City, Staples, Office Max, Dixons, PC World, and others. On a sequential basis, revenue in the first quarter of fiscal 2007 decreased by
$0.5 million, or 11 percent, compared to the fourth quarter of fiscal 2006.

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | --- | - |  | -- | -
|                                             |  | Three Months Ended April 30, |       |                     | 2006 over 2005% Change |  
|                                             |  | 2006                         |       |                     | 2005                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |     |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  
|Products                                     |  | $                            | 2,969 |                     | 72                     | % |  | $ | 1,833               |  | 100 | % |  | 62 | %
|Amortization  software development products |  |                              |      |                     |                       |   |  |   |                    |  |    |   |  |   |  
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  
|                                             |  |                              | 2,969 |                     | 72                     | % |  |   | 1,833               |  | 100 | % |  | 62 | %
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  
|Services                                     |  |                              |      |                     |                       |   |  |   |                    |  |    |   |  |   |  
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  
|                                             |  | $                            | 2,969 |                     | 72                     | % |  | $ | 1,833               |  | 100 | % |  | 62 | %
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |     |   |  |    |  



|                      |  |                             |   |                          |      |  |   
|--------------------- |  | --------------------------- | - | ------------------------ | ---- |  | --
|                      |  | Three Months EndedApril 30, |   | 2006 over 2005ppt Change
|                      |  | 2006                        |   |                          | 2005 | 
|Gross margin:         |  |                             |   |                          |      |  |   
|Products              |  | 28                          | % |                          |     |  | 28
|Services              |  |                            |   |                          |     |  |  
|Combined gross margin |  | 28                          | % |                          |     |  | 28



27



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##### Table of Contents

Cost of revenue in the first quarter of fiscal 2007 increased by $1.1 million, or 62 percent,
compared to the first quarter of fiscal 2006. As a percentage of revenue, cost of revenue in the first quarter of fiscal 2007 decreased by 28 percentage points to 72 percent compared to the first quarter of fiscal 2006. During the first
quarter of fiscal 2006, the level of ChargeSource sales was insufficient to fully absorb our fixed manufacturing overheard. Additionally, subsequent to the first quarter of fiscal 2006, we identified a manufacturing process performed by the contract
manufacturer of our ChargeSource products that may cause certain of our 70-watt AC power adapters to fail prematurely. This manufacturing process has been successfully remediated and the limited number of affected units has been identified.
Accordingly, we accrued approximately $0.3 million of additional warranty costs in cost of revenue in the first quarter of fiscal 2006 to cover the anticipated cost of replacement. During the fourth quarter of fiscal 2006, we completed
replacing all the units returned relating to this issue and eliminated the unused portion of the accrual, totaling $150,000.

Our ability
to continue to penetrate the retail channels and the OEM after-market accessories market is dependent upon the retailers and our OEM partners and the timing of their respective initiatives. Accordingly, it has been difficult for us to predict when
our ChargeSource sales would reach sufficient levels to support our current cost structure. However, we are encouraged by our current level of retail penetration and product placement and continue to believe that our ChargeSource business can break
even with quarterly revenue of approximately $5.0 million.

Operating Costs and Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | --- | --
|                                                                            |  | Three Months Ended April 30, |       |             | 2006 over 2005% Change |  
|                                                                            |  | 2006                         |       |             | 2005                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 424   |             | 10                     | % |  | $ | 270         |  | 15 | % |  | 57  | % 
|Allocated corporate overhead                                                |  |                              | 470   |             | 11                     | % |  |   | 304         |  | 17 | % |  | 54  | % 
|Gross engineering and support expenses                                      |  |                              | 414   |             | 10                     | % |  |   | 519         |  | 28 | % |  | (20 | %)
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|                                                                            |  | $                            | 1,308 |             | 31                     | % |  | $ | 1,093       |  | 60 | % |  | 20  | % 
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   

Selling, general and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our management, sales, marketing and administrative personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our
ChargeSource business. Selling, general and administrative expenses in the first quarter of fiscal 2007 increased by approximately $0.2 million, or 57 percent, compared to the first quarter of fiscal 2006. The increase was due to increased
legal fees incurred to collect amounts due from Targus, Inc., our former exclusive retail distributor. As this matter is settled, we do not expect to incur significant additional legal fees. See Legal Proceedings in Item II, Part 1 of
this report for a discussion of this matter.

See the section above entitled Consolidated under the caption Operating
Costs and Expenses for a discussion of allocated corporate overhead.

Gross engineering and support expenses generally consist of
salaries, employer paid benefits, and other personnel related costs of our electrical and mechanical design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material
usages, and travel and related costs incurred in the development and support of our ChargeSource business. Engineering and support expenses in the first quarter of fiscal 2007 decreased approximately $0.1 million, or 20 percent, compared
to the first quarter of fiscal 2006. The decrease is primarily due to reduced engineering design resources, including employees, temporary labor, and outside design consultants. These expenses are driven by our development programs that address the
need for higher powered adapters, OEM design and performance requirements, and national and international regulatory requirements and are expected to fluctuate quarter-to-quarter based on the active development programs and the scope of such
programs.



28



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##### Table of Contents

Liquidity and Capital Resources

Cash and cash equivalents at April 30, 2006 decreased $2.8 million to $23.2 million as compared to $26.0 million at January 31, 2006. The following table is a summary of our Condensed
Consolidated Statements of Cash Flows.



|                            |  |                             |        |   |      |   |        |  
|--------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                            |  | Three Months EndedApril 30, |       
|                            |  | 2006                        |        |   | 2005 |  
|                            |  | (in thousands)              |       
|Cash provided by (used in): |  |                             |        |  
|Operating activities        |  | $                           | (2,576 | ) |      | $ | (1,500 | )
|Investing activities        |  |                             | (264   | ) |      |   | (398   | )
|Financing activities        |  |                             |       |   |      |   |       |  

Operating Activities

Cash used in operating activities of $2.6 million in the first quarter of fiscal 2007 increased $1.1 million compared to the first quarter of fiscal 2006. Cash used in operating activities for the first
quarter of fiscal 2007 was driven by net loss of $0.6 million and a reduction in accrued liabilities of approximately $3.9 million, primarily due to vendor payments for inventory as well as the distribution of incentive compensation,
partially offset by non-cash charges totaling $0.8 million and $0.3 million for depreciation and amortization and provisions for obsolete inventory, respectively. Also, a net change in other operating assets and liabilities resulted in a
$0.9 million increase in cash flow. Within the net change in other operating assets and liabilities, increased sales resulted in an increase in inventory, decreasing cash flow by $0.1 million, which was offset by a $0.2 million
increase in deferred revenue and a $0.7 million increase in accounts payable.

Cash used in operating activities for the first quarter
of fiscal 2006 was $1.5 million driven by net loss of $1.5 million, partially offset by non-cash charges totaling $1.0 million and $0.1 million for depreciation and amortization and provisions for doubtful accounts receivable,
respectively. Also, a net change in operating assets and liabilities resulted in a $1.1 million decrease in cash flow. Within the net change in operating assets and liabilities, deferred revenue decreased by approximately $0.9 million
primarily as a result of the change in accounting treatment of sales to SwissQual.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.3 million and $0.4 million in the first quarter of fiscal 2007 and 2006, respectively. We purchased
approximately $0.4 million of property and equipment in the first quarter of fiscal 2007 and 2006.

We believe that our existing cash
and cash equivalent balances will provide us sufficient funds to satisfy our cash requirements for at least the next 12 months.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Currency Risk

We are exposed to the risk of changes in currency exchange rates. As of April 30, 2006, we had no
material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from
foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Interest Rate Sensitivity

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

We do not hold any derivative
financial instruments.

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

Equity Price Risk

Our short-term investments consist of balances maintained in a non-qualified deferred compensation plan funded by our executives and directors. We value these investments using the closing market value for the last
day of each month. These investments are subject to market price volatility. We reflect these investments on our balance sheet at their market value, with the unrealized gains and losses reflected as adjustments to both short-term investments and
the deferred compensation liability.

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



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
periodic reports that we file or submit with the SEC under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the period covered by this report on Form 10-Q. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of
the period covered by this report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

None.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Comarco Wireless Technologies, Inc. v.
Targus, Inc., Case No. 050004166, Superior Court of The State of California in and for The County of Orange:

On April 4,
2006, Comarco Wireless Technologies, Inc. (CWT) and Targus, Inc. (Targus) attended a voluntary mediation to resolve a long-standing dispute and executed a stipulation for settlement agreement whereby Targus agreed to pay CWT
$500,000 and both parties agreed to a release and discharge of all claims and causes of actions brought by each party. Subsequent to April 30, 2006, both parties entered into a settlement agreement and Targus paid us $500,000. All complaints
filed by both parties were also dismissed.

In addition to the matter discussed above, we are from time to time involved in various legal
proceedings incidental to the conduct of our business. We believe that the outcome of all such pending legal proceedings will not in the aggregate have a material adverse effect on our consolidated results of operations and financial position.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|32.1 |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|32.2 |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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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.



|                    |  |  |  |                                                          
|------------------- |  |  |  | ---------------------------------------------------------
|                    |  |  |  | COMARCO, INC.                                            
|                    |  | 
|Date: June 14, 2006 |  |  |  | /s/ Thomas A. Franza                                     
|                    |  |  |  | Thomas A. Franza President and Chief Executive Officer   
|                    |  | 
|Date: June 14, 2006 |  |  |  | /s/ Daniel R. Lutz                                       
|                    |  |  |  | Daniel R. Lutz Vice President and Chief Financial Officer



33