##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



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 OCTOBER 31, 2005



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. EmployerIdentification 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  þ



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



Yes ̈No  þ



The registrant had 7,422,042 shares of common stock outstanding as of December 9, 2005.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES



QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2005



TABLE OF CONTENTS



|                               |  |                                                                                                               |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                               |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                              
|                               |  |                                                                                                              
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                              |  |     
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Balance Sheets as of October 31, 2005 and January 31, 2005                             |  | 3   
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2005 and 2004 |  | 4   
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2005 and 2004           |  | 5   
|                               |  |                                                                                                              
|                               |  | Notes to Condensed Consolidated Financial Statements                                                          |  | 6   
|                               |  |                                                                                                              
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |  | 18  
|                               |  |                                                                                                              
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    |  | 33  
|                               |  |                                                                                                              
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                       |  | 34  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                              
|                               |  |                                                                                                              
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                             |  | 35  
|                               |  |                                                                                                              
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                   |  | 35  
|                               |  |                                                                                                              
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                               |  | 35  
|                               |  |                                                                                                              
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                           |  | 35  
|                               |  |                                                                                                              
|ITEM 5.                        |  | OTHER INFORMATION                                                                                             |  | 36  
|                               |  |                                                                                                              
|ITEM 6.                        |  | EXHIBITS                                                                                                      |  | 36  
|                               |  |                                                                                                              
|                               |  | SIGNATURES                                                                                                    |  | 37  



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)



|                                                                                                                                                            |  |                 |        |                     |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ------------------- | - | ------
|                                                                                                                                                            |  | October 31,2005 |        | January 31,2005 (A)
|ASSETS                                                                                                                                                      |  |                 |        |                     |   |       
|Current assets:                                                                                                                                             |  |                 |        |                     |   |       
|Cash and cash equivalents                                                                                                                                   |  | $               | 14,156 |                     | $ | 12,270
|Short-term investments                                                                                                                                      |  |                 | 1,175  |                     |   | 1,598 
|Accounts receivable, net of reserves of $446 and $551                                                                                                       |  |                 | 8,743  |                     |   | 4,575 
|Amounts due from affiliate                                                                                                                                  |  |                 | 1,186  |                     |   | 1,100 
|Inventory, net of reserves of $1,925 and $2,212                                                                                                             |  |                 | 8,240  |                     |   | 8,448 
|Other current assets                                                                                                                                        |  |                 | 350    |                     |   | 817   
|                                                                                                                                                            |  |                 |        |                     |   |       
|Total current assets                                                                                                                                        |  |                 | 33,850 |                     |   | 28,808
|                                                                                                                                                            |  |                 |        |                     |   |       
|Property and equipment, net                                                                                                                                 |  |                 | 1,674  |                     |   | 2,154 
|Software development costs, net                                                                                                                             |  |                 | 2,068  |                     |   | 3,543 
|Goodwill                                                                                                                                                    |  |                 | 2,394  |                     |   | 2,394 
|Acquired intangible assets, net                                                                                                                             |  |                 | 1,300  |                     |   | 1,495 
|Accounts receivable subject to litigation, net of reserves of $280                                                                                          |  |                 | 699    |                     |   | 701   
|Other assets                                                                                                                                                |  |                 | 1,131  |                     |   | 1,131 
|                                                                                                                                                            |  |                 |        |                     |   |       
|                                                                                                                                                            |  | $               | 43,116 |                     | $ | 40,226
|                                                                                                                                                            |  |                 |        |                     |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                 |        |                     |   |       
|Current liabilities:                                                                                                                                        |  |                 |        |                     |   |       
|Accounts payable                                                                                                                                            |  | $               | 448    |                     | $ | 101   
|Deferred revenue                                                                                                                                            |  |                 | 4,198  |                     |   | 3,747 
|Deferred compensation                                                                                                                                       |  |                 | 1,175  |                     |   | 1,598 
|Accrued liabilities                                                                                                                                         |  |                 | 8,105  |                     |   | 5,006 
|                                                                                                                                                            |  |                 |        |                     |   |       
|Total current liabilities                                                                                                                                   |  |                 | 13,926 |                     |   | 10,452
|                                                                                                                                                            |  |                 |        |                     |   |       
|Stockholders equity:                                                                                                                                       |  |                 |        |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized, no shares issued or outstanding at October 31, 2005 and
January 31, 2005                       |  |                 |       |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized, 7,422,042 shares issued and outstanding at October 31, 2005 and
January 31, 2005, respectively |  |                 | 742    |                     |   | 742   
|Additional paid-in capital                                                                                                                                  |  |                 | 14,051 |                     |   | 14,051
|Retained earnings                                                                                                                                           |  |                 | 14,397 |                     |   | 14,981
|                                                                                                                                                            |  |                 |        |                     |   |       
|Total stockholders equity                                                                                                                                  |  |                 | 29,190 |                     |   | 29,774
|                                                                                                                                                            |  |                 |        |                     |   |       
|                                                                                                                                                            |  | $               | 43,116 |                     | $ | 40,226
|                                                                                                                                                            |  |                 |        |                     |   |       



|(A) | Derived from the audited consolidated financial statements as of January 31, 2005.
|--- | ----------------------------------------------------------------------------------



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



3



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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 EndedOctober 31, |        |   | Nine Months EndedOctober 31, |  
|                                                             |  | 2005                          |        |   | 2004                         |   |        | 2005 |  |   | 2004   |  
|Revenue                                                      |  | $                             | 13,574 |   |                              | $ | 6,715  |      |  | $ | 32,670 |   |  | $ | 22,441 |  
|Cost of revenue                                              |  |                               | 8,362  |   |                              |   | 5,333  |      |  |   | 20,956 |   |  |   | 15,618 |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                 |  |                               | 5,212  |   |                              |   | 1,382  |      |  |   | 11,714 |   |  |   | 6,823  |  
|Selling, general, and administrative expenses                |  |                               | 2,639  |   |                              |   | 1,988  |      |  |   | 6,797  |   |  |   | 6,614  |  
|Engineering and support expenses                             |  |                               | 2,005  |   |                              |   | 1,849  |      |  |   | 5,621  |   |  |   | 5,605  |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                      |  |                               | 568    |   |                              |   | (2,455 | )    |  |   | (704   | ) |  |   | (5,396 | )
|Other income, net                                            |  |                               | 76     |   |                              |   | 57     |      |  |   | 196    |   |  |   | 135    |  
|Minority interest in losses of subsidiary                    |  |                               |       |   |                              |   | 17     |      |  |   |       |   |  |   | 66     |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes |  |                               | 644    |   |                              |   | (2,381 | )    |  |   | (508   | ) |  |   | (5,195 | )
|Income tax (expense) benefit                                 |  |                               | (31    | ) |                              |   | 446    |      |  |   | (31    | ) |  |   | (2,426 | )
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  |                               | 613    |   |                              |   | (1,935 | )    |  |   | (539   | ) |  |   | (7,621 | )
|Income (loss) from discontinued operations                   |  |                               | (3     | ) |                              |   | 222    |      |  |   | (45    | ) |  |   | 209    |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                             | 610    |   |                              | $ | (1,713 | )    |  | $ | (584   | ) |  | $ | (7,412 | )
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted income (loss) per share:                   |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  | $                             | 0.08   |   |                              | $ | (0.26  | )    |  | $ | (0.07  | ) |  | $ | (1.04  | )
|Income (loss) from discontinued operations                   |  |                               |       |   |                              |   | 0.03   |      |  |   | (0.01  | ) |  |   | 0.03   |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                             | 0.08   |   |                              | $ | (0.23  | )    |  | $ | (0.08  | ) |  | $ | (1.01  | )
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding:                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                        |  |                               | 7,422  |   |                              |   | 7,340  |      |  |   | 7,422  |   |  |   | 7,313  |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                      |  |                               | 7,434  |   |                              |   | 7,340  |      |  |   | 7,422  |   |  |   | 7,313  |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Common shares outstanding                                    |  |                               | 7,422  |   |                              |   | 7,340  |      |  |   | 7,422  |   |  |   | 7,340  |  
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



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



4



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                                     |  |                              |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                     |  | Nine Months EndedOctober 31, |       
|                                                                                                                     |  | 2005                         |        |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                |  |                              |        |   |      |   |        |  
|Net loss                                                                                                             |  | $                            | (584   | ) |      | $ | (7,412 | )
|Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                                                        |  |                              | 2,927  |   |      |   | 3,463  |  
|Deferred income taxes                                                                                                |  |                              |       |   |      |   | 2,876  |  
|Loss on disposal of property and equipment                                                                           |  |                              | 24     |   |      |   | 77     |  
|Provision for doubtful accounts receivable                                                                           |  |                              | (85    | ) |      |   | (72    | )
|Provision for obsolete inventory                                                                                     |  |                              | 1,003  |   |      |   | (141   | )
|Minority interest in losses of subsidiary                                                                            |  |                              |       |   |      |   | (66    | )
|Changes in operating assets and liabilities:                                                                         |  |                              |        |   |      |   |        |  
|Accounts receivable                                                                                                  |  |                              | (4,083 | ) |      |   | (696   | )
|Accounts receivable subject to litigation                                                                            |  |                              | 2      |   |      |   | 4,232  |  
|Amounts due from affiliate                                                                                           |  |                              | (86    | ) |      |   | 2,224  |  
|Inventory                                                                                                            |  |                              | (795   | ) |      |   | (1,494 | )
|Other assets                                                                                                         |  |                              | 467    |   |      |   | (629   | )
|Accounts payable                                                                                                     |  |                              | 347    |   |      |   | (328   | )
|Deferred revenue                                                                                                     |  |                              | 451    |   |      |   | (1,977 | )
|Accrued liabilities                                                                                                  |  |                              | 3,099  |   |      |   | (1,360 | )
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                                  |  |                              | 2,687  |   |      |   | (1,303 | )
|                                                                                                                     |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                |  |                              |        |   |      |   |        |  
|Proceeds from sales of property and equipment                                                                        |  |                              | 5      |   |      |   | 57     |  
|Purchases of property and equipment                                                                                  |  |                              | (605   | ) |      |   | (1,009 | )
|Acquired intangible assets                                                                                           |  |                              | (201   | ) |      |   | (66    | )
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                                                                |  |                              | (801   | ) |      |   | (1,018 | )
|                                                                                                                     |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                |  |                              |        |   |      |   |        |  
|Net proceeds from issuance of common stock                                                                           |  |                              |       |   |      |   | 26     |  
|Proceeds from issuance of subsidiary common stock                                                                    |  |                              |       |   |      |   | 129    |  
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                                                                            |  |                              |       |   |      |   | 155    |  
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                 |  |                              | 1,886  |   |      |   | (2,166 | )
|Cash and cash equivalents, beginning of period                                                                       |  |                              | 12,270 |   |      |   | 15,047 |  
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                                             |  | $                            | 14,156 |   |      | $ | 12,881 |  
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                                                   |  |                              |        |   |      |   |        |  
|Cash paid for interest                                                                                               |  | $                            |       |   |      | $ | 2      |  
|                                                                                                                     |  |                              |        |   |      |   |        |  
|Cash paid for income taxes                                                                                           |  | $                            | 2      |   |      | $ | 109    |  
|                                                                                                                     |  |                              |        |   |      |   |        |  



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



5



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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, 2005. 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 nine months ended October 31, 2005 are not necessarily indicative of the results to be expected for the year ending
January 31, 2006.



Principles of Consolidation:



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



Use of Estimates:



The preparation of 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.



Reclassifications:



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



Liquidity:



The Company
has sustained net losses over the past three fiscal years and at October 31, 2005 had cash balances of $14.2 million. The Company anticipates that the cash on hand at October 31, 2005 will meet working capital requirements to fund
operation costs expected to be incurred in the next twelve months.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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. The Company accounts 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 has 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 is 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 three and nine months ended October 31, 2005 and 2004, consistent with the provisions of SFAS No. 123, the Companys net income (loss), basic income (loss) per share, and diluted income (loss) per share
would have been reduced to the pro forma amounts as follows (in thousands except per share amounts):



|                                                                                                                                            |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---- | - | ---------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                                            |  | Three Months EndedOctober 31, |      |   | Nine Months EndedOctober 31, |  
|                                                                                                                                            |  | 2005                          |      |   | 2004                         |   |        | 2005 |  |   | 2004  |  
|Net income (loss):                                                                                                                          |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|As reported                                                                                                                                 |  | $                             | 610  |   |                              | $ | (1,713 | )    |  | $ | (584  | ) |  | $ | (7,412 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                               | (78  | ) |                              |   | (65    | )    |  |   | (233  | ) |  |   | (183   | )
|                                                                                                                                            |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Pro forma                                                                                                                                   |  | $                             | 532  |   |                              | $ | (1,778 | )    |  | $ | (817  | ) |  | $ | (7,595 | )
|                                                                                                                                            |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) per common share  basic:                                                                                                     |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|As reported                                                                                                                                 |  | $                             | 0.08 |   |                              | $ | (0.23  | )    |  | $ | (0.08 | ) |  | $ | (1.01  | )
|Pro forma                                                                                                                                   |  |                               | 0.07 |   |                              |   | (0.24  | )    |  |   | (0.11 | ) |  |   | (1.04  | )
|Income (loss) per common share  diluted:                                                                                                   |  |                               |      |   |                              |   |        |      |  |   |       |   |  |   |        |  
|As reported                                                                                                                                 |  | $                             | 0.08 |   |                              | $ | (0.23  | )    |  | $ | (0.08 | ) |  | $ | (1.01  | )
|Pro forma                                                                                                                                   |  |                               | 0.07 |   |                              |   | (0.24  | )    |  |   | (0.11 | ) |  |   | (1.04  | )



The fair value of
options granted under the Companys stock option plans during the three and nine months ended October 31, 2005 and 2004, was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted
average assumptions:



|                                         |  |                             |   |  |      |  
|---------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                         |  | Nine Months EndedOctober 31 |  
|                                         |  | 2005                        |   |  | 2004 |  
|Weighted average risk-free interest rate |  | 3.8                         | % |  | 3.8  | %
|Expected life (in years)                 |  | 6                           |   |  | 6    |  
|Expected stock volatility                |  | 49.9                        | % |  | 46.2 | %
|Dividend yield                           |  | None                        |   |  | None |  



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 options are
exercisable in installments determined by the compensation committee of the Companys Board of Directors; however, no employee option may be exercised



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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). The employee plan expired in May 2005 and the director plan expires in December 2010. Transactions and other information relating to these plans for the nine months ended October 31,
2005 are summarized below:



|                            |  |                     |   |  |                                |      
|--------------------------- |  | ------------------- | - |  | ------------------------------ | -----
|                            |  | Outstanding Options
|                            |  | Number ofShares     |   |  | Weighted-AverageExercise Price
|Balance, January 31, 2005   |  | 859,020             |   |  | $                              | 12.60
|Options granted             |  | 42,500              |   |  |                                | 8.18 
|Options canceled or expired |  | (39,500             | ) |  |                                | 11.69
|Options exercised           |  |                    |   |  |                                |     
|                            |  |                     |   |  |                                |      
|Balance, October 31, 2005   |  | 862,020             |   |  |                                | 12.43
|                            |  |                     |   |  |                                |      



The average fair value
of each of the options granted during the nine months ended October 31, 2005 was $8.18. The following table summarizes information about the Companys stock options outstanding at October 31, 2005:



|                         |  |                     |  |                                        |       |  |                             |       |                   |         |                             |   |      
|------------------------ |  | ------------------- |  | -------------------------------------- | ----- |  | --------------------------- | ----- | ----------------- | ------- | --------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                   
|Range of Exercise Prices |  | NumberOutstanding   |  | Weighted-Avg.RemainingContractual Life |       |  | Weighted-Avg.Exercise Price |       | NumberExercisable |         | Weighted-Avg.Exercise Price
|$ 6.91 to   9.89         |  | 382,000             |  | 7.30                                   |       |  | $                           | 8.08  |                   | 166,000 |                             | $ | 8.21 
|10.00 to 12.41           |  | 115,145             |  | 3.64                                   |       |  |                             | 11.49 |                   | 108,895 |                             |   | 11.48
|13.21 to 17.50           |  | 222,375             |  | 3.54                                   |       |  |                             | 14.49 |                   | 222,375 |                             |   | 14.49
|19.33 to 23.67           |  | 142,500             |  | 4.58                                   |       |  |                             | 21.63 |                   | 142,500 |                             |   | 21.63
|                         |  |                     |  |                                        |       |  |                             |       |                   |         |                             |   |      
|6.91 to   23.27          |  | 862,020             |  | 5.39                                   | years |  |                             | 12.43 |                   | 639,770 |                             |   | 13.94
|                         |  |                     |  |                                        |       |  |                             |       |                   |         |                             |   |      



Stock options
exercisable at October 31, 2005 were 639,770 at a weighted-average exercise price of $13.94. Shares available under the director plan for future grants at October 31, 2005 were 8,125.



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 October 31, 2005, 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 nine months ended October 31, 2005, no options were granted or exercised under the CWT option plan. Stock options exercisable at
October 31, 2005 were 49,000 at a weighted-average exercise price of $12.34. Shares available under the plan for future grants at October 31, 2005 were 198,000.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table summarizes information about CWT stock options outstanding at October 31,
2005:



|                         |  |                     |  |                                        |       |  |                              |       |                   |        |                              |   |      
|------------------------ |  | ------------------- |  | -------------------------------------- | ----- |  | ---------------------------- | ----- | ----------------- | ------ | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                   
|Range of Exercise Prices |  | NumberOutstanding   |  | Weighted-Avg.RemainingContractual Life |       |  | Weighted-Avg. Exercise Price |       | NumberExercisable |        | Weighted-Avg. Exercise Price
|$ 11.97 to 13.22         |  | 46,000              |  | 0.17                                   |       |  | $                            | 12.00 |                   | 46,000 |                              | $ | 12.00
|17.62                    |  | 3,000               |  | 1.33                                   |       |  |                              | 17.62 |                   | 3,000  |                              |   | 17.62
|                         |  |                     |  |                                        |       |  |                              |       |                   |        |                              |   |      
|11.97 to 17.62           |  | 49,000              |  | 0.24                                   | years |  |                              | 12.34 |                   | 49,000 |                              |   | 12.34
|                         |  |                     |  |                                        |       |  |                              |       |                   |        |                              |   |      



|3. | Recent Accounting Pronouncements
|-- | --------------------------------



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment, which revised
SFAS No. 123, Accounting for Stock-Based Compensation. This statement supersedes Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees. The revised
statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB No. 25, and requires that the compensation
costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first fiscal year beginning after June 15, 2005. The Company will adopt the statement on
February 1, 2006 as required. The Company has selected the modified prospective application transition method and will continue to use the Black-Scholes option-pricing model to determine the fair value of options granted. The Company is still
studying the impact of applying the various provisions of SFAS No. 123R.



In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107). SAB No. 107 provides guidance on the initial
implementation of SFAS No. 123R. In particular, the statement includes guidance related to share-based payment (SBP) awards with non-employees, valuation methods, and selecting underlying assumptions such as expected volatility and
expected term. It also gives guidance on the classification of compensation expense associated with SBP awards and accounting for the income tax effects of SBP awards upon the adoption of SFAS No. 123R. The Company is currently assessing the
guidance provided in SAB No. 107 in connection with the implementation of SFAS No. 123R.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43, Chapter 4. SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those
items be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS
No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect that the adoption of SFAS No. 151 will have on its consolidated financial statements.



In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections. SFAS No. 154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2007.



|4. | 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 October 31, 2005, the Company repurchased approximately 2.6 million shares for an average price of $8.22 per share. During the nine months ended October 31, 2005, the Company did not repurchase
any shares of common stock.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|5. | Earnings (Loss) Per Share
|-- | -------------------------



The Company calculates 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 (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for the nine months ended October 31, 2005 and the three and nine months ended October 31,
2004, basic and diluted loss per share were the same because the inclusion of potential common shares in the calculation would have been antidilutive.



Potential common shares of 12,180 have been excluded from diluted weighted average common shares for the nine months ended October 31, 2005, as the
effect would have been antidilutive. Similarly, potential common shares of 3,125 and 9,431 have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2004, as the effect would have been
antidilutive.



The following table presents reconciliations of
the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss). In the tables below, Net income or loss represents the numerator and Shares represents the denominator (in
thousands, except per share amounts):



|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------ |  | ----------------------------- | ----- | - | ---------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                             |  | Three Months EndedOctober 31, |       |   | Nine Months EndedOctober 31, |  
|                                                             |  | 2005                          |       |   | 2004                         |   |        | 2005 |  |   | 2004  |  
|Basic:                                                       |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                     |  | $                             | 613   |   |                              | $ | (1,935 | )    |  | $ | (539  | ) |  | $ | (7,621 | )
|Weighted average shares outstanding                          |  |                               | 7,422 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Basic earnings (loss) per share from continuing operations   |  | $                             | 0.08  |   |                              | $ | (0.26  | )    |  | $ | (0.07 | ) |  | $ | (1.04  | )
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) from discontinued operations                   |  | $                             | (3    | ) |                              | $ | 222    |      |  | $ | (45   | ) |  | $ | 209    |  
|Weighted average shares outstanding                          |  |                               | 7,422 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Basic earnings (loss) per share from discontinued operations |  | $                             |      |   |                              | $ | 0.03   |      |  | $ | (0.01 | ) |  | $ | 0.03   |  
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Net income (loss)                                            |  | $                             | 610   |   |                              | $ | (1,713 | )    |  | $ | (584  | ) |  | $ | (7,412 | )
|Weighted average shares outstanding                          |  |                               | 7,422 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Basic earnings (loss) per share                              |  | $                             | 0.08  |   |                              | $ | (0.23  | )    |  | $ | (0.08 | ) |  | $ | (1.01  | )
|                                                             |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|-------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                               |  | Three Months EndedOctober 31, |       |   | Nine Months EndedOctober 31, |  
|                                                               |  | 2005                          |       |   | 2004                         |   |        | 2005 |  |   | 2004  |  
|Diluted:                                                       |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                       |  | $                             | 613   |   |                              | $ | (1,935 | )    |  | $ | (539  | ) |  | $ | (7,621 | )
|Weighted average shares outstanding                            |  |                               | 7,434 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Diluted earnings (loss) per share from continuing operations   |  | $                             | 0.08  |   |                              | $ | (0.26  | )    |  | $ | (0.07 | ) |  | $ | (1.04  | )
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Income (loss) from discontinued operations                     |  | $                             | (3    | ) |                              | $ | 222    |      |  | $ | (45   | ) |  | $ | 209    |  
|Weighted average shares outstanding                            |  |                               | 7,422 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Diluted earnings (loss) per share from discontinued operations |  | $                             |      |   |                              | $ | 0.03   |      |  | $ | (0.01 | ) |  | $ | 0.03   |  
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Net income (loss)                                              |  | $                             | 610   |   |                              | $ | (1,713 | )    |  | $ | (584  | ) |  | $ | (7,412 | )
|Weighted average shares outstanding                            |  |                               | 7,434 |   |                              |   | 7,340  |      |  |   | 7,422 |   |  |   | 7,313  |  
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|Diluted earnings (loss) per share                              |  | $                             | 0.08  |   |                              | $ | (0.23  | )    |  | $ | (0.08 | ) |  | $ | (1.01  | )
|                                                               |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  



|6. | Customer Concentrations
|-- | -----------------------



A significant portion of the Companys revenue is derived from a limited number of customers. The three largest customers for the three and nine
months ended October 31, 2005 and 2004 are listed below.



|                            |  |                                |        |  |      |   |  |   |       |  |     |  
|--------------------------- |  | ------------------------------ | ------ |  | ---- | - |  | - | ----- |  | --- | -
|                            |  | Three Months Ended October 31, |       
|                            |  | 2005                           |        |  | 2004 |  
|                            |  | (In thousands)                 |       
|Total revenue               |  | $                              | 13,574 |  | 100  | % |  | $ | 6,715 |  | 100 | %
|Customer concentration:     |  |                                |        |  |      |   |  |   |       |  |     |  
|Verizon Wireless            |  |                                | 5,011  |  | 37   | % |  |   |      |  |    |  
|Kensington Technology Group |  |                                | 3,847  |  | 28   | % |  |   |      |  |    |  
|SwissQual                   |  |                                | 1,016  |  | 7    | % |  |   | 2,201 |  | 33  | %
|Targus, Inc.                |  |                                |       |  |     |   |  |   | 977   |  | 14  | %
|TIM Cellular, S.A.          |  |                                |       |  |     |   |  |   | 791   |  | 12  | %
|                            |  |                                |        |  |      |   |  |   |       |  |     |  
|                            |  | $                              | 9,874  |  | 72   | % |  | $ | 3,969 |  | 59  | %
|                            |  |                                |        |  |      |   |  |   |       |  |     |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                            |  |                               |        |  |      |   |  |   |        |  |     |  
|--------------------------- |  | ----------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                            |  | Nine Months Ended October 31, |       
|                            |  | 2005                          |        |  | 2004 |  
|                            |  | (In thousands)                |       
|Total revenue               |  | $                             | 32,670 |  | 100  | % |  | $ | 22,441 |  | 100 | %
|Customer concentration:     |  |                               |        |  |      |   |  |   |        |  |     |  
|Verizon Wireless            |  |                               | 7,450  |  | 23   | % |  |   |       |  |    |  
|Kensington Technology Group |  |                               | 7,128  |  | 22   | % |  |   |       |  |    |  
|SwissQual                   |  |                               | 6,118  |  | 18   | % |  |   | 6,571  |  | 29  | %
|Targus, Inc.                |  |                               |       |  |     |   |  |   | 3,634  |  | 16  | %
|TIM Cellular, S.A.          |  |                               |       |  |     |   |  |   | 2,569  |  | 12  | %
|                            |  |                               |        |  |      |   |  |   |        |  |     |  
|                            |  | $                             | 20,696 |  | 63   | % |  | $ | 12,774 |  | 57  | %
|                            |  |                               |        |  |      |   |  |   |        |  |     |  



In addition, the
Company derived 14 percent and 19 percent of its revenue from governmental agencies in the three months ended October 31, 2005, and 2004, respectively. The Company derived 19 percent and 21 percent of its revenue from
governmental agencies in the nine months ended October 31, 2005, and 2004, respectively.



The Companys European region is served by its reseller, SwissQual Holding Inc. (SwissQual). 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, the Company changed its 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 the Companys ability to assert financial influence over the operations of SwissQual. The Companys revenue for the nine months ended October 31, 2005 increased by approximately $1.2 million due to this
change.



|7. | Inventory
|-- | ---------



Inventory consists of the following (in thousands):



|                |  |                 |       |                 |   |      
|--------------- |  | --------------- | ----- | --------------- | - | -----
|                |  | October 31,2005 |       | January 31,2005
|Raw materials   |  | $               | 4,470 |                 | $ | 5,186
|Work in process |  |                 | 690   |                 |   | 471  
|Finished goods  |  |                 | 3,080 |                 |   | 2,791
|                |  |                 |       |                 |   |      
|                |  | $               | 8,240 |                 | $ | 8,448
|                |  |                 |       |                 |   |      



|8. | Software Development Costs, Net
|-- | -------------------------------



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



|                                       |  |                 |        |   |                 |   |        |  
|-------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                       |  | October 31,2005 |        |   | January 31,2005 |  
|Capitalized software development costs |  | $               | 8,978  |   |                 | $ | 8,978  |  
|Less: accumulated amortization         |  |                 | (6,910 | ) |                 |   | (5,435 | )
|                                       |  |                 |        |   |                 |   |        |  
|                                       |  | $               | 2,068  |   |                 | $ | 3,543  |  
|                                       |  |                 |        |   |                 |   |        |  



Capitalized software
development costs for the nine months ended October 31, 2005 and 2004 totaled $0. Amortization of software development costs for the nine months ended October 31, 2005 and 2004 totaled $1.5 million, and have been reported in cost of
revenue in the accompanying condensed consolidated financial statements. Amortization of software development costs for the three months ended October 31, 2005 and 2004,



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



totaled $498,000 and $487,000, respectively. 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.



|9. | Goodwill and Acquired Intangible Assets, Net
|-- | --------------------------------------------



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



|                                  |  |                 |        |   |                 |   |        |  
|--------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                  |  | October 31,2005 |        |   | January 31,2005 |  
|Goodwill                          |  | $               | 2,394  |   |                 | $ | 2,394  |  
|                                  |  |                 |        |   |                 |   |        |  
|Acquired intangible assets:       |  |                 |        |   |                 |   |        |  
|Definite-lived intangible assets: |  |                 |        |   |                 |   |        |  
|Software algorithms               |  | $               |       |   |                 | $ | 255    |  
|License rights                    |  |                 | 1,274  |   |                 |   | 1,073  |  
|Intellectual property rights      |  |                 | 1,244  |   |                 |   | 1,244  |  
|                                  |  |                 |        |   |                 |   |        |  
|                                  |  |                 | 2,518  |   |                 |   | 2,572  |  
|Less: accumulated amortization    |  |                 | (1,218 | ) |                 |   | (1,077 | )
|                                  |  |                 |        |   |                 |   |        |  
|                                  |  | $               | 1,300  |   |                 | $ | 1,495  |  
|                                  |  |                 |        |   |                 |   |        |  



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 |       | Call Box |   | Mobile PowerProducts |  | Total
|Balance as of October 31, 2005 |  | $                      | 1,898 |          | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |          |   |                      |  |       |   |  |   |      
|Balance as of January 31, 2005 |  | $                      | 1,898 |          | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |          |   |                      |  |       |   |  |   |      



The following table
presents the future expected amortization of the definite-lived intangible assets as of October 31, 2005 (in thousands):



|                                     |  |                     |      
|------------------------------------ |  | ------------------- | -----
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |      
|2006                                 |  | $                   | 116  
|2007                                 |  |                     | 434  
|2008                                 |  |                     | 225  
|2009                                 |  |                     | 178  
|2010                                 |  |                     | 178  
|Thereafter                           |  |                     | 169  
|                                     |  |                     |      
|Total estimated amortization expense |  | $                   | 1,300
|                                     |  |                     |      



Amortization of
definite-lived acquired intangible assets for the three months ended October 31, 2005 and 2004 totaled $139,000 and $168,000, respectively. For the nine months ended October 31, 2005 and 2004, amortization of definite-lived acquired
intangible assets totaled $397,000 and $404,000, respectively. The Company ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|10. | 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):



|                                                 |  |                              |      |   |      |   |      |  
|------------------------------------------------ |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                                 |  | Nine Months EndedOctober 31, |     
|                                                 |  | 2005                         |      |   | 2004 |  
|Beginning balance                                |  | $                            | 177  |   |      | $ | 282  |  
|Accruals for warranties issued during the period |  |                              | 825  |   |      |   | 356  |  
|Utilization                                      |  |                              | (607 | ) |      |   | (451 | )
|                                                 |  |                              |      |   |      |   |      |  
|                                                 |  | $                            | 395  |   |      | $ | 187  |  
|                                                 |  |                              |      |   |      |   |      |  



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 is
currently replacing these units.



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):



|                                      |  |                              |       |   |      |   |        |  
|------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ------ | -
|                                      |  | Nine Months EndedOctober 31, |      
|                                      |  | 2005                         |       |   | 2004 |  
|Beginning balance                     |  | $                            | 1,108 |   |      | $ | 1,904  |  
|Recognition of revenue                |  |                              | (811  | ) |      |   | (1,281 | )
|Deferral of revenue for new contracts |  |                              | 1,645 |   |      |   | 356    |  
|                                      |  |                              |       |   |      |   |        |  
|                                      |  | $                            | 1,942 |   |      | $ | 979    |  
|                                      |  |                              |       |   |      |   |        |  



|11. | 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 12,000 call boxes under long-term agreements.



14



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|------------------- |  | ----------------------------------- | ------ | - | -------- | - | ----- | -------------------- |  | - | ----- | -- |  | - | ------ | -
|                    |  | Three Months Ended October 31, 2005 |       
|                    |  | Wireless TestSolutions              |        |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                   | 7,543  |   |          | $ | 1,951 |                      |  | $ | 4,080 |    |  | $ | 13,574 |  
|Cost of revenue     |  |                                     | 3,950  |   |          |   | 1,225 |                      |  |   | 3,187 |    |  |   | 8,362  |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit        |  | $                                   | 3,593  |   |          | $ | 726   |                      |  | $ | 893   |    |  | $ | 5,212  |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                     | 47.6   | % |          |   | 37.2  | %                    |  |   | 21.9  | %  |  |   | 38.4   | %
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Nine Months Ended October 31, 2005  |       
|                    |  | Wireless TestSolutions              |        |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                   | 17,152 |   |          | $ | 7,901 |                      |  | $ | 7,617 |    |  | $ | 32,670 |  
|Cost of revenue     |  |                                     | 9,090  |   |          |   | 4,832 |                      |  |   | 7,034 |    |  |   | 20,956 |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit        |  | $                                   | 8,062  |   |          | $ | 3,069 |                      |  | $ | 583   |    |  | $ | 11,714 |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                     | 47.0   | % |          |   | 38.8  | %                    |  |   | 7.6   | %  |  |   | 35.9   | %
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Three Months Ended October 31, 2004 |       
|                    |  | Wireless TestSolutions              |        |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                   | 4,193  |   |          | $ | 1,468 |                      |  | $ | 1,054 |    |  | $ | 6,715  |  
|Cost of revenue     |  |                                     | 2,334  |   |          |   | 978   |                      |  |   | 2,021 |    |  |   | 5,333  |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit (loss) |  | $                                   | 1,859  |   |          | $ | 490   |                      |  | $ | (967  | )  |  | $ | 1,382  |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                     | 44.3   | % |          |   | 33.4  | %                    |  |   | (91.7 | %) |  |   | 20.6   | %
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Nine Months Ended October 31, 2004  |       
|                    |  | Wireless TestSolutions              |        |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                   | 13,052 |   |          | $ | 5,046 |                      |  | $ | 4,343 |    |  | $ | 22,441 |  
|Cost of revenue     |  |                                     | 7,420  |   |          |   | 3,307 |                      |  |   | 4,891 |    |  |   | 15,618 |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit (loss) |  | $                                   | 5,632  |   |          | $ | 1,739 |                      |  | $ | (548  | )  |  | $ | 6,823  |  
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                     | 43.2   | % |          |   | 34.5  | %                    |  |   | (12.6 | %) |  |   | 30.4   | %
|                    |  |                                     |        |   |          |   |       |                      |  |   |       |    |  |   |        |  



|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|-------------------------- |  | ---------------------- | ------ | -------- | - | -------------------- |  | --------- | ----- | ----- | - | ------ |  | - | ------
|                           |  | Wireless TestSolutions |        | Call Box |   | Mobile PowerProducts |  | Corporate |       | Total
|Assets at October 31, 2005 |  | $                      | 15,724 |          | $ | 6,301                |  | $         | 5,760 |       | $ | 15,331 |  | $ | 43,116
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|Assets at January 31, 2005 |  | $                      | 16,813 |          | $ | 3,720                |  | $         | 5,458 |       | $ | 14,235 |  | $ | 40,226
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table presents revenue by geographic region for the three and nine months ended
October 31, 2005 and 2004 (in thousands):



Revenue by Region:

(in thousands)



|              |  |                               |        |                              |   |       |  |      |        |  |   |       
|------------- |  | ----------------------------- | ------ | ---------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|              |  | Three Months EndedOctober 31, |        | Nine Months EndedOctober 31,
|              |  | 2005                          |        | 2004                         |   | 2005  |  | 2004
|North America |  | $                             | 10,090 |                              | $ | 3,042 |  | $    | 22,184 |  | $ | 11,405
|Europe        |  |                               | 2,942  |                              |   | 2,320 |  |      | 7,863  |  |   | 6,579 
|Asia          |  |                               | 106    |                              |   |      |  |      | 188    |  |   | 346   
|Latin America |  |                               | 436    |                              |   | 1,353 |  |      | 2,435  |  |   | 4,111 
|              |  |                               |        |                              |   |       |  |      |        |  |   |       
|              |  | $                             | 13,574 |                              | $ | 6,715 |  | $    | 32,670 |  | $ | 22,441
|              |  |                               |        |                              |   |       |  |      |        |  |   |       



|12. | 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 contribution amounts. If the Company is unable to meet the requisite matching, the Companys Savings and Retirement Plan may need to be amended.



Legal Contingencies



On March 16, 2005, CWT filed a complaint against Targus, Inc. (Targus) (Case No. 050004166, Superior
Court of The State of California in and for The County of Orange) for breach of contract, breach of implied duty of good faith and fair dealing, open book account, goods had and received, account stated, quantum valebant, and unjust enrichment.



In response to CWTs complaint, Targus filed a demurrer
and motion to strike as the amounts in dispute are owed by Targus and a foreign subsidiary, Targus Europe. In response, on May 18, 2005, CWT filed the first amended complaint and added Targus Europe as a defendant. Both Targus and Targus Europe
have answered the amended complaint. In response to the amended complaint, Targus Europe and Targus filed cross-complaints against CWT. Targus alleges that it suffered damages due to allegedly defective products. Targus Europe alleges that it
suffered damages due to the delayed delivery of products. The court-mandated case management conference was held on August 26, 2005, at which a June 2006 trial date was set. The parties are now engaged in discovery which is expected to continue
for several months.



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Targus was the exclusive distributor of the Companys ChargeSource products through January
2004, at which time they were removed as the exclusive distributor. Throughout fiscal 2005, the Company continued to honor its obligations under non-cancelable and non-returnable purchase orders placed by Targus and its affiliates and accepted by
Comarco through the first quarter of fiscal 2005 in an attempt to affect an orderly wind-down of the relationship. During December 2004, Targus ceased making payments to Comarco for product shipped under an open book account. As of October 31,
2005, Targus and its affiliates owed Comarco approximately $1.0 million, which is reflected in accounts receivable subject to litigation, net of a $0.3 million reserve in the consolidated balance sheet.



While Comarco believes this action is meritorious, discovery is ongoing and
any loss of the amounts owed to the Company that may result from the outcome of this matter is not determinable or estimable. No significant provision has been made for losses, if any, that may result from the final outcome of this matter.



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, Uncertainties, and Other Factors that May Affect Results of Operations and Financial Condition in our annual report on Form 10-K for the year ended January 31, 2005.



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).



18



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The following table sets forth our revenue for the business segments for the three and nine months ended
October 31, 2005 and 2004:



|             |  |                    |        |                 |                   |         |                |     |                 |  |                 |        |         |   |        |  |    |  
|------------ |  | ------------------ | ------ | --------------- | ----------------- | ------- | -------------- | --- | --------------- |  | --------------- | ------ | ------- | - | ------ |  | -- | -
|             |  | Three Months Ended |        |                 | Nine Months Ended |        
|             |  | October 31,2005    |        | October 31,2004 |                   | %Change |                |     | October 31,2005 |  | October 31,2004 |        | %Change |  
|             |  | (in thousands)     |        |                 |                   |         | (in thousands) |     |                 | 
|Revenue:     |  |                    |        |                 |                   |         |                |     |                 |  |                 |        |         |   |        |  |    |  
|WTS          |  | $                  | 7,543  |                 | $                 | 4,193   |                | 80  | %               |  | $               | 17,152 |         | $ | 13,052 |  | 31 | %
|Call Box     |  |                    | 1,951  |                 |                   | 1,468   |                | 33  | %               |  |                 | 7,901  |         |   | 5,046  |  | 57 | %
|ChargeSource |  |                    | 4,080  |                 |                   | 1,054   |                | 287 | %               |  |                 | 7,617  |         |   | 4,343  |  | 75 | %
|             |  |                    |        |                 |                   |         |                |     |                 |  |                 |        |         |   |        |  |    |  
|             |  | $                  | 13,574 |                 | $                 | 6,715   |                | 102 | %               |  | $               | 32,670 |         | $ | 22,441 |  | 46 | %
|             |  |                    |        |                 |                   |         |                |     |                 |  |                 |        |         |   |        |  |    |  



Our management
currently considers the following events, trends, and uncertainties to be important in understanding our operating results for the three and nine months ended October 31, 2005 and our future operating results.



Wireless Test Solutions



| |  |  | During the third quarter of fiscal 2006, we continued to deliver Seven.Five voice and data systems to Verizon Wireless (Verizon) under a previously awarded contract.
Verizon is currently converting its nationwide wireless network to the CDMA EvDO standard, which is considered to be the U.S. equivalent of 3G, and is utilizing Seven.Five to ensure the quality of its network. For the three and nine months ended
October 31, 2005, we recorded related revenue under this contract totaling $5.0 million and $7.4 million, respectively. We expect to deliver on the balance of this contract during the fourth quarter of fiscal 2006 and to record
related revenue totaling approximately $0.2 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of fiscal 2006, we were awarded a contract by Verizon to replace data testing equipment previously sourced from a competitor with our Seven.Five data
systems. The contract is for 55 data-only test systems valued at approximately $3.0 million. We expect to record the majority of the related revenue during the fourth quarter of fiscal 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our European region is served by our reseller SwissQual Holding Inc. (SwissQual). For the three and nine months ended October 31, 2005, revenue derived from
SwissQual sales totaled approximately $1.0 million and $6.1 million, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing of receiving and delivering on purchase orders from our 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 second quarter of fiscal 2006, we were awarded contracts by Orange, Riverside, Santa Barbara, and Merced Counties to upgrade analog call boxes to digital and to add
text-telephony (TTY) devices. Subsequent to the award of the contracts, our customers in Orange and Riverside Counties delayed the start of the upgrade projects in order to refine the final configuration and scope. We currently expect to
commence work on these contracts, which total approximately $3.5 million, late in the fourth quarter of fiscal 2006 and substantially complete the required work by the third quarter of fiscal 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of fiscal 2006, we were awarded contracts by Monterey and San Benito Counties, totaling approximately $0.4 million. These contracts
are to upgrade the installed base of call boxes to digital and to add TTY devices. We currently expect to commence work on these contracts
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | during the fourth quarter of fiscal 2006 and substantially complete the required work during the first quarter of fiscal 2007.
| | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Late in the third quarter of fiscal 2006, we commenced work on a contract awarded by the San Diego SAFE to upgrade and retrofit approximately 1,400 call boxes with digital and TTY
technologies and improve accessibility for persons with mobility limitations. This contract is valued at approximately $3.7 million and we expect to substantially complete the required work by the third quarter of fiscal 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subsequent to the third quarter of fiscal 2006, we were awarded a contract by the Metropolitan Transportation Commission Service Authority for Freeways and Expressways (MTC
SAFE or MTC), totaling approximately $4.1 million. This contract is to upgrade approximately 1,900 analog call boxes to digital and to add TTY devices. We currently expect to commence work during the first quarter of fiscal
2007 and to substantially complete the required work by the fourth quarter of fiscal 2007. MTC SAFE is responsible for the call box system installed in the nine Bay Area counties of California.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mobile Power Products (ChargeSource)



| |  |  | Kensington, the retail channel distributor of our ChargeSource products, continues to penetrate the retail marketplace both domestically and in Europe. Currently, Kensington is
shipping or will be shipping into approximately 4,800 outlets, which include CompUSA, Circuit City, Staples, Office Max, and others.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of fiscal 2006, we began shipping our ChargeSource products in support of Kensingtons Power-It-All centers, which showcases the full line of
ChargeSource products in Circuit City stores nationwide. The Power-It-All centers are store-within-a-store merchandising kiosks that direct consumers to the combination of power adaptor and universal SmartTips that provide reliable and
convenient power for all their mobile electronic devices. We currently expect other retailers, both domestically and in Europe, to rollout the Power-It-All merchandising concept in future quarters.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The current level of ChargeSource sales is insufficient to fully absorb our fixed overheard. Our ability 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 now believe that our ChargeSource business can break even with quarterly revenue of approximately $5.0 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the three and nine months ended October 31, 2005, we recorded inventory and other charges as cost of revenue totaling $0.2 million and $1.1 million,
respectively, to fully reserve legacy ChargeSource products and related components.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 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 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.



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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 October 31, 2005 that required us to test goodwill for impairment. Management believes there have been no significant changes during the nine months
ended October 31, 2005 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, 2005.



Results of Operations 
Continuing Operations



Consolidated



Revenue

(in thousands except percentages)



|                        |  |                               |        |      |                              |        |      |                        |   |        |   |  |             |        |   |            |     |    |  |     |   
|----------------------- |  | ----------------------------- | ------ | ---- | ---------------------------- | ------ | ---- | ---------------------- | - | ------ | - |  | ----------- | ------ | - | ---------- | --- | -- |  | --- | --
|                        |  | Three Months EndedOctober 31, |        |      | Nine Months EndedOctober 31, |        |      | Year over Year% Change |  
|                        |  | 2005                          |        | 2004 |                              |        | 2005 |                        |   | 2004   |   |  | ThreeMonths |        |   | NineMonths |    
|Revenue:                |  |                               |        |      |                              |        |      |                        |   |        |   |  |             |        |   |            |     |    |  |     |   
|Products                |  | $                             | 12,687 |      | $                            | 5,516  |      |                        | $ | 29,429 |   |  | $           | 18,586 |   |            | 130 | %  |  | 58  | % 
|Services                |  |                               | 887    |      |                              | 1,199  |      |                        |   | 3,241  |   |  |             | 3,855  |   |            | (26 | %) |  | (16 | %)
|                        |  |                               |        |      |                              |        |      |                        |   |        |   |  |             |        |   |            |     |    |  |     |   
|                        |  | $                             | 13,574 |      | $                            | 6,715  |      |                        | $ | 32,670 |   |  | $           | 22,441 |   |            | 102 | %  |  | 46  | % 
|                        |  |                               |        |      |                              |        |      |                        |   |        |   |  |             |        |   |            |     |    |  |     |   
|Operating income (loss) |  | $                             | 568    |      | $                            | (2,455 | )    |                        | $ | (704   | ) |  | $           | (5,396 | ) |            |     |    |  |     |   
|                        |  |                               |        |      |                              |        |      |                        |   |        |   |  |             |        |   |            |     |    |  |     |   



Revenue by Region

(in thousands except percentages)



|               |  |                               |        |                              |   |                        |  |      |        |             |   |        |            |     |    |  |     |   
|-------------- |  | ----------------------------- | ------ | ---------------------------- | - | ---------------------- |  | ---- | ------ | ----------- | - | ------ | ---------- | --- | -- |  | --- | --
|               |  | Three Months EndedOctober 31, |        | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|               |  | 2005                          |        | 2004                         |   | 2005                   |  | 2004 |        | ThreeMonths |   |        | NineMonths |    
|Revenue:       |  |                               |        |                              |   |                        |  |      |        |             |   |        |            |     |    |  |     |   
|Americas:      |  |                               |        |                              |   |                        |  |      |        |             |   |        |            |     |    |  |     |   
|North America  |  | $                             | 10,090 |                              | $ | 3,042                  |  | $    | 22,184 |             | $ | 11,405 |            | 232 | %  |  | 95  | % 
|Others         |  |                               | 436    |                              |   | 1,353                  |  |      | 2,435  |             |   | 4,111  |            | (68 | %) |  | (41 | %)
|Europe         |  |                               | 2,942  |                              |   | 2,320                  |  |      | 7,863  |             |   | 6,579  |            | 27  | %  |  | 20  | % 
|Asia  Pacific |  |                               | 106    |                              |   |                       |  |      | 188    |             |   | 346    |            |    |    |  | (46 | %)
|               |  |                               |        |                              |   |                        |  |      |        |             |   |        |            |     |    |  |     |   
|               |  | $                             | 13,574 |                              | $ | 6,715                  |  | $    | 32,670 |             | $ | 22,441 |            | 102 | %  |  | 46  | % 
|               |  |                               |        |                              |   |                        |  |      |        |             |   |        |            |     |    |  |     |   



Revenue for the three
and nine months ended October 31, 2005 increased by $6.9 million and $10.2 million, or 102 percent and 46 percent, respectively, compared to corresponding periods of fiscal 2005. Each business segment achieved revenue growth
for the three and nine month periods. For the three months ended October 31, 2005, WTS, call box, and ChargeSource revenue increased $3.4 million, $0.5 million, and $3.0 million or 80 percent, 33 percent, and
287 percent, respectively, compared to the third quarter of fiscal 2005. For the nine months ended October 31, 2005, WTS, call box, and ChargeSource revenue increased $4.1 million, $2.9 million, and $3.3 million, or
31 percent, 57 percent, and 75 percent, respectively, compared to the corresponding period of the prior fiscal year. During the third quarter of fiscal 2006, our WTS business continued to deliver on a significant contract from Verizon
Wireless for our 3G Seven.Five voice and data test systems. We also continued to perform under contracts awarded in the first quarter of fiscal 2006 to upgrade existing call box systems to digital technologies, as well as deploying TTY devices
providing access to the speech and hearing impaired. Additionally, our ChargeSource business continued to ramp-up as Kensington, our retail channel distribution partner, penetrated the retail marketplace.



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##### Table of Contents

For the three and nine months ended October 31, 2005, North America revenue increased by
$7.0 million and $10.8 million, or 232 percent and 95 percent, respectively, compared to the corresponding periods of the prior fiscal year. These increases were driven by increased product sales across all three businesses.



Cost of Revenue

(in thousands except percentages)



|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|----------------------------------- |  | ------------------------------ | ----- | ------------------ | ----------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ------ |  | ---------- | - | ------------------ | - | ------ |  | -- | - |  | --- | -- |  | -- | --
|                                    |  | Three Months Ended October 31, |       |                    | Nine Months Ended October 31, |   |  | Year over Year% Change |                   
|                                    |  | 2005                           |       |                    | 2004                          |   |  | 2005                   |                    |  | 2004 |   |  | ThreeMonths        |        |  | NineMonths |  
|                                    |  |                                |       | % ofRelatedRevenue |                               |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |        |  |            |   | % ofRelatedRevenue |   |        |  |    |   |  |    
|Cost of revenue:                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|Products                            |  | $                              | 7,117 |                    | 56                            | % |  | $                      | 3,952              |  | 72   | % |  | $                  | 17,135 |  | 58         | % |                    | $ | 11,582 |  | 62 | % |  | 80  | %  |  | 48 | % 
|Amortization  software development |  |                                | 493   |                    | 4                             | % |  |                        | 482                |  | 9    | % |  |                    | 1,458  |  | 5          | % |                    |   | 1,488  |  | 8  | % |  | 2   | %  |  | (2 | %)
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|                                    |  |                                | 7,610 |                    | 60                            | % |  |                        | 4,434              |  | 80   | % |  |                    | 18,593 |  | 63         | % |                    |   | 13,070 |  | 70 | % |  | 72  | %  |  | 42 | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|Services                            |  |                                | 747   |                    | 84                            | % |  |                        | 894                |  | 75   | % |  |                    | 2,347  |  | 72         | % |                    |   | 2,532  |  | 66 | % |  | (16 | %) |  | (7 | %)
|Amortization  software development |  |                                | 5     |                    | 1                             | % |  |                        | 5                  |  |     |   |  |                    | 16     |  | 1          | % |                    |   | 16     |  |   |   |  |    |    |  |   |   
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|                                    |  |                                | 752   |                    | 85                            | % |  |                        | 899                |  | 75   | % |  |                    | 2,363  |  | 73         | % |                    |   | 2,548  |  | 66 | % |  | (16 | %) |  | (7 | %)
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   
|                                    |  | $                              | 8,362 |                    | 62                            | % |  | $                      | 5,333              |  | 79   | % |  | $                  | 20,956 |  | 64         | % |                    | $ | 15,618 |  | 70 | % |  | 57  | %  |  | 34 | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |            |   |                    |   |        |  |    |   |  |     |    |  |    |   



|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|------------- |  | ----------------------------- | - |  | ---------------------------- | - |  | ---------------------- | - |  | ---- | - |  | ----------- | -- |  | ---------- | --
|              |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |   |  | Year over Year% Change |  
|              |  | 2005                          |   |  | 2004                         |   |  | 2005                   |   |  | 2004 |   |  | ThreeMonths |    |  | NineMonths |   
|Gross margin: |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|Products      |  | 40                            | % |  | 20                           | % |  | 37                     | % |  | 30   | % |  | 100         | %  |  | 23         | % 
|Services      |  | 15                            | % |  | 25                           | % |  | 27                     | % |  | 34   | % |  | (40         | %) |  | (21        | %)
|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|              |  | 38                            | % |  | 21                           | % |  | 36                     | % |  | 30   | % |  | 81          | %  |  | 20         | % 
|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   



Cost of revenue as a
percentage of revenue for the three months ended October 31, 2005 decreased 17 percentage points to 62 percent compared to the third quarter of fiscal 2005. Excluding amortization of software development costs, cost of revenue as a
percentage of revenue decreased 14 percentage points to 58 percent. For the nine months ended October 31, 2005, cost of revenue as a percentage of revenue decreased by 6 percentage points to 64 percent compared to the
corresponding period of the prior fiscal year. Excluding amortization of software development costs, cost of revenue as a percentage of revenue decreased 3 percentage points to 60 percent. Cost of revenue as a percentage of revenue
decreased due to increased product sales across all three businesses and the resulting increased absorption of fixed manufacturing costs. Additionally, the increase in WTS product sales, which typically have a higher gross margin in comparison to
our other businesses, contributed to the decrease in cost of revenue as a percentage of revenue for the three and nine months ended October 31, 2005 compared to the corresponding periods of the prior fiscal year.



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##### Table of Contents

Operating Costs and Expenses

(in thousands except percentages)



|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |            |   |             |   |        |  |    |   |  |     |    |  |     |   
|-------------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ------ |  | ---------- | - | ----------- | - | ------ |  | -- | - |  | --- | -- |  | --- | --
|                                       |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                       |  | 2005                           |       |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |        |  | NineMonths |  
|                                       |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |        |  |            |   | % ofRevenue |   |        |  |    |   |  |    
|Operating expenses:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |            |   |             |   |        |  |    |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                              | 1,258 |             | 9                             | % |  | $                      | 1,394       |  | 21   | % |  | $           | 3,301  |  | 10         | % |             | $ | 3,864  |  | 17 | % |  | (10 | %) |  | (15 | %)
|Allocated corporate overhead           |  |                                | 1,381 |             | 10                            | % |  |                        | 594         |  | 9    | % |  |             | 3,496  |  | 11         | % |             |   | 2,750  |  | 12 | % |  | 132 | %  |  | 27  | % 
|Gross engineering and support expenses |  |                                | 2,005 |             | 15                            | % |  |                        | 1,849       |  | 27   | % |  |             | 5,621  |  | 17         | % |             |   | 5,605  |  | 25 | % |  | 8   | %  |  |    |   
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |            |   |             |   |        |  |    |   |  |     |    |  |     |   
|                                       |  | $                              | 4,644 |             | 34                            | % |  | $                      | 3,837       |  | 57   | % |  | $           | 12,418 |  | 38         | % |             | $ | 12,219 |  | 54 | % |  | 21  | %  |  | 2   | % 
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |            |   |             |   |        |  |    |   |  |     |    |  |     |   



Selling, general, and
administrative expenses for the three months ended October 31, 2005 decreased $0.1 million, or 10 percent, compared to the corresponding period of the prior fiscal year. This decrease is primarily due to the recovery of a bad debt
expense, totaling $0.1 million, during the third quarter of fiscal 2006. For the nine months ended October 31, 2005, selling, general, and administrative expenses decreased $0.6 million, or 15 percent, compared to the
corresponding period of the prior fiscal year. As discussed below, selling, general, and administrative expenses for the nine months ended October 31, 2004 include a $0.4 million charge incurred to settle a dispute with a significant WTS
customer based in Latin America. This charge was recorded during the first quarter of fiscal 2005 and no such charge was incurred during the three and nine months ended October 31, 2005. Excluding this charge, selling, general, and
administrative expenses for the three and nine months ended October 31, 2005 remained flat in dollar terms compared to the corresponding periods of the prior fiscal year.



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 products. For the three months ended October 31, 2005, engineering and support expenses increased approximately $0.2 million, or 8 percent, compared to the corresponding period of the prior fiscal year. This
increase is attributable to incentive compensation accrued during the third quarter of fiscal 2006. Gross engineering and support expenses for the nine months ended October 31, 2005 was flat in comparison to the corresponding period of the
prior fiscal year.



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. For the three and nine months ended October 31, 2005, allocated corporate overhead
increased approximately $0.8 million compared to the corresponding periods of the prior fiscal year. The increase in allocated corporate overhead expenses for both periods was driven by increased professional fees for accounting and
Sarbanes-Oxley compliance, as well as incentive compensation accrued during the third quarter of fiscal 2006.



Other Income, Net



Other income, net, consists primarily of interest income earned on invested cash balances. Other income, net, totaled $76,000 and $196,000 for the three and nine months ended October 31, 2005, and $57,000 and $135,000



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##### Table of Contents

for the three and nine months ended October 31, 2004. The increase in other income for the three and nine month periods is primarily caused by increased
interest rates earned on 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 the current fiscal year, 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 prior years losses, as well as cumulative losses for the nine months ended
October 31, 2005, the adjusted net deferred tax assets remained fully reserved as of October 31, 2005.



Wireless Test Solutions (WTS)



Revenue

(in thousands except percentages)



|                        |  |                               |       |      |                              |       |      |                        |      |        |  |             |        |   |            |     |    |  |     |   
|----------------------- |  | ----------------------------- | ----- | ---- | ---------------------------- | ----- | ---- | ---------------------- | ---- | ------ |  | ----------- | ------ | - | ---------- | --- | -- |  | --- | --
|                        |  | Three Months EndedOctober 31, |       |      | Nine Months EndedOctober 31, |       |      | Year over Year% Change |     
|                        |  | 2005                          |       | 2004 |                              |       | 2005 |                        | 2004 |        |  | ThreeMonths |        |   | NineMonths |    
|Revenue:                |  |                               |       |      |                              |       |      |                        |      |        |  |             |        |   |            |     |    |  |     |   
|Products                |  | $                             | 7,523 |      | $                            | 4,132 |      |                        | $    | 17,105 |  | $           | 12,779 |   |            | 82  | %  |  | 34  | % 
|Services                |  |                               | 20    |      |                              | 61    |      |                        |      | 47     |  |             | 273    |   |            | (67 | %) |  | (83 | %)
|                        |  |                               |       |      |                              |       |      |                        |      |        |  |             |        |   |            |     |    |  |     |   
|                        |  | $                             | 7,543 |      | $                            | 4,193 |      |                        | $    | 17,152 |  | $           | 13,052 |   |            | 80  | %  |  | 31  | % 
|                        |  |                               |       |      |                              |       |      |                        |      |        |  |             |        |   |            |     |    |  |     |   
|Operating income (loss) |  | $                             | 802   |      | $                            | (626  | )    |                        | $    | 673    |  | $           | (2,405 | ) |            |     |    |  |     |   
|                        |  |                               |       |      |                              |       |      |                        |      |        |  |             |        |   |            |     |    |  |     |   



Revenue by Region

(in thousands except percentages)



|               |  |                               |       |                              |   |                        |  |      |        |             |   |        |            |       |    |  |     |   
|-------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ------ | ----------- | - | ------ | ---------- | ----- | -- |  | --- | --
|               |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|               |  | 2005                          |       | 2004                         |   | 2005                   |  | 2004 |        | ThreeMonths |   |        | NineMonths |      
|Revenue:       |  |                               |       |                              |   |                        |  |      |        |             |   |        |            |       |    |  |     |   
|Americas:      |  |                               |       |                              |   |                        |  |      |        |             |   |        |            |       |    |  |     |   
|North America  |  | $                             | 5,733 |                              | $ | 520                    |  | $    | 8,338  |             | $ | 2,670  |            | 1,003 | %  |  | 212 | % 
|Others         |  |                               | 436   |                              |   | 1,353                  |  |      | 2,435  |             |   | 4,111  |            | (68   | %) |  | (41 | %)
|Europe         |  |                               | 1,308 |                              |   | 2,320                  |  |      | 6,229  |             |   | 6,271  |            | (44   | %) |  | (1  | %)
|Asia  Pacific |  |                               | 66    |                              |   |                       |  |      | 150    |             |   |       |            |      |    |  |    |   
|               |  |                               |       |                              |   |                        |  |      |        |             |   |        |            |       |    |  |     |   
|               |  | $                             | 7,543 |                              | $ | 4,193                  |  | $    | 17,152 |             | $ | 13,052 |            | 80    | %  |  | 31  | % 
|               |  |                               |       |                              |   |                        |  |      |        |             |   |        |            |       |    |  |     |   



WTS revenue for the
three and nine months ended October 31, 2005 increased by $3.4 million and $4.1 million, or 80 percent and 31 percent, respectively, compared to corresponding periods of fiscal 2005. During the third quarter of fiscal 2006,
we continued to deliver on a significant contract from Verizon. Verizon is currently converting its nationwide wireless network to the CDMA EvDO standard, which is considered to be the U.S. equivalent of 3G. Our Seven.Five voice and data test
systems are being utilized to ensure the quality of Verizons network. Revenue attributable to this contract for the three and nine months ended October 31, 2005, totaled approximately $5.0 million and $7.4 million, respectively.
We expect to deliver on the balance of this contract during the fourth quarter of fiscal 2006, and to record related revenue totaling approximately $0.2 million.



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##### Table of Contents

Our European region is served by our reseller SwissQual. For the three and nine months ended
October 31, 2005, revenue derived from SwissQual totaled approximately $1.0 million and $6.1 million, respectively.



Cost of Revenue

(in thousands except percentages)



|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   
|----------------------------------- |  | ------------------------------ | ----- | ------------------ | ----------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | ---------- | - | ------------------ | - | ----- |  | -- | - |  | -- | - |  | --- | --
|                                    |  | Three Months Ended October 31, |       |                    | Nine Months Ended October 31, |   |  | Year over Year% Change |                   
|                                    |  | 2005                           |       |                    | 2004                          |   |  | 2005                   |                    |  | 2004 |   |  | ThreeMonths        |       |  | NineMonths |  
|                                    |  |                                |       | % ofRelatedRevenue |                               |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |            |   | % ofRelatedRevenue |   |       |  |    |   |  |   
|Cost of revenue:                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   
|Products                            |  | $                              | 3,438 |                    | 46                            | % |  | $                      | 1,838              |  | 44   | % |  | $                  | 7,577 |  | 44         | % |                    | $ | 5,918 |  | 46 | % |  | 87 | % |  | 28  | % 
|Amortization  software development |  |                                | 493   |                    | 6                             | % |  |                        | 482                |  | 12   | % |  |                    | 1,458 |  | 9          | % |                    |   | 1,488 |  | 12 | % |  | 2  | % |  | (2  | %)
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   
|                                    |  |                                | 3,931 |                    | 52                            | % |  |                        | 2,320              |  | 56   | % |  |                    | 9,035 |  | 53         | % |                    |   | 7,406 |  | 58 | % |  | 69 | % |  | 22  | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   
|Services                            |  |                                | 19    |                    | 95                            | % |  |                        | 14                 |  | 23   | % |  |                    | 55    |  | 117        | % |                    |   | 14    |  | 5  | % |  | 36 | % |  | 293 | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   
|                                    |  | $                              | 3,950 |                    | 52                            | % |  | $                      | 2,334              |  | 56   | % |  | $                  | 9,090 |  | 53         | % |                    | $ | 7,420 |  | 57 | % |  | 69 | % |  | 23  | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |    |   |  |     |   



|              |  |                               |   |  |                              |   |  |                        |    |  |      |   |  |             |    |  |            |   
|------------- |  | ----------------------------- | - |  | ---------------------------- | - |  | ---------------------- | -- |  | ---- | - |  | ----------- | -- |  | ---------- | --
|              |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |   |  | Year over Year% Change |   
|              |  | 2005                          |   |  | 2004                         |   |  | 2005                   |    |  | 2004 |   |  | ThreeMonths |    |  | NineMonths |   
|Gross margin: |  |                               |   |  |                              |   |  |                        |    |  |      |   |  |             |    |  |            |   
|Products      |  | 48                            | % |  | 44                           | % |  | 47                     | %  |  | 42   | % |  | 9           | %  |  | 12         | % 
|Services      |  | 5                             | % |  | 77                           | % |  | (17                    | %) |  | 95   | % |  | (94         | %) |  | (118       | %)
|              |  |                               |   |  |                              |   |  |                        |    |  |      |   |  |             |    |  |            |   
|              |  | 48                            | % |  | 44                           | % |  | 47                     | %  |  | 43   | % |  | 9           | %  |  | 9          | % 
|              |  |                               |   |  |                              |   |  |                        |    |  |      |   |  |             |    |  |            |   



WTS cost of revenue as
a percentage of revenue for the three and nine months ended October 31, 2005 decreased 4 percentage points compared to the corresponding periods of the prior fiscal year. Excluding amortization of software development costs, cost of
revenue as a percentage of revenue for the three and nine months ended October 31, 2005 increased 2 percentage points and decreased 1 percentage point, respectively, compared to the corresponding periods of fiscal 2005. The increase
of WTS cost of revenue as a percentage of revenue for the third quarter of fiscal 2006 was due to costs incurred to expedite the delivery and installation and commissioning of the Verizon Seven.Five voice and data systems, partially offset by
improved absorption of fixed manufacturing costs driven by increased revenue generated by all three businesses.



Amortization of previously capitalized software development costs for the three and nine months ended October 31, 2005 totaled $0.5 million and
$1.5 million, respectively. Amortization is currently expected to total approximately $2.0 million, $1.4 million, and $0.2 million for fiscal 2006, 2007, and 2008, respectively.



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##### Table of Contents

Operating Costs and Expenses

(in thousands except percentages)



|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |     |   
|-------------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | ---------- | - | ----------- | - | ----- |  | -- | - |  | --- | -- |  | --- | --
|                                       |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                       |  | 2005                           |       |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |       |  | NineMonths |  
|                                       |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |            |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                              | 812   |             | 11                            | % |  | $                      | 933         |  | 22   | % |  | $           | 2,120 |  | 12         | % |             | $ | 2,746 |  | 21 | % |  | (13 | %) |  | (23 | %)
|Allocated corporate overhead           |  |                                | 709   |             | 9                             | % |  |                        | 297         |  | 7    | % |  |             | 1,727 |  | 10         | % |             |   | 1,527 |  | 12 | % |  | 139 | %  |  | 13  | % 
|Gross engineering and support expenses |  |                                | 1,270 |             | 17                            | % |  |                        | 1,255       |  | 30   | % |  |             | 3,542 |  | 21         | % |             |   | 3,764 |  | 29 | % |  | 1   | %  |  | (6  | %)
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                       |  | $                              | 2,791 |             | 37                            | % |  | $                      | 2,485       |  | 59   | % |  | $           | 7,389 |  | 43         | % |             | $ | 8,037 |  | 62 | % |  | 12  | %  |  | (8  | %)
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |     |   



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 for the three months ended October 31, 2005 decreased $0.1 million compared to the third quarter of fiscal 2005, primarily due to
the recovery of a bad debt expense, totaling $0.1 million, in the third quarter of fiscal 2006. For the nine months ended October 31, 2005 selling, general, and administrative expenses decreased approximately $0.6 million, or
23 percent, compared to the corresponding period of the prior fiscal year. Selling, general, and administrative expenses for the nine months ended October 31, 2004 included a $0.4 million charge recognized in settlement of a dispute
with a significant customer based in Latin America. No such charge was incurred during the first nine months of fiscal 2006. Excluding this charge, selling, general, and administrative expenses for the nine months ended October 31, 2005 were
comparable to the corresponding period of the prior fiscal year.



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 for the three months ended October 31, 2005 were comparable to the corresponding period of the prior fiscal year. Gross engineering and support expenses for the nine months ended
October 31, 2005 decreased approximately $0.2 million, or 6 percent, compared to the corresponding period of the prior fiscal year primarily due to reduced travel and related costs incurred by our support personnel during the first
nine months 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 during the first nine months of fiscal 2006. Currently, we do not expect to capitalize software
development costs during fiscal 2006.



26



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##### Table of Contents

Emergency Call Box Systems Revenue

(in thousands except percentages)



|                 |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |    |  |     |   
|---------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | ---------- | --- | -- |  | --- | --
|                 |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|                 |  | 2005                          |       | 2004                         |   | 2005                   |  | 2004 |       | ThreeMonths |   |       | NineMonths |    
|Revenue:         |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |    |  |     |   
|Products         |  | $                             | 1,084 |                              | $ | 330                    |  | $    | 4,707 |             | $ | 1,464 |            | 229 | %  |  | 221 | % 
|Services         |  |                               | 867   |                              |   | 1,138                  |  |      | 3,194 |             |   | 3,582 |            | (24 | %) |  | (11 | %)
|                 |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |    |  |     |   
|                 |  | $                             | 1,951 |                              | $ | 1,468                  |  | $    | 7,901 |             | $ | 5,046 |            | 33  | %  |  | 57  | % 
|                 |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |    |  |     |   
|Operating income |  | $                             | 208   |                              | $ | 200                    |  | $    | 1,605 |             | $ | 562   |            |     |    |  |     |   
|                 |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |    |  |     |   



Revenue by Region

(in thousands except percentages)



|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |    |   |  |    |  
|-------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | ---------- | -- | - |  | -- | -
|               |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|               |  | 2005                          |       | 2004                         |   | 2005                   |  | 2004 |       | ThreeMonths |   |       | NineMonths |   
|Revenue:       |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |    |   |  |    |  
|Americas:      |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |    |   |  |    |  
|North America  |  | $                             | 1,951 |                              | $ | 1,468                  |  | $    | 7,901 |             | $ | 5,046 |            | 33 | % |  | 57 | %
|Others         |  |                               |      |                              |   |                       |  |      |      |             |   |      |            |   |   |  |   |  
|Europe         |  |                               |      |                              |   |                       |  |      |      |             |   |      |            |   |   |  |   |  
|Asia  Pacific |  |                               |      |                              |   |                       |  |      |      |             |   |      |            |   |   |  |   |  
|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |    |   |  |    |  
|               |  | $                             | 1,951 |                              | $ | 1,468                  |  | $    | 7,901 |             | $ | 5,046 |            | 33 | % |  | 57 | %
|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |    |   |  |    |  



Call box revenue for
the three and nine months ended October 31, 2005 increased by $0.5 million and $2.9 million, or 33 percent and 57 percent, respectively, compared to corresponding periods of fiscal 2005. During the third quarter of fiscal
2006, our call box business continued to perform under contracts to install digital upgrades to the existing call box system owned by the San Bernardino SAFE. For the three and nine months ended October 31, 2005, we recorded revenue totaling
$0.7 million and $2.1 million, respectively, related to this contract. No such contract work was ongoing during the corresponding periods of the prior fiscal year. Additionally, during the second quarter of fiscal 2006 we sold call boxes
to various subcontractors for installations being completed by the State of Hawaii totaling $1.1 million. Again, no such contract work was ongoing during the nine months ended October 31, 2004.



During the third quarter of fiscal 2006 and subsequent to the expiration of
the maintenance contract, we continued to provide call box maintenance services to a long-term customer. Accordingly, we deferred approximately $0.2 million of related revenue during the third quarter of fiscal 2006. We expect to receive an
executed maintenance contract and record the deferred amounts during the fourth quarter of fiscal 2006.



During the third quarter of fiscal 2006, we were awarded contracts by Monterey and San Benito Counties, totaling approximately $0.4 million. These
contracts are to upgrade the installed base of call boxes to digital and to add TTY devices. We currently expect to commence work on these contracts during the fourth quarter of fiscal 2006 and substantially complete the required work during the
first quarter of fiscal 2007.



Additionally, late in the third
quarter of fiscal 2006, we commenced work on a contract awarded by the San Diego SAFE to upgrade and retrofit approximately 1,400 call boxes with digital and TTY technologies and improve accessibility for persons with mobility limitations. This
contract is valued at approximately $3.7 million and we expect to substantially complete the required work by the third quarter of fiscal 2007.



27



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##### Table of Contents

Cost of Revenue

(in thousands except percentages)



|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   
|----------------------------------- |  | ------------------------------ | ----- | ------------------ | ----------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | ---------- | - | ------------------ | - | ----- |  | -- | - |  | --- | -- |  | --- | --
|                                    |  | Three Months Ended October 31, |       |                    | Nine Months Ended October 31, |   |  | Year over Year% Change |                   
|                                    |  | 2005                           |       |                    | 2004                          |   |  | 2005                   |                    |  | 2004 |   |  | ThreeMonths        |       |  | NineMonths |  
|                                    |  |                                |       | % ofRelatedRevenue |                               |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |            |   | % ofRelatedRevenue |   |       |  |    |   |  |    
|Cost of revenue:                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Products                            |  | $                              | 492   |                    | 45                            | % |  | $                      | 93                 |  | 28   | % |  | $                  | 2,524 |  | 54         | % |                    | $ | 773   |  | 53 | % |  | 429 | %  |  | 227 | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Services                            |  |                                | 728   |                    | 84                            | % |  |                        | 880                |  | 77   | % |  |                    | 2,292 |  | 72         | % |                    |   | 2,518 |  | 70 | % |  | (17 | %) |  | (9  | %)
|Amortization  software development |  |                                | 5     |                    | 1                             | % |  |                        | 5                  |  |     |   |  |                    | 16    |  |           |   |                    |   | 16    |  |   |   |  |    |    |  |    |   
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  |                                | 733   |                    | 85                            | % |  |                        | 885                |  | 78   | % |  |                    | 2,308 |  | 72         | % |                    |   | 2,534 |  | 71 | % |  | (17 | %) |  | (9  | %)
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  | $                              | 1,225 |                    | 63                            | % |  | $                      | 978                |  | 67   | % |  | $                  | 4,832 |  | 61         | % |                    | $ | 3,307 |  | 66 | % |  | 25  | %  |  | 46  | % 
|                                    |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |            |   |                    |   |       |  |    |   |  |     |    |  |     |   



|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|------------- |  | ----------------------------- | - |  | ---------------------------- | - |  | ---------------------- | - |  | ---- | - |  | ----------- | -- |  | ---------- | --
|              |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |   |  | Year over Year% Change |  
|              |  | 2005                          |   |  | 2004                         |   |  | 2005                   |   |  | 2004 |   |  | ThreeMonths |    |  | NineMonths |   
|Gross margin: |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|Products      |  | 55                            | % |  | 72                           | % |  | 46                     | % |  | 47   | % |  | (24         | %) |  | (2         | %)
|Services      |  | 15                            | % |  | 22                           | % |  | 28                     | % |  | 29   | % |  | (32         | %) |  | (3         | %)
|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   
|              |  | 37                            | % |  | 33                           | % |  | 39                     | % |  | 34   | % |  | 12          | %  |  | 15         | % 
|              |  |                               |   |  |                              |   |  |                        |   |  |      |   |  |             |    |  |            |   



Call box cost of
revenue as a percentage of revenue for the three and nine months ended October 31, 2005 decreased 4 percentage points and 5 percentage points, respectively, compared to the corresponding periods of the prior fiscal year. Due to the
previously discussed deferral of approximately $0.2 million of service revenue during the third quarter of fiscal 2006, cost of services revenue as a percentage of services revenue increased by 7 percentage points compared to the
corresponding period of fiscal 2005. Excluding the impact of the revenue deferral, cost of services revenue as a percentage of services revenue decreased 5 percentage points compared to the corresponding period of fiscal 2005. The decrease in
cost of services revenue for the three and nine months ended October 31, 2005 is attributable to improved absorption of fixed manufacturing costs driven by increased revenue generated by all three businesses.



Operating Costs and Expenses

(in thousands except percentages)



|                                       |  |                                |     |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |   |  |    |   
|-------------------------------------- |  | ------------------------------ | --- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | ---------- | - | ----------- | - | ----- |  | -- | - |  | --- | - |  | -- | --
|                                       |  | Three Months Ended October 31, |     |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                       |  | 2005                           |     |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |       |  | NineMonths |  
|                                       |  |                                |     | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |            |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                                |     |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |   |  |    |   
|SG&A expenses                          |  | $                              | 148 |             | 8                             | % |  | $                      | 84          |  | 6    | % |  | $           | 307   |  | 4          | % |             | $ | 313   |  | 6  | % |  | 76  | % |  | (2 | %)
|Allocated corporate overhead           |  |                                | 189 |             | 10                            | % |  |                        | 71          |  | 5    | % |  |             | 659   |  | 8          | % |             |   | 443   |  | 9  | % |  | 166 | % |  | 49 | % 
|Gross engineering and support expenses |  |                                | 181 |             | 9                             | % |  |                        | 135         |  | 9    | % |  |             | 498   |  | 6          | % |             |   | 421   |  | 8  | % |  | 34  | % |  | 18 | % 
|                                       |  |                                |     |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |   |  |    |   
|                                       |  | $                              | 518 |             | 27                            | % |  | $                      | 290         |  | 20   | % |  | $           | 1,464 |  | 18         | % |             | $ | 1,177 |  | 23 | % |  | 79  | % |  | 24 | % 
|                                       |  |                                |     |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |   |  |    |   



28



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##### Table of Contents

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



Mobile
Power Products (ChargeSource)



Revenue

(in thousands except percentages)



|               |  |                               |       |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |   |  |    |  
|-------------- |  | ----------------------------- | ----- | - | ---------------------------- | - | ------ | ---------------------- |  | - | ------ | - |  | ----------- | ------ | - | ---------- | --- | - |  | -- | -
|               |  | Three Months EndedOctober 31, |       |   | Nine Months EndedOctober 31, |   |        | Year over Year% Change | 
|               |  | 2005                          |       |   | 2004                         |   |        | 2005                   |  |   | 2004   |   |  | ThreeMonths |        |   | NineMonths |    
|Revenue:       |  |                               |       |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |   |  |    |  
|Products       |  | $                             | 4,080 |   |                              | $ | 1,054  |                        |  | $ | 7,617  |   |  | $           | 4,343  |   |            | 287 | % |  | 75 | %
|Services       |  |                               |      |   |                              |   |       |                        |  |   |       |   |  |             |       |   |            |    |   |  |   |  
|               |  |                               |       |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |   |  |    |  
|               |  | $                             | 4,080 |   |                              | $ | 1,054  |                        |  | $ | 7,617  |   |  | $           | 4,343  |   |            | 287 | % |  | 75 | %
|               |  |                               |       |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |   |  |    |  
|Operating loss |  | $                             | (442  | ) |                              | $ | (2,029 | )                      |  | $ | (2,982 | ) |  | $           | (3,553 | ) |            |     |   |  |    |  
|               |  |                               |       |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |   |  |    |  



Revenue by Region

(in thousands except percentages)



|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |   |  |     |   
|-------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | ---------- | --- | - |  | --- | --
|               |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|               |  | 2005                          |       | 2004                         |   | 2005                   |  | 2004 |       | ThreeMonths |   |       | NineMonths |    
|Revenue:       |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |   |  |     |   
|Americas:      |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |   |  |     |   
|North America  |  | $                             | 2,406 |                              | $ | 1,054                  |  | $    | 5,945 |             | $ | 3,689 |            | 128 | % |  | 61  | % 
|Others         |  |                               |      |                              |   |                       |  |      |      |             |   |      |            |    |   |  |    |   
|Europe         |  |                               | 1,634 |                              |   |                       |  |      | 1,634 |             |   | 308   |            |    |   |  | 431 | % 
|Asia  Pacific |  |                               | 40    |                              |   |                       |  |      | 38    |             |   | 346   |            |    |   |  | (89 | %)
|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |   |  |     |   
|               |  | $                             | 4,080 |                              | $ | 1,054                  |  | $    | 7,617 |             | $ | 4,343 |            | 287 | % |  | 75  | % 
|               |  |                               |       |                              |   |                        |  |      |       |             |   |       |            |     |   |  |     |   



Revenue by Customer

(in thousands except percentages)



|           |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |      |    |  |      |   
|---------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | ---------- | - | ----------- | - | ----- |  | --- | - |  | ---- | -- |  | ---- | --
|           |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|           |  | 2005                           |       |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |       |  | NineMonths |  
|           |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |            |   | % ofRevenue |   |       |  |     |   |  |     
|Revenue:   |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |      |    |  |      |   
|Kensington |  | $                              | 3,821 |             | 94                            | % |  | $                      |            |  |     |   |  | $           | 7,292 |  | 96         | % |             | $ |      |  |    |   |  |     |    |  |     |   
|Belkin     |  |                                |      |             |                              |   |  |                        | 8           |  | 1    | % |  |             |      |  |           |   |             |   | 641   |  | 15  | % |  | (100 | %) |  | (100 | %)
|Targus     |  |                                |      |             |                              |   |  |                        | 977         |  | 93   | % |  |             |      |  |           |   |             |   | 3,634 |  | 84  | % |  | (100 | %) |  | (100 | %)
|Other      |  |                                | 259   |             | 6                             | % |  |                        | 69          |  | 6    | % |  |             | 325   |  | 4          | % |             |   | 68    |  | 1   | % |  | 275  | %  |  | 378  | % 
|           |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |      |    |  |      |   
|           |  | $                              | 4,080 |             | 100                           | % |  | $                      | 1,054       |  | 100  | % |  | $           | 7,617 |  | 100        | % |             | $ | 4,343 |  | 100 | % |  | 287  | %  |  | 75   | % 
|           |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |      |    |  |      |   



ChargeSource revenue
for the three and nine months ended October 31, 2005 increased by $3.0 million and $3.3 million, or 287 percent and 75 percent, respectively, compared to corresponding periods of fiscal 2005. Revenue for the three and nine
month periods ending October 31, 2004 primarily consisted of shipments of legacy products to our former distribution partners in satisfaction of our contractual obligations. During the prior fiscal year, we transitioned the distribution of our
ChargeSource products to Kensington. Currently, Kensington continues to penetrate the retail channels and is shipping or will be shipping into approximately 4,800 outlets, which include CompUSA, Circuit City, Staples, Office Max, Good Guys, and
others.



29



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##### Table of Contents

On a sequential basis, revenue for the third quarter of fiscal 2006 increased by $2.4 million, or
139 percent, compared to the second quarter of fiscal 2006. Contributing to our sequential revenue increase and during the third quarter of fiscal 2006, we began shipping our ChargeSource products in support of Kensingtons Power-It-All
centers, which showcases the full line of ChargeSource products in Circuit City stores nationwide. The Power-It-All centers are store-within-a-store merchandising kiosks that direct consumers to the combination of power adaptor and
universal SmartTips that provide reliable and convenient power for all their mobile electronic devices. We currently expect other retailers, both domestically and in Europe, to rollout the Power-It-All merchandising concept in future quarters.



Cost of Revenue

(in thousands except percentages)



|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |    |   |  |    |  
|----------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | ---------- | - | ----------- | - | ----- |  | --- | - |  | -- | - |  | -- | -
|                                    |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                    |  | 2005                           |       |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |       |  | NineMonths |  
|                                    |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |            |   | % ofRevenue |   |       |  |     |   |  |   
|Cost of revenue:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |    |   |  |    |  
|Products                            |  | $                              | 3,187 |             | 78                            | % |  | $                      | 2,021       |  | 192  | % |  | $           | 7,034 |  | 92         | % |             | $ | 4,891 |  | 113 | % |  | 58 | % |  | 44 | %
|Amortization  software development |  |                                |      |             |                              |   |  |                        |            |  |     |   |  |             |      |  |           |   |             |   |      |  |    |   |  |   |   |  |   |  
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |    |   |  |    |  
|                                    |  |                                | 3,187 |             | 78                            | % |  | $                      | 2,021       |  | 192  | % |  | $           | 7,034 |  | 92         | % |             | $ | 4,891 |  | 113 | % |  | 58 | % |  | 44 | %
|Services                            |  |                                |      |             |                              |   |  |                        |            |  |     |   |  |             |      |  |           |   |             |   |      |  |    |   |  |   |   |  |   |  
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |    |   |  |    |  
|                                    |  | $                              | 3,187 |             | 78                            | % |  | $                      | 2,021       |  | 192  | % |  | $           | 7,034 |  | 92         | % |             | $ | 4,891 |  | 113 | % |  | 58 | % |  | 44 | %
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |     |   |  |    |   |  |    |  



|              |  |                               |   |  |                              |    |  |                        |   |  |      |    |  |             |   |  |            |  
|------------- |  | ----------------------------- | - |  | ---------------------------- | -- |  | ---------------------- | - |  | ---- | -- |  | ----------- | - |  | ---------- | -
|              |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |    |  | Year over Year% Change |  
|              |  | 2005                          |   |  | 2004                         |    |  | 2005                   |   |  | 2004 |    |  | ThreeMonths |   |  | NineMonths |  
|Gross margin: |  |                               |   |  |                              |    |  |                        |   |  |      |    |  |             |   |  |            |  
|Products      |  | 22                            | % |  | (92                          | %) |  | 8                      | % |  | (13  | %) |  | 124         | % |  | 161        | %
|Services      |  |                              |   |  |                             |    |  |                       |   |  |     |    |  |            |   |  |           |  
|              |  |                               |   |  |                              |    |  |                        |   |  |      |    |  |             |   |  |            |  
|              |  | 22                            | % |  | (92                          | %) |  | 8                      | % |  | (13  | %) |  | 124         | % |  | 161        | %
|              |  |                               |   |  |                              |    |  |                        |   |  |      |    |  |             |   |  |            |  



ChargeSource cost of
revenue as a percentage of revenue for the three and nine months ended October 31, 2005 decreased significantly compared to the corresponding periods of the prior fiscal year. Cost of revenue as a percentage of revenue decreased primarily due
to increased product sales and improved absorption of fixed manufacturing costs. The decrease in cost of revenue as a percentage of revenue for the three and nine months ended October 31, 2005 was partially offset by inventory and other charges
totaling $0.2 million and $1.1 million, respectively.



The current level of ChargeSource sales is insufficient to fully absorb our fixed overheard. Our ability 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 now believe that our ChargeSource business can break even with quarterly revenue of approximately $5.0 million.



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##### Table of Contents

Operating Costs and Expenses

(in thousands except percentages)



|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |    |  
|-------------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | ---------- | - | ----------- | - | ----- |  | -- | - |  | --- | -- |  | -- | -
|                                       |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                       |  | 2005                           |       |             | 2004                          |   |  | 2005                   |             |  | 2004 |   |  | ThreeMonths |       |  | NineMonths |  
|                                       |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |            |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |    |  
|SG&A expenses                          |  | $                              | 298   |             | 7                             | % |  | $                      | 377         |  | 36   | % |  | $           | 874   |  | 11         | % |             | $ | 805   |  | 18 | % |  | (21 | %) |  | 9  | %
|Allocated corporate overhead           |  |                                | 483   |             | 12                            | % |  |                        | 226         |  | 21   | % |  |             | 1,110 |  | 15         | % |             |   | 780   |  | 18 | % |  | 114 | %  |  | 42 | %
|Gross engineering and support expenses |  |                                | 554   |             | 14                            | % |  |                        | 459         |  | 44   | % |  |             | 1,581 |  | 21         | % |             |   | 1,420 |  | 33 | % |  | 21  | %  |  | 11 | %
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |    |  
|                                       |  | $                              | 1,335 |             | 33                            | % |  | $                      | 1,062       |  | 101  | % |  | $           | 3,565 |  | 47         | % |             | $ | 3,005 |  | 69 | % |  | 26  | %  |  | 19 | %
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |            |   |             |   |       |  |    |   |  |     |    |  |    |  



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



Discontinued Operations



On January 6, 2004, Comarco sold the assets of the reporting unit EDX. This reporting unit was formerly included in the wireless test solutions
segment. Additionally, during fiscal 2001, the Company sold its defense and commercial staffing businesses, the non-wireless businesses. Net loss from discontinued operations for the three and nine months ended October 31, 2005 was $3,000 and
$45,000, respectively, and related to expenses incurred for the non-wireless businesses.



Liquidity and Capital Resources



Cash and cash equivalents increased to $14.2 million at October 31, 2005 from $12.3 million at January 31, 2005.



Cash Flows from Operating Activities



We generated cash from continuing operations of $2.7 million in the nine months ended October 31, 2005 compared to $1.3 million used in the
corresponding period of the prior fiscal year.



For the nine
months ended October 31, 2005, accounts receivable and amounts due from affiliates increased by $4.2 million, primarily driven by increased sales across our three businesses. For the corresponding period of the prior fiscal year, accounts
receivable, accounts receivable subject to litigation, and amounts due from affiliate generated cash of $5.8 million. Based on revenue for the three months ended October 31, 2005, days sales outstanding decreased to 71 days from
92 days for the corresponding period of the prior fiscal year. Sales of our WTS products into our international markets typically require us to extend credit terms of between 90 days and 120 days. For the third quarter of fiscal 2006,
a significant portion of our WTS sales were to customers based in North America, where we typically extend credit terms of between 30 and 45 days. We have continued to experience low losses from bad debts, and good collections history with
isolated exceptions. Deferred revenue, accounts payable, and accrued liabilities generated cash of $3.9 million for the nine months ended October 31, 2005 compared to cash used of $3.7 million for the corresponding period of the prior
fiscal year. Cash used for inventory was $0.8 million for the nine months ended October 31, 2005 compared to cash used of $1.5 million for the corresponding period of the prior fiscal year.



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Cash Flows from Investing Activities



Net cash used in investing activities for the nine months ended October 31, 2005 was $0.8 million compared to
$1.0 million for the corresponding period of the prior fiscal year. Investments in property and equipment were approximately $0.6 million, a decrease of $0.4 million compared to the nine months ended October 31, 2004.



We believe that our existing cash and cash equivalent balances will
provide us sufficient funds to satisfy our cash requirements for at least the next twelve months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. Certain
factors and events could negatively affect our cash flows from operations, including:



| |  |  | Due to the uncertainties associated with the spending patterns of our customers and the corresponding demand for our wireless test solutions products, we have experienced and expect
to continue to experience significant fluctuations in demand. Such fluctuations have caused and may continue to cause significant variations in revenue and operating results, and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event Kensington, the distributor of our ChargeSource products, is unable to perform under its non-cancelable commitments due to its inability to take delivery of the
products and/or pay for such products in a timely manner, we would be required to establish alternative distribution channels.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are focused on preserving our cash balances by continuously monitoring expenses, identifying cost savings, and investing only in those development
programs and products most likely to contribute to our profitability.



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##### Table of Contents

|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 October 31, 2005, we had no material accounts receivable denominated in
foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward
foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.



Interest Rate Sensitivity



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



We do not hold any derivative financial instruments.



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



Equity Price Risk



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



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



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##### Table of Contents

|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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##### Table of Contents

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 March 16, 2005, Comarco Wireless Technologies,
Inc. (CWT) filed this action for breach of contract, breach of implied duty of good faith and fair dealing, open book account, goods had and received, account stated, quantum valebant, and unjust enrichment.



In response to CWTs complaint, Targus, Inc. (Targus) filed
a demurrer and motion to strike as the amounts in dispute are owed by Targus and a foreign subsidiary, Targus Europe. In response, on May 18, 2005, CWT filed the first amended complaint and added Targus Europe as a defendant. Both Targus and
Targus Europe have answered the amended complaint. In response to the amended complaint, Targus Europe and Targus filed cross-complaints against CWT. Targus alleges that it suffered damages due to allegedly defective products. Targus Europe alleges
that it suffered damages due to the delayed delivery of products. The court-mandated case management conference was held on August 26, 2005, at which a June 2006 trial date was set. The parties are now engaged in discovery, which is expected to
continue for several months.



Targus was the exclusive
distributor of our ChargeSource products through January 2004, at which time they were removed as the exclusive distributor. Throughout fiscal 2005, we continued to honor our obligations under non-cancelable and non-returnable purchase orders placed
by Targus and its affiliates and accepted by us through the first quarter of fiscal 2005 in an attempt to affect an orderly wind-down of the relationship. During December 2004, Targus ceased making payments for product shipped under an open book
account. As of October 31, 2005, Targus and its affiliates owed us approximately $1.0 million, which is reflected in accounts receivable subject to litigation, net of a $0.3 million reserve in the consolidated balance sheet.



While we believe this action is meritorious, discovery is
ongoing and any loss of the amounts owed to us that may result from the outcome of this matter is not determinable or estimable. No significant provision has been made for losses, if any, which may result from the final outcome of this matter.



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.



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##### Table of Contents

|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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##### Table of Contents

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: December 13, 2005 |  |  |  | /s/ Thomas A. Franza                                     
|                        |  |  |  | Thomas A. Franza President and Chief Executive
Officer   
|                        |  | 
|Date: December 13, 2005 |  |  |  | /s/ Daniel R. Lutz                                       
|                        |  |  |  | Daniel R. Lutz Vice President and Chief Financial Officer



37