##### Table of Contents

---

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

APRIL 30, 2007

OR



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

For the transition period from  to

Commission file number 0-5449



---

COMARCO, INC.

(Exact name of registrant as specified in its charter)



---



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

25541 Commercentre Drive, Lake Forest, California 92630

(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  x    No ̈

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

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

The registrant had 7,326,671 shares of common stock outstanding as of
June 12, 2007.



---



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED APRIL 30, 2007

TABLE OF CONTENTS



|                               |  |                                                                                                    |  |   
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                              
|PART I  FINANCIAL INFORMATION
|                               |  |                                                                                                   
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                   |  |   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Balance Sheets as of April 30, 2007 and January 31, 2007                    |  | 3 
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2007 and 2006 |  | 4 
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2007 and 2006 |  | 5 
|                               |  |                                                                                                   
|                               |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6 
|                               |  |                                                                                                   
|ITEM 2.                        |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS              |  | 17
|                               |  |                                                                                                   
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                         |  | 30
|                               |  |                                                                                                   
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                            |  | 31
|                              
|PART II  OTHER INFORMATION   
|                               |  |                                                                                                   
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                  |  | 32
|                               |  |                                                                                                   
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                        |  | 32
|                               |  |                                                                                                   
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                    |  | 32
|                               |  |                                                                                                   
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                |  | 32
|                               |  |                                                                                                   
|ITEM 5.                        |  | OTHER INFORMATION                                                                                  |  | 32
|                               |  |                                                                                                   
|ITEM 6.                        |  | EXHIBITS                                                                                           |  | 32
|                               | 
|SIGNATURES                     |  | 33                                                                                                



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



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

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except
share amounts)



|                                                                                                                                                                        |  |               |        |                     |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------------- | - | ------
|                                                                                                                                                                        |  | April 30,2007 |        | January 31,2007 (A)
|ASSETS                                                                                                                                                                  |  |               |        |                     |   |       
|Current Assets:                                                                                                                                                         |  |               |        |                     |   |       
|Cash and cash equivalents                                                                                                                                               |  | $             | 21,998 |                     | $ | 26,360
|Short-term investments                                                                                                                                                  |  |               | 700    |                     |   | 897   
|Accounts receivable, net of reserves of $143 and $111                                                                                                                   |  |               | 4,002  |                     |   | 10,942
|Inventory, net of reserves of $668 and $600                                                                                                                             |  |               | 5,109  |                     |   | 5,452 
|Other current assets                                                                                                                                                    |  |               | 364    |                     |   | 427   
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total current assets                                                                                                                                                    |  |               | 32,173 |                     |   | 44,078
|Property and equipment, net                                                                                                                                             |  |               | 2,915  |                     |   | 3,331 
|Software development costs, net                                                                                                                                         |  |               | 104    |                     |   | 243   
|Acquired intangible assets, net                                                                                                                                         |  |               | 731    |                     |   | 820   
|Goodwill                                                                                                                                                                |  |               | 2,394  |                     |   | 2,394 
|Restricted cash                                                                                                                                                         |  |               | 500    |                     |   | 500   
|Other assets                                                                                                                                                            |  |               | 47     |                     |   | 47    
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total assets                                                                                                                                                            |  | $             | 38,864 |                     | $ | 51,413
|                                                                                                                                                                        |  |               |        |                     |   |       
|                                                                                                                                                                        |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |               |        |                     |   |       
|Current Liabilities:                                                                                                                                                    |  |               |        |                     |   |       
|Accounts payable                                                                                                                                                        |  | $             | 518    |                     | $ | 718   
|Deferred revenue                                                                                                                                                        |  |               | 2,165  |                     |   | 2,586 
|Deferred compensation                                                                                                                                                   |  |               | 700    |                     |   | 897   
|Accrued liabilities                                                                                                                                                     |  |               | 3,424  |                     |   | 6,259 
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total current liabilities                                                                                                                                               |  |               | 6,807  |                     |   | 10,460
|Deferred income taxes                                                                                                                                                   |  |               | 59     |                     |   | 59    
|Tax liability: FIN 48                                                                                                                                                   |  |               | 86     |                     |   |      
|Deferred rent                                                                                                                                                           |  |               | 720    |                     |   | 767   
|Deferred revenue                                                                                                                                                        |  |               | 2,169  |                     |   | 2,138 
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total liabilities                                                                                                                                                       |  |               | 9,841  |                     |   | 13,424
|                                                                                                                                                                        |  |               |        |                     |   |       
|Commitments and Contingencies                                                                                                                                           |  |               |        |                     |   |       
|                                                                                                                                                                        |  |              
|Stockholders Equity:                                                                                                                                                   |  |               |        |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at April 30, 2007 and January 31, 2007,
respectively                       |  |               |       |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized; 7,371,338 and 7,371,637 shares issued and outstanding at April 30, 2007 and
January 31, 2007, respectively |  |               | 737    |                     |   | 737   
|Additional paid-in capital                                                                                                                                              |  |               | 6,898  |                     |   | 14,163
|Retained earnings                                                                                                                                                       |  |               | 21,388 |                     |   | 23,089
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total stockholders equity                                                                                                                                              |  |               | 29,023 |                     |   | 37,989
|                                                                                                                                                                        |  |               |        |                     |   |       
|Total liabilities and stockholders equity                                                                                                                              |  | $             | 38,864 |                     | $ | 51,413
|                                                                                                                                                                        |  |               |        |                     |   |       

---

|(A) | Derived from the audited
consolidated financial statements as of January 31, 2007.
|--- | ----------------------------------------------------------------------------------

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



3



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedApril 30, |       
|                                                    |  | 2007                        |        |   | 2006 |  
|Revenue                                             |  | $                           | 5,415  |   |      | $ | 10,555 |  
|Cost of revenue                                     |  |                             | 3,236  |   |      |   | 7,024  |  
|                                                    |  |                             |        |   |      |   |        |  
|Gross profit                                        |  |                             | 2,179  |   |      |   | 3,531  |  
|                                                    |  |                            
|Selling, general, and administrative expenses       |  |                             | 2,406  |   |      |   | 2,517  |  
|Engineering and support expenses                    |  |                             | 1,951  |   |      |   | 1,879  |  
|                                                    |  |                             |        |   |      |   |        |  
|Operating loss                                      |  |                             | (2,178 | ) |      |   | (865   | )
|Other income, net                                   |  |                             | 274    |   |      |   | 229    |  
|Gain on sale of equipment, net                      |  |                             | 321    |   |      |   |       |  
|Gain on sale of investment in SwissQual, net        |  |                             |       |   |      |   | 61     |  
|                                                    |  |                             |        |   |      |   |        |  
|Loss from continuing operations before income taxes |  |                             | (1,583 | ) |      |   | (575   | )
|Income tax expense                                  |  |                             | 32     |   |      |   |       |  
|                                                    |  |                             |        |   |      |   |        |  
|Net loss                                            |  | $                           | (1,615 | ) |      | $ | (575   | )
|                                                    |  |                             |        |   |      |   |        |  
|Basic and diluted loss per share:                   |  |                             |        |   |      |   |        |  
|Net loss                                            |  | $                           | (0.22  | ) |      | $ | (0.08  | )
|                                                    |  |                             |        |   |      |   |        |  
|Weighted average common shares outstanding:         |  |                             |        |   |      |   |        |  
|Basic                                               |  |                             | 7,366  |   |      |   | 7,429  |  
|                                                    |  |                             |        |   |      |   |        |  
|Diluted                                             |  |                             | 7,366  |   |      |   | 7,429  |  
|                                                    |  |                             |        |   |      |   |        |  
|Common shares outstanding                           |  |                             | 7,371  |   |      |   | 7,430  |  
|                                                    |  |                             |        |   |      |   |        |  

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



4



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                                          |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Three Months EndedApril 30, |       
|                                                                                          |  | 2007                        |        |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Net loss                                                                                  |  | $                           | (1,615 | ) |      | $ | (575   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                             | 652    |   |      |   | 751    |  
|Gain on sale/retirement of property and equipment                                         |  |                             | (310   | ) |      |   | (9     | )
|Gain on sale of investment in SwissQual                                                   |  |                             |       |   |      |   | (82    | )
|Stock based compensation expense                                                          |  |                             | 121    |   |      |   | 84     |  
|Provision for doubtful accounts receivable                                                |  |                             | 32     |   |      |   |       |  
|Provision for obsolete inventory                                                          |  |                             | 58     |   |      |   | 282    |  
|Changes in operating assets and liabilities:                                              |  |                             |        |   |      |   |        |  
|Accounts receivable                                                                       |  |                             | 6,908  |   |      |   | 53     |  
|Inventory                                                                                 |  |                             | 285    |   |      |   | (138   | )
|Other assets                                                                              |  |                             | 63     |   |      |   | 34     |  
|Accounts payable                                                                          |  |                             | (200   | ) |      |   | 684    |  
|Deferred revenue                                                                          |  |                             | (390   | ) |      |   | 225    |  
|Deferred rent                                                                             |  |                             | (47    | ) |      |   |       |  
|Accrued liabilities                                                                       |  |                             | (2,835 | ) |      |   | (3,885 | )
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                             | 2,722  |   |      |   | (2,576 | )
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Purchases of property and equipment                                                       |  |                             | (58    | ) |      |   | (357   | )
|Proceeds from sale of equipment                                                           |  |                             | 361    |   |      |   | 11     |  
|Proceeds from sale of investment in SwissQual                                             |  |                             |       |   |      |   | 82     |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                       |  |                             | 303    |   |      |   | (264   | )
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Net proceeds from issuance of common stock                                                |  |                             | 84     |   |      |   |       |  
|Dividends paid                                                                            |  |                             | (7,371 | ) |      |   |       |  
|Purchase and retirement of common stock                                                   |  |                             | (100   | ) |      |   |       |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash used in financing activities                                                     |  |                             | (7,387 | ) |      |   |       |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                 |  |                             | (4,362 | ) |      |   | (2,840 | )
|Cash and cash equivalents, beginning of period                                            |  |                             | 26,360 |   |      |   | 26,017 |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                  |  | $                           | 21,998 |   |      | $ | 23,177 |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                        |  |                             |        |   |      |   |        |  
|Cash paid for interest                                                                    |  | $                           | 8      |   |      | $ |       |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Cash paid for income taxes                                                                |  | $                           | 562    |   |      | $ | 119    |  
|                                                                                          |  |                             |        |   |      |   |        |  

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



5



---

##### 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, we, Comarco, or the Company), is a leading designer and manufacturer of external mobile power adapters used to power and charge notebook computers, mobile phones,
and many other rechargeable handheld devices. Comarco is also a provider of wireless test solutions for the wireless industry, as well as a provider of emergency call box systems and related maintenance services. Our operations consist solely of the
operations of Comarco Wireless Technologies, Inc. (CWT), which was incorporated in the State of Delaware in September 1993. Comarco, Inc. is a California corporation whose common stock has been publicly traded since 1971 when it was
spun-off from Genge Industries, Inc.



|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, 2007. The unaudited, interim condensed financial information presented herein reflects all adjustments, consisting only
of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three months ended April 30, 2007 are not necessarily indicative of
the results to be expected for the year ending January 31, 2008.

Principles of Consolidation:

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

Use of Estimates:

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

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



|3. | Adoption of New Accounting Pronouncement
|-- | ----------------------------------------

The
Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
(FIN 48) on February 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109 Accounting for
Income Taxes and prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.



6



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



As a result of the adoption of FIN 48, the Company recorded an $86,000 decrease in retained earnings
and increased non-current liabilities by $86,000. As of February 1, 2007, the total amount of unrecognized tax benefit is $592,000. If reversed, $86,000 of the decrease in the unrecognized benefit amount would result in a reduction in income
tax expense.

The Company recognizes interest and penalties associated with unrecognized tax benefits in the Income tax expense line item
of the Consolidated Statements of Operations. As of April 30, 2007, the Company had accrued approximately $14,000 in interest and penalties, which has been recorded directly to retained earnings in accordance with the adoption of FIN 48.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2002 in those jurisdictions where returns have been filed. Due to normal closures of the statute of limitations, the
Company anticipates that there is a reasonable possibility that the amount of unrecognized federal tax benefits will decrease by $31,000 within the next twelve months.



|4. | 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.

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

The compensation expense recognized in
connection with the adoption of SFAS 123R is summarized in the table below (in thousands except per share amounts):



|                                           |  |                             |      |      |   |     
|------------------------------------------ |  | --------------------------- | ---- | ---- | - | ----
|                                           |  | Three Months EndedApril 30,
|                                           |  | 2007                        |      | 2006
|Compensation expense relating to SFAS 123R |  | $                           | 121  |      | $ | 84  
|Impact on diluted earnings per share       |  |                             | 0.02 |      |   | 0.01



7



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



There was no impact on cash flows from operating, investing, or financing activities in connection
with the adoption of SFAS 123R. The total compensation cost related to nonvested awards not yet recognized is approximately $917,000, which will be expensed over a weighted average remaining life of 20.6 months.

For the first quarter of fiscal 2008 and 2007, no stock options were granted. There were 207,000 shares granted during fiscal 2007 with a per share
weighted-average value of $5.36 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:



|                                         |  |                             |  
|---------------------------------------- |  | --------------------------- | -
|                                         |  | Year Ended January 31, 2007 |  
|Expected dividend yield                  |  | 0.0                         | %
|Expected volatility                      |  | 44.2                        | %
|Weighted average risk-free interest rate |  | 4.8                         | %
|Expected life (in years)                 |  | 6.1                         |  
|Expected forfeitures                     |  | 10.6                        | %

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 up to 2,704,337 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. Figures for these plans reflect
a 3-for-2 stock split declared during the year ended January 31, 2001.

The director stock-based compensation plan (the Director
Plan) expires in December 2010, and the Companys former employee stock option plan (the Employee Plan) expired during May 2005. During December 2005, the Board of Directors approved and adopted a new equity incentive plan
(the 2005 Plan) covering 450,000 shares of common stock. The 2005 Plan was approved by the Companys shareholders at its annual shareholders meeting in June 2006. Under all plans, the options are exercisable in installments
determined by the compensation committee of the Companys Board of Directors; however, no employee option may be exercised prior to one year following the grant of the option. The options granted under the Director Plan and the Employee Plan
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 options granted under the 2005 Plan expire as determined by the committee, but no later than ten
years after the date of grant (five years for 10 percent shareholders).

Transactions and other information related to these plans for the
three months ended April 30, 2007 are summarized below:



|                            |  |                     |   |  |                                 |      
|--------------------------- |  | ------------------- | - |  | ------------------------------- | -----
|                            |  | Outstanding Options
|                            |  | Number of Shares    |   |  | Weighted-Average Exercise Price
|Balance, January 31, 2007   |  | 985,770             |   |  | $                               | 12.18
|Options granted             |  |                    |   |  |                                 |     
|Options canceled or expired |  | (65,645             | ) |  |                                 | 10.72
|Options exercised           |  | (26,125             | ) |  |                                 | 7.74 
|                            |  |                     |   |  |                                 |      
|Balance, April 30, 2007     |  | 894,000             |   |  |                                 |      
|                            |  |                     |   |  |                                 |      

No options were granted during the three months ended April 30, 2007. As of April 30,
2007, the stock options outstanding have no intrinsic value. The following table summarizes information about the Companys stock options outstanding at April 30, 2007:



8



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|                         |  |                     |  |                                        |  |                             |        |                    |         |                             |   |      
|------------------------ |  | ------------------- |  | -------------------------------------- |  | --------------------------- | ------ | ------------------ | ------- | --------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                   
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted-Avg.RemainingContractual Life |  | Weighted-Avg.Exercise Price |        | Number Exercisable |         | Weighted-Avg.Exercise Price
|$ 7.00 to 9.89           |  | 315,375             |  | 5.95                                   |  |                             | $ 7.94 |                    | 197,844 |                             | $ | 7.91 
|10.43 to 12.41           |  | 214,500             |  | 7.88                                   |  |                             | 10.75  |                    | 79,500  |                             |   | 11.29
|13.21 to 17.50           |  | 221,625             |  | 2.06                                   |  |                             | 14.49  |                    | 221,625 |                             |   | 14.49
|19.33 to 23.67           |  | 142,500             |  | 3.08                                   |  |                             | 21.63  |                    | 142,500 |                             |   | 21.63
|                         |  |                     |  |                                        |  |                             |        |                    |         |                             |   |      
|                         |  | 894,000             |  | 4.99 years                             |  |                             |        |                    | 641,469 |                             |   | 13.65
|                         |  |                     |  |                                        |  |                             |        |                    |         |                             |   |      

Stock options exercisable at April 30, 2007 were 641,469 at a weighted-average exercise price
of $13.65. At April 30, 2007, shares available for future grants under the 2005 Plan were 267,000 and under the director stock option plan were 625.

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

As of April 30, 2007, the Company owned all of the 3,353,000 outstanding shares of CWT common
stock. The fair market value of the shares and the exercise dates of the options are determined by the compensation committee of the Companys Board of Directors; however, no option may be exercised prior to one year following the grant of the
option. The options expire as determined by the compensation committee, but not later than ten years and one week after the date of grant.

During the three months ended April 30, 2007, no options were granted or exercised under the CWT option plan. There were no options exercisable at April 30, 2007. Shares available under the plan for future grants at April 30,
2007 were 198,000.



|5. | Recent Accounting Pronouncements
|-- | --------------------------------

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS 159). This standard amends SFAS No. 115,
Accounting for Certain Investment in Debt and Equity Securities, with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This
standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted as such, allows different applications for electing the option for a single item or groups of
items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which
for Comarco is fiscal 2009. The Company does not expect SFAS 159 to have a material impact on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This new standard establishes a framework for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases require, estimates of fair market value. SFAS 157 also expands financial
statement disclosure requirements about a companys use of fair value measurements, including the effect of such measures on earnings. This statement is effective for fiscal years beginning after November 15, 2007. The Company does not
expect the adoption of SFAS 157 to have a material impact on its consolidated financial statements.



9



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



|6. | Gain on Sale of Investment in SwissQual
|-- | ---------------------------------------

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

Revenue recorded related to SwissQual for the quarters ended
April 30, 2007 and 2006 totaled $26,000 and $659,000, respectively. Accounts receivable balances due from SwissQual at April 30, 2007 and January 31, 2007 were $26,000 and $1.2 million, respectively.

On December 15, 2005, the Company entered into a Distribution and Sales Agreement (DASA) with SwissQual whereby SwissQual receives 10
percent of the revenue on all Seven.Five product sales, less associated hardware costs, through December 31, 2006. Effective January 1, 2007 the revenue sharing applicable to both parties increases to 35 percent on hardware upgrades and 50
percent on software upgrades. At April 30, 2007 and January 31, 2007 the Company had accrued $610,000 and $93,000, respectively, relating to amounts payable to SwissQual under the DASA. During the first quarter of fiscal 2008 and 2007, the
Company paid $52,000 and $606,000, respectively, to SwissQual for revenue sharing amounts accrued under the DASA.

During January 2006,
Spirent plc (Spirent) acquired 100 percent of the outstanding shares of SwissQual for consideration totaling up to approximately $71.3 million. Approximately $37.6 million in cash was paid at the close of the transaction, which is net of
$2.5 million of transaction costs, with an additional $9.1 million put into escrow to secure certain indemnification obligations. The escrowed consideration is expected to be released within 24 months of the close. In addition, up to $22.1 million
in contingent consideration may be paid within 24 months upon satisfaction of certain performance and other requirements. Upon the closing of the transaction, the Company received approximately $6.8 million of the closing consideration, which is net
of $0.5 million of transaction costs, for its 18 percent ownership interest in SwissQual and may receive up to an additional $5.4 million of any escrow distribution and contingent consideration. During the year ended January 31, 2006, the
Company recorded a gain on sale of investment totaling $6.1 million, which was based on cash consideration received by the Company. During the first quarter of fiscal 2007, the Company recorded a net gain on sale of investment in the amount of
$61,000, which represents $82,000 in proceeds received from the escrowed consideration, less $21,000 in foreign jurisdiction withholding taxes, which are non-refundable. During the fourth quarter of fiscal 2007, the Company received an additional
$1.6 million of contingent consideration, net of $0.1 million of transaction costs, recorded as gain on sale of investment in SwissQual. Due to uncertainty as to timing and amount of any escrow distribution and contingent consideration, the Company
expects to record an additional gain as the contingency lapses and the funds are probable of receipt.



|7. | Stockholders Equity
|-- | --------------------

During 1992, the
Companys Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through April 30, 2007, the Company repurchased approximately 2.6 million
shares for an average price of $8.23 per share. During the quarter ended April 30, 2007, the Company repurchased 12,970 shares of common stock, at an average price of $7.68 per share.



10



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



A roll-forward of the Companys stockholders equity for the quarter ended April 30, 2007 is
presented below (in thousands, except share data):



|                                                                         |  |                                   |      |   |                          |   |         |                  |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------------------------- | ---- | - | ------------------------ | - | ------- | ---------------- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three Months Ended April 30, 2007 |     
|                                                                         |  | Common StockPar Value             |      |   | AdditionalPaid-InCapital |   |         | RetainedEarnings |  |   | Total   |  
|Balance at January 31, 2007, 7,371,637 shares                            |  |                                   | $737 |   |                          |   | $14,163 |                  |  |   | $23,089 |   |  |   | $37,989 |  
|Net loss                                                                 |  |                                   |     |   |                          |   |        |                  |  |   | (1,615  | ) |  |   | (1,615  | )
|Exercise of stock options, 12,671 shares (2,671 represent net exercises) |  |                                   | 1    |   |                          |   | 83      |                  |  |   |        |   |  |   | 84      |  
|Special cash dividend, $1 per share of common stock outstanding          |  |                                   |     |   |                          |   | (7,371  | )                |  |   |        |   |  |   | (7,371  | )
|Purchase and retirement of common stock, 12,970 shares                   |  |                                   | (1   | ) |                          |   | (98     | )                |  |   |        |   |  |   | (99     | )
|Stock based compensation expense                                         |  |                                   |     |   |                          |   | 121     |                  |  |   |        |   |  |   | 121     |  
|Cumulative effect of accounting change: adoption of FIN 48               |  |                                   |     |   |                          |   |        |                  |  |   | (86     | ) |  |   | (86     | )
|                                                                         |  |                                   |      |   |                          |   |         |                  |  |   |         |   |  |   |         |  
|Balance at April 30, 2007, 7,371,338 shares                              |  | $                                 | 737  |   |                          | $ | 6,898   |                  |  | $ | 21,388  |   |  | $ | 29,023  |  
|                                                                         |  |                                   |      |   |                          |   |         |                  |  |   |         |   |  |   |         |  

During the first quarter of fiscal 2008, the Company declared and paid a special dividend of $1
per share of its outstanding common stock for a total payment of $7.4 million.



|8. | Earnings (Loss) Per Share
|-- | -------------------------

The Company calculates
basic net earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. Since the
Company incurred a net loss for the quarters ended April 30, 2007 and 2006, basic and diluted net loss per share were the same because the inclusion of 6,952 and 73,229 potentially dilutive securities related to outstanding stock options,
respectively, would have been antidilutive.



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

A significant portion of
the Companys revenue is derived from a limited number of customers. The customers providing 10 percent or more of the Companys revenues for either quarter ended April 30, 2007 or 2006 are listed below (in thousands).



|                            |  |                              |       |      |   |      
|--------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                            |  | Three Months Ended April 30,
|                            |  | 2007                         |       | 2006
|Customer concentration:     |  |                              |       |      |   |      
|Kensington Technology Group |  | $                            | 252   |      | $ | 4,105
|Verizon Wireless            |  |                              | 2,400 |      |   | 2,517
|                            |  |                              |       |      |   |      
|                            |  | $                            | 2,652 |      | $ | 6,622
|                            |  |                              |       |      |   |      



11



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



The Verizon Wireless revenue amounts reported above are gross amounts, exclusive of revenue sharing
amounts we accrue payable to SwissQual (see Note 2).

The Company derived 48 percent and 24 percent of its revenue from governmental
agencies in the quarters ended April 30, 2007, and 2006, respectively.

The customers comprising 10 percent or more of the
Companys gross accounts receivable at either April 30, 2007 or January 31, 2007 are listed below (in thousands).



|                                |  |                |       |                  |   |       
|------------------------------- |  | -------------- | ----- | ---------------- | - | ------
|                                |  | April 30, 2007 |       | January 31, 2007
|Total gross accounts receivable |  | $              | 4,145 |                  | $ | 11,053
|                                |  |               
|Customer concentration:         |  |                |       |                  |   |       
|Kensington Technology Group     |  |                | 150   |                  |   | 2,975 
|Global Wireless Solutions, Inc. |  |                | 407   |                  |   |      
|MTC SAFE                        |  |                | 490   |                  |   | 1,531 
|SwissQual                       |  |                | 260   |                  |   | 1,185 
|                                |  |                |       |                  |   |       
|                                |  | $              | 1,307 |                  | $ | 5,691 
|                                |  |                |       |                  |   |       



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

Inventory consists of the following (in
thousands):



|                |  |                |       |                  |   |      
|--------------- |  | -------------- | ----- | ---------------- | - | -----
|                |  | April 30, 2007 |       | January 31, 2007
|Raw materials   |  | $              | 1,972 |                  | $ | 1,912
|Work in process |  |                | 73    |                  |   | 195  
|Finished goods  |  |                | 3,064 |                  |   | 3,345
|                |  |                |       |                  |   |      
|                |  | $              | 5,109 |                  | $ | 5,452
|                |  |                |       |                  |   |      



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

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



|                                       |  |                |        |   |                  |   |        |  
|-------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                       |  | April 30, 2007 |        |   | January 31, 2007 |  
|Capitalized software development costs |  | $              | 8,444  |   |                  | $ | 8,444  |  
|Less: accumulated amortization         |  |                | (8,340 | ) |                  |   | (8,201 | )
|                                       |  |                |        |   |                  |   |        |  
|                                       |  | $              | 104    |   |                  | $ | 243    |  
|                                       |  |                |        |   |                  |   |        |  

There were no capitalized software development costs in the first quarter of the current and prior
years. Amortization of software development costs for the quarters ended April 30, 2007 and 2006 totaled $139,000 and $326,000, respectively, and have been reported in cost of revenue in the accompanying condensed consolidated financial
statements. The remaining net book value of $104,000 is expected to be fully amortized in fiscal 2008.



12



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



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

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



|                                      |  |               |        |   |                 |   |        |  
|------------------------------------- |  | ------------- | ------ | - | --------------- | - | ------ | -
|                                      |  | April 30,2007 |        |   | January 31,2007 |  
|Goodwill                              |  | $             | 2,394  |   |                 | $ | 2,394  |  
|                                      |  |              
|Acquired intangible assets:           |  |               |        |   |                 |   |        |  
|Definite-lived intangible assets:     |  |               |        |   |                 |   |        |  
|License rights                        |  |               | 1,440  |   |                 |   | 1,440  |  
|Intellectual property rights          |  |               | 1,244  |   |                 |   | 1,244  |  
|                                      |  |               |        |   |                 |   |        |  
|                                      |  |               | 2,684  |   |                 |   | 2,684  |  
|Less: accumulated amortization        |  |               | (1,953 | ) |                 |   | (1,864 | )
|                                      |  |               |        |   |                 |   |        |  
|Total acquired intangible assets, net |  | $             | 731    |   |                 | $ | 820    |  
|                                      |  |               |        |   |                 |   |        |  

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



|                               |  |                      |   |                        |   |          |  |       |     |  |   |      
|------------------------------ |  | -------------------- | - | ---------------------- | - | -------- |  | ----- | --- |  | - | -----
|                               |  | Mobile PowerProducts |   | Wireless TestSolutions |   | Call Box |  | Total
|Balance as of April 30, 2007   |  | $                    |  |                        | $ | 1,898    |  | $     | 496 |  | $ | 2,394
|                               |  |                      |   |                        |   |          |  |       |     |  |   |      
|Balance as of January 31, 2007 |  | $                    |  |                        | $ | 1,898    |  | $     | 496 |  | $ | 2,394
|                               |  |                      |   |                        |   |          |  |       |     |  |   |      

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



|                                     |  |                     |    
|------------------------------------ |  | ------------------- | ---
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |    
|2008                                 |  |                     | 206
|2009                                 |  |                     | 178
|2010                                 |  |                     | 178
|2011                                 |  |                     | 126
|2012                                 |  |                     | 43 
|Thereafter                           |  |                     |   
|                                     |  |                     |    
|Total estimated amortization expense |  | $                   | 731
|                                     |  |                     |    

Amortization of definite-lived acquired intangible assets for the quarters ended April 30,
2007 and 2006 totaled $89,000 and $132,000, respectively. The Company ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142, Goodwill and Other Intangible Assets.



13



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



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

Standard Warranty

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



|                                                 |  |           |      |   |      |   |      |  
|------------------------------------------------ |  | --------- | ---- | - | ---- | - | ---- | -
|                                                 |  | April 30, |     
|                                                 |  | 2007      |      |   | 2006 |  
|Beginning balance                                |  | $         | 344  |   |      | $ | 172  |  
|Accruals for warranties issued during the period |  |           | 40   |   |      |   | 155  |  
|Utilization                                      |  |           | (235 | ) |      |   | (104 | )
|                                                 |  |           |      |   |      |   |      |  
|                                                 |  | $         | 149  |   |      | $ | 223  |  
|                                                 |  |           |      |   |      |   |      |  

Embedded Post Contract Support and Warranty

The Company defers revenue relating to its WTS product sales for post contract support and warranty for the term of the maintenance commitment made at the
time of the sale, generally one year. A summary of the post contract support and warranty activity is shown in the table below (in thousands):



|                         |  |           |      |   |      |   |       |  
|------------------------ |  | --------- | ---- | - | ---- | - | ----- | -
|                         |  | April 30, |     
|                         |  | 2007      |      |   | 2006 |  
|Beginning balance        |  | $         | 551  |   |      | $ | 1,476 |  
|Deferral of revenue      |  |           | 198  |   |      |   | 288   |  
|Amortization of deferral |  |           | (243 | ) |      |   | (569  | )
|                         |  |           |      |   |      |   |       |  
|                         |  | $         | 506  |   |      | $ | 1,195 |  
|                         |  |           |      |   |      |   |       |  

Extended Post Contract Support and Warranty

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



|                                      |  |           |       |   |      |   |       |  
|------------------------------------- |  | --------- | ----- | - | ---- | - | ----- | -
|                                      |  | April 30, |      
|                                      |  | 2007      |       |   | 2006 |  
|Beginning balance                     |  | $         | 2,952 |   |      | $ | 2,239 |  
|Recognition of revenue                |  |           | (231  | ) |      |   | (205  | )
|Deferral of revenue for new contracts |  |           | 270   |   |      |   | 460   |  
|                                      |  |           |       |   |      |   |       |  
|                                      |  | $         | 2,991 |   |      | $ | 2,494 |  
|                                      |  |           |       |   |      |   |       |  



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

In the first quarter of fiscal 2008, 16,125 stock options were exercised as net exercises and therefore no cash was received upon exercise. The number of
shares of Company common stock issued as a result of these net exercises totaled 2,671.



14



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



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

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

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

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 10,400 call boxes under
long-term agreements.

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



|                                                             |  |                                   |        |    |                        |   |        |          |  |   |           |   |       |   |     |  |   |        |  
|------------------------------------------------------------ |  | --------------------------------- | ------ | -- | ---------------------- | - | ------ | -------- |  | - | --------- | - | ----- | - | --- |  | - | ------ | -
|                                                             |  | Three Months Ended April 30, 2007 |       
|                                                             |  | Mobile PowerProducts              |        |    | Wireless TestSolutions |   |        | Call Box |  |   | Corporate |   | Total |  
|Revenue                                                      |  | $                                 | 321    |    |                        | $ | 2,616  |          |  | $ | 2,478     |   |       | $ |    |  | $ | 5,415  |  
|Cost of revenue                                              |  |                                   | 735    |    |                        |   | 1,245  |          |  |   | 1,256     |   |       |   |    |  |   | 3,236  |  
|                                                             |  |                                   |        |    |                        |   |        |          |  |   |           |   |       |   |     |  |   |        |  
|Gross profit (loss)                                          |  | $                                 | (414   | )  |                        | $ | 1,371  |          |  | $ | 1,222     |   |       | $ |    |  | $ | 2,179  |  
|                                                             |  |                                   |        |    |                        |   |        |          |  |   |           |   |       |   |     |  |   |        |  
|Gross margin                                                 |  |                                   | (129   | )% |                        |   | 52.4   | %        |  |   | 49.3      | % |       |   |    |  |   | 40.2   | %
|                                                             |  |                                   |        |    |                        |   |        |          |  |   |           |   |       |   |     |  |   |        |  
|Income (loss) from continuing operations before income taxes |  | $                                 | (1,489 | )  |                        | $ | (1,085 | )        |  | $ | 761       |   |       | $ | 230 |  | $ | (1,583 | )
|                                                             |  |                                   |        |    |                        |   |        |          |  |   |           |   |       |   |     |  |   |        |  



|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|------------------------------------------------------------ |  | --------------------------------- | ----- | - | ---------------------- | - | ------ | -------- |  | - | --------- | - | ----- | - | ------ |  | - | ------ | -
|                                                             |  | Three Months Ended April 30, 2006 |      
|                                                             |  | Mobile PowerProducts              |       |   | Wireless TestSolutions |   |        | Call Box |  |   | Corporate |   | Total |  
|Revenue                                                      |  | $                                 | 4,149 |   |                        | $ | 3,572  |          |  | $ | 2,834     |   |       | $ |       |  | $ | 10,555 |  
|Cost of revenue                                              |  |                                   | 2,969 |   |                        |   | 1,925  |          |  |   | 2,130     |   |       |   |       |  |   | 7,024  |  
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|Gross profit                                                 |  | $                                 | 1,180 |   |                        | $ | 1,647  |          |  | $ | 704       |   |       | $ |       |  | $ | 3,531  |  
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|Gross margin                                                 |  |                                   | 28.4  | % |                        |   | 46.1   | %        |  |   | 24.8      | % |       |   |       |  |   | 33.5   | %
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|Income (loss) from continuing operations before income taxes |  | $                                 | (128  | ) |                        | $ | (827   | )        |  | $ | 151       |   |       | $ | 229    |  | $ | (575   | )
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|                                                             |  |                                   |       |   |                       
|                                                             |  | Mobile PowerProducts              |       |   | Wireless TestSolutions |   |        | Call Box |  |   | Corporate |   | Total |  
|Assets at April 30, 2007                                     |  | $                                 | 1,197 |   |                        | $ | 9,051  |          |  | $ | 5,418     |   |       | $ | 23,198 |  | $ | 38,864 |  
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  
|Assets at January 31, 2007                                   |  | $                                 | 4,615 |   |                        | $ | 10,861 |          |  | $ | 8,181     |   |       | $ | 27,756 |  | $ | 51,413 |  
|                                                             |  |                                   |       |   |                        |   |        |          |  |   |           |   |       |   |        |  |   |        |  



15



---

##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)



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



|              |  |                             |       |      |   |       
|------------- |  | --------------------------- | ----- | ---- | - | ------
|              |  | Three Months EndedApril 30,
|              |  | 2007                        |       | 2006
|North America |  | $                           | 4,814 |      | $ | 8,939 
|Europe        |  |                             | 204   |      |   | 1,388 
|Asia          |  |                             | 142   |      |   | 5     
|Latin America |  |                             | 255   |      |   | 223   
|              |  |                             |       |      |   |       
|              |  | $                           | 5,415 |      | $ | 10,555
|              |  |                             |       |      |   |       



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

Purchase Commitments with
Suppliers

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

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

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

Executive Severance Commitments

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

Letter of Credit

In May 2006, the Company obtained a $500,000 letter of credit from US Bank pursuant
to a lease provision for the Companys corporate office, which was relocated in August 2006. The letter of credit is secured by a certificate of deposit with a 6-month maturity.

Legal Contingencies

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.



16



---

##### Table of Contents

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

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

Forward-Looking Statements

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

These forward-looking statements reflect current views about our plans, strategies, and prospects, but can only be based on
facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by
the forward-looking statements. Among the important factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specially addressed under the heading Risk Factors in our annual
report on Form 10-K for the year ended January 31, 2007.

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 designer and manufacturer of external mobile power adapters used to power and charge notebook computers, mobile phones, PDAs, and many other rechargeable handheld devices. Comarco is also a provider of
wireless test solutions for the wireless industry, as well as a provider of emergency call box systems and related maintenance services. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT).

Our revenue and related cash flows are primarily derived from sales of our ChargeSource mobile power products, wireless test solutions
(WTS) products, and emergency call box systems and related maintenance services. We have three reportable segments: ChargeSource, WTS, and Call Box. See Segment Reporting in Note 15 of notes to our condensed consolidated
financial statements included in Part I, Item 1 of this report.



17



---

##### Table of Contents

The following table sets forth our revenue for the business segments for the three months ended
April 30, 2007 and 2006:



|             |  |                              |       |      |   |          |  |     |   
|------------ |  | ---------------------------- | ----- | ---- | - | -------- |  | --- | --
|             |  | Three Months Ended April 30, |       |      |  
|             |  | 2007                         |       | 2006 |   | % Change | 
|             |  | (in thousands)               |       |      |  
|Revenue:     |  |                              |       |      |   |          |  |     |   
|WTS          |  | $                            | 2,616 |      | $ | 3,572    |  | (27 | )%
|Call Box     |  |                              | 2,478 |      |   | 2,834    |  | (13 | )%
|ChargeSource |  |                              | 321   |      |   | 4,149    |  | (92 | )%
|             |  |                              |       |      |   |          |  |     |   
|             |  | $                            | 5,415 |      | $ | 10,555   |  | (49 | )%
|             |  |                              |       |      |   |          |  |     |   

Management currently considers the following events, trends, and uncertainties to be important to
understanding our three business segments and corresponding operating results for the first quarter of fiscal 2008.

Mobile Power Products
(ChargeSource)



| |  |  | During the first quarter of fiscal 2008, we entered into a non-exclusive distribution arrangement with Kensington, thereby terminating our exclusive distribution
agreement. Under the non-exclusive agreement, we have the right to penetrate all channels with multiple partners and Kensington has the right to purchase our products without volume minimums. Kensington is also able to purchase mobile power products
from our competitors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Due to the transition to a non-exclusive distribution model, we have experienced and expect to continue to experience disruption in the sale of our ChargeSource
products over the next several quarters.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to entering into the non-exclusive distribution arrangement referenced above, Kensington was the exclusive retail channel distributor of our ChargeSource
products and was the source of the majority of our ChargeSource revenue.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ChargeSource revenue for the first quarter of fiscal 2008 decreased significantly to $0.3 million compared to $4.1 million for the first quarter of fiscal 2007 and
$3.8 million for the prior fiscal quarter. Additionally, we entered the second quarter of fiscal 2008 with a backlog of purchase orders from Kensington that was significantly less than the prior fiscal quarters. We believe Kensington is continuing
to sell through accumulated inventory of our ChargeSource products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Initial product orders from Kensington under the non-exclusive distribution agreement are significantly less than the number of units ordered on a monthly basis
during fiscal 2007. Additionally, certain products ordered by Kensington are still under development and are expected to be available during the second half of fiscal 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In response to increased competition, as well as our transition to a non-exclusive distribution model, we expect to achieve lower average selling prices per unit
and related gross margins on our ChargeSource products in fiscal 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The current level of ChargeSource sales is insufficient to fully absorb our fixed manufacturing and supply chain overhead. Our ability to drive increased sales is
dependent upon, among others, the following factors:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Successful development and release for manufacture of certain AC and AC/DC power adapter products designed to address the requirements of our retail, OEM
accessories, and OEM in-the-box channels;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securing additional retail distribution partners under non-exclusive arrangements, and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Market and customer acceptance of our new products expected to be available during the second half of fiscal 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

Wireless Test Solutions



| |  |  | Sales in North America were down for the first quarter of fiscal 2008 compared to first quarter of fiscal 2007. This decrease is primarily due to decreased demand
in the wireless test equipment market in which our WTS products are sold.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales in our European region were down for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007, also reflecting decreased demand from
customers of our WTS business. SwissQual, which was acquired by Spirent during January 2006, served as the exclusive reseller of our WTS products in our European region through December 31, 2006. SwissQual is now a direct competitor and is
actively marketing competing QoS products globally.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As previously announced, we have entered into a cooperative alliance with Ascom, a leading specialist in wireless onsite communications solutions based in
Switzerland, to develop, market, and support next-generation wireless network QoS, optimization, and test measurement systems. Together we are currently developing harmonized test and measurement systems and solutions for 3G and 4G wireless
standards. These harmonized products and solutions are expected to be available during the second half of fiscal 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe our Ascom alliance will enhance our technologies, positioning, and global footprint for sales and support. However, we are unsure as to what long term
effect this alliance will have on future sales of our products. Our success will depend in part upon our ability to co-develop harmonized products and solutions under the Ascom alliance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Current demand for our next-generation mobile test equipment continues to be soft across all our regions as wireless carriers delay deployment of capital for such
mobile test tools. WTS revenue for first quarter of fiscal 2008 decreased compared to first quarter of fiscal 2007, underscoring the challenges of our WTS business, which include a consolidating customer base comprised of a relatively small number
of wireless carriers and equipment vendors, as well as uncertainty regarding the timing and amount of anticipated orders from such customer base. Additionally, we have experienced increased competition in our European region from SwissQual and
others. We expect our ability to compete on a global basis to be driven by our ability to offer products that cover all current wireless technologies, as well as the timely integration of new technology and functionality into our product platform.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Emergency Call Box Systems



| |  |  | During the first quarter of fiscal 2008, we upgraded 497 call boxes with digital and/or text-telephony technologies and recorded revenue totaling approximately $1.0
million. Such upgrade revenue also included revenue related to retrofit, site mitigation, and call box removal activities performed in conjunction with the upgrade of the call box systems. During the first quarter of fiscal 2007, we upgraded 528
call boxes and recorded revenue totaling approximately $1.4 million, which also includes revenue related to retrofit, site mitigation activities, and call box removal activities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During fiscal 2007, the contract to upgrade approximately 1,400 call boxes owned by Capital Valley Regional SAFE (CVRS) with digital and TTY
technologies was awarded to a competitor. We currently expect to discontinue maintenance services in support of the CVRS call box system during the fourth quarter of fiscal 2008. Service revenue attributable to the CVRS maintenance contracted
totaled $0.5 million for fiscal 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We currently expect service revenue attributable to maintenance of existing call box systems to total approximately $3.8 million in fiscal 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We anticipate a decline in call box product revenue during fiscal 2008 as we expect to substantially complete the previously awarded digital and TTY upgrade
contracts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of
these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. No events
occurred or circumstances changed during the period ended April 30, 2007 that required us to test goodwill for impairment. Management believes there have been no significant changes during the three months ended April 30, 2007 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, 2007.

Results of Operations  Continuing Operations

Consolidated



|               |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   
|-------------- |  | ---------------------------- | ------ | - | ---------------------- | --- | - |  | - | ------ | ----------- |  | --- | - |  | --- | --
|               |  | Three Months Ended April 30, |        |   | 2007 over 2006% Change |    
|               |  | 2007                         |        |   | 2006                   |     |  
|               |  | (in thousands)               |        |   |                        |    
|               |  |                              |        |   | % ofRevenue            |     |   |  |   |        | % ofRevenue |  |     |   | 
|Revenue:       |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   
|Products       |  | $                            | 4,281  |   |                        | 79  | % |  | $ | 9,387  |             |  | 89  | % |  | (54 | )%
|Services       |  |                              | 1,134  |   |                        | 21  | % |  |   | 1,168  |             |  | 11  | % |  | (3  | )%
|               |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   
|               |  | $                            | 5,415  |   |                        | 100 | % |  | $ | 10,555 |             |  | 100 | % |  | (49 | )%
|               |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   
|Operating loss |  | $                            | (2,178 | ) |                        |     |   |  | $ | (865   | )           |  |     |   |  |     |   
|               |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   
|Net loss       |  | $                            | (1,615 | ) |                        |     |   |  | $ | (575   | )           |  |     |   |  |     |   
|               |  |                              |        |   |                        |     |   |  |   |        |             |  |     |   |  |     |   



20



---

##### Table of Contents

|               |  |                              |       |                        |   |        |  |       |   
|-------------- |  | ---------------------------- | ----- | ---------------------- | - | ------ |  | ----- | --
|               |  | Three Months Ended April 30, |       | 2007 over 2006% Change |  
|               |  | 2007                         |       | 2006                   |  
|               |  | (in thousands)               |       |                        |  
|Revenue:       |  |                              |       |                       
|Americas:      |  |                              |       |                        |   |        |  |       |   
|North America  |  | $                            | 4,814 |                        | $ | 8,939  |  | (46   | )%
|Others         |  |                              | 255   |                        |   | 223    |  | 14    | % 
|Europe         |  |                              | 204   |                        |   | 1,388  |  | (85   | )%
|Asia  Pacific |  |                              | 142   |                        |   | 5      |  | 2,740 | % 
|               |  |                              |       |                        |   |        |  |       |   
|               |  | $                            | 5,415 |                        | $ | 10,555 |  | (49   | )%
|               |  |                              |       |                        |   |        |  |       |   

Revenue

The first quarter of fiscal 2008 decrease in revenue of $5.1 million compared to the first quarter of fiscal 2007, is attributable to decreased revenue from all three of our businesses, with ChargeSource and WTS
decreasing approximately $3.8 million and $1.0 million, respectively, reflecting the transition of our ChargeSource distribution to a non-exclusive model and general weakness in the wireless test equipment market in which WTS operates.

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2007 over 2006% Change |  
|                                             |  | 2007                         |       |                     | 2006                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 2,338 |                     | 55                     | % |  | $ | 5,877               |  | 63 | % |  | (60 | )%
|Amortization  software development products |  |                              | 134   |                     | 3                      | % |  |   | 321                 |  | 3  | % |  | (58 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 2,472 |                     | 58                     | % |  |   | 6,198               |  | 66 | % |  | (60 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Services                                     |  |                              | 759   |                     | 67                     | % |  |   | 821                 |  | 70 | % |  | (8  | )%
|Amortization  software development services |  |                              | 5     |                     |                       |   |  |   | 5                   |  | 1  | % |  |    |   
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 764   |                     | 67                     | % |  |   | 826                 |  | 71 | % |  | (8  | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 3,236 |                     | 60                     | % |  | $ | 7,024               |  | 67 | % |  | (54 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



|                      |  |                              |   |  |                          |   |  |  
|--------------------- |  | ---------------------------- | - |  | ------------------------ | - |  | -
|                      |  | Three Months Ended April 30, |   |  | 2007 over 2006ppt Change
|                      |  | 2007                         |   |  | 2006                     |   | 
|Gross margin:         |  |                              |   |  |                          |   |  |  
|Products              |  | 42                           | % |  | 34                       | % |  | 8
|Services              |  | 33                           | % |  | 29                       | % |  | 4
|Combined gross margin |  | 40                           | % |  | 33                       | % |  | 7

The first quarter of fiscal 2008 decrease in cost of revenue of $3.8 million compared to first
quarter of fiscal 2007, was primarily attributable to a 49 percent volume decrease in revenue compared to the first quarter of fiscal 2007.



21



---

##### Table of Contents

Operating Costs and Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |   
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | -- | --
|                                                                            |  | Three Months Ended April 30, |       |             | 2007 over 2006% Change |  
|                                                                            |  | 2007                         |       |             | 2006                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |   
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 1,206 |             | 22                     | % |  | $ | 1,270       |  | 12 | % |  | (5 | )%
|Allocated corporate overhead                                                |  |                              | 1,200 |             | 22                     | % |  |   | 1,247       |  | 12 | % |  | (4 | )%
|Gross engineering and support expenses                                      |  |                              | 1,951 |             | 36                     | % |  |   | 1,879       |  | 18 | % |  | 4  | % 
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |   
|                                                                            |  | $                            | 4,357 |             | 80                     | % |  | $ | 4,396       |  | 42 | % |  | (1 | )%
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |   

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.

Operating expenses remained
relatively stable in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 because our fixed overhead is generally unchanged. As revenues decline, however, these expenses represent a larger percentage of revenue in the
current year than the prior year. The fixed cost structure of our various businesses has been maintained to support current and expected future business, even though for ChargeSource and WTS these costs exceeded revenue in the first quarter of
fiscal 2008.

Other Income, net

Other
income, net, consists primarily of interest income earned on invested cash balances. Other income, net, for the first quarter of fiscal 2008 increased approximately $45,000 compared to the first quarter of fiscal 2007. The increase in other income
is due to increased interest rates earned on higher invested cash balances.

Gain on Sale of Equipment, net

The gain on sale of equipment recorded during the first quarter of fiscal 2008 relates to the sale of WTS equipment, the majority of which was previously
leased to outsourced engineering services providers.

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. This
valuation allowance was established based on managements overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses,
carry forward temporary differences, and future tax deductions resulting from certain types of stock option exercises. Due to the losses of the first quarter, the adjusted net deferred tax assets remain fully reserved as of April 30, 2007.

The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement
No. 109, on February 1, 2007. As a result of the adoption of FIN 48, the Company recorded an $86,000 decrease in retained earnings and increased non-current liabilities by $86,000.



22



---

##### Table of Contents

Mobile Power Products (ChargeSource)



|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|-------------- |  | ---------------------------- | ------ | - | ---------------------- | --- | - |  | - | ----- | ----------- |  | --- | - |  | --- | --
|               |  | Three Months Ended April 30, |        |   | 2007 over 2006% Change |    
|               |  | 2007                         |        |   | 2006                   |     |  
|               |  | (in thousands)               |        |   |                        |    
|               |  |                              |        |   | % ofRevenue            |     |   |  |   |       | % ofRevenue |  |     |   | 
|Revenue:       |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|Products       |  | $                            | 321    |   |                        | 100 | % |  | $ | 4,149 |             |  | 100 | % |  | (92 | )%
|Services       |  |                              |       |   |                        |    |   |  |   |      |             |  |    |   |  |    |   
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|               |  | $                            | 321    |   |                        | 100 | % |  | $ | 4,149 |             |  | 100 | % |  | (92 | )%
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|Operating loss |  | $                            | (1,499 | ) |                        |     |   |  | $ | (128  | )           |  |     |   |  |     |   
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   



|               |  |                              |     |                        |   |       |  |     |   
|-------------- |  | ---------------------------- | --- | ---------------------- | - | ----- |  | --- | --
|               |  | Three Months Ended April 30, |     | 2007 over 2006% Change |  
|               |  | 2007                         |     | 2006                   |  
|               |  | (in thousands)               |     |                        |  
|Revenue:       |  |                              |     |                        |   |      
|Americas:      |  |                              |     |                        |   |       |  |     |   
|North America  |  | $                            | 182 |                        | $ | 3,542 |  | (95 | )%
|Others         |  |                              |    |                        |   |      |  |    |   
|Europe         |  |                              | 139 |                        |   | 607   |  | (77 | )%
|Asia  Pacific |  |                              |    |                        |   |      |  |    |   
|               |  |                              |     |                        |   |       |  |     |   
|               |  | $                            | 321 |                        | $ | 4,149 |  | (92 | )%
|               |  |                              |     |                        |   |       |  |     |   



|           |  |                              |     |                        |   |       |  |     |   
|---------- |  | ---------------------------- | --- | ---------------------- | - | ----- |  | --- | --
|           |  | Three Months Ended April 30, |     | 2007 over 2006% Change |  
|           |  | 2007                         |     | 2006                   |  
|           |  | (in thousands)               |     |                        |  
|Revenue:   |  |                              |     |                        |   |       |  |     |   
|Kensington |  | $                            | 252 |                        | $ | 4,015 |  | (94 | )%
|Other      |  |                              | 69  |                        |   | 134   |  | (49 | )%
|           |  |                              |     |                        |   |       |  |     |   
|           |  | $                            | 321 |                        | $ | 4,149 |  | (92 | )%
|           |  |                              |     |                        |   |       |  |     |   

The first quarter of fiscal 2008 decrease in ChargeSource revenue of $3.8 million compared to the
first quarter of fiscal 2007 was primarily due to the decrease in sales to Kensington. During the fourth quarter of fiscal 2007, we commenced negotiations to amend our exclusive retail distribution agreement with Kensington to allow us to partner
with multiple retail distributors on a non-exclusive basis and address certain underserved geographic regions, as well as additional domestic national retailers. In April 2007, we accomplished this objective and entered into a non-exclusive retail
distribution agreement with Kensington. During the fourth quarter of fiscal 2007 and the first quarter of fiscal 2008, we did not receive significant new orders from Kensington for products scheduled to be delivered in the first and second quarters
of fiscal 2008. We believe Kensington reduced their product orders in an effort to reduce their inventory of previously purchased ChargeSource products.



23



---

##### Table of Contents

Cost of Revenue and Gross Margin



|                                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | --- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |     |                     | 2007 over 2006% Change |  
|                                             |  | 2007                         |     |                     | 2006                   |   | 
|                                             |  | (in thousands)               |     |                     |                        |  
|                                             |  |                              |     | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 735 |                     | 229                    | % |  | $ | 2,969               |  | 72 | % |  | (75 | )%
|Amortization  software development products |  |                              |    |                     |                       |   |  |   |                    |  |   |   |  |    |   
|                                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 735 |                     | 229                    | % |  |   | 2,969               |  | 72 | % |  | (75 | )%
|                                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Services                                     |  |                              |    |                     |                       |   |  |   |                    |  |   |   |  |    |   
|                                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 735 |                     | 229                    | % |  | $ | 2,969               |  | 72 | % |  | (75 | )%
|                                             |  |                              |     |                     |                        |   |  |   |                     |  |    |   |  |     |   



|                      |  |                              |    |  |                          |   |  |      |  
|--------------------- |  | ---------------------------- | -- |  | ------------------------ | - |  | ---- | -
|                      |  | Three Months Ended April 30, |    |  | 2007 over 2006ppt Change |  
|                      |  | 2007                         |    |  | 2006                     |   | 
|Gross margin:         |  |                              |    |  |                          |   |  |      |  
|Products              |  | (129                         | )% |  | 28                       | % |  | (157 | )
|Services              |  |                             |    |  |                         |   |  |     |  
|Combined gross margin |  | (129                         | )% |  | 28                       | % |  | (157 | )

The first quarter of fiscal 2008 decrease in cost of revenue of $2.2 million was attributable to a
92 percent volume decrease in revenue compared to the first quarter of fiscal 2007, as discussed above. The current level of ChargeSource revenue is insufficient to fully absorb our fixed manufacturing overhead. Cost of revenue for the first quarter
of fiscal 2008 included approximately $0.5 million of allocated under-absorbed fixed manufacturing overhead.

Operating Costs and Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | --- | --
|                                                                            |  | Three Months Ended April 30, |       |             | 2007 over 2006% Change |  
|                                                                            |  | 2007                         |       |             | 2006                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 386   |             | 120                    | % |  | $ | 424         |  | 10 | % |  | (9  | )%
|Allocated corporate overhead                                                |  |                              | 276   |             | 86                     | % |  |   | 470         |  | 11 | % |  | (41 | )%
|Gross engineering and support expenses                                      |  |                              | 423   |             | 132                    | % |  |   | 414         |  | 10 | % |  | 2   | % 
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   
|                                                                            |  | $                            | 1,085 |             | 338                    | % |  | $ | 1,308       |  | 31 | % |  | (17 | )%
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |     |   

Selling, general and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our management, sales, marketing and administrative personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our
ChargeSource business.

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

Gross engineering and support expenses generally consist of salaries, employer paid
benefits, and other personnel related costs of our electrical and mechanical design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and
related costs incurred in the development and support of our ChargeSource business.



24



---

##### Table of Contents

Wireless Test Solutions (WTS)

Revenue



|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|-------------- |  | ---------------------------- | ------ | - | ---------------------- | --- | - |  | - | ----- | ----------- |  | --- | - |  | --- | --
|               |  | Three Months Ended April 30, |        |   | 2007 over 2006% Change |    
|               |  | 2007                         |        |   | 2006                   |     |  
|               |  | (in thousands)               |        |   |                        |    
|               |  |                              |        |   | % ofRevenue            |     |   |  |   |       | % ofRevenue |  |     |   | 
|Revenue:       |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|Products       |  | $                            | 2,492  |   |                        | 95  | % |  | $ | 3,536 |             |  | 99  | % |  | (30 | )%
|Services       |  |                              | 124    |   |                        | 5   | % |  |   | 36    |             |  | 1   | % |  | 244 | % 
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|               |  | $                            | 2,616  |   |                        | 100 | % |  | $ | 3,572 |             |  | 100 | % |  | (27 | )%
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   
|Operating loss |  | $                            | (1,430 | ) |                        |     |   |  | $ | (888  | )           |  |     |   |  |     |   
|               |  |                              |        |   |                        |     |   |  |   |       |             |  |     |   |  |     |   



|               |  |                              |       |                        |   |       |  |       |   
|-------------- |  | ---------------------------- | ----- | ---------------------- | - | ----- |  | ----- | --
|               |  | Three Months Ended April 30, |       | 2007 over 2006% Change |  
|               |  | 2007                         |       | 2006                   |  
|               |  | (in thousands)               |       |                        |  
|Revenue:       |  |                              |       |                        |   |      
|Americas:      |  |                              |       |                        |   |       |  |       |   
|North America  |  | $                            | 2,154 |                        | $ | 2,563 |  | (16   | )%
|Others         |  |                              | 255   |                        |   | 223   |  | 14    | % 
|Europe         |  |                              | 65    |                        |   | 781   |  | (92   | )%
|Asia  Pacific |  |                              | 142   |                        |   | 5     |  | 2,740 | % 
|               |  |                              |       |                        |   |       |  |       |   
|               |  | $                            | 2,616 |                        | $ | 3,572 |  | (27   | )%
|               |  |                              |       |                        |   |       |  |       |   

The first quarter of fiscal 2008 decrease of product revenue of $1.0 million compared to the first
quarter of fiscal 2007 was attributable to decreased demand for our WTS products in both North America and Europe. During the first quarter of fiscal 2008, sales to SwissQual, the former exclusive reseller of our WTS products in our European region,
decreased approximately $0.7 million compared to the first quarter of fiscal 2007. Due to the sale of SwissQual to Spirent in January 2006, SwissQual ceased to be our reseller in Europe effective December 31, 2006.

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2007 over 2006% Change |  
|                                             |  | 2007                         |       |                     | 2006                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 1,019 |                     | 41                     | % |  | $ | 1,587               |  | 45 | % |  | (36 | )%
|Amortization  software development products |  |                              | 134   |                     | 5                      | % |  |   | 321                 |  | 9  | % |  | (58 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 1,153 |                     | 46                     | % |  |   | 1,908               |  | 54 | % |  | (40 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Services                                     |  |                              | 92    |                     | 74                     | % |  |   | 17                  |  | 47 | % |  | 441 | % 
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 1,245 |                     | 48                     | % |  | $ | 1,925               |  | 54 | % |  | (35 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



25



---

##### Table of Contents

|                      |  |                              |   |  |                          |   |  |     |  
|--------------------- |  | ---------------------------- | - |  | ------------------------ | - |  | --- | -
|                      |  | Three Months Ended April 30, |   |  | 2007 over 2006ppt Change |  
|                      |  | 2007                         |   |  | 2006                     |   | 
|Gross margin:         |  |                              |   |  |                          |   |  |     |  
|Products              |  | 54                           | % |  | 46                       | % |  | 8   |  
|Services              |  | 26                           | % |  | 53                       | % |  | (27 | )
|Combined gross margin |  | 52                           | % |  | 46                       | % |  | 6   |  

The first quarter of fiscal 2008 decrease in cost of revenue of $0.7 million was attributable to a
27 percent volume decrease in revenue and decreased amortization of capitalized software development costs compared to the first quarter of fiscal 2007. Currently, we expect to fully amortize previously capitalized software development by the end of
fiscal 2008.

Operating Costs and Expenses



|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | -- | -
|                                                                            |  | Three Months Ended April 30, |       |             | 2007 over 2006% Change |  
|                                                                            |  | 2007                         |       |             | 2006                   |   | 
|                                                                            |  | (in thousands)               |       |             |                        |  
|                                                                            |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 737   |             | 28                     | % |  | $ | 737         |  | 21 | % |  |   |  
|Allocated corporate overhead                                                |  |                              | 662   |             | 25                     | % |  |   | 483         |  | 13 | % |  | 37 | %
|Gross engineering and support expenses                                      |  |                              | 1,402 |             | 54                     | % |  |   | 1,315       |  | 37 | % |  | 7  | %
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  
|                                                                            |  | $                            | 2,801 |             | 107                    | % |  | $ | 2,535       |  | 71 | % |  | 11 | %
|                                                                            |  |                              |       |             |                        |   |  |   |             |  |    |   |  |    |  

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.

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.

We capitalize costs incurred for the development of software embedded in our WTS products
subsequent to establishing technological feasibility. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized
include direct labor and related overhead. We did not capitalize any software development costs in the first quarter of fiscal 2008 or 2007.



26



---

##### Table of Contents

Emergency Call Box Systems



|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |     |   
|---------------- |  | ---------------------------- | ----- | ----------- | ---------------------- | - |  | - | ----------- |  | --- | - |  | --- | --
|                 |  | Three Months Ended April 30, |       |             | 2007 over 2006% Change |  
|                 |  | 2007                         |       |             | 2006                   |   | 
|                 |  | (in thousands)               |       |             |                        |  
|                 |  |                              |       | % ofRevenue |                        |   |  |   | % ofRevenue |  |     |   | 
|Revenue:         |  |                              |       |             |                        |   |  |   |             |  |     |   |  |     |   
|Products         |  | $                            | 1,468 |             | 59                     | % |  | $ | 1,702       |  | 60  | % |  | (14 | )%
|Services         |  |                              | 1,010 |             | 41                     | % |  |   | 1,132       |  | 40  | % |  | (11 | )%
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |     |   
|                 |  | $                            | 2,478 |             | 100                    | % |  | $ | 2,834       |  | 100 | % |  | (13 | )%
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |     |   
|Operating income |  | $                            | 751   |             |                        |   |  | $ | 151         |  |     |   |  |     |   
|                 |  |                              |       |             |                        |   |  |   |             |  |     |   |  |     |   



|               |  |                              |       |                        |   |       |  |     |   
|-------------- |  | ---------------------------- | ----- | ---------------------- | - | ----- |  | --- | --
|               |  | Three Months Ended April 30, |       | 2007 over 2006% Change |  
|               |  | 2007                         |       | 2006                   |  
|               |  | (in thousands)               |       |                        |  
|Revenue:       |  |                              |       |                        |   |      
|Americas:      |  |                              |       |                        |   |       |  |     |   
|North America  |  | $                            | 2,478 |                        | $ | 2,834 |  | (13 | )%
|Others         |  |                              |      |                        |   |      |  |    |   
|Europe         |  |                              |      |                        |   |      |  |    |   
|Asia  Pacific |  |                              |      |                        |   |      |  |    |   
|               |  |                              |       |                        |   |       |  |     |   
|               |  | $                            | 2,478 |                        | $ | 2,834 |  | (13 | )%
|               |  |                              |       |                        |   |       |  |     |   

Revenue

The first quarter of fiscal 2008 decrease in call box revenue of $0.4 million compared to the first quarter of fiscal 2007, was primarily attributable to a decrease in sales of digital and TTY upgrades to our
installed base of call box systems under maintenance contracts. During the first quarter of fiscal 2008, we upgraded 497 call boxes with digital and/or TTY technologies and recorded revenue totaling approximately $1.0 million. Such upgrade revenue
also included revenue related to retrofit, site mitigation, and call box removal activities performed in conjunction with the upgrade of the call box systems, which totaled approximately $0.1 million. For the first quarter of fiscal 2007 we upgraded
528 call boxes and recorded revenue totaling approximately $1.4 million, which also includes revenue related to retrofit, site mitigation activities, and call box removal activities, which totaled approximately $0.3 million. Non-upgrade revenue for
first quarter of fiscal 2008 and 2007 totaled approximately $0.5 million and $0.3 million, respectively.

Cost of Revenue and Gross Margin



|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------- | ---------------------- | - |  | - | ------------------- |  | -- | - |  | --- | --
|                                             |  | Three Months Ended April 30, |       |                     | 2007 over 2006% Change |  
|                                             |  | 2007                         |       |                     | 2006                   |   | 
|                                             |  | (in thousands)               |       |                     |                        |  
|                                             |  |                              |       | % of RelatedRevenue |                        |   |  |   | % of RelatedRevenue |  |    |   | 
|Cost of revenue:                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|Products                                     |  | $                            | 584   |                     | 40                     | % |  | $ | 1,321               |  | 78 | % |  | (56 | )%
|                                             |  |                              |       |                     |                       
|Services                                     |  |                              | 667   |                     | 66                     | % |  |   | 804                 |  | 71 | % |  | (17 | )%
|Amortization  software development products |  |                              | 5     |                     | 1                      | % |  |   | 5                   |  | 1  | % |  |    |   
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  |                              | 672   |                     | 67                     | % |  |   | 809                 |  | 72 | % |  | (17 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   
|                                             |  | $                            | 1,256 |                     | 51                     | % |  | $ | 2,130               |  | 75 | % |  | (41 | )%
|                                             |  |                              |       |                     |                        |   |  |   |                     |  |    |   |  |     |   



27



---

##### Table of Contents

|                      |  |                              |   |  |                          |   |  |   
|--------------------- |  | ---------------------------- | - |  | ------------------------ | - |  | --
|                      |  | Three Months Ended April 30, |   |  | 2007 over 2006ppt Change
|                      |  | 2007                         |   |  | 2006                     |   | 
|Gross margin:         |  |                              |   |  |                          |   |  |   
|Products              |  | 60                           | % |  | 22                       | % |  | 38
|Services              |  | 33                           | % |  | 28                       | % |  | 5 
|Combined gross margin |  | 49                           | % |  | 25                       | % |  | 24

The first quarter of fiscal 2008 decrease in cost of product revenue of approximately $0.7 million
compared to the first quarter of fiscal 2007 was partially attributable to a 14 percent volume decrease in product revenue. Additionally, cost of product revenue for the first quarter of fiscal 2008 includes credits totaling approximately $0.3
million for an expired and unused settlement obligation to a former call box customer and previously accrued warranty obligations related to recently installed call box upgrades. No such credits were recorded during the first quarter of the prior
fiscal year. Excluding these credits, cost of product revenue for the first quarter of fiscal 2008 as a percentage of product revenue was 59 percent. Finally, cost of revenue for the first quarter of fiscal 2007 includes approximately $0.2 million
in incremental costs paid to subcontractors and allocated under-absorbed fixed manufacturing overhead compared to the first quarter of fiscal 2008. Excluding these incremental costs, cost of revenue for the first quarter of fiscal 2007 as a
percentage of revenue was approximately 67 percent.

Operating Costs and Expenses



|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |     |   
|--------------------------------------------------------------------------- |  | ---------------------------- | --- | ----------- | ---------------------- | - |  | - | ----------- |  | -- | - |  | --- | --
|                                                                            |  | Three Months Ended April 30, |     |             | 2007 over 2006% Change |  
|                                                                            |  | 2007                         |     |             | 2006                   |   | 
|                                                                            |  | (in thousands)               |     |             |                        |  
|                                                                            |  |                              |     | % ofRevenue |                        |   |  |   | % ofRevenue |  |    |   | 
|Operating expenses:                                                         |  |                              |     |             |                        |   |  |   |             |  |    |   |  |     |   
|Selling, general, and administrative expenses, excluding corporate overhead |  | $                            | 83  |             | 3                      | % |  | $ | 109         |  | 4  | % |  | (24 | )%
|Allocated corporate overhead                                                |  |                              | 262 |             | 11                     | % |  |   | 294         |  | 10 | % |  | (11 | )%
|Gross engineering and support expenses                                      |  |                              | 126 |             | 5                      | % |  |   | 150         |  | 5  | % |  | (16 | )%
|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |     |   
|                                                                            |  | $                            | 471 |             | 19                     | % |  | $ | 553         |  | 19 | % |  | (15 | )%
|                                                                            |  |                              |     |             |                        |   |  |   |             |  |    |   |  |     |   

Selling, general, and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our management, inside sales, and administrative personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our call box
business.

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 call box business.

Liquidity and Capital Resources

Cash and cash equivalents at April 30, 2007 decreased $4.4 million to $22.0 million as compared to $26.4 million at January 31, 2007. The
following table is a summary of our Condensed Consolidated Statements of Cash Flows.



28



---

##### Table of Contents

|                            |  |                              |        |   |      |   |        |  
|--------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                            |  | Three Months Ended April 30, |       
|                            |  | 2007                         |        |   | 2006 |  
|                            |  | (in thousands)               |       
|Cash provided by (used in): |  |                              |        |  
|Operating activities        |  | $                            | 2,722  |   |      | $ | (2,576 | )
|Investing activities        |  |                              | 303    |   |      |   | (264   | )
|Financing activities        |  |                              | (7,387 | ) |      |   |       |  

Operating Activities

Cash generated by operating activities of $2.7 million for the first quarter of fiscal 2008 was driven by collections of accounts receivable of $6.9 million offset by our net loss of $1.6 million and a reduction in
accrued liabilities of $2.8 million, primarily due to vendor payments for inventory as well as income tax payments.

As of April 30,
2007 we have accrued $610,000 payable to SwissQual for revenue sharing related to our Wireless Test Solutions sales for calendar year 2007. We expect to pay this liability in full during the current fiscal year.

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

Investing Activities

During the first quarter of
fiscal 2008 we accrued $361,000 relating primarily to the sale of wireless test solutions equipment that had been previously leased. We also purchased $58,000 of property and equipment.

Net cash used in investing activities was $0.3 million in the first quarter of fiscal 2007. We purchased approximately $0.4 million of property and
equipment in the first quarter of fiscal 2007 and received payments from SwissQual of $82,000 relating to escrowed consideration.

Financing Activities

During the first quarter of fiscal 2008 we declared and paid a special dividend of $1 per share of our outstanding common stock for a
total payment of $7.4 million.

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



29



---

##### 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 April 30, 2007, we had no
material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from
foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Interest Rate Sensitivity

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

We do not hold any derivative
financial instruments.

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

Equity Price Risk

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

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



30



---

##### 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.



31



---

##### Table of Contents

PART II  OTHER INFORMATION



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

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



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

None.



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

None.



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

None.



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

On June 4, 2007 the
Companys Board of Directors formed an Executive Committee to augment the resources devoted to evaluating the Companys strategic business and operational focus, improve its financial performance and lead the search for two additional
independent directors. The Executive Committee will be chaired by independent director Erik H. van der Kaay and includes independent director Jeffrey R. Hultman and Thomas A. Franza, director and Chief Executive Officer of Comarco.



|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



32



---

##### 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: June 14, 2007 |  |  |  | /s/ Thomas A. Franza                       |  | 
|                    |  |  |  | Thomas A. Franza                           |  | 
|                    |  |  |  | President and Chief Executive Officer      |  | 
|                    |  |  | 
|Date: June 14, 2007 |  |  |  | /s/ Daniel R. Lutz                         |  | 
|                    |  |  |  | Daniel R. Lutz                             |  | 
|                    |  |  |  | Vice President and Chief Financial Officer |  | 



33