##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended

JULY 31, 2006

OR



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

For the transition period from  to

Commission
file number 0-5449

COMARCO, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 95-2088894                          
|(State or other 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  þ    No ̈

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

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  þ

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

Yes ̈No  þ

The registrant had 7,378,789 shares of common stock outstanding as of September 7, 2006.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2006

TABLE OF CONTENTS



|                               |  |                                                                                                           |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                           |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                          
|                               |  |                                                                                                          
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                          |  |     
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Balance Sheets as of July 31, 2006 and January 31, 2006                            |  | 3   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2006 and 2005 |  | 4   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2006 and 2005           |  | 5   
|                               |  |                                                                                                          
|                               |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                               |  |                                                                                                          
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     |  | 19  
|                               |  |                                                                                                          
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                |  | 35  
|                               |  |                                                                                                          
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                                   |  | 36  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                          
|                               |  |                                                                                                          
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                         |  | 37  
|                               |  |                                                                                                          
|ITEM 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                               |  | 37  
|                               |  |                                                                                                          
|ITEM 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                                           |  | 37  
|                               |  |                                                                                                          
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                       |  | 37  
|                               |  |                                                                                                          
|ITEM 5.                        |  | OTHER INFORMATION                                                                                         |  | 38  
|                               |  |                                                                                                          
|ITEM 6.                        |  | EXHIBITS                                                                                                  |  | 38  
|                               | 
|SIGNATURES                     |  | 39                                                                                                       



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except
share amounts)



|                                                                                                                                                                       |  |              |        |                     |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------------- | - | ------
|                                                                                                                                                                       |  | July 31,2006 |        | January 31,2006 (A)
|ASSETS                                                                                                                                                                 |  |              |        |                     |   |       
|Current Assets:                                                                                                                                                        |  |              |        |                     |   |       
|Cash and cash equivalents                                                                                                                                              |  | $            | 22,989 |                     | $ | 26,017
|Short-term investments                                                                                                                                                 |  |              | 806    |                     |   | 1,166 
|Accounts receivable, net of reserves of $79 and $78                                                                                                                    |  |              | 10,718 |                     |   | 9,285 
|Accounts receivable subject to litigation, net of reserves of $0 and $480                                                                                              |  |              |       |                     |   | 500   
|Inventory, net of reserves of $1,812 and $1,910                                                                                                                        |  |              | 7,234  |                     |   | 8,749 
|Other current assets                                                                                                                                                   |  |              | 1,345  |                     |   | 423   
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total current assets                                                                                                                                                   |  |              | 43,092 |                     |   | 46,140
|Property and equipment, net                                                                                                                                            |  |              | 2,771  |                     |   | 1,595 
|Software development costs, net                                                                                                                                        |  |              | 708    |                     |   | 1,361 
|Acquired intangible assets, net                                                                                                                                        |  |              | 995    |                     |   | 1,257 
|Goodwill                                                                                                                                                               |  |              | 2,394  |                     |   | 2,394 
|Restricted cash                                                                                                                                                        |  |              | 500    |                     |   |      
|Other assets                                                                                                                                                           |  |              | 59     |                     |   | 58    
|                                                                                                                                                                       |  |              |        |                     |   |       
|                                                                                                                                                                       |  | $            | 50,519 |                     | $ | 52,805
|                                                                                                                                                                       |  |              |        |                     |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |              |        |                     |   |       
|Current Liabilities:                                                                                                                                                   |  |              |        |                     |   |       
|Accounts payable                                                                                                                                                       |  | $            | 821    |                     | $ | 727   
|Deferred revenue                                                                                                                                                       |  |              | 5,942  |                     |   | 5,480 
|Deferred compensation                                                                                                                                                  |  |              | 806    |                     |   | 1,166 
|Accrued liabilities                                                                                                                                                    |  |              | 6,768  |                     |   | 9,324 
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total current liabilities                                                                                                                                              |  |              | 14,337 |                     |   | 16,697
|Deferred rent                                                                                                                                                          |  |              | 657    |                     |   |      
|                                                                                                                                                                       |  |              |        |                     |   |       
|                                                                                                                                                                       |  |              | 14,994 |                     |   | 16,697
|                                                                                                                                                                       |  |              |        |                     |   |       
|Commitments and Contingencies                                                                                                                                          |  |              |        |                     |   |       
|Stockholders Equity:                                                                                                                                                  |  |              |        |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 31, 2006 and January 31,
2006, respectively                       |  |              |       |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized; 7,738,789 and 7,422,542 shares issued and outstanding at July 31, 2006
and January 31, 2006, respectively |  |              | 738    |                     |   | 742   
|Additional paid-in capital                                                                                                                                             |  |              | 13,808 |                     |   | 14,054
|Retained earnings                                                                                                                                                      |  |              | 20,979 |                     |   | 21,312
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total stockholders equity                                                                                                                                             |  |              | 35,525 |                     |   | 36,108
|                                                                                                                                                                       |  |              |        |                     |   |       
|                                                                                                                                                                       |  | $            | 50,519 |                     | $ | 52,805
|                                                                                                                                                                       |  |              |        |                     |   |       



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

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



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COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | -------------------------- | ------ | ---- | ------------------------ | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months EndedJuly 31, |        |      | Six Months EndedJuly 31, |       
|                                                             |  | 2006                       |        | 2005 |                          |        | 2006 |  |   | 2005   |  
|Revenue                                                      |  | $                          | 12,972 |      | $                        | 11,134 |      |  | $ | 23,528 |   |  | $ | 19,097 |  
|Cost of revenue                                              |  |                            | 8,246  |      |                          | 7,069  |      |  |   | 15,271 |   |  |   | 12,595 |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                 |  |                            | 4,726  |      |                          | 4,065  |      |  |   | 8,257  |   |  |   | 6,502  |  
|Selling, general, and administrative expenses                |  |                            | 2,606  |      |                          | 1,959  |      |  |   | 5,124  |   |  |   | 4,157  |  
|Engineering and support expenses                             |  |                            | 2,099  |      |                          | 1,803  |      |  |   | 3,977  |   |  |   | 3,617  |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                      |  |                            | 21     |      |                          | 303    |      |  |   | (844   | ) |  |   | (1,272 | )
|Other income, net                                            |  |                            | 221    |      |                          | 63     |      |  |   | 450    |   |  |   | 120    |  
|Gain on sale of investment in SwissQual, net                 |  |                            |       |      |                          |       |      |  |   | 61     |   |  |   |       |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes |  |                            | 242    |      |                          | 366    |      |  |   | (333   | ) |  |   | (1,152 | )
|Income tax expense                                           |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  |                            | 242    |      |                          | 366    |      |  |   | (333   | ) |  |   | (1,152 | )
|Loss from discontinued operations                            |  |                            |       |      |                          | (39    | )    |  |   |       |   |  |   | (42    | )
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                          | 242    |      | $                        | 327    |      |  | $ | (333   | ) |  | $ | (1,194 | )
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Basic and diluted income (loss) per share:                   |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  | $                          | 0.03   |      | $                        | 0.04   |      |  | $ | (0.05  | ) |  | $ | (0.16  | )
|Loss from discontinued operations                            |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                          | 0.03   |      | $                        | 0.04   |      |  | $ | (0.05  | ) |  | $ | (0.16  | )
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding:                  |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Basic                                                        |  |                            | 7,391  |      |                          | 7,422  |      |  |   | 7,410  |   |  |   | 7,422  |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Diluted                                                      |  |                            | 7,436  |      |                          | 7,431  |      |  |   | 7,410  |   |  |   | 7,422  |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Common shares outstanding                                    |  |                            | 7,379  |      |                          | 7,422  |      |  |   | 7,379  |   |  |   | 7,422  |  
|                                                             |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  

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



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COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                       |  |                          |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                       |  | Six Months EndedJuly 31, |       
|                                                                                                       |  | 2006                     |        |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |  |                          |        |   |      |   |        |  
|Net loss                                                                                               |  | $                        | (333   | ) |      | $ | (1,194 | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                                          |  |                          | 1,533  |   |      |   | 1,984  |  
|Gain on sale/retirement of property and equipment                                                      |  |                          | (21    | ) |      |   |       |  
|Gain on sale of investment in SwissQual                                                                |  |                          | (82    | ) |      |   |       |  
|Stock based compensation expense                                                                       |  |                          | 230    |   |      |   |       |  
|Provision for doubtful accounts receivable                                                             |  |                          | 6      |   |      |   | (31    | )
|Provision for obsolete inventory                                                                       |  |                          | 473    |   |      |   | 711    |  
|Changes in operating assets and liabilities:                                                           |  |                          |        |   |      |   |        |  
|Accounts receivable                                                                                    |  |                          | (938   | ) |      |   | (4,008 | )
|Amounts due from affiliate                                                                             |  |                          |       |   |      |   | (1,926 | )
|Inventory                                                                                              |  |                          | 1,041  |   |      |   | (389   | )
|Other assets                                                                                           |  |                          | (922   | ) |      |   | 468    |  
|Accounts payable                                                                                       |  |                          | 94     |   |      |   | 554    |  
|Deferred revenue                                                                                       |  |                          | 462    |   |      |   | (32    | )
|Deferred rent                                                                                          |  |                          | 657    |   |      |   |       |  
|Accrued liabilities                                                                                    |  |                          | (2,556 | ) |      |   | 1,038  |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Net cash used in operating activities                                                                  |  |                          | (356   | ) |      |   | (2,825 | )
|                                                                                                       |  |                          |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |  |                          |        |   |      |   |        |  
|Proceeds from sales of property and equipment                                                          |  |                          | 22     |   |      |   |       |  
|Purchases of property and equipment                                                                    |  |                          | (1,796 | ) |      |   | (367   | )
|Acquired intangible assets                                                                             |  |                          |       |   |      |   | (51    | )
|Increase in restricted cash                                                                            |  |                          | (500   | ) |      |   |       |  
|Proceeds from sale of investment in SwissQual                                                          |  |                          | 82     |   |      |   |       |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Net cash used in investing activities                                                                  |  |                          | (2,192 | ) |      |   | (418   | )
|                                                                                                       |  |                          |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |  |                          |        |   |      |   |        |  
|Purchase and retirement of common stock                                                                |  |                          | (480   | ) |      |   |       |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Net cash used in financing activities                                                                  |  |                          | (480   | ) |      |   |       |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                              |  |                          | (3,028 | ) |      |   | (3,243 | )
|Cash and cash equivalents, beginning of period                                                         |  |                          | 26,017 |   |      |   | 12,270 |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                               |  | $                        | 22,989 |   |      | $ | 9,027  |  
|                                                                                                       |  |                          |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                                     |  |                          |        |   |      |   |        |  
|Cash paid for income taxes                                                                             |  | $                        | 173    |   |      | $ | 2      |  
|                                                                                                       |  |                          |        |   |      |   |        |  

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

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



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

Basis of
Presentation:

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

Principles of Consolidation:

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

Use of Estimates:

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

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

Reclassifications:

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



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

The Company grants stock
options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Prior to January 31, 2006, the Company accounted for stock option grants using the intrinsic method in
accordance with Accounting Principles Board (APB) Opinion No. 25,



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Accounting for Stock Issued to Employees and related interpretations in accounting for its stock-based compensation plans. The Company adopted
the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. Accordingly, no compensation expense was recognized
for the stock option grants. Had compensation cost for the Companys stock option plans been determined based on the fair value at the grant date for awards during the three and six months ended July 31, 2005, consistent with the
provisions of SFAS No. 123, the Companys net income (loss), basic income (loss) per share, and diluted income (loss) per share would have been adjusted to the pro forma amounts as follows (in thousands except per share amounts):



|                                                                                                                                            |  |                                |      |   |                              |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---- | - | ---------------------------- | - | ------ | -
|                                                                                                                                            |  | Three MonthsEnded July 31,2005 |      |   | Six MonthsEnded July 31,2005 |  
|Net income (loss):                                                                                                                          |  |                                |      |   |                              |   |        |  
|As reported                                                                                                                                 |  | $                              | 327  |   |                              | $ | (1,194 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                | (87  | ) |                              |   | (174   | )
|                                                                                                                                            |  |                                |      |   |                              |   |        |  
|Pro forma                                                                                                                                   |  | $                              | 240  |   |                              | $ | (1,368 | )
|                                                                                                                                            |  |                                |      |   |                              |   |        |  
|Income (loss) per common share  basic:                                                                                                     |  |                                |      |   |                              |   |        |  
|As reported                                                                                                                                 |  | $                              | 0.04 |   |                              | $ | (0.16  | )
|Pro forma                                                                                                                                   |  | $                              | 0.03 |   |                              | $ | (0.18  | )
|Income (loss) per common share  diluted:                                                                                                   |  |                                |      |   |                              |   |        |  
|As reported                                                                                                                                 |  | $                              | 0.04 |   |                              | $ | (0.16  | )
|Pro forma                                                                                                                                   |  | $                              | 0.03 |   |                              | $ | (0.18  | )

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

The compensation expense recognized in connection with the adoption of SFAS
No. 123R was $146,000 and $229,000 for the three and six months ended July 31, 2006, respectively. Thus, earnings per share were decreased by $0.02 for the three months ended July 31, 2006, and the loss per share was increased by
$0.03 for the six months ended July 31, 2006. There was no impact on cash flows from operating, investing, or financing activities in connection with the adoption of SFAS No. 123R. The total compensation cost related to nonvested awards
not yet recognized is approximately $1.4 million, which will be expensed over a weighted average remaining life of 24.7 months.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The fair value of options granted under the Companys stock option plans during the three and
six months ended July 31, 2006 and 2005 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



|                                         |  |                              |   |  |                              |  
|---------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | -
|                                         |  | Six MonthsEnded July 31,2006 |   |  | Six MonthsEnded July 31,2005 |  
|Weighted average risk-free interest rate |  | 4.8                          | % |  | 3.8                          | %
|Expected life (in years)                 |  | 6.1                          |   |  | 6.0                          |  
|Expected stock volatility                |  | 44.2                         | % |  | 49.9                         | %
|Dividend yield                           |  | None                         |   |  | None                         |  
|Expected forfeitures                     |  | 10.6                         | % |  | 10                           | %

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

The director stock-based compensation plan (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 our 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 of 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 of the 2005 Plan expire as determined by the committee, but no later than ten years after the date of grant.



|                             |  |                     |   |  |                                |       |                                        |   |    
|---------------------------- |  | ------------------- | - |  | ------------------------------ | ----- | -------------------------------------- | - | ---
|                             |  | Outstanding Options
|                             |  | Number ofShares     |   |  | Weighted-AverageExercise Price |       | AggregateIntrinsic Value(in thousands)
|Balance, January 31, 2006    |  | 861,520             |   |  | $                              | 12.43 |                                        |   |    
|Options granted              |  | 207,000             |   |  |                                | 10.00 |                                        |   |    
|Options canceled or expired  |  | (1,250              | ) |  |                                | 12.01 |                                        |   |    
|Options exercised            |  | (45,000             | ) |  |                                | 9.72  |                                        |   |    
|                             |  |                     |   |  |                                |       |                                        |   |    
|Balance, July 31, 2006       |  | 1,022,270           |   |  |                                | 12.06 |                                        | $ | 675
|                             |  |                     |   |  |                                |       |                                        |   |    
|Exercisable at July 31, 2006 |  |                     |   |  |                                |       |                                        | $ | 276
|                             |  |                     |   |  |                                |       |                                        |   |    



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The average fair value of each of the options granted during the six months ended July 31, 2006
was $10.00. The following table summarizes information about the Companys stock options outstanding at July 31, 2006:



|                        |                |                     |           |                                        |           |                             |   |                   |  |                             |  |   |      
|----------------------- | -------------- | ------------------- | --------- | -------------------------------------- | --------- | --------------------------- | - | ----------------- |  | --------------------------- |  | - | -----
|                        |                | Options Outstanding |           | Options Exercisable                   
|Range of ExercisePrices |                | NumberOutstanding   |           | Weighted-Avg.RemainingContractual Life |           | Weighted-Avg.Exercise Price |   | NumberExercisable |  | Weighted-Avg.Exercise Price
|$                       | 6.91 to 9.89   |                     | 393,000   |                                        | 6.4       |                             | $ | 8.00              |  | 156,750                     |  | $ | 7.96 
|                        | 10.43 to 12.41 |                     | 265,145   |                                        | 7.2       |                             |   | 10.90             |  | 107,645                     |  |   | 11.59
|                        | 13.21 to 17.50 |                     | 221,625   |                                        | 2.8       |                             |   | 14.49             |  | 221,625                     |  |   | 14.49
|                        | 19.33 to 23.67 |                     | 142,500   |                                        | 3.8       |                             |   | 21.63             |  | 142,500                     |  |   | 21.63
|                        |                |                     |           |                                        |           |                             |   |                   |  |                             |  |   |      
|                        | 6.91 to 23.67  |                     | 1,022,270 |                                        | 5.5 years |                             |   | 12.06             |  | 628,520                     |  |   | 13.98
|                        |                |                     |           |                                        |           |                             |   |                   |  |                             |  |   |      

Stock options exercisable at July 31, 2006 were 628,520 at a weighted-average exercise price
of $13.98. At July 31, 2006, shares available for future grants under the 2005 Plan were 250,500 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 July 31, 2006, the Company owned all of the 3,353,000 outstanding shares of CWT common
stock. The fair market value of the shares and the exercise dates of the options are determined by the compensation committee of the Companys Board of Directors; however, no option may be exercised prior to one year following the grant of the
option. The options expire as determined by the compensation committee, but not later than ten years and one week after the date of grant.

During the three and six months ended July 31, 2006, no options were granted or exercised under the CWT option plan. Stock options exercisable at July 31, 2006 were 3,000 at an exercise price of $17.62, with a remaining
contractual life of 0.6 years. Shares available under the plan for future grants at July 31, 2006 were 198,000.

The following table
summarizes information about CWT stock options outstanding at July 31, 2006:



|                        |       |                     |       |                                        |           |                             |   |                   |  |                             |  |   |      
|----------------------- | ----- | ------------------- | ----- | -------------------------------------- | --------- | --------------------------- | - | ----------------- |  | --------------------------- |  | - | -----
|                        |       | Options Outstanding |       | Options Exercisable                   
|Range ofExercise Prices |       | NumberOutstanding   |       | Weighted-Avg.RemainingContractual Life |           | Weighted-Avg.Exercise Price |   | NumberExercisable |  | Weighted-Avg.Exercise Price
|$                       | 17.62 |                     | 3,000 |                                        | 0.6 years |                             | $ | 17.62             |  | 3,000                       |  | $ | 17.62
|                        |       |                     |       |                                        |           |                             |   |                   |  |                             |  |   |      
|                        |       |                     | 3,000 |                                        | 0.6 years |                             |   |                   |  | 3,000                       |  |   |      
|                        |       |                     |       |                                        |           |                             |   |                   |  |                             |  |   |      



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

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

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company is
required to adopt FIN 48 effective February 1, 2007. The cumulative effect of initially adopting FIN 48 is to record



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



an adjustment to opening retained earnings in the year of adoption and should be presented separately. Only tax positions that meet the more likely than not
recognition threshold at the effective date may be recognized upon adoption of FIN 48. The Company is in the process of evaluating the impact of the adoption of the Interpretation on the Companys consolidated financial statements.



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

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

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



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

During 1992, the
Companys Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through July 31, 2006, the Company repurchased approximately 2.6 million
shares for an average price of $8.24 per share. During the three and six months ended July 31, 2006, the Company repurchased 51,278 shares of common stock at an average price of $9.36 per share.



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

The Company calculates
net earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Since the
Company incurred a net loss for the six months ended July 31, 2006 and 2005, basic and diluted loss per share were the same because the inclusion of potential common shares in the calculation would have been antidilutive.

Potential common shares of 64,005 have been excluded from diluted weighted average common shares for the six months ended July 31, 2006, as the
effect would have been antidilutive. Similarly, potential common shares of 12,735 have been excluded from diluted weighted average common shares for the six months ended July 31, 2005, as the effect would have been antidilutive.



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------ |  | -------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                         |  | Three Months EndedJuly 31, |       |      | Six Months EndedJuly 31, |      
|                                                                         |  | 2006                       |       | 2005 |                          |       | 2006 |  |   | 2005  |  
|Basic:                                                                   |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                 |  | $                          | 242   |      | $                        | 366   |      |  | $ | (333  | ) |  | $ | (1,152 | )
|Weighted average shares outstanding                                      |  |                            | 7,391 |      |                          | 7,422 |      |  |   | 7,410 |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share from continuing operations   |  | $                          | 0.03  |      | $                        | 0.04  |      |  | $ | (0.05 | ) |  | $ | (0.16  | )
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Loss from discontinued operations                                        |  | $                          |      |      | $                        | (39   | )    |  | $ |      |   |  | $ | (42    | )
|Weighted average shares outstanding                                      |  |                            |      |      |                          | 7,422 |      |  |   |      |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share from discontinued operations |  | $                          |      |      | $                        |      |      |  | $ |      |   |  | $ |       |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Net income (loss)                                                        |  | $                          | 242   |      | $                        | 327   |      |  | $ | (333  | ) |  | $ | (1,194 | )
|Weighted average shares outstanding                                      |  |                            | 7,391 |      |                          | 7,422 |      |  |   | 7,410 |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share                              |  | $                          | 0.03  |      | $                        | 0.04  |      |  | $ | (0.05 | ) |  | $ | (0.16  | )
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Diluted:                                                                 |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                 |  | $                          | 242   |      | $                        | 366   |      |  | $ | (333  | ) |  | $ | (1,152 | )
|Weighted average shares outstanding                                      |  |                            | 7,436 |      |                          | 7,431 |      |  |   | 7,410 |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share from continuing operations   |  | $                          | 0.03  |      | $                        | 0.04  |      |  | $ | (0.05 | ) |  | $ | (0.16  | )
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Loss from discontinued operations                                        |  | $                          |      |      | $                        | (39   | )    |  | $ |      |   |  | $ | (42    | )
|Weighted average shares outstanding                                      |  |                            |      |      |                          | 7,431 |      |  |   |      |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share from discontinued operations |  | $                          |      |      | $                        |      |      |  | $ |      |   |  | $ |       |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Net income (loss)                                                        |  | $                          | 242   |      | $                        | 327   |      |  | $ | (333  | ) |  | $ | (1,194 | )
|Weighted average shares outstanding                                      |  |                            | 7,436 |      |                          | 7,431 |      |  |   | 7,410 |   |  |   | 7,422  |  
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share                              |  | $                          | 0.03  |      | $                        | 0.04  |      |  | $ | (0.05 | ) |  | $ | (0.16  | )
|                                                                         |  |                            |       |      |                          |       |      |  |   |       |   |  |   |        |  



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

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

Until the first quarter of fiscal 2006, when the Company changed its accounting for SwissQual revenue to the full accrual basis, revenue attributable to sales to SwissQual was deferred until receipt of payment. Commencing with the first
quarter of fiscal 2006, the Company changed its accounting for sales to SwissQual based upon



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



SwissQuals financial strength and past payment history and the lack of the Companys ability to assert financial influence over the operations of
SwissQual. The table below reflects the impact that change had on revenue, operating loss, and earnings (loss) per share for the quarter ended April 30, 2005 (in thousands except earnings (loss) per share).



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



|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 revenue for the three and six months ended July 31, 2006 and 2005 are listed below.



|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|--------------------------- |  | --------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                            |  | Three Months Ended July 31, |       
|                            |  | 2006                        |        |  | 2005 |  
|                            |  | (In thousands)              |       
|Total revenue               |  | $                           | 12,972 |  | 100  | % |  | $ | 11,134 |  | 100 | %
|Customer concentration:     |  |                             |        |  |      |   |  |   |        |  |     |  
|SwissQual                   |  |                             | 506    |  | 4    | % |  |   | 2,938  |  | 26  | %
|Verizon Wireless            |  |                             | 1,584  |  | 12   | % |  |   | 1,828  |  | 17  | %
|Kensington Technology Group |  |                             | 4,061  |  | 31   | % |  |   | 1,687  |  | 15  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|                            |  | $                           | 6,151  |  | 47   | % |  | $ | 6,453  |  | 58  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  



|                            |  |                           |        |  |      |   |  |   |        |  |     |  
|--------------------------- |  | ------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                            |  | Six Months Ended July 31, |       
|                            |  | 2006                      |        |  | 2005 |  
|                            |  | (In thousands)            |       
|Total revenue               |  | $                         | 23,528 |  | 100  | % |  | $ | 19,097 |  | 100 | %
|Customer concentration:     |  |                           |        |  |      |   |  |   |        |  |     |  
|SwissQual                   |  |                           | 1,175  |  | 5    | % |  |   | 4,113  |  | 22  | %
|Kensington Technology Group |  |                           | 8,100  |  | 34   | % |  |   | 3,489  |  | 18  | %
|Verizon Wireless            |  |                           | 3,780  |  | 16   | % |  |   | 1,911  |  | 10  | %
|                            |  |                           |        |  |      |   |  |   |        |  |     |  
|                            |  | $                         | 13,055 |  | 55   | % |  | $ | 9,513  |  | 50  | %
|                            |  |                           |        |  |      |   |  |   |        |  |     |  

In addition, the Company derived 30 percent and 20 percent of its revenue from
governmental agencies in the three months ended July 31, 2006, and 2005, respectively. The Company derived 32 percent and 23 percent of its revenue from governmental agencies in the six months ended July 31, 2006, and 2005,
respectively.

The Companys European region is served by its reseller, SwissQual Holding Inc. (SwissQual). Through the
end of fiscal 2005, revenue attributable to sales to SwissQual was deferred until receipt of payment. Commencing with the first quarter of fiscal 2006, the Company changed its accounting for sales to SwissQual by



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



recognizing revenue on a full accrual basis. This change was made based upon SwissQuals financial strength and payment history and the lack of the
Companys ability to assert financial influence over the operations of SwissQual. The Companys revenue for the six months ended July 31, 2005 increased by approximately $1.0 million due to this change.

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



|                            |  |              |        |  |                 |   |  |   |       |  |     |  
|--------------------------- |  | ------------ | ------ |  | --------------- | - |  | - | ----- |  | --- | -
|                            |  | July 31,2006 |        |  | January 31,2006 |  
|Total accounts receivable   |  | $            | 10,797 |  | 100             | % |  | $ | 9,363 |  | 100 | %
|Customer concentration:     |  |              |        |  |                 |   |  |   |       |  |     |  
|SwissQual                   |  |              |       |  |                |   |  |   | 2,335 |  | 25  | %
|Kensington Technology Group |  |              | 3,994  |  | 37              | % |  |   | 3,292 |  | 35  | %
|Verizon Wireless            |  |              | 1,248  |  | 12              | % |  |   |      |  |    |  
|                            |  |              |        |  |                 |   |  |   |       |  |     |  
|                            |  | $            | 5,242  |  | 49              | % |  | $ | 5,627 |  | 60  | %
|                            |  |              |        |  |                 |   |  |   |       |  |     |  



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

Inventory consists of the following (in
thousands):



|                |  |              |       |                 |   |      
|--------------- |  | ------------ | ----- | --------------- | - | -----
|                |  | July 31,2006 |       | January 31,2006
|Raw materials   |  | $            | 2,611 |                 | $ | 4,359
|Work in process |  |              | 463   |                 |   | 915  
|Finished goods  |  |              | 4,160 |                 |   | 3,475
|                |  |              |       |                 |   |      
|                |  | $            | 7,234 |                 | $ | 8,749
|                |  |              |       |                 |   |      



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

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



|                                       |  |              |        |   |                 |   |        |  
|-------------------------------------- |  | ------------ | ------ | - | --------------- | - | ------ | -
|                                       |  | July 31,2006 |        |   | January 31,2006 |  
|Capitalized software development costs |  | $            | 8,444  |   |                 | $ | 8,444  |  
|Less: accumulated amortization         |  |              | (7,736 | ) |                 |   | (7,083 | )
|                                       |  |              |        |   |                 |   |        |  
|                                       |  | $            | 708    |   |                 | $ | 1,361  |  
|                                       |  |              |        |   |                 |   |        |  

Capitalized software development costs for the six months ended July 31, 2006 and 2005
totaled $0. Amortization of software development costs for the six months ended July 31, 2006 and 2005 totaled $653,000 and $976,000, respectively, and have been reported in cost of revenue in the accompanying condensed consolidated financial
statements. Amortization of software development costs for the three months ended July 31, 2006 and 2005 totaled $326,000 and $488,000, respectively. The amortization period for the software costs capitalized is the shorter of the economic life
of the related product or based on expected unit sales under the sales ratio method, typically two to four years.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

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



|                                  |  |              |        |   |                 |   |        |  
|--------------------------------- |  | ------------ | ------ | - | --------------- | - | ------ | -
|                                  |  | July 31,2006 |        |   | January 31,2006 |  
|Goodwill                          |  | $            | 2,394  |   |                 | $ | 2,394  |  
|                                  |  |              |        |   |                 |   |        |  
|Acquired intangible assets:       |  |              |        |   |                 |   |        |  
|Definite-lived intangible assets: |  |              |        |   |                 |   |        |  
|Software algorithms               |  | $            |       |   |                 | $ |       |  
|License rights                    |  |              | 1,355  |   |                 |   | 1,355  |  
|Intellectual property rights      |  |              | 1,244  |   |                 |   | 1,244  |  
|                                  |  |              |        |   |                 |   |        |  
|                                  |  |              | 2,599  |   |                 |   | 2,599  |  
|Less: accumulated amortization    |  |              | (1,604 | ) |                 |   | (1,342 | )
|                                  |  |              |        |   |                 |   |        |  
|                                  |  | $            | 995    |   |                 | $ | 1,257  |  
|                                  |  |              |        |   |                 |   |        |  

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

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



|                               |  |                        |       |          |   |                      |  |       |   |  |   |      
|------------------------------ |  | ---------------------- | ----- | -------- | - | -------------------- |  | ----- | - |  | - | -----
|                               |  | Wireless TestSolutions |       | Call Box |   | Mobile PowerProducts |  | Total
|Balance as of July 31, 2006    |  | $                      | 1,898 |          | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |          |   |                      |  |       |   |  |   |      
|Balance as of January 31, 2006 |  | $                      | 1,898 |          | $ | 496                  |  | $     |  |  | $ | 2,394
|                               |  |                        |       |          |   |                      |  |       |   |  |   |      

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



|                                     |  |                     |    
|------------------------------------ |  | ------------------- | ---
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |    
|2007                                 |  |                     | 245
|2008                                 |  |                     | 225
|2009                                 |  |                     | 178
|2010                                 |  |                     | 178
|2011                                 |  |                     | 126
|Thereafter                           |  |                     | 43 
|                                     |  |                     |    
|Total estimated amortization expense |  | $                   | 995
|                                     |  |                     |    

Amortization of definite-lived acquired intangible assets for the quarters ended July 31,
2006 and 2005 totaled $130,000 and $127,000, respectively. For the six months ended July 31, 2006 and 2005, amortization of definite-lived acquired intangible assets totaled $262,000 and $257,000, respectively. The Company ceased amortizing
goodwill beginning February 1, 2002 upon adoption of SFAS No. 142.



14



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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):



|                                                 |  |                          |      |   |      |   |      |  
|------------------------------------------------ |  | ------------------------ | ---- | - | ---- | - | ---- | -
|                                                 |  | Six Months EndedJuly 31, |     
|                                                 |  | 2006                     |      |   | 2005 |  
|Beginning balance                                |  | $                        | 172  |   |      | $ | 177  |  
|Accruals for warranties issued during the period |  |                          | 431  |   |      |   | 657  |  
|Utilization                                      |  |                          | (312 | ) |      |   | (366 | )
|                                                 |  |                          |      |   |      |   |      |  
|                                                 |  | $                        | 291  |   |      | $ | 468  |  
|                                                 |  |                          |      |   |      |   |      |  

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

Extended Warranty

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



|                                      |  |                          |       |   |      |   |       |  
|------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                                      |  | Six Months EndedJuly 31, |      
|                                      |  | 2006                     |       |   | 2005 |  
|Beginning balance                     |  | $                        | 2,239 |   |      | $ | 1,108 |  
|Recognition of revenue                |  |                          | (414  | ) |      |   | (483  | )
|Deferral of revenue for new contracts |  |                          | 1,216 |   |      |   | 508   |  
|                                      |  |                          |       |   |      |   |       |  
|                                      |  | $                        | 3,041 |   |      | $ | 1,133 |  
|                                      |  |                          |       |   |      |   |       |  



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

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



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

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

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



15



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 11,100 call boxes under long-term agreements.

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

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



|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|------------------- |  | -------------------------------- | ----- | - | -------- | - | ----- | -------------------- |  | - | ----- | -- |  | - | ------ | -
|                    |  | Three Months Ended July 31, 2006 |      
|                    |  | Wireless TestSolutions           |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                | 3,710 |   |          | $ | 4,745 |                      |  | $ | 4,517 |    |  | $ | 12,972 |  
|Cost of revenue     |  |                                  | 1,576 |   |          |   | 3,277 |                      |  |   | 3,393 |    |  |   | 8,246  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit        |  | $                                | 2,134 |   |          | $ | 1,468 |                      |  | $ | 1,124 |    |  | $ | 4,726  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                  | 57.5  | % |          |   | 30.9  | %                    |  |   | 24.9  | %  |  |   | 36.4   | %
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Six Months Ended July 31, 2006   |      
|                    |  | Wireless TestSolutions           |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                | 7,283 |   |          | $ | 7,579 |                      |  | $ | 8,666 |    |  | $ | 23,528 |  
|Cost of revenue     |  |                                  | 3,501 |   |          |   | 5,407 |                      |  |   | 6,363 |    |  |   | 15,271 |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit        |  | $                                | 3,782 |   |          | $ | 2,172 |                      |  | $ | 2,303 |    |  | $ | 8,257  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                  | 51.9  | % |          |   | 28.7  | %                    |  |   | 26.6  | %  |  |   | 35.1   | %
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Three Months Ended July 31, 2005 |      
|                    |  | Wireless TestSolutions           |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                | 5,890 |   |          | $ | 3,539 |                      |  | $ | 1,705 |    |  | $ | 11,134 |  
|Cost of revenue     |  |                                  | 2,979 |   |          |   | 2,076 |                      |  |   | 2,014 |    |  |   | 7,069  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit (loss) |  | $                                | 2,911 |   |          | $ | 1,463 |                      |  | $ | (309  | )  |  | $ | 4,065  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                  | 49.4  | % |          |   | 41.3  | %                    |  |   | (18.1 | %) |  |   | 36.5   | %
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|                    | 
|                    |  | Six Months Ended July 31, 2005   |      
|                    |  | Wireless TestSolutions           |       |   | Call Box |   |       | Mobile PowerProducts |  |   | Total |   
|Revenue             |  | $                                | 9,609 |   |          | $ | 5,950 |                      |  | $ | 3,538 |    |  | $ | 19,097 |  
|Cost of revenue     |  |                                  | 5,141 |   |          |   | 3,607 |                      |  |   | 3,847 |    |  |   | 12,595 |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross profit (loss) |  | $                                | 4,468 |   |          | $ | 2,343 |                      |  | $ | (309  | )  |  | $ | 6,502  |  
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  
|Gross margin        |  |                                  | 46.5  | % |          |   | 39.4  | %                    |  |   | (8.7  | %) |  |   | 34.0   | %
|                    |  |                                  |       |   |          |   |       |                      |  |   |       |    |  |   |        |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|-------------------------- |  | ---------------------- | ------ | -------- | - | -------------------- |  | --------- | ----- | ----- | - | ------ |  | - | ------
|                           |  | Wireless TestSolutions |        | Call Box |   | Mobile PowerProducts |  | Corporate |       | Total
|Assets at July 31, 2006    |  | $                      | 10,010 |          | $ | 8,874                |  | $         | 5,931 |       | $ | 25,704 |  | $ | 50,519
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       
|Assets at January 31, 2006 |  | $                      | 13,775 |          | $ | 6,834                |  | $         | 5,013 |       | $ | 27,183 |  | $ | 52,805
|                           |  |                        |        |          |   |                      |  |           |       |       |   |        |  |   |       

The following table presents revenue by geographic region for the three and six months ended
July 31, 2006 and 2005 (in thousands):



|                                  |  |                            |        |                          |   |        |  |      |        |  |   |       
|--------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|Revenue by Region: (in thousands) |  | Three Months EndedJuly 31, |        | Six Months EndedJuly 31,
|                                  |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|North America                     |  | $                          | 11,109 |                          | $ | 7,399  |  | $    | 20,049 |  | $ | 12,093
|Europe                            |  |                            | 759    |                          |   | 2,747  |  |      | 2,147  |  |   | 4,922 
|Asia                              |  |                            | 235    |                          |   | 72     |  |      | 240    |  |   | 84    
|Latin America                     |  |                            | 869    |                          |   | 916    |  |      | 1,092  |  |   | 1,998 
|                                  |  |                            |        |                          |   |        |  |      |        |  |   |       
|                                  |  | $                          | 12,972 |                          | $ | 11,134 |  | $    | 23,528 |  | $ | 19,097
|                                  |  |                            |        |                          |   |        |  |      |        |  |   |       



|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.

Severance Commitments

The Company entered into severance compensation agreements with certain executive and other officers. 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.



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Letter of Credit

In May 2006, the Company obtained a $500,000 letter of credit from US Bank pursuant to a lease provision for its new corporate offices to which the Company relocated on August 28, 2006. The letter of credit is
secured by a certificate of deposit with a 6-month maturity.

Legal Contingencies

On April 4, 2006, CWT and Targus, Inc. (Targus), the Companys former ChargeSource distributor, attended a voluntary mediation to
resolve a long-standing dispute and executed a stipulation for settlement agreement whereby Targus agreed to pay CWT $500,000 and both parties agreed to a release and discharge of all claims and causes of actions brought by each party. Subsequent to
that date and during the second quarter of fiscal 2007, both parties entered into a settlement agreement and Targus paid the Company $500,000. All complaints filed by both parties were also dismissed.

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



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##### Table of Contents

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

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

Forward-Looking Statements

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

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

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

Basis of Presentation

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

Executive Summary

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

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



19



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##### Table of Contents

The following table sets forth our revenue for the business segments for the three and six months ended
July 31, 2006 and 2005:



|             |  |                    |        |              |                  |         |                |       |              |  |              |        |         |   |        |  |       |   
|------------ |  | ------------------ | ------ | ------------ | ---------------- | ------- | -------------- | ----- | ------------ |  | ------------ | ------ | ------- | - | ------ |  | ----- | --
|             |  | Three Months Ended |        |              | Six Months Ended |        
|             |  | July 31,2006       |        | July 31,2005 |                  | %Change |                |       | July 31,2006 |  | July 31,2005 |        | %Change |  
|             |  | (in thousands)     |        |              |                  |         | (in thousands) |       |              | 
|Revenue:     |  |                    |        |              |                  |         |                |       |              |  |              |        |         |   |        |  |       |   
|WTS          |  | $                  | 3,710  |              | $                | 5,890   |                | (37.0 | %)           |  | $            | 7,283  |         | $ | 9,609  |  | (24.2 | %)
|Call Box     |  |                    | 4,745  |              |                  | 3,539   |                | 34.1  | %            |  |              | 7,579  |         |   | 5,950  |  | 27.4  | % 
|ChargeSource |  |                    | 4,517  |              |                  | 1,705   |                | 164.9 | %            |  |              | 8,666  |         |   | 3,538  |  | 144.9 | % 
|             |  |                    |        |              |                  |         |                |       |              |  |              |        |         |   |        |  |       |   
|             |  | $                  | 12,972 |              | $                | 11,134  |                | 16.5  | %            |  | $            | 23,528 |         | $ | 19,097 |  | 23.2  | % 
|             |  |                    |        |              |                  |         |                |       |              |  |              |        |         |   |        |  |       |   

Management currently considers the following events, trends, and uncertainties to be important to
understanding our three business segments and corresponding operating results for the three and six months ended July 31, 2006.

Wireless Test
Solutions



| |  |  | Our North American region experienced significant year-over-year growth for the six months ended July 31, 2006 compared to the corresponding period of fiscal 2006 driven by
sales to Verizon Wireless.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On a sequential basis, WTS revenue for the second quarter of fiscal 2007 was down significantly compared to prior quarters. Previously, we expected increased demand for
next-generation mobile test equipment in our primary regions during the second half of fiscal 2007. However, it appears that the current demand is softer than anticipated as wireless carriers delay deployment of capital for such mobile test tools.
This underscores the challenges of our WTS business, which include a customer base 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales in our European region were down significantly for the three and six months ended July 31, 2006 compared to the corresponding periods of fiscal 2006. SwissQual, which was
acquired by Spirent during January 2006, serves as the exclusive reseller of our WTS products in our European region. We currently expect SwissQual to continue as our exclusive reseller until January 2007. We are establishing a direct sales and
support organization for our European region to replace SwissQual once the current reseller agreement expires. Additionally, we are exploring other potential strategic alliances that could enhance our technologies, positioning, and global footprint
for sales and support. However, we are unsure as to what long term effect, if any, the sale of SwissQual to Spirent will have on future sales of our products. Our success will depend in part upon our ability to replace SwissQual as the provider of
sales and support services and upon our ability to compete with Spirent and others.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the three months ending July 31, 2006 and 2005, revenue derived from SwissQual totaled approximately $0.5 million and $2.9 million, respectively. For the six
months ended July 31, 2006 and 2005, revenue derived from SwissQual totaled approximately $1.2 million and $4.1 million, respectively. Through the end of fiscal 2005, revenue attributable to sales to SwissQual was deferred until
receipt of payment. Commencing with the first quarter of fiscal 2006, we changed our accounting for sales to SwissQual by recognizing revenue on a full accrual basis. This change was made based upon SwissQuals financial strength and payment
history and the lack of our ability to assert financial influence over the operations of SwissQual. WTS revenue for the first quarter of fiscal 2006 was increased by approximately $1.0 million due to this change.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

Emergency Call Box Systems



| |  |  | During the second quarter of fiscal 2007, we continued to execute on a contract previously awarded by the San Diego SAFE to upgrade approximately 1,400 call boxes with digital
and text-telephony (TTY) technologies and retrofit approximately 1,000 call box sites to improve accessibility for persons with mobility limitations. We recorded approximately $1.1 million in revenue attributable to this
contract during the second quarter of fiscal 2007 and we currently expect to complete the project during the third quarter of fiscal 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the second quarter of fiscal 2007, we completed work in Santa Barbara County to upgrade approximately 332 call boxes with digital and TTY technologies. We recorded
approximately $0.6 million in revenue attributable to this contract during the second quarter of fiscal 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We commenced upgrade work on the call box systems owned by the Metropolitan Transportation Commission SAFE, which service the nine counties of the San Francisco Bay Area, during the
second quarter of fiscal 2007. We recorded approximately $1.0 million in revenue attributable to this contract during the second quarter of fiscal 2007, and we currently expect to complete the project during the fourth quarter of fiscal 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the second quarter of fiscal 2007, we commenced and completed upgrade projects located in the California counties of Merced, San Benito, Lake, and Mendocino, and recorded
approximately $0.4 million during the second quarter of fiscal 2007. These contracts required us to upgrade existing call boxes systems owned by these California SAFEs with a mix of digital and/TTY technologies and to perform other site
mitigation and retrofit services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of July 31, 2006, there are approximately 11,100 call boxes that we maintain under long-term agreements. Certain of our SAFE customers have removed or have indicated
that they intend to remove up to 1,600 call boxes to reduce the density of the systems and to make funds available for the necessary digital upgrades. We currently expect that as of January 31, 2007, there will be approximately
10,700 call boxes that we maintain under long-term agreements. Service revenue attributable to maintenance of existing call box systems totaled approximately $1.1 million in the second quarter of fiscal 2007 and is expected to total
approximately $4.2 million in fiscal 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mobile Power Products (ChargeSource)



| |  |  | Kensington, the retail channel distributor of our ChargeSource products, continues to penetrate the retail marketplace. Currently, Kensington is shipping into approximately
6,300 outlets in North America and Europe, which include CompUSA, Circuit City, Staples, Office Max, Dixons, PC World, and others.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 three and six months ended July 31, 2006 that required us to test goodwill for impairment. Management believes there have been no significant changes during the three and six months ended
July 31, 2006 to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year
ended January 31, 2006.

Results of Operations  Continuing Operations

Consolidated

Revenue

(in thousands except change)



|                        |  |                            |        |                          |   |        |                        |   |        |   |  |             |        |   |           |    |   |  |    |  
|----------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ | ---------------------- | - | ------ | - |  | ----------- | ------ | - | --------- | -- | - |  | -- | -
|                        |  | Three Months EndedJuly 31, |        | Six Months EndedJuly 31, |   |        | Year over Year% Change |  
|                        |  | 2006                       |        | 2005                     |   | 2006   |                        |   | 2005   |   |  | ThreeMonths |        |   | SixMonths |   
|Revenue:                |  |                            |        |                          |   |        |                        |   |        |   |  |             |        |   |           |    |   |  |    |  
|Products                |  | $                          | 11,773 |                          | $ | 9,951  |                        | $ | 21,161 |   |  | $           | 16,743 |   |           | 18 | % |  | 26 | %
|Services                |  |                            | 1,199  |                          |   | 1,183  |                        |   | 2,367  |   |  |             | 2,354  |   |           | 1  | % |  | 1  | %
|                        |  |                            |        |                          |   |        |                        |   |        |   |  |             |        |   |           |    |   |  |    |  
|                        |  | $                          | 12,972 |                          | $ | 11,134 |                        | $ | 23,528 |   |  | $           | 19,097 |   |           | 17 | % |  | 23 | %
|                        |  |                            |        |                          |   |        |                        |   |        |   |  |             |        |   |           |    |   |  |    |  
|Operating income (loss) |  | $                          | 21     |                          | $ | 303    |                        | $ | (844   | ) |  | $           | (1,272 | ) |           |    |   |  |    |  
|                        |  |                            |        |                          |   |        |                        |   |        |   |  |             |        |   |           |    |   |  |    |  

Revenue by Region

(in thousands except change)



|               |  |                            |        |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|-------------- |  | -------------------------- | ------ | ------------------------ | - | ---------------------- |  | ---- | ------ | ----------- | - | ------ | --------- | --- | -- |  | --- | --
|               |  | Three Months EndedJuly 31, |        | Six Months EndedJuly 31, |   | Year over Year% Change | 
|               |  | 2006                       |        | 2005                     |   | 2006                   |  | 2005 |        | ThreeMonths |   |        | SixMonths |    
|Revenue:       |  |                            |        |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|Americas:      |  |                            |        |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|North America  |  | $                          | 11,109 |                          | $ | 7,399                  |  | $    | 20,049 |             | $ | 12,093 |           | 50  | %  |  | 66  | % 
|Others         |  |                            | 869    |                          |   | 916                    |  |      | 1,092  |             |   | 1,998  |           | (5  | %) |  | (45 | %)
|Europe         |  |                            | 759    |                          |   | 2,747                  |  |      | 2,147  |             |   | 4,922  |           | (72 | %) |  | (56 | %)
|Asia  Pacific |  |                            | 235    |                          |   | 72                     |  |      | 240    |             |   | 84     |           | 226 | %  |  | 186 | % 
|               |  |                            |        |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|               |  | $                          | 12,972 |                          | $ | 11,134                 |  | $    | 23,528 |             | $ | 19,097 |           | 17  | %  |  | 23  | % 
|               |  |                            |        |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   

Revenue for the three and six months ended July 31, 2006 increased by $1.8 million, or
17 percent, and $4.4 million, or 23 percent, respectively, compared to the corresponding period of fiscal 2006. Our call box and ChargeSource businesses achieved revenue growth for the three and six month periods, which was partially
offset by current year decreases in WTS revenue. During the three and six months ended July 31,



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##### Table of Contents

2006, our call box business continued to perform under contracts awarded in the first quarter of fiscal 2006 to upgrade existing call box systems to digital
technologies, as well as deploying TTY devices providing access to the speech and hearing impaired. Additionally, our ChargeSource business continued to achieve significant growth compared to the corresponding periods of fiscal 2006.

For the three and six months ended July 31, 2006, revenue from our European region decreased $2.0 million, or 72 percent, and
$2.8 million, or 56 percent, respectively, compared to the corresponding periods of fiscal 2006. The decrease in revenue from our European region is primarily attributable to our WTS business and decreased sales to SwissQual, the exclusive
reseller of our Seven.Five product platform in our European region.

Cost of Revenue and Gross Margin

(in thousands except

margin and change)



|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|----------------------------------- |  | --------------------------- | ----- | ------------------ | ------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ------ |  | --------- | - | ------------------ | - | ------ |  | -- | - |  | --- | -- |  | --- | --
|                                    |  | Three Months Ended July 31, |       |                    | Six Months Ended July 31, |   |  | Year over Year% Change |                   
|                                    |  | 2006                        |       |                    | 2005                      |   |  | 2006                   |                    |  | 2005 |   |  | ThreeMonths        |        |  | SixMonths |  
|                                    |  |                             |       | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |        |  |           |   | % ofRelatedRevenue |   |        |  |    |   |  |    
|Cost of revenue:                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|Products                            |  | $                           | 7,160 |                    | 61                        | % |  | $                      | 5,838              |  | 59   | % |  | $                  | 13,037 |  | 62        | % |                    | $ | 10,020 |  | 60 | % |  | 23  | %  |  | 30  | % 
|Amortization  software development |  |                             | 321   |                    | 3                         | % |  |                        | 482                |  | 5    | % |  |                    | 642    |  | 3         | % |                    |   | 965    |  | 6  | % |  | (33 | %) |  | (33 | %)
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 7,481 |                    | 64                        | % |  |                        | 6,320              |  | 64   | % |  |                    | 13,679 |  | 65        | % |                    |   | 10,985 |  | 66 | % |  | 18  | %  |  | 24  | % 
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|Services                            |  |                             | 760   |                    | 63                        | % |  |                        | 744                |  | 63   | % |  |                    | 1,581  |  | 67        | % |                    |   | 1,599  |  | 68 | % |  | 2   | %  |  | (1  | %)
|Amortization  software development |  |                             | 5     |                    | 1                         | % |  |                        | 5                  |  |     |   |  |                    | 11     |  |          |   |                    |   | 11     |  |   |   |  |    |    |  |    |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 765   |                    | 64                        | % |  |                        | 749                |  | 63   | % |  |                    | 1,592  |  | 67        | % |                    |   | 1,610  |  | 68 | % |  |     |    |  |     |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  | $                           | 8,246 |                    | 64                        | % |  | $                      | 7,069              |  | 63   | % |  | $                  | 15,271 |  | 65        | % |                    | $ | 12,595 |  | 66 | % |  | 17  | %  |  | 21  | % 
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |        |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   



|                      |  |                            |   |  |                          |   |  |                          |   |  |      |   |  |             |   |  |          
|--------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ------------------------ | - |  | ---- | - |  | ----------- | - |  | ---------
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |   |  | Year over Yearppt Change
|                      |  | 2006                       |   |  | 2005                     |   |  | 2006                     |   |  | 2005 |   |  | ThreeMonths |   |  | SixMonths
|Gross margin:         |  |                            |   |  |                          |   |  |                          |   |  |      |   |  |             |   |  |          
|Products              |  | 36                         | % |  | 36                       | % |  | 35                       | % |  | 34   | % |  |            |   |  | 1        
|Services              |  | 36                         | % |  | 37                       | % |  | 33                       | % |  | 32   | % |  | (1          | ) |  | 1        
|Combined gross margin |  | 36                         | % |  | 37                       | % |  | 35                       | % |  | 34   | % |  | (1          | ) |  | 1        

Cost of revenue for the three and six months ended July 31, 2006 decreased by
$1.2 million, or 17 percent, and $2.7 million, or 21 percent, respectively, compared to the corresponding periods of fiscal 2006. For the three and six months ended July 31, 2006, cost of product revenue as a percentage of
revenue increased 2 percentage points compared to the corresponding periods of fiscal 2006. The increase is driven by increased product sales of our ChargeSource and call box products.



23



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##### Table of Contents

Operating Costs and Expenses

(in thousands except change)



|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |    |   |  |    |  
|-------------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | ---- | - |  | -- | - |  | -- | -
|                                       |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2006                        |       |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |      |   |  |   
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |    |   |  |    |  
|SG&A expenses                          |  | $                           | 1,366 |             | 10.5                      | % |  | $                      | 871         |  | 7.8  | % |  | $           | 2,637 |  | 11.2      | % |             | $ | 2,043 |  | 10.7 | % |  | 57 | % |  | 29 | %
|Allocated corporate overhead           |  |                             | 1,240 |             | 9.6                       | % |  |                        | 1,088       |  | 9.8  | % |  |             | 2,487 |  | 10.6      | % |             |   | 2,114 |  | 11.1 | % |  | 14 | % |  | 18 | %
|Gross engineering and support expenses |  |                             | 2,099 |             | 16.2                      | % |  |                        | 1,803       |  | 16.2 | % |  |             | 3,977 |  | 16.9      | % |             |   | 3,617 |  | 18.9 | % |  | 16 | % |  | 10 | %
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |    |   |  |    |  
|                                       |  | $                           | 4,705 |             | 36.3                      | % |  | $                      | 3,762       |  | 33.8 | % |  | $           | 9,101 |  | 38.7      | % |             | $ | 7,774 |  | 40.7 | % |  | 25 | % |  | 17 | %
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |    |   |  |    |  

Selling, general, and administrative expenses for the three and six months ended July 31,
2006 increased $0.5 million, or 57 percent, and $0.6 million, or 29 percent, respectively, compared to the corresponding periods of fiscal 2006. The increase is partially due to a $0.1 million and $0.3 million increase
in legal fees for the three and six months ended July 31, 2006, respectively, incurred by our ChargeSource business relating to intellectual property rights matters and the collection of amounts due from Targus, Inc., the former exclusive
retail distributor. Also contributing to the increase for the three and six months ended July 31, 2006 is increased selling costs incurred by our WTS business in support of our European and Asia regions. In addition, selling, general, and
administrative expenses for the three and six months ended July 31, 2005 includes a credit for the recovery of a bad debt expense totaling $0.1 million. No such recovery took place during the current fiscal year.

Allocated corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and
other administrative personnel, as well as professional fees, directors fees, and other costs and expenses attributable to being a public company. These costs are typically allocated to our three segments based on each businesss
percentage share of total Company costs and expenses. As a percentage of revenue, allocated corporate overhead remained consistent for the three and six months ended July 31, 2006 compared to the comparable periods of fiscal 2006.

Gross engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our hardware and
software design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our
products. Engineering and support expenses for the three and six months ended July 31, 2006 increased $0.3 million, or 16 percent, and $0.4 million, or 10 percent. This increase is primarily due to increased WTS engineering
expenses, consisting of salaries and third-party design fees, in support of our on-going efforts to replace Seven.Five software content currently provided by SwissQual. Also, during the six months ended July 31, 2006 our product support
department incurred increased travel and personnel related expenses in support of our product installation and commissioning efforts compared to the corresponding period of fiscal 2006.

Other Income, net

Other income, net, consists primarily of interest income earned on invested cash
balances. Interest income earned on invested cash balances for the three and six months ended July 31, 2006 totaled $221,000 and $450,000, respectively. For the three and six months ended July 31, 2005, interest income totaled $63,000 and
$120,000, respectively. The current year increase in interest income is due to increased invested cash balances and increased interest rates earned on invested cash balances.



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##### Table of Contents

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 prior years losses, as well as cumulative losses for the six months ended July 31, 2006, the adjusted net deferred tax assets remained fully reserved as of July 31,
2006.

Wireless Test Solutions (WTS)

Revenue

(in thousands except change)



|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|---------------------------------------------- |  | -------------------------- | ----- | ------------------------ | ---- | - | ---------------------- |  | - | ------ | - |  | ----------- | ----- | - | --------- | ---- | -- |  | --- | --
|                                               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |      |   | Year over Year% Change | 
|                                               |  | 2006                       |       |                          | 2005 |   | 2006                   |  |   | 2005   |   |  | ThreeMonths |       |   | SixMonths |     
|Revenue:                                       |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|Products                                       |  | $                          | 3,631 |                          |      | $ | 5,883                  |  | $ | 7,168  |   |  | $           | 9,582 |   |           | (38  | %) |  | (25 | %)
|Services                                       |  |                            | 79    |                          |      |   | 7                      |  |   | 115    |   |  |             | 27    |   |           | 1029 | %  |  | 326 | % 
|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|                                               |  | $                          | 3,710 |                          |      | $ | 5,890                  |  | $ | 7,283  |   |  | $           | 9,609 |   |           | (37  | %) |  | (24 | %)
|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|Operating income (loss)                        |  | $                          | (605  | )                        |      | $ | 819                    |  | $ | (1,492 | ) |  | $           | (129  | ) |           |      |    |  |     |   
|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|                                               |  |                            |      
|Revenue by Region (in thousands except change) |  |                            |       |                          |      |   |                        |  |   |       
|                                               |  |                            |      
|                                               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |      |   | Year over Year% Change | 
|                                               |  | 2006                       |       |                          | 2005 |   | 2006                   |  |   | 2005   |   |  | ThreeMonths |       |   | SixMonths |     
|Revenue:                                       |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|Americas:                                      |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|North America                                  |  | $                          | 2,004 |                          |      | $ | 2,155                  |  | $ | 4,568  |   |  | $           | 2,605 |   |           | (7   | %) |  | 75  | % 
|Others                                         |  |                            | 869   |                          |      |   | 916                    |  |   | 1,092  |   |  |             | 1,998 |   |           | (5   | %) |  | (45 | %)
|Europe                                         |  |                            | 642   |                          |      |   | 2,747                  |  |   | 1,423  |   |  |             | 4,922 |   |           | (77  | %) |  | (71 | %)
|Asia  Pacific                                 |  |                            | 195   |                          |      |   | 72                     |  |   | 200    |   |  |             | 84    |   |           |      |    |  |     |   
|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   
|                                               |  | $                          | 3,710 |                          |      | $ | 5,890                  |  | $ | 7,283  |   |  | $           | 9,609 |   |           | (37  | %) |  | (24 | %)
|                                               |  |                            |       |                          |      |   |                        |  |   |        |   |  |             |       |   |           |      |    |  |     |   

Revenue for the three months ended July 31, 2006 decreased by $2.2 million, or
37 percent, compared to the corresponding period of fiscal 2006. The second quarter decrease is attributable to decreased sales from our European region, which is served by our reseller, SwissQual. For the second quarter of fiscal 2007, revenue
derived from our European region decreased by $2.1 million, or 77 percent, compared to the second quarter of fiscal 2006.

During
January 2006, Spirent purchased 100 percent of the outstanding stock of SwissQual, which included our 18 percent equity investment. We currently expect SwissQual to continue as the exclusive reseller of our Seven.Five product platform in
our European region through January 2007. Additionally, we expect SwissQual to compete with us in our current mobile test equipment niche starting in January 2007. Due to our contractual relationship with SwissQual, we lack visibility into the
demand and related purchasing habits of the Seven.Five users in our European region. Coupled with decreased sales for the three and six months ended July 31, 2006 in our European region compared to the corresponding periods of fiscal 2006 and a
relatively small number of wireless carriers and equipment vendors, it is difficult to forecast our results from period to period. Consequently, our WTS business is affected in any single region by the priorities of a relatively concentrated group
of customers.



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##### Table of Contents

Revenue for the six months ended July 31, 2006 decreased by $2.3 million, or 24 percent,
compared to the corresponding period of fiscal 2006. This decrease is primarily attributable to decreased sales from our European region partially offset by increased sales to our customers in North America driven by strong sales to Verizon
Wireless. For the six months ended July 31, 2006, revenue derived from our European region decreased by $3.5 million, or 71 percent, compared to the six months ended July 31, 2005. These period comparisons highlight that the
wireless industry is composed of a relatively small number of wireless carriers and equipment vendors, which can lead to volatility in our results.

Cost of Revenue and Gross Margin

(in thousands except

margin and change)



|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   
|----------------------------------- |  | --------------------------- | ----- | ------------------ | ------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | --------- | - | ------------------ | - | ----- |  | --- | - |  | --- | -- |  | --- | --
|                                    |  | Three Months Ended July 31, |       |                    | Six Months Ended July 31, |   |  | Year over Year% Change |                   
|                                    |  | 2006                        |       |                    | 2005                      |   |  | 2006                   |                    |  | 2005 |   |  | ThreeMonths        |       |  | SixMonths |  
|                                    |  |                             |       | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |           |   | % ofRelatedRevenue |   |       |  |     |   |  |    
|Cost of revenue:                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   
|Products                            |  | $                           | 1,206 |                    | 33                        | % |  | $                      | 2,476              |  | 42   | % |  | $                  | 2,793 |  | 39        | % |                    | $ | 4,140 |  | 43  | % |  | (51 | %) |  | (33 | %)
|Amortization  software development |  |                             | 321   |                    | 9                         | % |  |                        | 482                |  | 8    | % |  |                    | 642   |  | 9         | % |                    |   | 965   |  | 10  | % |  | (33 | %) |  | (33 | %)
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   
|                                    |  |                             | 1,527 |                    | 42                        | % |  |                        | 2,958              |  | 50   | % |  |                    | 3,435 |  | 48        | % |                    |   | 5,105 |  | 53  | % |  | (48 | %) |  | (33 | %)
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   
|Services                            |  |                             | 49    |                    | 62                        | % |  |                        | 21                 |  | 300  | % |  |                    | 66    |  | 57        | % |                    |   | 36    |  | 133 | % |  |     |    |  |     |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   
|                                    |  | $                           | 1,576 |                    | 42                        | % |  | $                      | 2,979              |  | 51   | % |  | $                  | 3,501 |  | 48        | % |                    | $ | 5,141 |  | 53  | % |  | (47 | %) |  | (32 | %)
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |     |   |  |     |    |  |     |   



|                      |  |                            |   |  |                          |    |  |                          |   |  |      |    |  |             |  |          
|--------------------- |  | -------------------------- | - |  | ------------------------ | -- |  | ------------------------ | - |  | ---- | -- |  | ----------- |  | ---------
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |    |  | Year over Yearppt Change
|                      |  | 2006                       |   |  | 2005                     |    |  | 2006                     |   |  | 2005 |    |  | ThreeMonths |  | SixMonths
|Gross margin:         |  |                            |   |  |                          |    |  |                          |   |  |      |    |  |             |  |          
|Products              |  | 58                         | % |  | 50                       | %  |  | 52                       | % |  | 47   | %  |  | 8           |  | 5        
|Services              |  | 38                         | % |  | (200                     | %) |  | 43                       | % |  | (33  | %) |  | 238         |  | 76       
|Combined gross margin |  | 58                         | % |  | 49                       | %  |  | 52                       | % |  | 47   | %  |  | 9           |  | 5        

Cost of revenue for the three and six months ended July 31, 2006 decreased by
$1.4 million, or 47 percent, and $1.6 million, or 32 percent, respectively, compared to the corresponding periods of fiscal 2006. For the three and six months ended July 31, 2006, cost of product revenue as a percentage of
revenue decreased 8 percentage points and 5 percentage points, respectively, compared to the corresponding periods of fiscal 2006. The decrease in cost of product revenue as a percentage of revenue for the three and six months ended
July 31, 2006 was primarily driven by several higher-margin Seven.Five upgrade orders shipped during the second quarter of fiscal 2007. No similar type upgrade orders were shipped during the corresponding periods of fiscal 2006.

Amortization of previously capitalized software development costs for the three and six months ended July 31, 2006 totaled $0.3 million and
$0.6 million, respectively. Currently, we expect to continue to amortize previously capitalized software development costs at a rate of approximately $0.3 million per quarter through the third quarter of fiscal 2007, and subsequent to
that, reduced rates of amortization as some engineering projects become fully amortized through the end of fiscal 2008.



26



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##### Table of Contents

Operating Costs and Expenses

(in thousands except change)



|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|-------------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | ---- | - |  | --- | -- |  | --- | --
|                                       |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2006                        |       |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |      |   |  |    
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                           | 803   |             | 21.6                      | % |  | $                      | 476         |  | 8.1  | % |  | $           | 1,541 |  | 21.2      | % |             | $ | 1,308 |  | 13.6 | % |  | 69  | %  |  | 18  | % 
|Allocated corporate overhead           |  |                             | 407   |             | 11.0                      | % |  |                        | 507         |  | 8.6  | % |  |             | 890   |  | 12.2      | % |             |   | 1,017 |  | 10.6 | % |  | (20 | %) |  | (12 | %)
|Gross engineering and support expenses |  |                             | 1,529 |             | 41.2                      | % |  |                        | 1,109       |  | 18.8 | % |  |             | 2,843 |  | 39.0      | % |             |   | 2,272 |  | 23.6 | % |  | 38  | %  |  | 25  | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|                                       |  | $                           | 2,739 |             | 73.8                      | % |  | $                      | 2,092       |  | 35.5 | % |  | $           | 5,274 |  | 72.4      | % |             | $ | 4,597 |  | 47.8 | % |  | 31  | %  |  | 15  | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   

Selling, general, and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our sales, marketing, and support personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our WTS business. Selling,
general, and administrative expenses for the three and six months ended July 31, 2006 increased $0.3 million and $0.2 million, respectively, compared to the corresponding periods of fiscal 2006, primarily due to increased sales and
marketing as we continue to establish a sales and support organization in support of our European region, as well as the expansion of our sales and support capabilities in Asia. Additionally, selling, general, and administrative expenses for the
second quarter of fiscal 2006 includes a credit for the recovery of a bad debt expense totaling $0.1 million. No such recovery took place during the second quarter of fiscal 2007.

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

Gross engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel
related costs of our hardware and software design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the
development and support of our WTS business. Engineering and support expenses for the three and six months ended July 31, 2006 increased $0.4 million, or 38 percent, and $0.6 million, or 25 percent. These increases are due
to increased engineering expenses, consisting of salaries and third-party design fees, in support of our on-going efforts to replace Seven.Five software content currently provided by SwissQual. Also, during the six months ended July 31, 2006
our product support department incurred increased travel and personnel related expenses in support of our product installation and commissioning efforts compared to the corresponding period of fiscal 2006.

We capitalize costs incurred for the development of software embedded in our WTS products subsequent to establishing technological feasibility. These
capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. We did not
capitalize any software development costs in the three and six months ending July 31, 2006 and 2005 as we completed the development of the software embedded in our Seven.Five product platform prior to such periods.



27



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##### Table of Contents

Emergency Call Box Systems

Revenue

(in thousands except change)



|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|---------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | --------- | -- | -- |  | -- | --
|                                               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |   | Year over Year% Change | 
|                                               |  | 2006                       |       | 2005                     |   | 2006                   |  | 2005 |       | ThreeMonths |   |       | SixMonths |   
|Revenue:                                       |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|Products                                       |  | $                          | 3,625 |                          | $ | 2,363                  |  | $    | 5,327 |             | $ | 3,623 |           | 53 | %  |  | 47 | % 
|Services                                       |  |                            | 1,120 |                          |   | 1,176                  |  |      | 2,252 |             |   | 2,327 |           | (5 | %) |  | (3 | %)
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|                                               |  | $                          | 4,745 |                          | $ | 3,539                  |  | $    | 7,579 |             | $ | 5,950 |           | 34 | %  |  | 27 | % 
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|Operating income                               |  | $                          | 826   |                          | $ | 932                    |  | $    | 976   |             | $ | 1,396 |           |    |    |  |    |   
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|                                               |  |                            |      
|Revenue by Region (in thousands except change) |  |                            |       |                          |   |                        |  |      |      
|                                               |  |                            |      
|                                               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |   | Year over Year% Change | 
|                                               |  | 2006                       |       | 2005                     |   | 2006                   |  | 2005 |       | ThreeMonths |   |       | SixMonths |   
|Revenue:                                       |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|Americas:                                      |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|North America                                  |  | $                          | 4,745 |                          | $ | 3,539                  |  | $    | 7,579 |             | $ | 5,950 |           | 34 | %  |  | 27 | % 
|Others                                         |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |   |    |  |   |   
|Europe                                         |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |   |    |  |   |   
|Asia  Pacific                                 |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |   |    |  |   |   
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   
|                                               |  | $                          | 4,745 |                          | $ | 3,539                  |  | $    | 7,579 |             | $ | 5,950 |           | 34 | %  |  | 27 | % 
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |    |    |  |    |   

Revenue for the three and six months ended July 31, 2006 increased by $1.2 million, or
34 percent, and $1.6 million, or 27 percent, respectively, compared to corresponding periods of fiscal 2006. The increase in revenue is due to the number of upgrade projects active during the respective fiscal periods. During the
second quarter of fiscal 2007, we commenced upgrade work on the call box system owned by MTC and recorded product revenue totaling approximately $1.0 million. We expect to complete the MTC upgrade project by the fourth quarter of fiscal 2007.
Also during the second quarter of fiscal 2007, we commenced and completed upgrade projects located in the California counties of Merced, San Benito, Lake, and Mendocino, and recorded approximately $0.4 million during the second quarter of
fiscal 2007. These projects were not underway during the three and six months ended July 31, 2005.



28



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##### Table of Contents

Cost of Revenue and Gross Margin

(in thousands except

margin and change)



|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|----------------------------------- |  | --------------------------- | ----- | ------------------ | ------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | --------- | - | ------------------ | - | ----- |  | -- | - |  | -- | -- |  | -- | --
|                                    |  | Three Months Ended July 31, |       |                    | Six Months Ended July 31, |   |  | Year over Year% Change |                   
|                                    |  | 2006                        |       |                    | 2005                      |   |  | 2006                   |                    |  | 2005 |   |  | ThreeMonths        |       |  | SixMonths |  
|                                    |  |                             |       | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |           |   | % ofRelatedRevenue |   |       |  |    |   |  |   
|Cost of revenue:                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|Products                            |  | $                           | 2,561 |                    | 71                        | % |  | $                      | 1,348              |  | 57   | % |  | $                  | 3,881 |  | 73        | % |                    | $ | 2,033 |  | 56 | % |  | 90 | %  |  | 91 | % 
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|Amortization  software development |  |                             |      |                    |                          |   |  |                        |                   |  |     |   |  |                    |      |  |          |   |                    |   |      |  |   |   |  |   |    |  |   |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|                                    |  |                             | 2,561 |                    | 71                        | % |  |                        | 1,348              |  | 57   | % |  |                    | 3,881 |  | 73        | % |                    |   | 2,033 |  | 56 | % |  | 90 | %  |  | 91 | % 
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|Services                            |  |                             | 711   |                    | 63                        | % |  |                        | 723                |  | 61   | % |  |                    | 1,515 |  | 67        | % |                    |   | 1,563 |  | 67 | % |  | (2 | %) |  | (3 | %)
|Amortization  software development |  |                             | 5     |                    | 1                         | % |  |                        | 5                  |  | 1    | % |  |                    | 11    |  | 1         | % |                    |   | 11    |  | 1  | % |  |   |    |  |   |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|                                    |  |                             | 716   |                    | 64                        | % |  |                        | 728                |  | 62   | % |  |                    | 1,526 |  | 68        | % |                    |   | 1,574 |  | 68 | % |  | (2 | %) |  | (3 | %)
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   
|                                    |  | $                           | 3,277 |                    | 69                        | % |  | $                      | 2,076              |  | 59   | % |  | $                  | 5,407 |  | 71        | % |                    | $ | 3,607 |  | 61 | % |  | 58 | %  |  | 50 | % 
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |    |    |  |    |   



|                      |  |                            |   |  |                          |   |  |                        |   |  |      |   |  |             |   |  |           |  
|--------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---------------------- | - |  | ---- | - |  | ----------- | - |  | --------- | -
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |   |  | Year over Year% Change |  
|                      |  | 2006                       |   |  | 2005                     |   |  | 2006                   |   |  | 2005 |   |  | ThreeMonths |   |  | SixMonths |  
|Gross margin:         |  |                            |   |  |                          |   |  |                        |   |  |      |   |  |             |   |  |           |  
|Products              |  | 29                         | % |  | 43                       | % |  | 27                     | % |  | 44   | % |  | (14         | ) |  | (17       | )
|Services              |  | 36                         | % |  | 38                       | % |  | 32                     | % |  | 32   | % |  | (2          | ) |  |          |  
|Combined gross margin |  | 31                         | % |  | 41                       | % |  | 29                     | % |  | 39   | % |  | (10         | ) |  | (10       | )

Cost of revenue for the three and six months ended July 31, 2006 increased by
$1.2 million, or 58 percent, and $1.8 million, or 50 percent, respectively, compared to the corresponding periods of fiscal 2006. For the three and six months ended July 31, 2006, cost of product revenue as a percentage of
revenue increased 14 percentage points and 17 percentage points, respectively, compared to the corresponding periods of fiscal 2006. The increase in cost of product revenue as a percentage of revenue for the three and six months ended
July 31, 2006 was primarily driven by the number of active upgrade projects resulting in increased use of third parties to perform certain upgrade installation, site mitigation, and retrofit work. We had fewer active upgrade projects during the
three and six months ended July 31, 2005 and therefore did not utilize third party subcontractors. Additionally, cost of product revenue for the three and six months ended July 31, 2006 includes charges totaling $0.1 million and
$0.2 million, respectively, to write off excess and obsolete inventory. There were no comparable inventory charges incurred in the three and six months ended July 31, 2005.



29



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##### Table of Contents

Operating Costs and Expenses

(in thousands except change)



|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |     |  |      |   |  |     |    |  |    |   
|-------------------------------------- |  | --------------------------- | --- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | --- |  | ---- | - |  | --- | -- |  | -- | --
|                                       |  | Three Months Ended July 31, |     |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2006                        |     |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |     | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |     |  |      |   |  |    
|Operating expenses:                    |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |     |  |      |   |  |     |    |  |    |   
|SG&A expenses                          |  | $                           | 118 |             | 2.5                       | % |  | $                      | 89          |  | 2.5  | % |  | $           | 227   |  | 3.0       | % |             | $ | 159 |  | 2.7  | % |  | 33  | %  |  | 43 | % 
|Allocated corporate overhead           |  |                             | 380 |             | 8.0                       | % |  |                        | 257         |  | 7.3  | % |  |             | 675   |  | 8.9       | % |             |   | 471 |  | 7.9  | % |  | 48  | %  |  | 43 | % 
|Gross engineering and support expenses |  |                             | 144 |             | 3.0                       | % |  |                        | 185         |  | 5.2  | % |  |             | 294   |  | 3.9       | % |             |   | 317 |  | 5.3  | % |  | (22 | %) |  | (7 | %)
|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |     |  |      |   |  |     |    |  |    |   
|                                       |  | $                           | 642 |             | 13.5                      | % |  | $                      | 531         |  | 15.0 | % |  | $           | 1,196 |  | 15.8      | % |             | $ | 947 |  | 15.9 | % |  | 21  | %  |  | 26 | % 
|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |     |  |      |   |  |     |    |  |    |   

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. Selling, general, and administrative expenses for the three and six months ended July 31, 2006 increased by 33 percent and 43 percent, respectively, compared to the corresponding periods of fiscal 2006. The increase is due
to increased personnel costs incurred during the current fiscal year.

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

Mobile Power Products (ChargeSource)

Revenue

(in thousands except change)



|               |  |                            |       |   |                          |   |        |                        |  |   |       |   |  |             |        |   |           |     |   |  |     |  
|-------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---------------------- |  | - | ----- | - |  | ----------- | ------ | - | --------- | --- | - |  | --- | -
|               |  | Three Months EndedJuly 31, |       |   | Six Months EndedJuly 31, |   |        | Year over Year% Change | 
|               |  | 2006                       |       |   | 2005                     |   |        | 2006                   |  |   | 2005  |   |  | ThreeMonths |        |   | SixMonths |    
|Revenue:       |  |                            |       |   |                          |   |        |                        |  |   |       |   |  |             |        |   |           |     |   |  |     |  
|Products       |  | $                          | 4,517 |   |                          | $ | 1,705  |                        |  | $ | 8,666 |   |  | $           | 3,538  |   |           | 165 | % |  | 145 | %
|Services       |  |                            |      |   |                          |   |       |                        |  |   |      |   |  |             |       |   |           |     |   |  |     |  
|               |  |                            |       |   |                          |   |        |                        |  |   |       |   |  |             |        |   |           |     |   |  |     |  
|               |  | $                          | 4,517 |   |                          | $ | 1,705  |                        |  | $ | 8,666 |   |  | $           | 3,538  |   |           | 165 | % |  | 145 | %
|               |  |                            |       |   |                          |   |        |                        |  |   |       |   |  |             |        |   |           |     |   |  |     |  
|Operating loss |  | $                          | (200  | ) |                          | $ | (1,448 | )                      |  | $ | (328  | ) |  | $           | (2,539 | ) |           |     |   |  |     |  
|               |  |                            |       |   |                          |   |        |                        |  |   |       |   |  |             |        |   |           |     |   |  |     |  



30



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##### Table of Contents

Revenue by Region

(in thousands except change)



|               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |   |  |     |  
|-------------- |  | -------------------------- | ----- | ------------------------ | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | --------- | --- | - |  | --- | -
|               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |   | Year over Year% Change | 
|               |  | 2006                       |       | 2005                     |   | 2006                   |  | 2005 |       | ThreeMonths |   |       | SixMonths |    
|Revenue:       |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |   |  |     |  
|Americas:      |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |   |  |     |  
|North America  |  | $                          | 4,360 |                          | $ | 1,705                  |  | $    | 7,902 |             | $ | 3,538 |           | 156 | % |  | 123 | %
|Others         |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |    |   |  |    |  
|Europe         |  |                            | 117   |                          |   |                       |  |      | 724   |             |   |      |           |    |   |  |    |  
|Asia  Pacific |  |                            | 40    |                          |   |                       |  |      | 40    |             |   |      |           |    |   |  |    |  
|               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |   |  |     |  
|               |  | $                          | 4,517 |                          | $ | 1,705                  |  | $    | 8,666 |             | $ | 3,538 |           | 165 | % |  | 145 | %
|               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |   |  |     |  

Revenue by Customer

(in thousands except change)



|           |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |      |   |  |      |  
|---------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | --- | - |  | ---- | - |  | ---- | -
|           |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|           |  | 2006                        |       |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|           |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |     |   |  |     
|Revenue:   |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |      |   |  |      |  
|Kensington |  | $                           | 4,086 |             | 90                        | % |  | $                      | 1,687       |  | 99   | % |  | $           | 8,101 |  | 93        | % |             | $ | 3,489 |  | 99  | % |  | 142  | % |  | 132  | %
|Other      |  |                             | 431   |             | 10                        | % |  |                        | 18          |  | 1    | % |  |             | 565   |  | 7         | % |             |   | 49    |  | 1   | % |  | 2294 | % |  | 1053 | %
|           |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |      |   |  |      |  
|           |  | $                           | 4,517 |             | 100                       | % |  | $                      | 1,705       |  | 100  | % |  | $           | 8,666 |  | 100       | % |             | $ | 3,538 |  | 100 | % |  | 165  | % |  | 145  | %
|           |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |      |   |  |      |  

Revenue for the three and six months ended July 31, 2006 increased by $2.8 million, or
165 percent, and $5.1 million, or 145 percent, respectively, compared to corresponding periods of fiscal 2006. The increase in revenue is primarily due to Kensingtons success in penetrating the Big Box retailers.
Currently, Kensington is shipping into approximately 6,300 outlets in North America and Europe, which include CompUSA, Circuit City, Staples, Office Max, Dixons, PC World, and others. We began shipping Kensington-branded products during the
first quarter of fiscal 2006. On a sequential basis, revenue in the second quarter of fiscal 2007 increased by $0.4 million, or 9 percent, compared to the first quarter of fiscal 2007.

Cost of Revenue and Gross Margin

(in thousands except change)



|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |    |   |  |    |  
|----------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | --- | - |  | -- | - |  | -- | -
|                                    |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                    |  | 2006                        |       |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|                                    |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |     |   |  |   
|Cost of revenue:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |    |   |  |    |  
|Products                            |  | $                           | 3,393 |             | 75                        | % |  | $                      | 2,014       |  | 118  | % |  | $           | 6,363 |  | 73        | % |             | $ | 3,847 |  | 109 | % |  | 68 | % |  | 65 | %
|Amortization  software development |  |                             |      |             |                          |   |  |                        |            |  |     |   |  |             |      |  |          |   |             |   |      |  |    |   |  |   |   |  |   |  
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |    |   |  |    |  
|                                    |  |                             | 3,393 |             | 75                        | % |  |                        | 2,014       |  | 118  | % |  |             | 6,363 |  | 73        | % |             |   | 3,847 |  | 109 | % |  | 68 | % |  | 65 | %
|Services                            |  |                             |      |             |                          |   |  |                        |            |  |     |   |  |             |      |  |          |   |             |   |      |  |    |   |  |   |   |  |   |  
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |    |   |  |    |  
|                                    |  | $                           | 3,393 |             | 75                        | % |  |                        | 2,014       |  | 118  | % |  |             | 6,363 |  | 73        | % |             |   | 3,847 |  | 109 | % |  | 68 | % |  | 65 | %
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |    |   |  |    |  



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|                      |  |                            |   |  |                          |    |  |                          |   |  |      |    |  |             |  |          
|--------------------- |  | -------------------------- | - |  | ------------------------ | -- |  | ------------------------ | - |  | ---- | -- |  | ----------- |  | ---------
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |    |  | Year over Yearppt Change
|                      |  | 2006                       |   |  | 2005                     |    |  | 2006                     |   |  | 2005 |    |  | ThreeMonths |  | SixMonths
|Gross margin:         |  |                            |   |  |                          |    |  |                          |   |  |      |    |  |             |  |          
|Products              |  | 25                         | % |  | (18                      | %) |  | 27                       | % |  | (9   | %) |  | 43          |  | 36       
|Services              |  |                           |   |  |                         |    |  |                         |   |  |     |    |  |            |  |         
|Combined gross margin |  | 25                         | % |  | (18                      | %) |  | 27                       | % |  | (9   | %) |  | 43          |  | 36       

Cost of revenue for the three and six months ended July 31, 2006 increased by
$1.4 million, or 68 percent, and $2.5 million, or 65 percent, respectively, compared to the corresponding periods of fiscal 2006. The increase in cost of revenue is primarily due to the increase in revenue for the three and six
months ended July 31, 2006 compared to the corresponding periods of the prior fiscal year. Cost of product revenue for the three and six months ended July 31, 2005 include inventory and warranty charges totaling approximately $0.8 million.
Subsequent to the first quarter of fiscal 2006, we identified a manufacturing process performed by the contract manufacturer of our ChargeSource products that may cause certain of our 70-watt AC power adapters to fail prematurely. This manufacturing
process has been successfully remediated and the limited number of affected units has been identified. Accordingly, we accrued $0.3 million as additional warranty costs in cost of product revenue in the first quarter of fiscal 2006 to cover the
anticipated cost of replacement. During the fourth quarter of fiscal 2006, we completed replacing all the units returned relating to this issue and eliminated the unused portion of the accrual, totaling $150,000. Additionally, during the second
quarter of fiscal 2006, we recorded an inventory charge totaling approximately $0.5 million in order to fully reserve for legacy ChargeSource products and related components.

For the three and six months ended July 31, 2006 compared to the corresponding periods of fiscal 2006, cost of product revenue as a percentage of
revenue, excluding the inventory and warranty charges discussed above, decreased 14 percentage points and 13 percentage points, respectively. During the three and six months ended July 31, 2005, the level of ChargeSource sales was
insufficient to fully absorb our fixed manufacturing overhead resulting in increased cost of product revenue as a percentage of revenue.

Operating
Costs and Expenses

(in thousands except change)



|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|-------------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | ---- | - |  | --- | -- |  | --- | --
|                                       |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2006                        |       |             | 2005                      |   |  | 2006                   |             |  | 2005 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |      |   |  |    
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                           | 445   |             | 9.9                       | % |  | $                      | 306         |  | 18.0 | % |  | $           | 869   |  | 10.0      | % |             | $ | 576   |  | 16.3 | % |  | 45  | %  |  | 51  | % 
|Allocated corporate overhead           |  |                             | 453   |             | 10.0                      | % |  |                        | 324         |  | 19.0 | % |  |             | 922   |  | 10.6      | % |             |   | 626   |  | 17.7 | % |  | 40  | %  |  | 47  | % 
|Gross engineering and support expenses |  |                             | 426   |             | 9.4                       | % |  |                        | 509         |  | 29.8 | % |  |             | 840   |  | 9.7       | % |             |   | 1,028 |  | 29.0 | % |  | (16 | %) |  | (18 | %)
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   
|                                       |  | $                           | 1,324 |             | 29.3                      | % |  | $                      | 1,139       |  | 66.8 | % |  | $           | 2,631 |  | 30.3      | % |             | $ | 2,230 |  | 63.0 | % |  | 16  | %  |  | 18  | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |      |   |  |     |    |  |     |   

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,



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facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our ChargeSource business. Selling,
general, and administrative expenses in the three and six months ended July 31, 2006 increased by approximately $0.1 million, or 45 percent, and approximately $0.3 million, or 51 percent, compared to the corresponding
periods of fiscal 2006. The increase is primarily due to a $0.1 million and $0.3 million increase in legal fees for the three and six months ended July 31, 2006, respectively, relating to intellectual property rights matters and the collection of
amounts due from Targus, Inc., the former exclusive retail distributor.

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

Gross engineering and support expenses
generally consist of salaries, employer paid benefits, and other personnel related costs of our electrical and mechanical design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees,
lab costs, material usages, and travel and related costs incurred in the development and support of our ChargeSource business. Engineering and support expenses for the three and six months ended July 31, 2006 decreased $0.1 million, or
16 percent, and $0.2 million, or 18 percent. The decrease in gross engineering and support expenses is due to the decreased use of temporary labor and contract design resources and is consistent with our current development cycle and
focus on OEM design solutions.

Liquidity and Capital Resources

Cash and cash equivalents at July 31, 2006 decreased $3.0 million to $23.0 million as compared to $26.0 million at January 31, 2006. The following table is a summary of our Condensed
Consolidated Statements of Cash Flows.



|                     |  |                          |        |   |      |   |        |  
|-------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                     |  | Six Months EndedJuly 31, |       
|                     |  | 2006                     |        |   | 2005 |  
|                     |  | (in thousands)           |       
|Cash used in:        |  |                          |        |  
|Operating activities |  | $                        | (356   | ) |      | $ | (2,825 | )
|Investing activities |  |                          | (2,192 | ) |      |   | (418   | )
|Financing activities |  |                          | (480   | ) |      |   |       |  

Operating Activities

Cash used in operating activities of $0.4 million for the six months ended July 31, 2006 decreased $2.5 million compared to the six months ended July 31, 2005. Cash used in operating activities for
the first half of fiscal 2007 was driven by net loss of $0.3 million and a reduction in accrued liabilities of approximately $2.6 million, primarily due to vendor payments for inventory as well as the distribution of incentive
compensation, partially offset by non-cash charges totaling $1.5 million and $0.5 million for depreciation and amortization and provisions for obsolete inventory, respectively. Also, a net change in other operating assets and liabilities
resulted in a $0.4 million increase in cash flow. Within the net change in other operating assets and liabilities, inventory decreased by $1.0 million, increasing cash flow, which was offset by a $0.9 million increase in other assets,
which relates to amounts due from our new landlord for tenant improvement reimbursements.

Cash used in operating activities in the six
months ended July 31, 2005 was $2.8 million driven by net loss of $1.2 million, partially offset by non-cash charges totaling $2.0 million and $0.7 million for depreciation and amortization and provisions for obsolete
inventory, respectively. For the six months ended July 31, 2005, accounts receivable and amounts due from affiliates increased by $5.9 million, primarily due to increased sales in the latter part of the second quarter. Days sales
outstanding decreased to 102 days as of July 31, 2005. Sales of our WTS products into our international markets typically require us to extend credit terms of between 90 days and 120 days. We have continued to experience low
losses from bad debts, and good collections history with isolated exceptions. Accounts payable and accrued liabilities generated cash of $1.6 million for the six months ended July 31, 2005, and cash used for inventory was
$0.4 million.



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##### Table of Contents

Cash Flows from Investing Activities

Net cash used in investing activities was $2.2 million and $0.4 million in the six months ended July 31, 2006 and 2005, respectively. We purchased approximately $1.8 million and $0.4 million
of property and equipment in the first six months of fiscal 2007 and 2006. The increase relates primarily to tenant improvements made relating to our corporate relocation as well as equipment built for a revenue sharing contract with one of our WTS
customers. Additionally, during the six months ended July 31, 2006 we obtained a letter of credit in the amount of $500,000 from US Bank, secured by a certificate of deposit with a 6-month maturity required by the lease for our new corporate
office.

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.

Cash Flows from Financing Activities

During fiscal 2007, we repurchased approximately 51,000 shares in the open market for a total cost of approximately $0.4 million, or an average price of $9.36 per share. During fiscal 2006 we had no stock
repurchases.



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##### Table of Contents

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

Currency Risk

We are exposed to the risk of changes in currency exchange rates. As of July 31, 2006, we had no
material accounts receivable denominated in foreign currencies. Our standard terms require customers to pay for our products and services in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from
foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Interest Rate Sensitivity

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

We do not hold any derivative
financial instruments.

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

Equity Price Risk

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

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



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##### Table of Contents

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

Evaluation of Disclosure Controls and
Procedures

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

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

Changes in Internal Control Over Financial Reporting

None.



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##### Table of Contents

PART II  OTHER INFORMATION



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

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

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

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



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

None.



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

None.



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



| | 1. | The Annual Meeting of Shareholders of Comarco was held on June 20, 2006. The holders of Comarcos stock were entitled to elect five directors to serve until 2007. The
following table sets forth the names of the five persons elected at the Annual Meeting to serve as directors until 2007 and the number of votes cast for or withheld with respect to each person.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     |  |           |  |         
|-------------------- |  | --------- |  | --------
|                     |  | For       |  | Withheld
|Don M. Bailey        |  | 5,900,651 |  | 387,217 
|Thomas A. Franza     |  | 6,024,622 |  | 263,246 
|Gerald D. Griffin    |  | 5,800,646 |  | 487,222 
|Jeffrey R. Hultman   |  | 5,800,646 |  | 487,222 
|Erik H. van der Kaay |  | 5,800,646 |  | 487,222 



| | 2. | The shareholders also voted on and approved the ratification of the appointment of BDO Seidman, LLP as Comarcos independent registered public accounting firm for the fiscal
year ended January 31, 2007. The vote for the proposal was as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|          |  |         |  |            
|--------- |  | ------- |  | -----------
|For       |  | Against |  | Abstentions
|6,281,578 |  | 1,716   |  | 4,574      



| | 3. | The shareholders also voted on and approved the ratification of the 2005 Equity Incentive Plan. The vote for the proposal was as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------



|          |  |         |  |             |  |                
|--------- |  | ------- |  | ----------- |  | ---------------
|For       |  | Against |  | Abstentions |  | BrokerNon-Votes
|3,929,324 |  | 419,956 |  | 10,220      |  | 1,928,368      



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##### Table of Contents

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

None.



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



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



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



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



39