##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended JULY 31, 2007

OR



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

For the transition period from  to

Commission file number 0-5449



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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)



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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

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



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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, 2007

TABLE OF CONTENTS



|                               |  |                                                                                                           |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                           |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                          
|                               |  |                                                                                                          
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                          |  |     
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Balance Sheets as of July 31, 2007 and January 31, 2007                            |  | 3   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2007 and 2006 |  | 4   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2007 and 2006           |  | 5   
|                               |  |                                                                                                          
|                               |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                               |  |                                                                                                          
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     |  | 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 31,2007 |        | January 31,2007 (A)
|ASSETS                                                                                                                                                                 |  |              |        |                     |   |       
|Current Assets:                                                                                                                                                        |  |              |        |                     |   |       
|Cash and cash equivalents                                                                                                                                              |  | $            | 21,002 |                     | $ | 26,360
|Short-term investments                                                                                                                                                 |  |              | 686    |                     |   | 897   
|Accounts receivable, net of reserves of $54 and $111                                                                                                                   |  |              | 3,129  |                     |   | 10,942
|Inventory, net of reserves of $720 and $600                                                                                                                            |  |              | 4,079  |                     |   | 5,452 
|Other current assets                                                                                                                                                   |  |              | 495    |                     |   | 427   
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total current assets                                                                                                                                                   |  |              | 29,391 |                     |   | 44,078
|Property and equipment, net                                                                                                                                            |  |              | 2,683  |                     |   | 3,331 
|Software development costs, net                                                                                                                                        |  |              | 39     |                     |   | 243   
|Acquired intangible assets, net                                                                                                                                        |  |              | 642    |                     |   | 820   
|Goodwill                                                                                                                                                               |  |              | 2,394  |                     |   | 2,394 
|Restricted cash                                                                                                                                                        |  |              | 500    |                     |   | 500   
|Other assets                                                                                                                                                           |  |              | 47     |                     |   | 47    
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total assets                                                                                                                                                           |  | $            | 35,696 |                     | $ | 51,413
|                                                                                                                                                                       |  |              |        |                     |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |              |        |                     |   |       
|Current Liabilities:                                                                                                                                                   |  |              |        |                     |   |       
|Accounts payable                                                                                                                                                       |  | $            | 297    |                     | $ | 718   
|Deferred revenue                                                                                                                                                       |  |              | 2,227  |                     |   | 2,586 
|Deferred compensation                                                                                                                                                  |  |              | 686    |                     |   | 897   
|Accrued liabilities                                                                                                                                                    |  |              | 3,032  |                     |   | 6,259 
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total current liabilities                                                                                                                                              |  |              | 6,242  |                     |   | 10,460
|Deferred income taxes                                                                                                                                                  |  |              | 59     |                     |   | 59    
|Tax liability: FIN 48                                                                                                                                                  |  |              | 86     |                     |   |      
|Deferred rent                                                                                                                                                          |  |              | 673    |                     |   | 767   
|Deferred revenue                                                                                                                                                       |  |              | 1,976  |                     |   | 2,138 
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total liabilities                                                                                                                                                      |  |              | 9,036  |                     |   | 13,424
|                                                                                                                                                                       |  |              |        |                     |   |       
|Commitments and Contingencies                                                                                                                                          |  |              |        |                     |   |       
|                                                                                                                                                                       |  |             
|Stockholders Equity:                                                                                                                                                  |  |              |        |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 31, 2007 and January 31,
2007, respectively                       |  |              |       |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized; 7,326,671 and 7,371,637 shares issued and outstanding at July 31, 2007
and January 31, 2007, respectively |  |              | 733    |                     |   | 737   
|Additional paid-in capital                                                                                                                                             |  |              | 6,759  |                     |   | 14,163
|Retained earnings                                                                                                                                                      |  |              | 19,168 |                     |   | 23,089
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total stockholders equity                                                                                                                                             |  |              | 26,660 |                     |   | 37,989
|                                                                                                                                                                       |  |              |        |                     |   |       
|Total liabilities and stockholders equity                                                                                                                             |  | $            | 35,696 |                     | $ | 51,413
|                                                                                                                                                                       |  |              |        |                     |   |       

---

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

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | -------------------------- | ------ | ------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months EndedJuly 31, |        | Six Months EndedJuly 31, |     
|                                              |  | 2007                       |        |                          | 2006 |   | 2007   |  |   | 2006   |  
|Revenue                                       |  | $                          | 5,919  |                          |      | $ | 12,972 |  | $ | 11,334 |   |  | $ | 23,528 |  
|Cost of revenue                               |  |                            | 4,111  |                          |      |   | 8,246  |  |   | 7,347  |   |  |   | 15,271 |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Gross profit                                  |  |                            | 1,808  |                          |      |   | 4,726  |  |   | 3,987  |   |  |   | 8,257  |  
|                                              |  |                            |        |                         
|Selling, general, and administrative expenses |  |                            | 2,356  |                          |      |   | 2,606  |  |   | 4,762  |   |  |   | 5,124  |  
|Engineering and support expenses              |  |                            | 2,159  |                          |      |   | 2,099  |  |   | 4,109  |   |  |   | 3,977  |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Operating income (loss)                       |  |                            | (2,707 | )                        |      |   | 21     |  |   | (4,884 | ) |  |   | (844   | )
|Other income, net                             |  |                            | 218    |                          |      |   | 221    |  |   | 491    |   |  |   | 450    |  
|Gain on sale of equipment, net                |  |                            |       |                          |      |   |       |  |   | 321    |   |  |   |       |  
|Gain on sale of investment in SwissQual, net  |  |                            | 269    |                          |      |   |       |  |   | 269    |   |  |   | 61     |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Income (loss) before income taxes             |  |                            | (2,220 | )                        |      |   | 242    |  |   | (3,803 | ) |  |   | (333   | )
|Income tax expense                            |  |                            |       |                          |      |   |       |  |   | 32     |   |  |   |       |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Net income (loss)                             |  | $                          | (2,220 | )                        |      | $ | 242    |  | $ | (3,835 | ) |  | $ | (333   | )
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Basic and diluted income (loss) per share:    |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Net income (loss)                             |  | $                          | (0.30  | )                        |      | $ | 0.03   |  | $ | (0.52  | ) |  | $ | (0.05  | )
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding:   |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Basic                                         |  |                            | 7,333  |                          |      |   | 7,391  |  |   | 7,349  |   |  |   | 7,410  |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Diluted                                       |  |                            | 7,333  |                          |      |   | 7,436  |  |   | 7,349  |   |  |   | 7,410  |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  
|Common shares outstanding                     |  |                            | 7,327  |                          |      |   | 7,379  |  |   | 7,327  |   |  |   | 7,379  |  
|                                              |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        |  

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                       |  |                           |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                       |  | Six Months Ended July 31, |       
|                                                                                                       |  | 2007                      |        |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |  |                           |        |   |      |   |        |  
|Net loss                                                                                               |  | $                         | (3,835 | ) |      | $ | (333   | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                                          |  |                           | 1,193  |   |      |   | 1,533  |  
|Gain on sale/retirement of property and equipment                                                      |  |                           | (300   | ) |      |   | (21    | )
|Gain on sale of investment in SwissQual                                                                |  |                           | (269   | ) |      |   | (82    | )
|Stock based compensation expense                                                                       |  |                           | 265    |   |      |   | 230    |  
|Provision for doubtful accounts receivable                                                             |  |                           | 4      |   |      |   | 6      |  
|Provision for obsolete inventory                                                                       |  |                           | 69     |   |      |   | 473    |  
|Changes in operating assets and liabilities:                                                           |  |                           |        |   |      |   |        |  
|Accounts receivable                                                                                    |  |                           | 7,809  |   |      |   | (938   | )
|Inventory                                                                                              |  |                           | 1,304  |   |      |   | 1,041  |  
|Other assets                                                                                           |  |                           | (68    | ) |      |   | (922   | )
|Accounts payable                                                                                       |  |                           | (421   | ) |      |   | 94     |  
|Deferred revenue                                                                                       |  |                           | (521   | ) |      |   | 462    |  
|Deferred rent                                                                                          |  |                           | (94    | ) |      |   | 657    |  
|Accrued liabilities                                                                                    |  |                           | (3,227 | ) |      |   | (2,556 | )
|                                                                                                       |  |                           |        |   |      |   |        |  
|Net cash provided by (used) in operating activities                                                    |  |                           | 1,909  |   |      |   | (356   | )
|                                                                                                       |  |                           |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |  |                           |        |   |      |   |        |  
|Purchases of property and equipment                                                                    |  |                           | (224   | ) |      |   | (1,796 | )
|Proceeds from sale of equipment                                                                        |  |                           | 361    |   |      |   | 22     |  
|Increase in restricted cash                                                                            |  |                           |       |   |      |   | (500   | )
|Proceeds from sale of investment in SwissQual                                                          |  |                           | 269    |   |      |   | 82     |  
|                                                                                                       |  |                           |        |   |      |   |        |  
|Net cash provided by (used) in investing activities                                                    |  |                           | 406    |   |      |   | (2,192 | )
|                                                                                                       |  |                           |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |  |                           |        |   |      |   |        |  
|Net proceeds from issuance of common stock                                                             |  |                           | 84     |   |      |   |       |  
|Dividends paid                                                                                         |  |                           | (7,371 | ) |      |   |       |  
|Purchase and retirement of common stock                                                                |  |                           | (386   | ) |      |   | (480   | )
|                                                                                                       |  |                           |        |   |      |   |        |  
|Net cash used in financing activities                                                                  |  |                           | (7,673 | ) |      |   | (480   | )
|                                                                                                       |  |                           |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                              |  |                           | (5,358 | ) |      |   | (3,028 | )
|Cash and cash equivalents, beginning of period                                                         |  |                           | 26,360 |   |      |   | 26,017 |  
|                                                                                                       |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                               |  | $                         | 21,002 |   |      | $ | 22,989 |  
|                                                                                                       |  |                           |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                                     |  |                           |        |   |      |   |        |  
|Cash paid for interest                                                                                 |  | $                         | 8      |   |      | $ |       |  
|                                                                                                       |  |                           |        |   |      |   |        |  
|Cash paid for income taxes                                                                             |  | $                         | 714    |   |      | $ | 173    |  
|                                                                                                       |  |                           |        |   |      |   |        |  

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



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

Basis of
Presentation:

The interim condensed consolidated financial statements of Comarco included herein have been prepared without audit in
accordance with accounting principles generally accepted in the United States of America for interim information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited
consolidated financial statements included in the Companys annual report on Form 10-K for the year ended January 31, 2007. The unaudited, interim condensed financial information presented herein reflects all adjustments, consisting only
of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for the three and six months ended July 31, 2007 are not necessarily
indicative of the results to be expected for the year ending January 31, 2008.

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.



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

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

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

The Company recognizes interest and
penalties associated with unrecognized tax benefits in the income tax expense line item of the Consolidated Statements of Operations. As of July 31, 2007, the Company had accrued approximately $14,000 in interest and penalties, which has been
recorded directly to retained earnings in accordance with the adoption of FIN 48.

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



|4. | Stock-Based Compensation
|-- | ------------------------

The Company grants stock
options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.

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



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                           |  |                            |      |                          |   |      |  |      |      |  |   |     
|------------------------------------------ |  | -------------------------- | ---- | ------------------------ | - | ---- |  | ---- | ---- |  | - | ----
|                                           |  | Three Months EndedJuly 31, |      | Six Months EndedJuly 31,
|                                           |  | 2007                       |      | 2006                     |   | 2007 |  | 2006
|Compensation expense relating to SFAS 123R |  | $                          | 144  |                          | $ | 146  |  | $    | 265  |  | $ | 229 
|Impact on diluted earnings per share       |  | $                          | 0.02 |                          | $ | 0.02 |  | $    | 0.04 |  | $ | 0.03

There was no impact on cash flows from operating, investing, or financing activities in connection
with the adoption of SFAS 123R. The total compensation cost related to nonvested awards not yet recognized is approximately $945,000, which will be expensed over a weighted average remaining life of 21.8 months.

The fair value of options granted under the Companys stock option plans during the three and six months ended July 31, 2007 and 2006 was
estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



|                                         |  |                           |   |  |      |  
|---------------------------------------- |  | ------------------------- | - |  | ---- | -
|                                         |  | Six Months Ended July 31, |  
|                                         |  | 2007                      |   |  | 2006 |  
|Weighted average risk-free interest rate |  | 4.8                       | % |  | 4.8  | %
|Expected life (in years)                 |  | 5.8                       |   |  | 6.1  |  
|Expected stock volatility                |  | 40.1                      | % |  | 44.2 | %
|Dividend yield                           |  | None                      |   |  | None |  
|Expected forfeitures                     |  | 10.6                      | % |  | 10.6 | %

Comarco, Inc. has stock-based compensation plans under which outside directors and certain
employees receive stock options. The employee stock option plans and a director stock option plan provide that officers, key employees, and directors may be granted options to purchase 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.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Transactions and other information related to these plans for the six months ended July 31, 2007
are summarized below:



|                            |  |                     |   |  |                                |      
|--------------------------- |  | ------------------- | - |  | ------------------------------ | -----
|                            |  | Outstanding Options
|                            |  | Number of Shares    |   |  | Weighted-AverageExercise Price
|Balance, January 31, 2007   |  | 985,770             |   |  | $                              | 12.18
|Options granted             |  | 92,500              |   |  |                                | 6.27 
|Options canceled or expired |  | (154,645            | ) |  |                                | 12.35
|Options exercised           |  | (26,125             | ) |  |                                | 7.74 
|                            |  |                     |   |  |                                |      
|Balance, July 31, 2007      |  | 897,500             |   |  |                                | 11.67
|                            |  |                     |   |  |                                |      

The average fair value of each of the options granted during the six months ended July 31,
2007 was $2.87. As of July 31, 2007 the stock options outstanding have no intrinsic value. The following table summarizes information about the Companys stock options outstanding at July 31, 2007:



|                         |  |                     |  |                                         |  |                              |       |                    |         |                             |   |      
|------------------------ |  | ------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ------------------ | ------- | --------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                    
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted-Avg. RemainingContractual Life |  | Weighted-Avg. Exercise Price |       | Number Exercisable |         | Weighted-Avg.Exercise Price
|$ 6.19 to 9.89           |  | 402,500             |  | 6.68                                    |  | $                            | 7.57  |                    | 240,250 |                             | $ | 7.82 
|10.43 to 12.41           |  | 197,000             |  | 7.58                                    |  |                              | 10.76 |                    | 107,000 |                             |   | 11.04
|13.21 to 17.50           |  | 163,000             |  | 1.92                                    |  |                              | 14.59 |                    | 163,000 |                             |   | 14.59
|19.33 to 23.67           |  | 135,000             |  | 2.82                                    |  |                              | 21.72 |                    | 135,000 |                             |   | 21.72
|                         |  |                     |  |                                         |  |                              |       |                    |         |                             |   |      
|6.19 to 23.67            |  | 897,500             |  | 5.43 years                              |  |                              | 11.67 |                    | 645,250 |                             |   | 12.97
|                         |  |                     |  |                                         |  |                              |       |                    |         |                             |   |      

Stock options exercisable at July 31, 2007 were 645,250 at a weighted-average exercise price
of $12.97. At July 31, 2007, shares available for future grants under the 2005 Plan were 174,500 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, 2007 the Company owned all of the 3,353,000 outstanding shares of CWT common
stock. The fair market value of the shares and the exercise dates of the options are determined by the compensation committee of the Companys Board of Directors; however, no option may be exercised prior to one year following the grant of the
option. The options expire as determined by the compensation committee, but not later than ten years and one week after the date of grant.

During the three and six months ended July 31, 2007, no options were granted or exercised under the CWT option plan. There were no options outstanding at July 31, 2007. Shares available under the plan for future grants at
July 31, 2007 were 198,000.



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

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS 159). This standard amends SFAS No. 115,
Accounting for Certain Investment in Debt and Equity Securities, with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This
standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted as such, allows different applications for electing the option for a single item or groups of
items, and requires disclosures to facilitate comparisons of similar assets and liabilities that



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



are accounted for differently in relation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which
for Comarco is fiscal 2009. The Company does not expect SFAS 159 to have a material impact on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This new standard establishes a framework for measuring the fair value of assets and liabilities.
This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases require, estimates of fair market value. SFAS 157 also expands
financial statement disclosure requirements about a companys use of fair value measurements, including the effect of such measures on earnings. This statement is effective for fiscal years beginning after November 15, 2007, which for
Comarco is fiscal 2009. The Company does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial statements.



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

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

Revenue recorded related to SwissQual for the three and six
months ended July 31, 2007 was de minimus. Revenue recorded related to SwissQual for the three and six months ended July 31, 2006 totaled $506,000 and $1.2 million, respectively. Accounts receivable balances due from SwissQual at
July 31, 2007 and January 31, 2007 were $7,000 and $1.2 million, respectively.

On December 15, 2005, the Company
entered into a Distribution and Sales Agreement (DASA) with SwissQual whereby SwissQual receives 10 percent of the revenue on all Seven.Five product sales, less associated hardware costs, through December 31, 2006. Effective
January 1, 2007 the revenue sharing applicable to both parties increased to 35 percent on hardware upgrades and 50 percent on software upgrades. At July 31, 2007 and January 31, 2007 the Company had accrued $42,000 and
$93,000, respectively, relating to amounts payable to SwissQual under the DASA. During the second quarter of fiscal 2008 and 2007, the Company paid $632,000 and $527,000, respectively, to SwissQual for revenue sharing amounts accrued under the DASA.
For the six months ended July 31, 2007 and 2006, the Company paid $684,000 and $1.1 million, respectively, to SwissQual for revenue sharing amounts.

During January 2006, Spirent plc (Spirent) acquired 100 percent of the outstanding shares of SwissQual for consideration totaling up to approximately $71.3 million. Approximately
$37.6 million in cash was paid at the close of the transaction, which is net of $2.5 million of transaction costs, with an additional $9.1 million put into escrow to secure certain indemnification obligations. The escrowed
consideration is expected to be released within 24 months of the close. In addition, up to $22.1 million in contingent consideration may be paid within 24 months upon satisfaction of certain performance and other requirements. Upon
the closing of the transaction, the Company received approximately $6.8 million of the closing consideration, which is net of $0.5 million of transaction costs, for its 18 percent ownership interest in SwissQual and may receive up to
an additional $5.4 million of any escrow distribution and contingent consideration. During the year ended January 31, 2006, the Company recorded a gain on sale of investment totaling $6.1 million, which was based on cash consideration
received by the Company. During the first quarter of fiscal 2007, the Company recorded a net gain on sale of investment in the amount of $61,000, which represents $82,000 in proceeds received from the escrowed consideration, less $21,000 in foreign
jurisdiction withholding taxes, which are non-refundable. During the fourth quarter of fiscal 2007, the Company received an additional $1.6 million of contingent consideration, net of $0.1 million of transaction costs, recorded as gain on
sale of investment in SwissQual. Finally, during the second quarter of fiscal 2008, the Company received an additional



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



$269,000 of contingent consideration, net of $21,000 of transaction costs. Due to uncertainty as to timing and amount of any escrow distribution and
contingent consideration, the Company expects to record an additional gain as the contingency lapses and the funds are probable of receipt.



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

During 1992, the
Companys Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through July 31, 2007, the Company repurchased approximately 2.7 million
shares for an average price of $8.20 per share. During the three and six months ended July 31, 2007, the Company repurchased 44,667 and 57,637 shares of common stock at an average price of $6.41 and $6.70 per share, respectively.

A roll-forward of the Companys stockholders equity for the six months ended July 31, 2007 is presented below
(in thousands, except share data):



|                                                                         |  |                                |     |   |                          |   |        |                  |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------ | --- | - | ------------------------ | - | ------ | ---------------- |  | - | ------ | - |  | - | ------ | -
|                                                                         |  | Six Months Ended July 31, 2007 |    
|                                                                         |  | CommonStock ParValue           |     |   | AdditionalPaid-InCapital |   |        | RetainedEarnings |  |   | Total  |  
|Balance at January 31, 2007, 7,371,637 shares                            |  | $                              | 737 |   |                          | $ | 14,163 |                  |  | $ | 23,089 |   |  | $ | 37,989 |  
|Net loss                                                                 |  |                                |    |   |                          |   |       |                  |  |   | (3,835 | ) |  |   | (3,835 | )
|Exercise of stock options, 12,671 shares (2,671 represent net exercises) |  |                                | 1   |   |                          |   | 83     |                  |  |   |       |   |  |   | 84     |  
|Special cash dividend, $1 per share of common stock outstanding          |  |                                |    |   |                          |   | (7,371 | )                |  |   |       |   |  |   | (7,371 | )
|Purchase and retirement of common stock, 57,637 shares                   |  |                                | (5  | ) |                          |   | (381   | )                |  |   |       |   |  |   | (386   | )
|Stock based compensation expense                                         |  |                                |    |   |                          |   | 265    |                  |  |   |       |   |  |   | 265    |  
|Cumulative effect of accounting change: adoption of FIN 48               |  |                                |    |   |                          |   |       |                  |  |   | (86    | ) |  |   | (86    | )
|                                                                         |  |                                |     |   |                          |   |        |                  |  |   |        |   |  |   |        |  
|Balance at July 31, 2007, 7,326,671 shares                               |  | $                              | 733 |   |                          | $ | 6,759  |                  |  | $ | 19,168 |   |  | $ | 26,660 |  
|                                                                         |  |                                |     |   |                          |   |        |                  |  |   |        |   |  |   |        |  

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



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

The Company calculates
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 three and six months ended July 31, 2007 and the six months ended July 31, 2006, basic and diluted loss per share were the same because the inclusion of potential common shares related to outstanding
stock options in the calculation would have been antidilutive.

Potential common shares of 13 and 1,585 have been excluded from diluted
weighted average common shares for the three and six months ended July 31, 2007, as the effect would have been antidilutive. Similarly, 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.



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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, |     
|                                            |  | 2007                       |        |                          | 2006 |   | 2007  |  |   | 2006   |  
|Basic:                                      |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  
|Net income (loss)                           |  | $                          | (2,220 | )                        |      | $ | 242   |  | $ | (3,835 | ) |  | $ | (333  | )
|Weighted average shares outstanding         |  |                            | 7,333  |                          |      |   | 7,391 |  |   | 7,349  |   |  |   | 7,410 |  
|                                            |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  
|Basic and diluted earnings (loss) per share |  | $                          | (0.30  | )                        |      | $ | 0.03  |  | $ | (0.52  | ) |  | $ | (0.05 | )
|                                            |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  
|Diluted:                                    |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  
|Net income (loss)                           |  | $                          | (2,220 | )                        |      | $ | 242   |  | $ | (3,835 | ) |  | $ | (333  | )
|Weighted average shares outstanding         |  |                            | 7,333  |                          |      |   | 7,436 |  |   | 7,349  |   |  |   | 7,410 |  
|                                            |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  
|Basic and diluted earnings (loss) per share |  | $                          | (0.30  | )                        |      | $ | 0.03  |  | $ | (0.52  | ) |  | $ | (0.05 | )
|                                            |  |                            |        |                          |      |   |       |  |   |        |   |  |   |       |  



|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 any of the periods presented below are listed here:



|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|--------------------------- |  | --------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                            |  | Three Months Ended July 31, |       
|                            |  | 2007                        |        |  | 2006 |  
|                            |  | (In thousands)              |       
|Total revenue               |  | $                           | 5,919  |  | 100  | % |  | $ | 12,972 |  | 100 | %
|                            |  |                             |        | 
|Customer concentration:     |  |                             |        |  |      |   |  |   |        |  |     |  
|Ventura County SAFE         |  |                             | 796    |  | 13   | % |  |   |       |  |    |  
|San Bernardino County SAFE  |  |                             | 667    |  | 11   | % |  |   |       |  |    |  
|Kensington Technology Group |  |                             | 400    |  | 7    | % |  |   | 4,243  |  | 33  | %
|Verizon Wireless            |  |                             | 418    |  | 7    | % |  |   | 1,584  |  | 12  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|                            |  | $                           | 2,281  |  | 38   | % |  | $ | 5,827  |  | 45  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|                            | 
|                            |  | Six Months Ended July 31,   |       
|                            |  | 2007                        |        |  | 2006 |  
|                            |  | (In thousands)              |       
|Total revenue               |  | $                           | 11,334 |  | 100  | % |  | $ | 23,528 |  | 100 | %
|                            |  |                             |        | 
|Customer concentration:     |  |                             |        |  |      |   |  |   |        |  |     |  
|Verizon Wireless            |  |                             | 2,938  |  | 26   | % |  |   | 3,780  |  | 16  | %
|MTC SAFE                    |  |                             | 1,094  |  | 10   | % |  |   |       |  |    |  
|Kensington Technology Group |  |                             | 652    |  | 6    | % |  |   | 8,373  |  | 36  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  
|                            |  | $                           | 4,684  |  | 42   | % |  | $ | 12,153 |  | 52  | %
|                            |  |                             |        |  |      |   |  |   |        |  |     |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The Verizon Wireless revenue amounts reported above are gross amounts, without reducing the revenue
for revenue sharing amounts we accrue payable to SwissQual (see Note 2).

In addition, the Company derived 61 percent and
30 percent of its revenue from governmental agencies in the three months ended July 31, 2007, and 2006, respectively. The Company derived 56 percent and 32 percent of its revenue from governmental agencies in the six months ended
July 31, 2007, and 2006, respectively.

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



|                                |  |               |       |  |                  |   |  |   |        |  |     |  
|------------------------------- |  | ------------- | ----- |  | ---------------- | - |  | - | ------ |  | --- | -
|                                |  | July 31, 2007 |       |  | January 31, 2007 |  
|Total gross accounts receivable |  | $             | 3,183 |  | 100              | % |  | $ | 11,053 |  | 100 | %
|                                |  |               |       | 
|Customer concentration:         |  |               |       |  |                  |   |  |   |        |  |     |  
|PCCW Limited                    |  |               | 490   |  | 15               | % |  |   |       |  |    |  
|Kensington Technology Group     |  |               | 402   |  | 13               | % |  |   | 2,975  |  | 27  | %
|MTC SAFE                        |  |               | 156   |  | 5                | % |  |   | 1,531  |  | 14  | %
|SwissQual                       |  |               |      |  |                 |   |  |   | 1,185  |  | 11  | %
|                                |  |               |       |  |                  |   |  |   |        |  |     |  
|                                |  | $             | 1,048 |  | 33               | % |  | $ | 5,691  |  | 52  | %
|                                |  |               |       |  |                  |   |  |   |        |  |     |  



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

Inventory, net of reserves, consists of
the following (in thousands):



|                |  |              |       |                 |   |      
|--------------- |  | ------------ | ----- | --------------- | - | -----
|                |  | July 31,2007 |       | January 31,2007
|Raw materials   |  | $            | 2,565 |                 | $ | 1,912
|Work in process |  |              | 29    |                 |   | 195  
|Finished goods  |  |              | 1,485 |                 |   | 3,345
|                |  |              |       |                 |   |      
|                |  | $            | 4,079 |                 | $ | 5,452
|                |  |              |       |                 |   |      



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

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



|                                       |  |              |        |   |                 |   |        |  
|-------------------------------------- |  | ------------ | ------ | - | --------------- | - | ------ | -
|                                       |  | July 31,2007 |        |   | January 31,2007 |  
|Capitalized software development costs |  | $            | 8,444  |   |                 | $ | 8,444  |  
|Less: accumulated amortization         |  |              | (8,405 | ) |                 |   | (8,201 | )
|                                       |  |              |        |   |                 |   |        |  
|                                       |  | $            | 39     |   |                 | $ | 243    |  
|                                       |  |              |        |   |                 |   |        |  

There were no capitalized software development costs in the first and second quarters of the
current and prior years. Amortization of software development costs for the six months ended July 31, 2007 and 2006 totaled $204,000 and $653,000, 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, 2007 and 2006 totaled $65,000 and $326,000, respectively. The remaining net book value of $39,000 is expected to be fully
amortized in fiscal 2008.



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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 31,2007 |        |   | January 31,2007 |  
|Goodwill                          |  | $            | 2,394  |   |                 | $ | 2,394  |  
|                                  |  |              |        |   |                 |   |        |  
|Acquired intangible assets:       |  |              |        |   |                 |   |        |  
|Definite-lived intangible assets: |  |              |        |   |                 |   |        |  
|License rights                    |  | $            | 1,440  |   |                 | $ | 1,440  |  
|Intellectual property rights      |  |              | 1,244  |   |                 |   | 1,244  |  
|                                  |  |              |        |   |                 |   |        |  
|                                  |  |              | 2,684  |   |                 |   | 2,684  |  
|Less: accumulated amortization    |  |              | (2,042 | ) |                 |   | (1,864 | )
|                                  |  |              |        |   |                 |   |        |  
|                                  |  | $            | 642    |   |                 | $ | 820    |  
|                                  |  |              |        |   |                 |   |        |  

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



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

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



|                                     |  |                     |    
|------------------------------------ |  | ------------------- | ---
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |    
|2008                                 |  | $                   | 117
|2009                                 |  |                     | 178
|2010                                 |  |                     | 178
|2011                                 |  |                     | 126
|2012                                 |  |                     | 43 
|Thereafter                           |  |                     |   
|                                     |  |                     |    
|Total estimated amortization expense |  | $                   | 642
|                                     |  |                     |    

Amortization of definite-lived acquired intangible assets for the quarters ended July 31,
2007 and 2006 totaled $89,000 and $130,000, respectively. For the six months ended July 31, 2007 and 2006, amortization of definite-lived acquired intangible assets totaled $178,000 and $262,000, respectively. The Company ceased amortizing
goodwill beginning February 1, 2002 upon adoption of SFAS No. 142, Goodwill and Other Intangible Assets.



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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, |     
|                                                 |  | 2007                     |      |   | 2006 |  
|Beginning balance                                |  | $                        | 344  |   |      | $ | 172  |  
|Utilization                                      |  |                          | (305 | ) |      |   | (311 | )
|Accruals for warranties issued during the period |  |                          | 65   |   |      |   | 430  |  
|                                                 |  |                          |      |   |      |   |      |  
|                                                 |  | $                        | 104  |   |      | $ | 291  |  
|                                                 |  |                          |      |   |      |   |      |  

Embedded Post Contract Support and Warranty

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



|                         |  |                          |      |   |      |   |        |  
|------------------------ |  | ------------------------ | ---- | - | ---- | - | ------ | -
|                         |  | Six Months EndedJuly 31, |     
|                         |  | 2007                     |      |   | 2006 |  
|Beginning balance        |  | $                        | 551  |   |      | $ | 1,476  |  
|Amortization of deferral |  |                          | (469 | ) |      |   | (1,149 | )
|Deferral of revenue      |  |                          | 276  |   |      |   | 614    |  
|                         |  |                          |      |   |      |   |        |  
|                         |  | $                        | 358  |   |      | $ | 941    |  
|                         |  |                          |      |   |      |   |        |  

Extended Post Contract Support and Warranty

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



|                                      |  |                          |       |   |      |   |       |  
|------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                                      |  | Six Months EndedJuly 31, |      
|                                      |  | 2007                     |       |   | 2006 |  
|Beginning balance                     |  | $                        | 2,952 |   |      | $ | 2,239 |  
|Recognition of revenue                |  |                          | (540  | ) |      |   | (392  | )
|Deferral of revenue for new contracts |  |                          | 443   |   |      |   | 1,194 |  
|                                      |  |                          |       |   |      |   |       |  
|                                      |  | $                        | 2,855 |   |      | $ | 3,041 |  
|                                      |  |                          |       |   |      |   |       |  



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

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



15



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

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

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

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

The call box segment designs and manufactures call box systems that
provide emergency communication over existing wireless networks. In addition, the call box segment provides system installation and long-term maintenance services. Currently, the Company services and maintains approximately 10,200 call boxes under
long-term agreements.

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



|                    |  |                                  |       |    |                        |   |       |          |  |   |       |   |  |   |       |  
|------------------- |  | -------------------------------- | ----- | -- | ---------------------- | - | ----- | -------- |  | - | ----- | - |  | - | ----- | -
|                    |  | Three Months Ended July 31, 2007 |      
|                    |  | Mobile PowerProducts             |       |    | Wireless TestSolutions |   |       | Call Box |  |   | Total |  
|Revenue             |  | $                                | 766   |    |                        | $ | 1,382 |          |  | $ | 3,771 |   |  | $ | 5,919 |  
|Cost of revenue     |  |                                  | 1,055 |    |                        |   | 923   |          |  |   | 2,133 |   |  |   | 4,111 |  
|                    |  |                                  |       |    |                        |   |       |          |  |   |       |   |  |   |       |  
|Gross profit (loss) |  | $                                | (289  | )  |                        | $ | 459   |          |  | $ | 1,638 |   |  | $ | 1,808 |  
|                    |  |                                  |       |    |                        |   |       |          |  |   |       |   |  |   |       |  
|Gross margin        |  |                                  | (37.7 | )% |                        |   | 33.2  | %        |  |   | 43.4  | % |  |   | 30.5  | %
|                    |  |                                  |       |    |                        |   |       |          |  |   |       |   |  |   |       |  



|                    |  |                                |       |    |                        |   |       |          |  |   |       |   |  |   |        |  
|------------------- |  | ------------------------------ | ----- | -- | ---------------------- | - | ----- | -------- |  | - | ----- | - |  | - | ------ | -
|                    |  | Six Months Ended July 31, 2007 |      
|                    |  | Mobile PowerProducts           |       |    | Wireless TestSolutions |   |       | Call Box |  |   | Total |  
|Revenue             |  | $                              | 1,087 |    |                        | $ | 3,998 |          |  | $ | 6,249 |   |  | $ | 11,334 |  
|Cost of revenue     |  |                                | 1,790 |    |                        |   | 2,169 |          |  |   | 3,388 |   |  |   | 7,347  |  
|                    |  |                                |       |    |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross profit (loss) |  | $                              | (703  | )  |                        | $ | 1,829 |          |  | $ | 2,861 |   |  | $ | 3,987  |  
|                    |  |                                |       |    |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross margin        |  |                                | (64.7 | )% |                        |   | 45.7  | %        |  |   | 45.8  | % |  |   | 35.2   | %
|                    |  |                                |       |    |                        |   |       |          |  |   |       |   |  |   |        |  



|                |  |                                  |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|--------------- |  | -------------------------------- | ----- | - | ---------------------- | - | ----- | -------- |  | - | ----- | - |  | - | ------ | -
|                |  | Three Months Ended July 31, 2006 |      
|                |  | Mobile PowerProducts             |       |   | Wireless TestSolutions |   |       | Call Box |  |   | Total |  
|Revenue         |  | $                                | 4,517 |   |                        | $ | 3,710 |          |  | $ | 4,745 |   |  | $ | 12,972 |  
|Cost of revenue |  |                                  | 3,393 |   |                        |   | 1,576 |          |  |   | 3,277 |   |  |   | 8,246  |  
|                |  |                                  |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross profit    |  | $                                | 1,124 |   |                        | $ | 2,134 |          |  | $ | 1,468 |   |  | $ | 4,726  |  
|                |  |                                  |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross margin    |  |                                  | 24.9  | % |                        |   | 57.5  | %        |  |   | 30.9  | % |  |   | 36.4   | %
|                |  |                                  |       |   |                        |   |       |          |  |   |       |   |  |   |        |  



16



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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                |  |                                |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|--------------- |  | ------------------------------ | ----- | - | ---------------------- | - | ----- | -------- |  | - | ----- | - |  | - | ------ | -
|                |  | Six Months Ended July 31, 2006 |      
|                |  | Mobile PowerProducts           |       |   | Wireless TestSolutions |   |       | Call Box |  |   | Total |  
|Revenue         |  | $                              | 8,666 |   |                        | $ | 7,283 |          |  | $ | 7,579 |   |  | $ | 23,528 |  
|Cost of revenue |  |                                | 6,363 |   |                        |   | 3,501 |          |  |   | 5,407 |   |  |   | 15,271 |  
|                |  |                                |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross profit    |  | $                              | 2,303 |   |                        | $ | 3,782 |          |  | $ | 2,172 |   |  | $ | 8,257  |  
|                |  |                                |       |   |                        |   |       |          |  |   |       |   |  |   |        |  
|Gross margin    |  |                                | 26.6  | % |                        |   | 51.9  | %        |  |   | 28.7  | % |  |   | 35.1   | %
|                |  |                                |       |   |                        |   |       |          |  |   |       |   |  |   |        |  



|                           |  |                      |       |                        |   |          |  |           |       |       |   |        |  |   |       
|-------------------------- |  | -------------------- | ----- | ---------------------- | - | -------- |  | --------- | ----- | ----- | - | ------ |  | - | ------
|                           |  | Mobile PowerProducts |       | Wireless TestSolutions |   | Call Box |  | Corporate |       | Total
|Assets at July 31, 2007    |  | $                    | 1,809 |                        | $ | 7,358    |  | $         | 4,341 |       | $ | 22,188 |  | $ | 35,696
|                           |  |                      |       |                        |   |          |  |           |       |       |   |        |  |   |       
|Assets at January 31, 2007 |  | $                    | 4,615 |                        | $ | 10,861   |  | $         | 8,181 |       | $ | 27,756 |  | $ | 51,413
|                           |  |                      |       |                        |   |          |  |           |       |       |   |        |  |   |       

The following table presents revenue by geographic region for the three and six months ended
July 31, 2007 and 2006 (in thousands):



|                                  |  |                            |       |                          |   |        |  |      |        |  |   |       
|--------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|Revenue by Region: (in thousands) |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31,
|                                  |  | 2007                       |       | 2006                     |   | 2007   |  | 2006
|North America                     |  | $                          | 4,957 |                          | $ | 11,109 |  | $    | 9,771  |  | $ | 20,049
|Europe                            |  |                            | 410   |                          |   | 759    |  |      | 614    |  |   | 2,147 
|Asia                              |  |                            | 200   |                          |   | 235    |  |      | 342    |  |   | 240   
|Latin America                     |  |                            | 352   |                          |   | 869    |  |      | 607    |  |   | 1,092 
|                                  |  |                            |       |                          |   |        |  |      |        |  |   |       
|                                  |  | $                          | 5,919 |                          | $ | 12,972 |  | $    | 11,334 |  | $ | 23,528
|                                  |  |                            |       |                          |   |        |  |      |        |  |   |       



|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. Currently the Company has open purchase orders with a contract manufacturer in China in the amount of approximately $0.8 million
relating to components for ChargeSource products currently in development. If some of these components are no longer needed due to design changes, we may not be able to cancel the orders in time to avoid incurring cancellation charges or taking
delivery.

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.



17



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Executive Severance Commitments

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

Letter of Credit

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

Legal Contingencies

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



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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, 2007.

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

Basis of Presentation

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

Executive Summary

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

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



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The following table sets forth our revenue for the business segments for the three and six months ended
July 31, 2007 and 2006:



|             |  |                             |       |      |                           |         |  |       |      |  |      |        |         |   |        |  |       |   
|------------ |  | --------------------------- | ----- | ---- | ------------------------- | ------- |  | ----- | ---- |  | ---- | ------ | ------- | - | ------ |  | ----- | --
|             |  | Three Months Ended July 31, |       |      | Six Months Ended July 31, |        
|             |  | 2007                        |       | 2006 |                           | %Change |  |       | 2007 |  | 2006 |        | %Change |  
|             |  | (in thousands)              |       |      | (in thousands)            |        
|Revenue:     |  |                             |       |      |                           |         |  |       |      |  |      |        |         |   |        |  |       |   
|ChargeSource |  | $                           | 766   |      | $                         | 4,517   |  | (83.0 | )%   |  | $    | 1,087  |         | $ | 8,666  |  | (87.5 | )%
|WTS          |  |                             | 1,382 |      |                           | 3,710   |  | (62.7 | )%   |  |      | 3,998  |         |   | 7,283  |  | (45.1 | )%
|Call Box     |  |                             | 3,771 |      |                           | 4,745   |  | (20.5 | )%   |  |      | 6,249  |         |   | 7,579  |  | (17.5 | )%
|             |  |                             |       |      |                           |         |  |       |      |  |      |        |         |   |        |  |       |   
|             |  | $                           | 5,919 |      | $                         | 12,972  |  | (54.4 | )%   |  | $    | 11,334 |         | $ | 23,528 |  | (51.8 | )%
|             |  |                             |       |      |                           |         |  |       |      |  |      |        |         |   |        |  |       |   

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, 2007.

Mobile Power
Products (ChargeSource)



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



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



| |  |  | ChargeSource revenue for the second quarter of fiscal 2008 decreased significantly to $0.8 million compared to $4.5 million for the second quarter of
fiscal 2007. Additionally, we entered the third quarter of fiscal 2008 with a backlog of purchase orders from Kensington that was significantly less than quarterly backlog levels of the prior fiscal year. We currently believe Kensington is sourcing
certain external power adapters, which are not slim and light, from other Asian suppliers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| | - | Market and customer acceptance of our new products expected to be available during the fourth quarter of fiscal 2008.
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Our ChargeSource products are based on proprietary patented construction technology that enables the production of slim and light power sources for many
rechargeable mobile devices from standard wall outlets as well as power outlets in airplanes, cars and other modes of transportation. We currently expect to expand our product portfolio to include a product created for retail distribution that can
provide up to 90 Watts of continuous power and 100 Watts peak. This product, which is expected to be
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

| | generally available during the fourth quarter of fiscal 2008, has an input of 90 to 264 volts of alternating current and 10.5 to 18 volts of direct current
auto/air operation and will be compliant with both the Restriction of Hazardous Substances (RoHS) directive and the U.S. ENERGY STAR program, and will meet all other standards for sale worldwide.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Wireless Test Solutions



| |  |  | Current demand for our next-generation mobile test equipment continues to be soft across all our regions as wireless carriers delay deployment of capital for such
mobile test tools. WTS revenue for the three and six months ended July 31, 2007 decreased compared to the corresponding periods of the prior fiscal year, underscoring the challenges of our WTS business, which include a consolidating customer
base comprised of a relatively small number of wireless carriers and equipment vendors, as well as uncertainty regarding the timing and amount of anticipated orders from such customer base. Additionally, we have experienced increased competition in
our European region from SwissQual and others. We expect our ability to compete on a global basis to be driven by our ability to offer products that cover all current wireless technologies, as well as the timely integration of new technology and
functionality into our product platform.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

Emergency Call Box Systems



| |  |  | During the second quarter of fiscal 2008, we upgraded 1,287 call boxes with digital and/or text-telephony technologies and recorded revenue totaling approximately
$2.2 million. Such upgrade revenue also included revenue related to retrofit, site mitigation, and call box removal activities performed in conjunction with the upgrade of the call box systems. During second quarter of fiscal 2007, we upgraded
1,422 call boxes and recorded revenue totaling approximately $3.2 million, which also includes revenue related to retrofit, site mitigation activities, and call box removal activities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subsequent to the second quarter of fiscal 2008, a previously awarded contract to upgrade the call boxes owned by the Riverside County SAFE to digital technology
was amended to also include the TTY technology upgrade. This project is valued at approximately $1.6 million and is expected to commence and substantially complete during the second half of fiscal 2008. The term of the corresponding maintenance
agreement was also extended through June 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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, 2007 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, 2007 to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the
fiscal year ended January 31, 2007.

Results of Operations  Continuing Operations

Consolidated

Revenue

(in thousands except change)



|                        |  |                            |        |                          |      |   |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|----------------------- |  | -------------------------- | ------ | ------------------------ | ---- | - | ---------------------- |  | - | ------ | - |  | ----------- | ------ | - | --------- | --- | -- |  | --- | --
|                        |  | Three Months EndedJuly 31, |        | Six Months EndedJuly 31, |      |   | Year over Year% Change | 
|                        |  | 2007                       |        |                          | 2006 |   | 2007                   |  |   | 2006   |   |  | ThreeMonths |        |   | SixMonths |    
|Revenue:                |  |                            |        |                          |      |   |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|Products                |  | $                          | 4,746  |                          |      | $ | 11,773                 |  | $ | 9,027  |   |  | $           | 21,161 |   |           | (60 | )% |  | (57 | )%
|Services                |  |                            | 1,173  |                          |      |   | 1,199                  |  |   | 2,307  |   |  |             | 2,367  |   |           | (2  | )% |  | (3  | )%
|                        |  |                            |        |                          |      |   |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|                        |  | $                          | 5,919  |                          |      | $ | 12,972                 |  | $ | 11,334 |   |  | $           | 23,528 |   |           | (54 | )% |  | (52 | )%
|                        |  |                            |        |                          |      |   |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|Operating income (loss) |  | $                          | (2,707 | )                        |      | $ | 21                     |  | $ | (4,884 | ) |  | $           | (844   | ) |           |     |    |  |     |   
|                        |  |                            |        |                          |      |   |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   

Revenue by Region

(in thousands except change)



|               |  |                            |       |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|-------------- |  | -------------------------- | ----- | ------------------------ | - | ---------------------- |  | ---- | ------ | ----------- | - | ------ | --------- | --- | -- |  | --- | --
|               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |   | Year over Year% Change | 
|               |  | 2007                       |       | 2006                     |   | 2007                   |  | 2006 |        | ThreeMonths |   |        | SixMonths |    
|Revenue:       |  |                            |       |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|Americas:      |  |                            |       |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|North America  |  | $                          | 4,957 |                          | $ | 11,109                 |  | $    | 9,771  |             | $ | 20,049 |           | (55 | )% |  | (51 | )%
|Others         |  |                            | 352   |                          |   | 869                    |  |      | 607    |             |   | 1,092  |           | (60 | )% |  | (44 | )%
|Europe         |  |                            | 410   |                          |   | 759                    |  |      | 614    |             |   | 2,147  |           | (46 | )% |  | (71 | )%
|Asia  Pacific |  |                            | 200   |                          |   | 235                    |  |      | 342    |             |   | 240    |           | (15 | )% |  | 43  | % 
|               |  |                            |       |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   
|               |  | $                          | 5,919 |                          | $ | 12,972                 |  | $    | 11,334 |             | $ | 23,528 |           | (54 | )% |  | (52 | )%
|               |  |                            |       |                          |   |                        |  |      |        |             |   |        |           |     |    |  |     |   



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##### Table of Contents

Revenue for the three and six months ended July 31, 2007 decreased by $7.1 million, or
54 percent, and $12.2 million, or 52 percent, respectively, compared to the corresponding period of fiscal 2007. The decrease is attributable to declines in revenue in all three of our businesses, with ChargeSource and WTS decreasing
$3.8 million and $2.3 million, respectively, in the second quarter of fiscal 2008 and $7.6 million and $3.3 million, respectively, for the six months ended July 31, 2007 compared to the same periods of the prior fiscal year.
These decreases continue to reflect the transition of our ChargeSource distribution to a non-exclusive model and general weakness in the wireless test equipment market in which WTS operates.

Cost of Revenue and Gross Margin

(in thousands except
margin and change)



|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|----------------------------------- |  | --------------------------- | ----- | ------------------ | ------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | --------- | - | ------------------ | - | ------ |  | -- | - |  | --- | -- |  | --- | --
|                                    |  | Three Months Ended July 31, |       |                    | Six Months Ended July 31, |   |  | Year over Year% Change |                   
|                                    |  | 2007                        |       |                    | 2006                      |   |  | 2007                   |                    |  | 2006 |   |  | ThreeMonths        |       |  | SixMonths |  
|                                    |  |                             |       | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |           |   | % ofRelatedRevenue |   |        |  |    |   |  |    
|Cost of revenue:                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|Products                            |  | $                           | 3,237 |                    | 68                        | % |  | $                      | 7,160              |  | 61   | % |  | $                  | 5,575 |  | 62        | % |                    | $ | 13,037 |  | 62 | % |  | (55 | )% |  | (57 | )%
|Amortization  software development |  |                             | 59    |                    | 1                         | % |  |                        | 321                |  | 3    | % |  |                    | 193   |  | 2         | % |                    |   | 642    |  | 3  | % |  | (82 | )% |  | (70 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 3,296 |                    | 69                        | % |  |                        | 7,481              |  | 64   | % |  |                    | 5,768 |  | 64        | % |                    |   | 13,679 |  | 65 | % |  | (56 | )% |  | (58 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|Services                            |  |                             | 810   |                    | 69                        | % |  |                        | 760                |  | 63   | % |  |                    | 1,568 |  | 68        | % |                    |   | 1,581  |  | 67 | % |  | 7   | %  |  | (1  | )%
|Amortization  software development |  |                             | 5     |                    | 1                         | % |  |                        | 5                  |  | 1    | % |  |                    | 11    |  |          |   |                    |   | 11     |  |   |   |  |    |    |  |    |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 815   |                    | 70                        | % |  |                        | 765                |  | 64   | % |  |                    | 1,579 |  | 68        | % |                    |   | 1,592  |  | 67 | % |  | 7   | %  |  | (1  | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   
|                                    |  | $                           | 4,111 |                    | 70                        | % |  | $                      | 8,246              |  | 64   | % |  | $                  | 7,347 |  | 65        | % |                    | $ | 15,271 |  | 65 | % |  | (50 | )% |  | (52 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |        |  |    |   |  |     |    |  |     |   



|                      |  |                            |   |  |                          |   |  |                          |   |  |      |   |  |             |   |  |           |  
|--------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ------------------------ | - |  | ---- | - |  | ----------- | - |  | --------- | -
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |   |  | Year over Yearppt Change |  
|                      |  | 2007                       |   |  | 2006                     |   |  | 2007                     |   |  | 2006 |   |  | ThreeMonths |   |  | SixMonths |  
|Gross margin:         |  |                            |   |  |                          |   |  |                          |   |  |      |   |  |             |   |  |           |  
|Products              |  | 31                         | % |  | 36                       | % |  | 36                       | % |  | 35   | % |  | (5          | ) |  | 1         |  
|Services              |  | 30                         | % |  | 36                       | % |  | 32                       | % |  | 33   | % |  | (6          | ) |  | (1        | )
|Combined gross margin |  | 30                         | % |  | 36                       | % |  | 35                       | % |  | 35   | % |  | (6          | ) |  |          |  

Cost of revenue for the three and six months ended July 31, 2007 decreased by
$4.1 million, or 50 percent, and $7.9 million, or 52 percent, respectively, compared to the corresponding periods of fiscal 2007. These decreases are consistent with revenue declines of 54 percent and 52 percent for the
same periods.



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 |            
|                                       |  | 2007                        |       |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                           | 1,071 |             | 18                        | % |  | $                      | 1,366       |  | 10   | % |  | $           | 2,277 |  | 20        | % |             | $ | 2,637 |  | 11 | % |  | (22 | )% |  | (14 | )%
|Allocated corporate overhead           |  |                             | 1,285 |             | 22                        | % |  |                        | 1,240       |  | 10   | % |  |             | 2,485 |  | 22        | % |             |   | 2,487 |  | 11 | % |  | 4   | %  |  |    |   
|Gross engineering and support expenses |  |                             | 2,159 |             | 36                        | % |  |                        | 2,099       |  | 16   | % |  |             | 4,109 |  | 36        | % |             |   | 3,977 |  | 17 | % |  | 3   | %  |  | 3   | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                       |  | $                           | 4,515 |             | 76                        | % |  | $                      | 4,705       |  | 36   | % |  | $           | 8,871 |  | 78        | % |             | $ | 9,101 |  | 39 | % |  | (4  | )% |  | (3  | )%
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   

Selling, general, and administrative expenses for the three and six months ended July 31,
2007 decreased $0.3 million, or 22 percent, and $0.4 million, or 14 percent, respectively, compared to the corresponding periods of fiscal 2007. The decreases are caused by reduced personnel and related costs of the sales and
administrative staff for the ChargeSource and WTS businesses.

Allocated corporate overhead consists of salaries and other
personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors fees, and other costs and expenses attributable to being a public company.
These costs are typically allocated to our three segments based on each businesss percentage share of total Company costs and expenses. Allocated corporate overhead remained consistent for the three and six months ended July 31, 2007
compared to the comparable periods of fiscal 2007. As revenue has declined in both the three and six month periods ending July 31, 2007 compared to the corresponding periods of the prior year, allocated corporate overhead expenses represent a
larger percentage of revenue than in the prior year. The fixed cost structure of our business has been maintained to support current and expected future business.

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, 2007 increased $0.1 million, or 3 percent. This increase is primarily due to increased ChargeSource engineering expenses, consisting of material usage and lab fees in support of our on-going efforts to develop new products
for our retail and OEM accessories channels.

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, 2007 totaled $218,000 and
$499,000, respectively. For the three and six months ended July 31, 2006, interest income totaled $221,000 and $450,000, 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

Gain on Sale of Equipment, net

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

Gain on Sale of Investment in SwissQual, net

During the second quarter of fiscal 2008, we received additional sale consideration based on earn-out provisions totaling approximately $0.3 million, net of $21,000 of transaction costs, from Spirent, the acquirer of our
18 percent interest in SwissQual (see Note 6).

Income Tax Expense (Benefit)

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required
valuation allowance. During the second quarter of fiscal 2005, we established a valuation allowance totaling approximately $2.9 million, or the entire deferred tax asset balance existing as of the beginning of fiscal 2005, as reclassified. This
valuation allowance was established based on managements overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses,
carry forward temporary differences, and future tax deductions resulting from certain types of stock option exercises. Due to the losses of the first and second quarters, the adjusted net deferred tax assets remain fully reserved as of July 31,
2007.

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

Mobile Power Products (ChargeSource)

Revenue

(in thousands except change)



|               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |       |   |           |     |    |  |     |   
|-------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---------------------- |  | - | ------ | - |  | ----------- | ----- | - | --------- | --- | -- |  | --- | --
|               |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |   |       | Year over Year% Change | 
|               |  | 2007                       |        |   | 2006                     |   |       | 2007                   |  |   | 2006   |   |  | ThreeMonths |       |   | SixMonths |    
|Revenue:       |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |       |   |           |     |    |  |     |   
|Products       |  | $                          | 766    |   |                          | $ | 4,517 |                        |  | $ | 1,087  |   |  | $           | 8,666 |   |           | (83 | )% |  | (88 | )%
|Services       |  |                            |       |   |                          |   |      |                        |  |   |       |   |  |             |      |   |           |    |    |  |    |   
|               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |       |   |           |     |    |  |     |   
|               |  | $                          | 766    |   |                          | $ | 4,517 |                        |  | $ | 1,087  |   |  | $           | 8,666 |   |           | (83 | )% |  | (88 | )%
|               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |       |   |           |     |    |  |     |   
|Operating loss |  | $                          | (1,602 | ) |                          | $ | (200  | )                      |  | $ | (3,101 | ) |  | $           | (328  | ) |           |     |    |  |     |   
|               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |       |   |           |     |    |  |     |   

Revenue by Region

(in thousands except change)



|               |  |                            |     |                          |   |                        |  |      |       |             |   |       |           |      |    |  |      |   
|-------------- |  | -------------------------- | --- | ------------------------ | - | ---------------------- |  | ---- | ----- | ----------- | - | ----- | --------- | ---- | -- |  | ---- | --
|               |  | Three Months EndedJuly 31, |     | Six Months EndedJuly 31, |   | Year over Year% Change | 
|               |  | 2007                       |     | 2006                     |   | 2007                   |  | 2006 |       | ThreeMonths |   |       | SixMonths |     
|Revenue:       |  |                            |     |                          |   |                        |  |      |       |             |   |       |           |      |    |  |      |   
|Americas:      |  |                            |     |                          |   |                        |  |      |       |             |   |       |           |      |    |  |      |   
|North America  |  | $                          | 369 |                          | $ | 4,360                  |  | $    | 551   |             | $ | 7,902 |           | (92  | )% |  | (93  | )%
|Others         |  |                            |    |                          |   |                       |  |      |      |             |   |      |           |     |    |  |     |   
|Europe         |  |                            | 397 |                          |   | 117                    |  |      | 536   |             |   | 724   |           | 239  | %  |  | (26  | )%
|Asia  Pacific |  |                            |    |                          |   | 40                     |  |      |      |             |   | 40    |           | (100 | )% |  | (100 | )%
|               |  |                            |     |                          |   |                        |  |      |       |             |   |       |           |      |    |  |      |   
|               |  | $                          | 766 |                          | $ | 4,517                  |  | $    | 1,087 |             | $ | 8,666 |           | (83  | )% |  | (88  | )%
|               |  |                            |     |                          |   |                        |  |      |       |             |   |       |           |      |    |  |      |   



25



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Revenue by Customer

(in thousands except change)



|           |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |     |    |  |     |   
|---------- |  | --------------------------- | --- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | --- | - |  | --- | -- |  | --- | --
|           |  | Three Months Ended July 31, |     |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|           |  | 2007                        |     |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|           |  |                             |     | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |     |   |  |    
|Revenue:   |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |     |    |  |     |   
|Kensington |  | $                           | 400 |             | 52                        | % |  | $                      | 4,243       |  | 94   | % |  | $           | 652   |  | 60        | % |             | $ | 8,373 |  | 97  | % |  | (91 | )% |  | (92 | )%
|Other      |  |                             | 366 |             | 48                        | % |  |                        | 274         |  | 6    | % |  |             | 435   |  | 40        | % |             |   | 293   |  | 3   | % |  | 34  | %  |  | 48  | % 
|           |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |     |    |  |     |   
|           |  | $                           | 766 |             | 100                       | % |  | $                      | 4,517       |  | 100  | % |  | $           | 1,087 |  | 100       | % |             | $ | 8,666 |  | 100 | % |  | (83 | )% |  | (88 | )%
|           |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |     |   |  |     |    |  |     |   

Revenue for the three and six months ended July 31, 2007 decreased by $3.8 million, or
83 percent, and $7.6 million, or 88 percent, respectively, compared to corresponding periods of fiscal 2007. The decrease in revenue is primarily due to the decrease in sales to Kensington. As previously discussed, in April 2007 we
entered into a non-exclusive retail distribution agreement with Kensington to allow us to partner with multiple retail distributors. Since the fourth quarter of fiscal 2007, we have not received significant new orders from Kensington for products
scheduled to be delivered in the current fiscal year. We currently believe Kensington is sourcing certain external power adapters, which are not slim and light, from other Asian suppliers resulting in decreased orders for our slim and light
ChargeSource products. Additionally, certain products ordered by Kensington are still under development and are expected to be available during the fourth quarter of fiscal 2008. On a sequential basis, revenue in the second quarter of fiscal 2008
increased by $0.4 million, or 139 percent, compared to the first quarter of fiscal 2008.

Cost of Revenue and Gross Margin

(in thousands except change)



|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|----------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | -- | - |  | --- | -- |  | --- | --
|                                    |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                    |  | 2007                        |       |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|                                    |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |    |   |  |    
|Cost of revenue:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|Products                            |  | $                           | 1,055 |             | 138                       | % |  | $                      | 3,393       |  | 75   | % |  | $           | 1,790 |  | 165       | % |             | $ | 6,363 |  | 73 | % |  | (69 | )% |  | (72 | )%
|Amortization  software development |  |                             |      |             |                          |   |  |                        |            |  |     |   |  |             |      |  |          |   |             |   |      |  |   |   |  |    |    |  |    |   
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 1,055 |             | 138                       | % |  |                        | 3,393       |  | 75   | % |  |             | 1,790 |  | 165       | % |             |   | 6,363 |  | 73 | % |  | (69 | )% |  | (72 | )%
|Services                            |  |                             |      |             |                          |   |  |                        |            |  |     |   |  |             |      |  |          |   |             |   |      |  |   |   |  |    |    |  |    |   
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                    |  | $                           | 1,055 |             | 138                       | % |  | $                      | 3,393       |  | 75   | % |  | $           | 1,790 |  | 165       | % |             | $ | 6,363 |  | 73 | % |  | (69 | )% |  | (72 | )%
|                                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   



|                      |  |                            |    |  |                          |   |  |                          |    |  |      |   |  |             |   |  |           |  
|--------------------- |  | -------------------------- | -- |  | ------------------------ | - |  | ------------------------ | -- |  | ---- | - |  | ----------- | - |  | --------- | -
|                      |  | Three Months EndedJuly 31, |    |  | Six Months EndedJuly 31, |   |  | Year over Yearppt Change |   
|                      |  | 2007                       |    |  | 2006                     |   |  | 2007                     |    |  | 2006 |   |  | ThreeMonths |   |  | SixMonths |  
|Gross margin:         |  |                            |    |  |                          |   |  |                          |    |  |      |   |  |             |   |  |           |  
|Products              |  | (38                        | )% |  | 25                       | % |  | (65                      | )% |  | 27   | % |  | (63         | ) |  | (92       | )
|Services              |  |                           |    |  |                         |   |  |                         |    |  |     |   |  |            |   |  |          |  
|Combined gross margin |  | (38                        | )% |  | 25                       | % |  | (65                      | )% |  | 27   | % |  | (63         | ) |  | (92       | )

Cost of revenue for the three and six months ended July 31, 2007 decreased by
$2.3 million, or 69 percent, and $4.6 million, or 72 percent, respectively, compared to the corresponding periods of fiscal 2007. The decrease in cost of revenue is primarily due to the decrease in revenue for the three and six
months ended July 31, 2007 compared to the corresponding periods of the prior fiscal year. The current level of ChargeSource revenue is insufficient to fully absorb our fixed manufacturing overhead. Cost of revenue for the three and six months
ended July 31, 2007 included approximately $0.5 million and $1.1 million of under-absorbed fixed manufacturing overhead.



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 |            
|                                       |  | 2007                        |       |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                           | 401   |             | 52                        | % |  | $                      | 445         |  | 10   | % |  | $           | 787   |  | 72        | % |             | $ | 869   |  | 10 | % |  | (10 | )% |  | (9  | )%
|Allocated corporate overhead           |  |                             | 366   |             | 48                        | % |  |                        | 453         |  | 10   | % |  |             | 642   |  | 59        | % |             |   | 922   |  | 10 | % |  | (19 | )% |  | (30 | )%
|Gross engineering and support expenses |  |                             | 546   |             | 71                        | % |  |                        | 426         |  | 9    | % |  |             | 969   |  | 89        | % |             |   | 840   |  | 10 | % |  | 28  | %  |  | 15  | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                       |  | $                           | 1,313 |             | 171                       | % |  | $                      | 1,324       |  | 29   | % |  | $           | 2,398 |  | 220       | % |             | $ | 2,631 |  | 30 | % |  | (1  | )% |  | (9  | )%
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   

Selling, general, and administrative expenses generally consist of salaries, employer paid
benefits, commissions and other personnel related costs of our management, sales, marketing, and administrative personnel, facility and IT costs, professional fees, advertising, promotions, printed media, and travel directly attributable to our
ChargeSource business. Selling, general, and administrative expenses in the three and six months ended July 31, 2007 decreased by approximately $44,000, or 10 percent, and approximately $0.1 million, or 9 percent, compared to the
corresponding periods of fiscal 2007. The decrease is primarily due to reduced personnel costs in both the three and six month periods.

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, 2007 increased $0.1 million, or 28 percent, and $0.1 million, or 15 percent. The increase in gross engineering and support
expenses is due to increased material usages and lab costs as new products are currently in development.



27



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##### Table of Contents

Wireless Test Solutions (WTS)

Revenue

(in thousands except change)



|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|---------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---------------------- |  | - | ------ | - |  | ----------- | ------ | - | --------- | --- | -- |  | --- | --
|                                               |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |   |       | Year over Year% Change | 
|                                               |  | 2007                       |        |   | 2006                     |   |       | 2007                   |  |   | 2006   |   |  | ThreeMonths |        |   | SixMonths |    
|Revenue:                                       |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|Products                                       |  | $                          | 1,339  |   |                          | $ | 3,631 |                        |  | $ | 3,831  |   |  | $           | 7,168  |   |           | (63 | )% |  | (47 | )%
|Services                                       |  |                            | 43     |   |                          |   | 79    |                        |  |   | 167    |   |  |             | 115    |   |           | (46 | )% |  | (45 | )%
|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|                                               |  | $                          | 1,382  |   |                          | $ | 3,710 |                        |  | $ | 3,998  |   |  | $           | 7,283  |   |           | (63 | )% |  | (45 | )%
|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|Operating loss                                 |  | $                          | (2,039 | ) |                          | $ | (605  | )                      |  | $ | (3,469 | ) |  | $           | (1,492 | ) |           |     |    |  |     |   
|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|                                              
|Revenue by Region (in
thousands except change) | 
|                                               |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |   |       | Year over Year% Change | 
|                                               |  | 2007                       |        |   | 2006                     |   |       | 2007                   |  |   | 2006   |   |  | ThreeMonths |        |   | SixMonths |    
|Revenue:                                       |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|Americas:                                      |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|North America                                  |  | $                          | 817    |   |                          | $ | 2,004 |                        |  | $ | 2,971  |   |  | $           | 4,568  |   |           | (59 | )% |  | (35 | )%
|Others                                         |  |                            | 352    |   |                          |   | 869   |                        |  |   | 607    |   |  |             | 1,092  |   |           | (59 | )% |  | (44 | )%
|Europe                                         |  |                            | 13     |   |                          |   | 642   |                        |  |   | 78     |   |  |             | 1,423  |   |           | (98 | )% |  | (95 | )%
|Asia  Pacific                                 |  |                            | 200    |   |                          |   | 195   |                        |  |   | 342    |   |  |             | 200    |   |           | 3   | %  |  | 71  | % 
|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   
|                                               |  | $                          | 1,382  |   |                          | $ | 3,710 |                        |  | $ | 3,998  |   |  | $           | 7,283  |   |           | (63 | )% |  | (45 | )%
|                                               |  |                            |        |   |                          |   |       |                        |  |   |        |   |  |             |        |   |           |     |    |  |     |   

Revenue for the three months ended July 31, 2007 decreased by $2.3 million, or
63 percent, compared to the corresponding period of fiscal 2007. The second quarter decrease is attributable to decreased demand for our WTS products in the Americas and Europe. For the second quarter of fiscal 2008, sales to Verizon Wireless
decreased $1.2 million as our largest customer in North America substantially completed a roll-out of the Seven.Five systems in their regions. Additionally, sales to SwissQual, the former exclusive reseller of our WTS products in our European
region, decreased approximately $0.5 million compared to the second quarter of fiscal 2007. Due to the sale of SwissQual to Spirent in January 2006, SwissQual ceased to be our reseller in Europe effective December 31, 2006.

Revenue for the six months ended July 31, 2007 decreased by $3.3 million, or 45 percent, compared to the corresponding period of fiscal
2007. This decrease is primarily attributable to decreased sales from our regions in the Americas and Europe. For the six months ended July 31, 2007, revenue derived from our North American and European regions decreased by $1.6 million
and $1.3 million, or 35 percent and 95 percent, respectively, compared to the six months ended July 31, 2006. 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.



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 |                   
|                                    |  | 2007                        |     |                    | 2006                      |   |  | 2007                   |                    |  | 2006 |   |  | ThreeMonths        |       |  | SixMonths |  
|                                    |  |                             |     | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |           |   | % ofRelatedRevenue |   |       |  |    |   |  |    
|Cost of revenue:                    |  |                             |     |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Products                            |  | $                           | 783 |                    | 58                        | % |  | $                      | 1,206              |  | 33   | % |  | $                  | 1,803 |  | 47        | % |                    | $ | 2,793 |  | 39 | % |  | (35 | )% |  | (35 | )%
|Amortization  software development |  |                             | 59  |                    | 4                         | % |  |                        | 321                |  | 9    | % |  |                    | 193   |  | 5         | % |                    |   | 642   |  | 9  | % |  | (82 | )% |  | (70 | )%
|                                    |  |                             |     |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 842 |                    | 63                        | % |  |                        | 1,527              |  | 42   | % |  |                    | 1,996 |  | 52        | % |                    |   | 3,435 |  | 48 | % |  | (45 | )% |  | (42 | )%
|                                    |  |                             |     |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Services                            |  |                             | 81  |                    | 188                       | % |  |                        | 49                 |  | 62   | % |  |                    | 173   |  | 104       | % |                    |   | 66    |  | 57 | % |  | 65  | %  |  | 162 | % 
|                                    |  |                             |     |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  | $                           | 923 |                    | 67                        | % |  | $                      | 1,576              |  | 42   | % |  | $                  | 2,169 |  | 54        | % |                    | $ | 3,501 |  | 48 | % |  | (41 | )% |  | (38 | )%
|                                    |  |                             |     |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   



|                      |  |                            |    |  |                          |   |  |                          |    |  |      |   |  |             |   |  |           |  
|--------------------- |  | -------------------------- | -- |  | ------------------------ | - |  | ------------------------ | -- |  | ---- | - |  | ----------- | - |  | --------- | -
|                      |  | Three Months EndedJuly 31, |    |  | Six Months EndedJuly 31, |   |  | Year over Yearppt Change |   
|                      |  | 2007                       |    |  | 2006                     |   |  | 2007                     |    |  | 2006 |   |  | ThreeMonths |   |  | SixMonths |  
|Gross margin:         |  |                            |    |  |                          |   |  |                          |    |  |      |   |  |             |   |  |           |  
|Products              |  | 37                         | %  |  | 58                       | % |  | 48                       | %  |  | 52   | % |  | (21         | ) |  | (4        | )
|Services              |  | (88                        | )% |  | 38                       | % |  | (4                       | )% |  | 43   | % |  | (126        | ) |  | (47       | )
|Combined gross margin |  | 33                         | %  |  | 58                       | % |  | 46                       | %  |  | 52   | % |  | (25         | ) |  | (6        | )

Cost of revenue for the three and six months ended July 31, 2007 decreased by
$0.7 million, or 41 percent, and $1.3 million, or 38 percent, respectively, compared to the corresponding periods of fiscal 2007. The decrease in cost of revenue for the three and six months ended July 31, 2007 is driven by
decreased sales volume of 63 percent and 45 percent, respectively.

Amortization of previously capitalized software development
costs for the three and six months ended July 31, 2007 totaled $0.1 million and $0.2 million, respectively. Currently, we do not expect to capitalize any additional software development costs through the end of fiscal 2008.

Operating Costs and Expenses

(in
thousands except change)



|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|-------------------------------------- |  | --------------------------- | ----- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | -- | - |  | --- | -- |  | --- | --
|                                       |  | Three Months Ended July 31, |       |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2007                        |       |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |       | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |    |   |  |    
|Operating expenses:                    |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|SG&A expenses                          |  | $                           | 538   |             | 39                        | % |  | $                      | 803         |  | 22   | % |  | $           | 1,275 |  | 32        | % |             | $ | 1,541 |  | 21 | % |  | (33 | )% |  | (17 | )%
|Allocated corporate overhead           |  |                             | 482   |             | 35                        | % |  |                        | 407         |  | 11   | % |  |             | 1,144 |  | 29        | % |             |   | 890   |  | 12 | % |  | 18  | %  |  | 29  | % 
|Gross engineering and support expenses |  |                             | 1,478 |             | 107                       | % |  |                        | 1,529       |  | 41   | % |  |             | 2,879 |  | 72        | % |             |   | 2,843 |  | 39 | % |  | (3  | )% |  | 1   | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   
|                                       |  | $                           | 2,498 |             | 181                       | % |  | $                      | 2,739       |  | 74   | % |  | $           | 5,298 |  | 133       | % |             | $ | 5,274 |  | 72 | % |  | (9  | )% |  | 1   | % 
|                                       |  |                             |       |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |     |    |  |     |   



29



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##### Table of Contents

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, 2007 decreased $0.3 million compared to the corresponding periods of fiscal 2007, primarily due to reduced sales and marketing personnel and related costs, offset by
increased legal fees in administering our post-sale relationship with SwissQual.

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, 2007 remained stable as our costs in
support of our on-going efforts to replace Seven.Five software content previously provided by SwissQual remain consistent.

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, 2007 and 2006 as we completed
the development of the software embedded in our Seven.Five product platform prior to such periods.



30



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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 | 
|                                               |  | 2007                       |       | 2006                     |   | 2007                   |  | 2006 |       | ThreeMonths |   |       | SixMonths |    
|Revenue:                                       |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|Products                                       |  | $                          | 2,641 |                          | $ | 3,625                  |  | $    | 4,109 |             | $ | 5,327 |           | (27 | )% |  | (23 | )%
|Services                                       |  |                            | 1,130 |                          |   | 1,120                  |  |      | 2,140 |             |   | 2,252 |           | 1   | %  |  | (5  | )%
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|                                               |  | $                          | 3,771 |                          | $ | 4,745                  |  | $    | 6,249 |             | $ | 7,579 |           | (21 | )% |  | (18 | )%
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|Operating income                               |  | $                          | 934   |                          | $ | 826                    |  | $    | 1,686 |             | $ | 976   |           |     |    |  |     |   
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|                                              
|Revenue by Region (in
thousands except change) | 
|                                               |  | Three Months EndedJuly 31, |       | Six Months EndedJuly 31, |   | Year over Year% Change | 
|                                               |  | 2007                       |       | 2006                     |   | 2007                   |  | 2006 |       | ThreeMonths |   |       | SixMonths |    
|Revenue:                                       |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|Americas:                                      |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|North America                                  |  | $                          | 3,771 |                          | $ | 4,745                  |  | $    | 6,249 |             | $ | 7,579 |           | (21 | )% |  | (18 | )%
|Others                                         |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |    |    |  |    |   
|Europe                                         |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |    |    |  |    |   
|Asia  Pacific                                 |  |                            |      |                          |   |                       |  |      |      |             |   |      |           |    |    |  |    |   
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   
|                                               |  | $                          | 3,771 |                          | $ | 4,745                  |  | $    | 6,249 |             | $ | 7,579 |           | (21 | )% |  | (18 | )%
|                                               |  |                            |       |                          |   |                        |  |      |       |             |   |       |           |     |    |  |     |   

Revenue for the three and six months ended July 31, 2007 decreased by $1.0 million, or
21 percent, and $1.3 million, or 18 percent, respectively, compared to corresponding periods of fiscal 2007. The decrease in revenue was primarily attributable to decreased sales of digital and TTY upgrades to our installed base of
call box systems under maintenance contracts. During the three and six months ended July 31, 2007, we upgraded 1,287 and 1,784 call boxes with digital and/or TTY technologies, respectively, and recorded revenue totaling approximately
$2.2 million and $3.2 million, respectively. Such upgrade revenue also included revenue related to retrofit, site mitigation, and call box removal activities performed in conjunction with the upgrade of the call box system. During the
three and six months ended July 31, 2006, we upgraded 1,422 and 1,710 call boxes, respectively, and recorded revenue totaling approximately $3.2 million and $4.6 million, respectively. Non-upgrade revenue attributable to sales of new
call boxes for the three and six months ended July 31, 2007 totaled approximately $0.4 million and $0.9 million, respectively, compared to $0.3 million and $0.6 million for the corresponding periods of the prior fiscal year.



31



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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 |                   
|                                    |  | 2007                        |       |                    | 2006                      |   |  | 2007                   |                    |  | 2006 |   |  | ThreeMonths        |       |  | SixMonths |  
|                                    |  |                             |       | % ofRelatedRevenue |                           |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |           |   | % ofRelatedRevenue |   |       |  |    |   |  |    
|Cost of revenue:                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Products                            |  | $                           | 1,399 |                    | 53                        | % |  | $                      | 2,561              |  | 71   | % |  | $                  | 1,982 |  | 48        | % |                    | $ | 3,881 |  | 73 | % |  | (45 | )% |  | (49 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Amortization  software development |  |                             |      |                    |                          |   |  |                        |                   |  |     |   |  |                    |      |  |          |   |                    |   |      |  |   |   |  |    |    |  |    |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 1,399 |                    | 53                        | % |  |                        | 2,561              |  | 71   | % |  |                    | 1,982 |  | 48        | % |                    |   | 3,881 |  | 73 | % |  | (45 | )% |  | (49 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|Services                            |  |                             | 729   |                    | 65                        | % |  |                        | 711                |  | 63   | % |  |                    | 1,395 |  | 65        | % |                    |   | 1,515 |  | 67 | % |  | 3   | %  |  | (8  | )%
|Amortization  software development |  |                             | 5     |                    |                          |   |  |                        | 5                  |  | 1    | % |  |                    | 11    |  | 1         | % |                    |   | 11    |  | 1  | % |  |    |    |  |    |   
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  |                             | 734   |                    | 65                        | % |  |                        | 716                |  | 64   | % |  |                    | 1,406 |  | 66        | % |                    |   | 1,526 |  | 68 | % |  | 3   | %  |  | (8  | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   
|                                    |  | $                           | 2,133 |                    | 57                        | % |  | $                      | 3,277              |  | 69   | % |  | $                  | 3,388 |  | 54        | % |                    | $ | 5,407 |  | 71 | % |  | (35 | )% |  | (37 | )%
|                                    |  |                             |       |                    |                           |   |  |                        |                    |  |      |   |  |                    |       |  |           |   |                    |   |       |  |    |   |  |     |    |  |     |   



|                      |  |                            |   |  |                          |   |  |                        |   |  |      |   |  |             |   |  |          
|--------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---------------------- | - |  | ---- | - |  | ----------- | - |  | ---------
|                      |  | Three Months EndedJuly 31, |   |  | Six Months EndedJuly 31, |   |  | Year over Year% Change
|                      |  | 2007                       |   |  | 2006                     |   |  | 2007                   |   |  | 2006 |   |  | ThreeMonths |   |  | SixMonths
|Gross margin:         |  |                            |   |  |                          |   |  |                        |   |  |      |   |  |             |   |  |          
|Products              |  | 47                         | % |  | 29                       | % |  | 52                     | % |  | 27   | % |  | 18          |   |  | 25       
|Services              |  | 35                         | % |  | 36                       | % |  | 34                     | % |  | 32   | % |  | (1          | ) |  | 2        
|Combined gross margin |  | 43                         | % |  | 31                       | % |  | 46                     | % |  | 29   | % |  | 12          |   |  | 17       

Cost of product revenue for the three and six months ended July 31, 2007 decreased by
$1.2 million, or 45 percent, and $1.9 million, or 49 percent, respectively, compared to the corresponding period of the prior fiscal year. For the three and six months ended July 31, 2007, cost of product revenue as a
percentage of product revenue decreased 18 percentage points and 25 percentage points, respectively, compared to the corresponding period of the prior fiscal year. The decrease in cost of product revenue as a percentage of product revenue
for the three and six months ended July 31, 2007 is attributable to decreased 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, 2007 and therefore third party subcontractor costs decreased.
Third party contractor costs decreased by $0.3 million and $0.5 million for the three and six months ended July 31, 2007, respectively, compared to the corresponding periods of fiscal 2007. Additionally, allocated under-absorbed fixed
manufacturing overhead decreased by $0.2 million and $0.3 million for the three and six months ended July 31, 2007, respectively, compared to the corresponding periods of fiscal 2007. Finally, cost of product revenue for the three
months ended April 30, 2007 includes credits totaling approximately $0.3 million for an expired and unused settlement obligation to a former call box customer and previously accrued warranty obligations related to recently installed call
box upgrades. No such credits were recorded during the three and six months of the prior fiscal year. Excluding these credits and the decrease in incremental subcontractor and manufacturing overhead costs, cost of product revenue for the three and
six months ended July 31, 2007, as a percentage of product revenue were 72 percent and 75 percent, respectively, compared to 71 percent and 73 percent for the three and six months ended July 31, 2006, respectively.



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Operating Costs and Expenses

(in thousands except change)



|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |    |    |  |     |   
|-------------------------------------- |  | --------------------------- | --- | ----------- | ------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | --------- | - | ----------- | - | ----- |  | -- | - |  | -- | -- |  | --- | --
|                                       |  | Three Months Ended July 31, |     |             | Six Months Ended July 31, |   |  | Year over Year% Change |            
|                                       |  | 2007                        |     |             | 2006                      |   |  | 2007                   |             |  | 2006 |   |  | ThreeMonths |       |  | SixMonths |  
|                                       |  |                             |     | % ofRevenue |                           |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |           |   | % ofRevenue |   |       |  |    |   |  |   
|Operating expenses:                    |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |    |    |  |     |   
|SG&A expenses                          |  | $                           | 132 |             | 3                         | % |  | $                      | 118         |  | 3    | % |  | $           | 215   |  | 4         | % |             | $ | 227   |  | 3  | % |  | 12 | %  |  | (5  | )%
|Allocated corporate overhead           |  |                             | 437 |             | 12                        | % |  |                        | 380         |  | 8    | % |  |             | 699   |  | 11        | % |             |   | 675   |  | 9  | % |  | 15 | %  |  | 4   | % 
|Gross engineering and support expenses |  |                             | 135 |             | 4                         | % |  |                        | 144         |  | 3    | % |  |             | 261   |  | 4         | % |             |   | 294   |  | 4  | % |  | (6 | )% |  | (11 | )%
|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |    |    |  |     |   
|                                       |  | $                           | 704 |             | 19                        | % |  | $                      | 642         |  | 14   | % |  | $           | 1,175 |  | 19        | % |             | $ | 1,196 |  | 16 | % |  | 10 | %  |  | (2  | )%
|                                       |  |                             |     |             |                           |   |  |                        |             |  |      |   |  |             |       |  |           |   |             |   |       |  |    |   |  |    |    |  |     |   

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, 2007 remained fairly comparable both as a percentage of revenue and in real dollar amounts, to the corresponding periods of the prior fiscal
year.

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

Liquidity and Capital Resources

Cash and cash equivalents at July 31, 2007 decreased $5.4 million to $21.0 million as compared to $26.4 million at January 31, 2007. The following table is a summary of our Condensed
Consolidated Statements of Cash Flows.



|                     |  |                           |        |   |      |   |        |  
|-------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                     |  | Six Months Ended July 31, |       
|                     |  | 2007                      |        |   | 2006 |  
|                     |  | (in thousands)            |       
|Cash used in:        |  |                           |        |   |      |   |        |  
|Operating activities |  | $                         | 1,909  |   |      | $ | (356   | )
|Investing activities |  |                           | 406    |   |      |   | (2,192 | )
|Financing activities |  |                           | (7,673 | ) |      |   | (480   | )

Operating Activities

Cash generated by operating activities of $1.9 million for the six months ended July 31, 2007 was driven by collection of accounts receivable of $7.8 million and a reduction in inventory of
$1.3 million, offset by our net loss of $3.8 million and a reduction in accrued liabilities of $3.2 million, primarily due to vendor payments for inventory, income tax payments, and revenue sharing paid to SwissQual in the amount of
$632,000.

Cash used in operating activities of $0.4 million for the six months ended July 31, 2006 was driven by a net loss of
$0.3 million and a reduction in accrued liabilities of approximately $2.6 million, primarily due to vendor



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##### Table of Contents

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.

Investing Activities

During the six months ended July 31, 2007 we received $361,000 relating primarily to the sale of WTS equipment that had been previously leased, and we collected $269,000 in contingent consideration from SwissQual relating to the
January 2006 sale to Spirent (see Note 6). During the first six months of fiscal 2008 we spent $224,000 of capitalized expenditures, mostly relating to tooling and other equipment for ChargeSource.

During the six months ended July 31, 2006 we purchased approximately $1.8 million of property and equipment relating primarily to tenant
improvements made during 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.

Financing
Activities

During the first quarter of fiscal 2008 we declared and paid a special dividend of $1 per share of our outstanding common
stock for a total payment of $7.4 million. During the six months ended July 31, 2007 we repurchased approximately 58,000 shares in the open market for a total cost of $0.4 million, or an average price of $6.70 per share.

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.

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



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

Interest Rate Sensitivity

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

We do not hold any derivative
financial instruments.

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

Equity Price Risk

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

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



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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
|------- | -----------------

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
|------- | -----------------------------------------------------------

The following table shows shares repurchased during the six months ended July 31, 2007:



|                                |  |                                |  |                             |      |                                                                            |        |                                                                         |        
|------------------------------- |  | ------------------------------ |  | --------------------------- | ---- | -------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------- | -------
|Period                          |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share |      | Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms |        | MaximumNumber ofShares thatMay Yet bePurchasedUnder thePlans
orPrograms
|February 1 to February 28, 2007 |  | 12,970                         |  | $                           | 7.68 |                                                                            | 12,970 |                                                                         | 366,846
|March 1 to March 31, 2007       |  |                               |  |                             |     |                                                                            |       |                                                                         | 366,846
|April 1 to April 30, 2007       |  |                               |  |                             |     |                                                                            |       |                                                                         | 366,846
|May 1 to May 31, 2007           |  | 44,667                         |  | $                           | 6.41 |                                                                            | 44,667 |                                                                         | 322,179
|June 1 to June 30, 2007         |  |                               |  |                             |     |                                                                            |       |                                                                         | 322,179
|July 1 to July 31, 2007         |  |                               |  |                             |     |                                                                            |       |                                                                         | 322,179
|                                |  |                                |  |                             |      |                                                                            |        |                                                                         |        
|                                |  | 57,637                         |  | $                           | 6.70 |                                                                            | 57,637 |                                                                         | 322,179
|                                |  |                                |  |                             |      |                                                                            |        |                                                                         |        

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. The program has no stated termination date. All of the repurchases were made pursuant to this program.



|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 12, 2007. 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        |  | 5,776,129 |  | 565,781 
|Thomas A. Franza     |  | 5,792,504 |  | 549,406 
|Gerald D. Griffin    |  | 5,870,267 |  | 471,643 
|Jeffrey R. Hultman   |  | 5,870,267 |  | 471,643 
|Erik H. van der Kaay |  | 5,868,167 |  | 473,743 



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##### Table of Contents

| | 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, 2008. The vote for the proposal was as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|          |  |         |  |            
|--------- |  | ------- |  | -----------
|For       |  | Against |  | Abstentions
|5,989,705 |  | 294,538 |  | 57,967     



|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 13, 2007 |  |  |  | /s/ Thomas A. Franza                                
|                         |  |  |  | Thomas A. Franza                                    
|                         |  |  |  | President and Chief Executive Officer               
|                         |  | 
|Date: September 13, 2007 |  |  |  | /s/ Daniel R. Lutz                                  
|                         |  |  |  | Daniel R. Lutz                                      
|                         |  |  |  | Executive Vice President and Chief Financial Officer



39