Form 10-Q


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarter Ended July 31, 1997                   Commission File Number 0-5449



                                 COMARCO, Inc.
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

                 CALIFORNIA                                 95-2088894
---------------------------------                     ---------------------
(State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                       Identification Number)

22800 Savi Ranch Parkway, Suite 214, Yorba Linda, California       92887-1299
-------------------------------------------------------------    -------------
 (Address of principal executive office)                           (Zip Code)

Registrant's telephone number, including area code              (714) 282-3832
                                                                --------------  
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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of August 31, 1997.

                           Common Stock,
                          $.10 Par Value                   4,715,467 Shares
                          --------------                   ----------------


<PAGE>

Index to Form 10-Q
                                                                Page No.
                                                                --------
Part I.        Financial Information

Condensed Consolidated Balance Sheets
   July 31, 1997 and January 31, 1997                              1

Condensed Consolidated Statements of Income
   Quarters Ended and Two Quarters Ended July 31, 1997
   and July 31, 1996                                               2

Condensed Consolidated Statements of Cash Flows
   Two Quarters Ended July 31, 1997 and July 31, 1996              3

Notes to Condensed Consolidated Financial Statements               4-5

Management's Discussion and Analysis of Financial
  Condition and Results of Operations                              6-10



PART II.       OTHER INFORMATION

Item 6.     Exhibits and Reports on Form 8-K                       11

Signature                                                          12


<PAGE>
                          PART I - FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS
<TABLE>
                                 COMARCO, Inc. and Subsidiaries
                              Condensed Consolidated Balance Sheets

                                                          July 31, 1997              January 31, 1997
ASSETS                                                     (Unaudited)                     *
                                                          --------------             ----------------
<S>                                                       <C>                        <C>
Current assets:
         Cash and cash equivalents                        $       6,572,000          $     12,711,000
         Short-term investments                                   2,086,000                 1,824,000
         Accounts receivable, net                                14,103,000                11,526,000
         Inventory                                                4,619,000                 3,042,000
         Other current assets                                     2,242,000                 2,257,000
                                                          -----------------          ----------------

Total current assets                                             29,622,000                31,360,000

Long-term investments                                             2,700,000                 1,859,000
Property and equipment, net                                       2,115,000                 1,408,000
Software development costs, net                                   2,981,000                 2,434,000
Intangible assets, net                                            2,698,000                 1,842,000
Other assets                                                        498,000                   307,000
                                                          -----------------          ----------------

TOTAL ASSETS                                              $      40,614,000          $     39,210,000
                                                          =================          ================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
         Accounts payable                                 $         934,000          $        217,000
         Deferred revenue                                         2,338,000                 2,678,000
         Accrued liabilities                                      8,322,000                 8,036,000
                                                          -----------------          ----------------

Total current liabilities                                        11,594,000                10,931,000

Deferred income taxes                                             1,155,000                 1,302,000

Stockholders' equity:
         Common stock, $.10 par value,
           33,705,000   shares   authorized, 
           4,715,832  and  4,777,959  shares
           outstanding at July 31, 1997 and
           January 31, 1997, respectively                           472,000                   478,000
         Capital contributed in excess
           of par value                                           2,920,000                 4,450,000
         Retained earnings                                       24,473,000                22,049,000
                                                          -----------------          ----------------

Total stockholders' equity                                       27,865,000                26,977,000
                                                          -----------------          ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $      40,614,000          $     39,210,000
                                                          =================          ================

See accompanying notes to the condensed consolidated financial statements.

*The  condensed  consolidated  balance  sheet as of  January  31,  1997 has been
summarized  from the  Company's  audited  consolidated  balance sheet as of that
date.
</TABLE>


<PAGE>
                         COMARCO, Inc. and Subsidiaries
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>

                                               Quarter Ended                                 Two Quarters Ended
                                               -------------                                 ------------------
                                     July 31, 1997           July 31, 1996          July 31, 1997           July 31, 1996
                                     -------------           -------------          -------------           -------------
<S>                              <C>                     <C>                    <C>                     <C>
Revenues:
   Contract revenues             $      13,716,000       $      11,517,000      $      27,638,000       $      23,469,000
   Product sales                         7,299,000               4,581,000             13,474,000               9,037,000
                                         ---------               ---------             ----------               ---------
                                        21,015,000              16,098,000             41,112,000              32,506,000
                                        ----------              ----------             ----------              ----------

Direct costs:
   Contract costs                        9,698,000               7,114,000             19,272,000              15,499,000
   Cost of product sales                 3,206,000               2,089,000              5,876,000               4,196,000
                                         ---------               ---------              ---------               ---------
                                        12,904,000               9,203,000             25,148,000              19,695,000

Indirect costs                           6,110,000               5,344,000             12,310,000               9,635,000
                                         ---------               ---------             ----------               ---------

                                        19,014,000              14,547,000             37,458,000              29,330,000
                                        ----------              ----------             ----------              ----------

Operating income                         2,001,000               1,551,000              3,654,000               3,176,000

Net interest income                        121,000                 147,000                256,000                 300,000
                                           -------                 -------                -------                 -------

Income before income taxes               2,122,000               1,698,000              3,910,000               3,476,000

Income taxes                               807,000                 610,000              1,486,000               1,286,000
                                 -----------------       -----------------      -----------------      ------------------


Net income                       $       1,315,000       $       1,088,000      $       2,424,000      $        2,190,000
                                 =================       =================      =================      ==================

Earnings per share*
   Primary                       $             .24       $             .20      $             .45      $              .41
                                 =================       =================      =================      ==================



*Fully diluted earnings per share has not been presented as the effect is immaterial.




See accompanying notes to the condensed consolidated financial statements.
</TABLE>


<PAGE>


                         COMARCO, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
                                                                           Two Quarters Ended
                                                                           ------------------
                                                                July 31, 1997            July 31, 1996
                                                                -------------            -------------
<S>                                                         <C>                        <C>                                      
Cash flows from operating activities:
    Net income                                              $       2,424,000          $      2,190,000
    Adjustments to reconcile net income to net
     cash provided (used) by operating activities:
       Depreciation and amortization                                1,275,000                 1,182,000
       Loss on disposal of property and equipment                       9,000                     6,000
       Deferred income taxes                                         (402,000)                      -
       Provision for doubtful accounts receivable                      20,000                    18,000
       Net purchases of trading securities                           (482,000)                 (530,000)
       Increase in accounts receivable                             (2,597,000)               (1,454,000)
       Increase in inventory                                       (1,016,000)                 (636,000)
       Decrease (increase) in other current assets                    270,000                  (103,000)
       Decrease (increase) in other assets                           (191,000)                   37,000
       Increase (decrease) in accounts payable                        717,000                  (263,000)
       Decrease in deferred revenue                                  (340,000)                  (14,000)
       Increase (decrease) in accrued liabilities                     286,000                  (244,000)
                                                            ------------------         -----------------

    Net cash provided (used) by operating activities                  (27,000)                  189,000

Cash flows from investing activities:
    Purchases of investments                                       (1,204,000)               (1,250,000)
    Proceeds from sales and maturities of investments                 583,000                 1,550,000
    Purchases of property and equipment                              (969,000)                 (380,000)
    Software development costs                                     (1,266,000)                 (957,000)
    Cost of acquisition of Cubic, net of cash acquired             (1,720,000)                      -
                                                            ------------------         -----------------

    Net cash used in investing activities                          (4,576,000)               (1,037,000)

Cash flows from financing activities:
    Proceeds from issuance of common stock                            219,000                   380,000
    Purchase of common stock                                       (1,755,000)                  (37,000)
                                                            ------------------         -----------------

    Net cash provided (used) by financing activities               (1,536,000)                  343,000
                                                            ------------------         ----------------

Net decrease in cash and cash equivalents                   $      (6,139,000)         $       (505,000)
                                                            ==================         =================


Supplemental  disclosures  of cash flow  information:
  Cash paid during the two quarters for:
       Interest                                             $              -           $             -
       Income taxes                                                 1,268,000                 1,427,000



See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
                         COMARCO, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                         July 31, 1997 and July 31,1996
                                   (Unaudited)

1.     General

       The financial statements have been prepared without audit.  However, they
       reflect all adjustments  which in the opinion of management are necessary
       to fairly  state the  Company's financial  position at July 31, 1997  and
       January  31, 1997, the  results of its  operations for the quarter  ended
       and  two quarters  ended  July 31, 1997 and  July 31, 1996, and  its cash
       flows for the two  quarters  ended July 31, 1997 and  July 31, 1996.  The
       information has been prepared in accordance with Form  10-Q instructions,
       but does not necessarily  include all information and footnotes  required
       by  generally  accepted  accounting  principles  for  complete  financial
       statements.  The results of the quarter ended and two quarters ended July
       31, 1997 are not necessarily indicative of the results to be obtained for
       the full fiscal year.

2.     Asset Acquisitions

       The Condensed  Consolidated  Balance Sheet includes the callbox assets of
       Cubic  Communications,  Inc., acquired by Comarco Wireless  Technologies,
       Inc., a subsidiary of the Company,  in February  1997,  and the Condensed
       Consolidated  Statement of Income includes Cubic callbox operations since
       February  1,  1997.  The  acquisition  has been  accounted  for using the
       purchase method of accounting,  and  accordingly,  the purchase price was
       allocated  to  the  acquired tangible and  identifiable intangible assets
       and assumed  liabilities based on their respective fair values.

3.     Significant Accounting Policies - Per Share Information

       The outstanding  shares used for earnings per share  calculations for all
       years presented  include the weighted average effect of common shares and
       common  share  equivalents  outstanding  during  the year.  Common  share
       equivalents  include  dilutive stock options  computed using the treasury
       stock  method.  Consolidated  net income of the Company used for earnings
       per share  purposes is diluted as a result of stock options issued by the
       Company's   subsidiaries   which  enable  their  holders  to  obtain  the
       subsidiaries'  common stock.  Primary earnings per share is calculated as
       follows:
<TABLE>
                                                       Quarter Ended                                Two Quarters Ended
                                                       -------------                                ------------------   
                                              July 31, 1997         July 31, 1996           July 31, 1997         July 31, 1996
                                              -------------         -------------           -------------         -------------
         <S>                                 <C>                    <C>                     <C>                  <C>
         Net income                          $    1,315,000         $   1,088,000           $   2,424,000        $    2,190,000
         less - net income
           allocated to subsidiary
           dilutive stock options
           outstanding                              (92,000)              (55,000)               (156,000)             (110,000)
                                                 ----------           -----------               ---------             ---------
         Net income used in
           calculation of primary
           income per share                  $    1,223,000         $   1,033,000           $   2,268,000        $    2,080,000
                                             ==============           ===========           =============        ==============
         Weighted average number
           of common shares used in
           calculation of primary
           income per share                       5,080,000             5,123,000               5,088,000             5,096,000
                                                ============            =========           =============             =========
         Primary income per
           common share                      $           .24        $         .20           $         .45        $          .41
                                             ===============        =============           =============        ==============
</TABLE>

4.   New  Accounting pronouncements

     In February 1997, the  Financial  Accounting  Standard  Board (FASB) issued
     Statement of  Financial   Accounting  Standards   No. 128  (SFAS No.  128),
     "Earnings   per  Share."   SFAS  No.  128  provides  new  methods  for  the
     computation,  presentation  and  disclosure  of primary  and  fully-diluted
     earnings  per share,  simplifying  the  calculations  and making  them more
     comparable with international  accounting  standards.  Pursuant to SFAS No.
     128, the Company is required to adopt the  provisions of this  Statement in
     the  fourth  quarter  of Fiscal  Year  1998,  restating  the  current  year
     quarterly information and all prior periods presented.  The Company has not
     completed its analysis of the impact on the financial  statements that will
     be caused by the adoption of this Statement.

     In  February  1997,  the  FASB issued  Statement  of  Financial  Accounting
     Standards No. 129 (SFAS No. 129),  "Disclosure of Information about Capital
     Structure."  The  Company  is  required  to adopt  the  provisions  of this
     Statement for the year ending January 31, 1999.   This  Statement continues
     the previous requirements to disclose certain information about an entity's
     capital structure found in APB Opinions No. 10, "Omnibus Opinion-1966," No.
     15,  "Earnings  per  Share," and FASB  Statement  No.  47,  "Disclosure  of
     Long-Term  Obligations," for entities that were subject to the requirements
     of those standards.  As the Company has been subject to the requirements of
     each of those  standards,  adoption  of SFAS No. 129 will have no impact on
     the Company's financial statements.

     In June 1997, the  FASB issued  Statement of Financial Accounting Standards
     No. 130 (SFAS No. 130),  "Reporting  Comprehensive  Income."  SFAS  No. 130
     establishes   standards  for  the  reporting  and display  of comprehensive
     income and  its components in  the financial  statements.  The  Company  is
     required  to adopt the  provisions  of this Statement for  the year  ending
     January 31, 1999.  Earlier application is permitted; however, upon adoption
     the Company will be required to  reclassify previously  reported annual and
     interim  financial  statements.  The Company  believes  that the disclosure
     of  comprehensive  income in accordance  with the  provisions of  SFAS  No.
     130 will not impact the manner of presentation  of its financial statements
     as currently and previously reported.

     In June  1997, the FASB issued  Statement of Financial Accounting Standards
     No.  131 (SFAS  No.  131),  "Disclosures  about  Segments  of an Enterprise
     and  Related  Information."  SFAS No. 131  requires the Company to  present
     certain   information about operating   segments  and  related information,
     including  geographic  and  major customer data, in  its  annual  financial
     statements  and  in condensed  financial  statements  for interim  periods.
     The Company is  required to adopt the  provisions of this Statement for the
     year ending  January 31, 1999.  Earlier  application is permitted; however,
     upon adoption the Company will be required to restate  previously  reported
     annual  segment and related  information in accordance  with the provisions
     of SFAS No. 131. The Company has not  completed its analysis of  the impact
     on the  financial  statements that  will be caused by  the adoption of this
     Statement.


5.   Reclassifications

     Certain reclassifications of prior year amounts have been made to conform
     with the current year presentation.

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
              FINANCIAL CONDITION


              This  quarterly  report  on  Form  10-Q  contains  forward-looking
              statements  within the  meaning of Section  27A of the  Securities
              Exchange Act of 1934.  These are in  paragraphs 8, 11, 13, 14, 16,
              18,  21, 23 and 24 of  Management's  Discussion  and  Analysis  of
              Results of  Operations  and Financial  Condition.  A more complete
              discussion of business  risks is included in the Company's  Annual
              Report on Form 10-K for the year ended January 31, 1997.

       (a)    Results of Operations

              During the second quarter of Fiscal Year 1998 (year ending January
              31, 1998),  the Company  recorded total revenues of $21.0 million,
              up 30.4% from the  revenues of $16.1  million  for the  comparable
              period  of the  prior  fiscal  year.  Revenues  for the  first two
              quarters  of Fiscal  Year 1998 of $41.1  million are up 26.5% from
              $32.5 million for the comparable  period of the prior fiscal year.
              Increased year-to-year revenues are primarily due to

              o   increased sales of the Company's wireless communications
                  products, including various field measurement and revenue
                  assurance systems to major cellular telephone carriers;

              o   acquisitions as of October 1, 1996 and February 5, 1997 of
                  cellular callbox product lines from GTE and Cubic
                  Communications, respectively; and

              o   acquisition as of August 1, 1996 of a commercial outsourced
                  staffing company.

              Total  direct  costs of $12.9  million  for the second  quarter of
              Fiscal Year 1998 are up $3.7 million,  or 40.2%, from $9.2 million
              for the second  quarter of Fiscal Year 1997.  Direct costs for the
              first two  quarters  of Fiscal  Year 1998 of $25.1  million are up
              $5.4  million,  or 27.4%,  from $19.7  million for the  comparable
              period of the prior  fiscal  year.  The  increases  are due to the
              on-going costs  contributed by the  acquisitions of the commercial
              outsourced  staffing  company  and the  cellular  callbox  product
              lines, as well as costs to add additional wireless  communications
              products  business  capacity  in a new,  larger  U.S.  facility to
              support future higher anticipated sales levels.

              Total  indirect  costs of $6.1  million for the second  quarter of
              Fiscal Year 1998 are up $.8 million,  or 15.1%,  from $5.3 million
              for the second quarter of Fiscal Year 1997. Indirect costs for the
              first two  quarters  of Fiscal  Year 1998 of $12.3  million are up
              $2.7  million,  or 28.1%,  from $9.6  million  for the  comparable
              period of the prior fiscal year. The increases are also related to
              the  commercial  outsourced  staffing  and  callbox  product  line
              acquisitions,  as well as  increased  costs from  expansion in the
              wireless   communications   products   business,   including   the
              establishment of two international sales offices.

              Net interest income  (interest  income less interest  expense) for
              the second  quarter of Fiscal Year 1998  amounted to $121,000,  as
              compared to $147,000 for the comparable period of the prior fiscal
              year.  Net  interest  income for the first two  quarters of Fiscal
              Year 1998  amounted to  $256,000,  as compared to $300,000 for the
              comparable  period of the prior fiscal  year.  The  decreases  are
              principally  due to a reduction  in cash  available to invest over
              the current year's first two quarters, as a result of funding  the
              wireless  communications  products expansion and the Cubic callbox
              product  line  acquisition,  as well as cash  used to  re-purchase
              Company common stock.

              The  Company's  effective  tax rate for the first two  quarters of
              Fiscal  Year 1998 is 38% versus an  effective  tax rate of 37% for
              the comparable period of the prior fiscal year.

              The overall  increase in net income from the prior  fiscal year is
              primarily due to the significant increase in the sales of wireless
              communications products.


              Wireless Communications Products

              Wireless  communications products revenues increased 69.0% to $7.1
              million  for the  second  quarter  of  Fiscal  Year 1998 from $4.2
              million  for the  comparable  period  of the  prior  fiscal  year.
              Revenues  increased  57.8% to $13.1  million for the two  quarters
              ended July 31, 1997 from $8.3 million for the comparable period of
              the prior fiscal year.  These increases are due to increased sales
              of the Company's field  measurement  systems and revenue assurance
              systems for major cellular  telephone carriers and the acquisition
              of the callbox  product  lines from GTE and Cubic  Communications.
              The Company  has  continued  to broaden its product  line with the
              introduction of field measurement  equipment,  including  products
              supporting  the GSM and CDMA  air  interfaces.  Summary  operating
              results for Comarco  Wireless  Technologies,  Inc.,  the Company's
              wireless communications products subsidiary, are as follows:

<TABLE>
                                               Two Quarters Ended      Two Quarters Ended
                                                  July 31, 1997           July 31, 1996
                                                  -------------           -------------
               <S>                                   <C>                     <C>
               Revenues                              $13,076,000             $8,285,000
               Cost of product sales                   5,651,000              3,035,000
                                                       ---------              ---------

               Gross margin                            7,425,000              5,250,000
               Gross margin percentage                    56.8%                  63.4%

               Indirect costs*                         4,582,000              3,033,000
                                                       ---------              ---------

               Operating income                      $ 2,843,000             $2,217,000
                                                      ==========             ==========
</TABLE>

              *Indirect  costs  include  selling,  general,  and  administrative
              expenses as well as research and development expenses.

              The  decreased  gross margin  percentage  is due to the  increased
              costs   incurred  to  increase   the   capacity  of  the  wireless
              communications   products  business,   which  included  additional
              staffing,   moving  to  a  larger  facility  in  California,   and
              associated  costs  to  support  future  anticipated  higher  sales
              levels. If the increased  forecast sales levels  materialize,  the
              Company would expect the Company's gross income percentage to move
              back toward historical  levels,  though there can be no assurances
              in that regard.

              The increase in indirect costs of 51.1% for the first two quarters
              of Fiscal Year 1998 over the comparable period of the prior fiscal
              year is a result of costs incurred  to establish two international
              sales  offices  and  an increase  in  research  and   development.
              Selling,  general  and administrative   expenses  increased  48.0%
              from  the  first  two  quarters of Fiscal  Year 1997  to the first
              two  quarters of Fiscal  Year 1998, while research and development
              expenses increased 62.8% to $1,034,000 from the first two quarters
              of Fiscal Year 1997 to the first two quarters of Fiscal Year 1998.

              Operating  income as a  percentage  of  revenues  is 24.3% for the
              second  quarter  of Fiscal  Year 1998,  compared  to 26.4% for the
              comparable period of the prior fiscal year.  Operating income as a
              percentage  of  revenues  is 21.7% for the first two  quarters  of
              Fiscal Year 1998,  compared to 26.8% for the comparable  period of
              the prior  fiscal  year.  This  decrease is  primarily  due to the
              increased costs related to business expansion, as discussed above.

              As part of its overall product development program, the Company is
              continuing  its  software  product   development  program  in  its
              wireless  communications  products  business.  In accordance  with
              Financial  Accounting Standard No. 86, Accounting for the Costs of
              Computer Software to be Sold, Leased, or Otherwise  Marketed,  the
              Company capitalized $1,266,000 and $957,000, respectively,  during
              the  first  two   quarters   of  Fiscal   Years   1998  and  1997,
              respectively.  Corresponding  amounts  amortized were $644,000 and
              $650,000, respectively.  The Company's  future  product  prospects
              will depend, in part, on its ability to enhance the  functionality
              of its existing products in a timely and cost-effective manner and
              to  identify,  develop,  and  achieve  market  acceptance  of  new
              products.  There can be no assurance that the Company will be able
              to   respond  to  technological  advances,  changes  in   customer
              requirements,  or  changes  in regulatory requirements or industry
              standards, and any significant delays in development, introduction
              or  shipment  of  products, or  achievement of  acceptable product
              costs, could  have a  material  adverse  effect  on the  Company's
              business,  operating results and financial condition.

              The Company's orders for wireless communications products totalled
              $6.1 million for the second  quarter of Fiscal Year 1998,  up from
              $4.3  million from the  comparable  prior  period.  For the twelve
              month periods ended July 1997 and 1996, orders received were $36.5
              million and $15.5  million,  respectively.  Included in the amount
              for the  twelve  months  ended  July 31,  1997 is $10  million  of
              long-term   maintenance   service  business  associated  with  the
              purchase  of the GTE  callbox  product  line.  Because of the long
              sales cycle  involved in selling these  products and the high unit
              sales price, the Company believes that orders are best analyzed by
              looking at a twelve  month time  period,  as orders can  fluctuate
              significantly  from  quarter  to  quarter.  The value of  unfilled
              orders at July 31,  1997  totalled  $17.0  million,  of which $7.9
              million relates to long-term maintenance contracts.  An additional
              $1.9 million of deferred revenue has been recorded for anticipated
              customer warranty obligations.

              The   Company   has    experienced    fluctuations   in   wireless
              communications  products  activity in each of the past four years,
              with  greater  sales in the  second  half of its  fiscal  year and
              lesser  amounts  in the  first  half.  This  trend  may or may not
              continue as the Company attempts to broaden its product offerings.
              The nature of the  wireless  communications  products  business is
              inherently  unpredictable  as the Company has not historically had
              a significant amount of  unfilled  orders  at the end of a period.
              Therefore,  the amount of orders,  sales  levels,  and profits are
              difficult to predict and may fluctuate  significantly from quarter
              to quarter.

              The  Company  faces  additional  risk  factors in  developing  its
              wireless  communications  products  business,  including:  foreign
              marketing,    capital   requirements,    technical   requirements,
              employees,  competition,  and proprietary information.  A negative
              impact to any of these risk factors could have a material  adverse
              effect on the Company's business, operating results, and financial
              condition.  Foreign  marketing risks include:  the need for export
              licenses;  tariffs and other  potential  trade  restrictions;  and
              changes in laws governing the imposition of duties, quotas, taxes,
              or other charges relating to the import or export of its products.
              Other companies  having a presence or doing business  overseas may
              have  advantages   over  the  Company  in  these  areas.   Certain
              components  used by the Company in its existing  products are only
              available  from a single or limited  number of suppliers,  and the
              inability   by  any  of  these   suppliers   to  fulfill   Company
              requirements  may result in an interruption in production.  Access
              to technical design of air interface  devices is essential for the
              Company   to   anticipate   and   develop   compatible    wireless
              communications  products,  therefore, the inability to obtain such
              technical  designs on a timely basis would have a direct impact on
              product  design and schedule.  The Company's  future  success also
              depends  in  large  part  on the  continued  service  of  its  key
              personnel,  and on its  ability to  continue to attract and retain
              qualified employees, especially highly skilled engineers, for whom
              competition in the industry is intense.  In addition,  the ability
              of the Company to compete  successfully  depends  upon a number of
              factors,   including  the  rate  at  which  customers  accept  the
              Company's  products  in  overseas  markets,  product  quality  and
              performance,  experienced  sales and  marketing  personnel,  rapid
              development  of  new  products  and  features,  evolving  industry
              standards, and the number and nature of the Company's competitors.
              There can be no assurance that the Company will be able to compete
              successfully in the future. The Company relies on a combination of
              trade secrets,  copyrights,  trademarks, and contractual rights to
              protect its intellectual property.  There can be no assurance that
              the steps  taken by the  Company  will be  adequate to protect its
              technology;  in addition, the laws of certain foreign countries in
              which  the  Company's  products  may be  sold do not  protect  the
              Company's  intellectual  property  rights to the same extent as do
              the laws of the United States.


              Outsourced Staffing Services Revenue

              Revenues provided by the Company's traditional outsourced staffing
              services  business area increased 16.8%, from $11.9 million in the
              second  quarter of Fiscal Year 1997 to $13.9 million in the second
              quarter of Fiscal  Year 1998.  Revenues  from this  business  area
              increased 15.7%,  from $24.2 million for the first two quarters of
              Fiscal Year 1997 to $28.0  million  for the first two  quarters of
              Fiscal Year 1998.  Revenues in this business area  decreased  from
              74.5% of the Company's total revenues in the first two quarters of
              Fiscal Year 1997 to 68.1% of the Company's  total  revenues in the
              first  two   quarters  of  Fiscal  Year  1998.   The  increase  in
              period-to-period   revenue  is  due  to  the  acquisition  of  the
              commercial  outsourced  staffing  company on August 1, 1996, which
              contributed  $5.0  million of revenue in the first two quarters of
              Fiscal  Year  1998,  partially  offset  by  a  decrease  in  other
              outsourced  staffing  revenue at some of the  Company's  locations
              providing services to government agencies.

              Sales  to the  U.S.  Government  as  well as to  government  prime
              contractors were 43% and 33% of the Company's total revenue during
              the  first  two   quarters   of  Fiscal   Years   1997  and  1998,
              respectively.  In  the  course  of  the  Company's  business,  its
              government  contracts  are  periodically  opened for  competition,
              although none of the Company's  government contracts are scheduled
              to end in Fiscal  Year 1998.  The  Company  plans to  aggressively
              compete for all work opened for competition to the extent possible
              and selectively pursue certain high value government procurements.
              There can be no  assurance  that the Company  will be selected and
              awarded the work associated with any of its future  proposals.  In
              addition,  government  agencies may terminate  their  contracts in
              whole or in part at their  convenience.  Government  agencies  may
              remove  funding  previously  provided or may not  exercise  option
              periods.  Therefore,  there  can be  no assurance  that government
              agencies will  fund  the portions  of existing  contracts that are
              unfunded, or that the agencies will exercise any options.

              Operating  income  (revenues less direct costs and indirect costs)
              for  outsourced  staffing  services is down 34.1% from $437,000 in
              the second  quarter of Fiscal  Year 1997 to $288,000 in the second
              quarter of Fiscal  Year  1998.  Operating  income  for  outsourced
              staffing  services  is down 15.4% from  $959,000  in the first two
              quarters of Fiscal Year 1997 to $811,000 in the first two quarters
              of Fiscal  Year 1998.  Decreased  operating  income  from  several
              government  airport  services  contracts was  partially  offset by
              increased  operating  income  provided by the  acquisition  of the
              commercial outsourced staffing company.


       (b)    Financial Condition

              The  Company  signed  a  loan  agreement  with  a  bank  effective
              September 26, 1994,  which was amended  effective August 15, 1997.
              The loan agreement  consists of (1) an $8 million revolving credit
              facility,  which  expires  May  31,  1999,  and  (2) a $5  million
              guidance line of credit, which expires May 31, 1998. The revolving
              credit  facility  and the  guidance  line of credit are  unsecured
              provided that the Company maintains certain covenants.  Currently,
              management anticipates that cash flow will remain at a level which
              will enable the  Company to avoid  utilizing  the credit  facility
              except to support letters of credit and acquisition financing, and
              that the Company will be able to purchase investments on a regular
              basis.  The Company's  cash and investment  balances  averaged $13
              million   (includes  highly  liquid  long-term   investments  with
              maturities  of 12 to 36 months)  during the first two  quarters of
              Fiscal  Year 1998.  However,  maintaining  such cash  balances  is
              predicated  on the Company  maintaining  its business  base and is
              subject  to the cost of  financing  new  contracts,  acquisitions,
              software  product  development  costs,  and  the  Company's  stock
              re-purchase program.

              During the first two quarters of Fiscal Year 1998,  the  Company's
              average  days'  sales  in  accounts   receivable  have  increased,
              primarily  due  to  increased  sales  of  wireless  communications
              products,  which have a longer collection cycle than the Company's
              outsourced staffing revenues.

              Several additional key factors indicating the Company's  financial
              condition include:
<TABLE>

                                              July 31, 1997        January 31, 1997
                                              -------------        ----------------
              <S>                          <C>                     <C>
              Current ratio                            2.55                    2.87
              Working capital              $     18,018,000        $     20,429,000
              Book value per share                    $5.91                   $5.65
</TABLE>

              The  decrease in the current  ratio and amount of working  capital
              during the first two  quarters  of Fiscal  Year 1998 is due to the
              funding  of  the   wireless   communications   products   business
              expansion,  as well as funds used to  re-purchase  Company  common
              stock during the first two quarters of Fiscal Year 1998.

              The Company has a significant  commitment for capital expenditures
              at July 31,  1997 for  Comarco  Wireless  Technologies,  Inc.  The
              Company  has  developed  and  intends to  continue  to develop new
              product line extensions for the wireless communications  industry.
              This product development program is expected to be funded from the
              Company's current working capital.  Under the software development
              portion of the Company's product development  program, the Company
              capitalized and amortized in accordance with Financial  Accounting
              Standard No. 86,  Accounting for the Costs of Computer Software to
              be Sold, Leased, or Otherwise  Marketed,  $1,266,000 and $644,000,
              respectively, in the first two quarters of Fiscal Year 1998.

              The  Company's   Board  of  Directors   has   authorized  a  stock
              re-purchase  program  of up to  1,500,000  shares.  As of July 31,
              1997,  the Company  has  re-purchased  and  retired  approximately
              928,000  shares.  The  average  price paid per share  re-purchased
              under the program was $6.48.

              The Company is subject to legal proceedings and claims which arise
              in the ordinary course of business.  In the opinion of management,
              the amount of ultimate  liability  with  respect to these  actions
              will not materially affect the financial condition of the Company.

              The  Company  believes  that its cash  flow  from  operations  and
              available  bank  borrowings  will be  sufficient  to  satisfy  the
              current and anticipated capital requirements for operations.


<PAGE>

PART II - OTHER INFORMATION

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

       (a)    Exhibits

              The following exhibits are included herewith:

              10.26 Third  Amendment  to Loan  Agreement  dated  August 15, 1997
              between the Company and NationsBank of Virginia, N.A.

              10.27 Third Amended and Restated  Master Line of Credit Note dated
              August 15, 1997 between the Company and  NationsBank  of Virginia,
              N.A.

              10.28 Third Amended and Restated  Guidance Line of Credit Note
              dated August 15, 1997 between the Company and NationsBank of
              Virginia, N.A.

              ll. Schedule of Computation of Net Income Per Share

       (b)    Reports on Form 8-K

              None.


<PAGE>


                                    SIGNATURE



Pursuant  to the  requirements  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.
                                  -------------
                                  (Registrant)




September 15, 1997




                                 THOMAS P. BAIRD
               --------------------------------------------------
                                 Thomas P. Baird
                             Chief Financial Officer
              (Authorized Officer and Principal Financial Officer)