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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q



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

For the quarterly period ended

OCTOBER 31, 2008

OR



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

For the transition period from  to

Commission file number 0-5449

COMARCO, INC.

(Exact name of registrant as specified in its charter)







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

25541 Commercentre Drive, Lake Forest, California 92630

(Address of principal executive offices and zip code)

(949) 599-7400

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No   ̈

Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈ |  | Smaller reporting company  þ

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

Yes   ̈    No  þ

The registrant had 7,326,671 shares of common stock outstanding as of December 5, 2008.









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##### Table of Contents

COMARCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED
OCTOBER 31, 2008

TABLE OF CONTENTS



|                               |  |                                                                                                                |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                               
|                               |  |                                                                                                               
|ITEM 1.                        |  | FINANCIAL STATEMENTS (Unaudited)                                                                               |  |     
|                               |  |                                                                                                               
|                               |  | Condensed Consolidated Balance Sheets as of October 31, 2008 and January 31, 2008                              |  | 3   
|                               |  |                                                                                                               
|                               |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 
2008 and 2007 |  | 4   
|                               |  |                                                                                                               
|                               |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2008 and
2007            |  | 5   
|                               |  |                                                                                                               
|                               |  | Notes to Condensed Consolidated Financial Statements                                                           |  | 6   
|                               |  |                                                                                                               
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          |  | 20  
|                               |  |                                                                                                               
|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                                                                                |  | 38  
|                               |  |                                                                                                               
|ITEM 4.                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            |  | 38  
|                               |  |                                                                                                               
|ITEM 5.                        |  | OTHER INFORMATION                                                                                              |  | 38  
|                               |  |                                                                                                               
|ITEM 6.                        |  | EXHIBITS                                                                                                       |  | 38  
|                               | 
|SIGNATURES                     |  | 39                                                                                                            



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PART I  FINANCIAL INFORMATION



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

COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except
share amounts)



|                                                                                                                                                            |  |                 |        |   |                     |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ------------------- | - | ------
|                                                                                                                                                            |  | October 31,2008 |        |   | January 31,2008 (A)
|ASSETS                                                                                                                                                      |  |                 |        |   |                     |   |       
|Current Assets:                                                                                                                                             |  |                 |        |   |                     |   |       
|Cash and cash equivalents                                                                                                                                   |  | $               | 7,607  |   |                     | $ | 17,011
|Short-term investments                                                                                                                                      |  |                 |       |   |                     |   | 336   
|Accounts receivable, net of reserves of $49 and $43                                                                                                         |  |                 | 4,222  |   |                     |   | 2,979 
|Inventory, net of reserves of $671 and $577                                                                                                                 |  |                 | 4,793  |   |                     |   | 2,659 
|Current assets of discontinued operations                                                                                                                   |  |                 |       |   |                     |   | 3,572 
|Other current assets                                                                                                                                        |  |                 | 776    |   |                     |   | 718   
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total current assets                                                                                                                                        |  |                 | 17,398 |   |                     |   | 27,275
|Property and equipment, net                                                                                                                                 |  |                 | 2,058  |   |                     |   | 2,572 
|Software development costs, net                                                                                                                             |  |                 | 688    |   |                     |   |      
|Acquired intangible assets, net                                                                                                                             |  |                 | 408    |   |                     |   | 525   
|Goodwill                                                                                                                                                    |  |                 | 1,898  |   |                     |   | 1,898 
|Restricted cash                                                                                                                                             |  |                 | 250    |   |                     |   | 250   
|Non-current assets of discontinued operations                                                                                                               |  |                 |       |   |                     |   | 28    
|Other assets                                                                                                                                                |  |                 | 4      |   |                     |   | 33    
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total assets                                                                                                                                                |  | $               | 22,704 |   |                     | $ | 32,581
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                 |        |   |                     |   |       
|Current Liabilities:                                                                                                                                        |  |                 |        |   |                     |   |       
|Accounts payable                                                                                                                                            |  | $               | 1,231  |   |                     | $ | 803   
|Deferred revenue                                                                                                                                            |  |                 | 1,843  |   |                     |   | 1,776 
|Deferred compensation                                                                                                                                       |  |                 |       |   |                     |   | 336   
|Current liabilities of discontinued operations                                                                                                              |  |                 |       |   |                     |   | 1,366 
|Accrued liabilities                                                                                                                                         |  |                 | 4,741  |   |                     |   | 5,271 
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total current liabilities                                                                                                                                   |  |                 | 7,815  |   |                     |   | 9,552 
|Tax liability: FIN 48                                                                                                                                       |  |                 | 86     |   |                     |   | 86    
|Deferred rent                                                                                                                                               |  |                 | 419    |   |                     |   | 573   
|Non-current liabilities of discontinued operations                                                                                                          |  |                 |       |   |                     |   | 3     
|Deferred revenue, net of current portion                                                                                                                    |  |                 | 1,026  |   |                     |   | 1,552 
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total liabilities                                                                                                                                           |  |                 | 9,346  |   |                     |   | 11,766
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Commitments, Contingencies, and Subsequent Events                                                                                                           |  |                 |        |   |                     |   |       
|Stockholders Equity:                                                                                                                                       |  |                 |        |   |                     |   |       
|Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2008 and
January 31, 2008, respectively         |  |                 |       |   |                     |   |      
|Common stock, $0.10 par value, 50,625,000 shares authorized; 7,326,671 shares issued and outstanding at October 31, 2008 and
January 31, 2008, respectively |  |                 | 733    |   |                     |   | 733   
|Additional paid-in capital                                                                                                                                  |  |                 | 14,642 |   |                     |   | 14,434
|(Accumulated deficit) retained earnings                                                                                                                     |  |                 | (2,017 | ) |                     |   | 5,648 
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total stockholders equity                                                                                                                                  |  |                 | 13,358 |   |                     |   | 20,815
|                                                                                                                                                            |  |                 |        |   |                     |   |       
|Total liabilities and stockholders equity                                                                                                                  |  | $               | 22,704 |   |                     | $ | 32,581
|                                                                                                                                                            |  |                 |        |   |                     |   |       



|(A) | Derived from the audited consolidated financial statements as of January 31, 2008.
|--- | ----------------------------------------------------------------------------------

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



3



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COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)



|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                         |  | Three Months EndedOctober 31, |        |   | Nine Months EndedOctober 31, |  
|                                                         |  | 2008                          |        |   | 2007                         |   |        | 2008 |  |   | 2007   |  
|Revenue                                                  |  | $                             | 4,236  |   |                              | $ | 3,099  |      |  | $ | 21,763 |   |  | $ | 8,184   |  
|Cost of revenue                                          |  |                               | 3,777  |   |                              |   | 2,817  |      |  |   | 14,898 |   |  |   | 6,905   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                             |  |                               | 459    |   |                              |   | 282    |      |  |   | 6,865  |   |  |   | 1,279   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Selling, general, and administrative expenses            |  |                               | 3,100  |   |                              |   | 2,428  |      |  |   | 10,294 |   |  |   | 7,011   |  
|Engineering and support expenses                         |  |                               | 1,825  |   |                              |   | 2,176  |      |  |   | 5,954  |   |  |   | 6,096   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|                                                         |  |                               | 4,925  |   |                              |   | 4,604  |      |  |   | 16,248 |   |  |   | 13,107  |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Operating loss                                           |  |                               | (4,466 | ) |                              |   | (4,322 | )    |  |   | (9,383 | ) |  |   | (11,828 | )
|Other income, net                                        |  |                               | 25     |   |                              |   | 207    |      |  |   | 105    |   |  |   | 699     |  
|Gain on sale of equipment, net                           |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | 321     |  
|Gain on sale of investment in SwissQual, net             |  |                               |       |   |                              |   | 308    |      |  |   |       |   |  |   | 577     |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Loss from continuing operations before income taxes      |  |                               | (4,441 | ) |                              |   | (3,807 | )    |  |   | (9,278 | ) |  |   | (10,231 | )
|Income tax benefit                                       |  |                               | 32     |   |                              |   | 815    |      |  |   | 632    |   |  |   | 1,818   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Net loss from continuing operations                      |  |                               | (4,409 | ) |                              |   | (2,992 | )    |  |   | (8,646 | ) |  |   | (8,413  | )
|Income from discontinued operations, net of income taxes |  |                               | 50     |   |                              |   | 411    |      |  |   | 981    |   |  |   | 1,996   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                 |  | $                             | (4,359 | ) |                              | $ | (2,581 | )    |  | $ | (7,665 | ) |  | $ | (6,417  | )
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted income (loss) per share:               |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Net loss from continuing operations                      |  | $                             | (0.60  | ) |                              | $ | (0.41  | )    |  | $ | (1.18  | ) |  | $ | (1.14   | )
|Net income from discontinued operations                  |  |                               | 0.01   |   |                              |   | 0.06   |      |  |   | 0.13   |   |  |   | 0.27    |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|                                                         |  | $                             | (0.59  | ) |                              | $ | (0.35  | )    |  | $ | (1.05  | ) |  | $ | (0.87   | )
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding:              |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Basic                                                    |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,342   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Diluted                                                  |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,342   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Common shares outstanding                                |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,327   |  
|                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  

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



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COMARCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                       |  |                              |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                       |  | Nine Months EndedOctober 31, |        
|                                                                                                       |  | 2008                         |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |  |                              |         |   |      |   |        |  
|Net loss from continuing operations                                                                    |  | $                            | (8,646  | ) |      | $ | (8,413 | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                              |         |   |      |   |        |  
|Depreciation and amortization                                                                          |  |                              | 1,246   |   |      |   | 1,634  |  
|Loss (gain) on sale/retirement of property and equipment                                               |  |                              | 25      |   |      |   | (298   | )
|Gain on sale of investment in SwissQual, net                                                           |  |                              |        |   |      |   | (577   | )
|Stock based compensation expense                                                                       |  |                              | 208     |   |      |   | 427    |  
|Deferred income taxes                                                                                  |  |                              |        |   |      |   | (483   | )
|Provision for doubtful accounts receivable                                                             |  |                              | 15      |   |      |   | 6      |  
|Provision for obsolete inventory                                                                       |  |                              | 35      |   |      |   | 79     |  
|Changes in operating assets and liabilities:                                                           |  |                              |         |   |      |   |        |  
|Accounts receivable                                                                                    |  |                              | (1,258  | ) |      |   | 4,575  |  
|Inventory                                                                                              |  |                              | (2,169  | ) |      |   | 151    |  
|Other assets                                                                                           |  |                              | (29     | ) |      |   | (578   | )
|Accounts payable                                                                                       |  |                              | 428     |   |      |   | (209   | )
|Deferred revenue                                                                                       |  |                              | (459    | ) |      |   | (698   | )
|Deferred rent                                                                                          |  |                              | (154    | ) |      |   | (142   | )
|Accrued liabilities                                                                                    |  |                              | (530    | ) |      |   | (1,673 | )
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net cash used in continuing operating activities                                                       |  |                              | (11,288 | ) |      |   | (6,199 | )
|Net cash provided by discontinued operating activities                                                 |  |                              | 3,212   |   |      |   | 5,149  |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net cash used in operating activities                                                                  |  |                              | (8,076  | ) |      |   | (1,050 | )
|                                                                                                       |  |                              |         |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |  |                              |         |   |      |   |        |  
|Proceeds from sales of property and equipment                                                          |  |                              | 3       |   |      |   | 361    |  
|Purchases of property and equipment                                                                    |  |                              | (561    | ) |      |   | (409   | )
|Acquired intangible assets                                                                             |  |                              | (82     | ) |      |   |       |  
|Software development costs                                                                             |  |                              | (688    | ) |      |   |       |  
|Proceeds from sale of investment in SwissQual, net                                                     |  |                              |        |   |      |   | 577    |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net cash provided by (used in) continuing investing activities                                         |  |                              | (1,328  | ) |      |   | 529    |  
|Net cash used in discontinued investing activities                                                     |  |                              |        |   |      |   | (3     | )
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                                                    |  |                              | (1,328  | ) |      |   | 526    |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |  |                              |         |   |      |   |        |  
|Net proceeds from issuance of common stock                                                             |  |                              |        |   |      |   | 84     |  
|Dividends paid                                                                                         |  |                              |        |   |      |   | (7,371 | )
|Purchase and retirement of common stock                                                                |  |                              |        |   |      |   | (386   | )
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net cash used in financing activities                                                                  |  |                              |        |   |      |   | (7,673 | )
|                                                                                                       |  |                              |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                              |  |                              | (9,404  | ) |      |   | (8,197 | )
|Cash and cash equivalents, beginning of period                                                         |  |                              | 17,011  |   |      |   | 26,360 |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                                               |  | $                            | 7,607   |   |      | $ | 18,163 |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                                     |  |                              |         |   |      |   |        |  
|Cash paid for interest                                                                                 |  | $                            |        |   |      | $ | 8      |  
|                                                                                                       |  |                              |         |   |      |   |        |  
|Cash paid for income taxes, net of refunds                                                             |  | $                            | 18      |   |      | $ | 724    |  
|                                                                                                       |  |                              |         |   |      |   |        |  

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



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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, BlackBerry® smartphones, iPods®, and other handheld
devices. Comarco is also a provider of wireless test solutions for the wireless industry. 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, 2008. The unaudited, interim condensed financial information presented herein reflects all adjustments, consisting of
normal recurring accruals and discontinued operations adjustments, 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 nine months ended
October 31, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2009.

Principles of
Consolidation:

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

Use of Estimates:

The preparation of unaudited interim 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 unaudited interim 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, revenue recognition, allowance for doubtful accounts, capitalization and
amortization of software development costs, reserves for inventory obsolescence, valuation allowances for deferred tax assets, and determination of stock based compensation.

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. | Discontinued Operations
|-- | -----------------------

On July 10, 2008, the
Company executed an asset purchase agreement to sell the assets of its call box business for $2.7 million in cash. The transaction closed on July 10, 2008 and accordingly, the Company recorded a pre-tax gain on the sale in the amount of
$382,000 during the second quarter. In accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of the call
box business are now presented as discontinued operations for all periods in the unaudited interim condensed consolidated financial statements.

During the third quarter of fiscal 2009, the Company recorded an additional pre-tax gain on the sale of the call box business of $150,000 in conjunction with the execution of a subcontractor agreement that provides for a monthly cash
payment of $12,500 to the Company from the buyer of the call box business over a 12-month period. Offsetting the gain of $150,000 in the third quarter were additional pre-tax expenses incurred relating to the sale of the business of approximately
$68,000.

Operating results of the discontinued operations are as follows (in thousands):



|                                                   |  |                               |    |      |                              |       |      |  |   |       |   |  |   |        |  
|-------------------------------------------------- |  | ----------------------------- | -- | ---- | ---------------------------- | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                   |  | Three Months EndedOctober 31, |    |      | Nine Months EndedOctober 31, |      
|                                                   |  | 2008                          |    | 2007 |                              |       | 2008 |  |   | 2007  |  
|Revenues                                           |  | $                             |   |      | $                            | 1,915 |      |  | $ | 3,680 |   |  | $ | 8,165  |  
|                                                   |  |                               |    |      |                              |       |      |  |   |       |   |  |   |        |  
|Income from discontinued operations:               |  |                               |    |      |                              |       |      |  |   |       |   |  |   |        |  
|Gain on sale, net of taxes of $32,000 and $182,000 |  | $                             | 50 |      | $                            |      |      |  | $ | 282   |   |  | $ |       |  
|Income from discontinued operations, before taxes  |  |                               |   |      |                              | 666   |      |  |   | 1,149 |   |  |   | 3,287  |  
|Income tax expense                                 |  |                               |   |      |                              | (255  | )    |  |   | (450  | ) |  |   | (1,291 | )
|                                                   |  |                               |    |      |                              |       |      |  |   |       |   |  |   |        |  
|Total income from discontinued operations          |  | $                             | 50 |      | $                            | 411   |      |  | $ | 981   |   |  | $ | 1,996  |  
|                                                   |  |                               |    |      |                              |       |      |  |   |       |   |  |   |        |  

Income from discontinued operations
consists of direct revenues and direct expenses of the call box business, including cost of revenues, as well as other fixed and allocated costs to the extent that such costs will be eliminated as a result of the transaction. The Company
historically allocated certain fixed manufacturing costs, indirect engineering costs, and corporate overhead based upon analysis of actual percentage shares of Company costs and expenses to each of its three businesses. The two remaining businesses,
ChargeSource® and WTS, now reflect allocations of the amounts previously allocated to the call box business segment.



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Assets and liabilities related to discontinued operations at January 31, 2008 consisted of the
following (in thousands):



|                                          |  |                  |      
|----------------------------------------- |  | ---------------- | -----
|                                          |  | January 31, 2008
|Assets:                                   |  |                  |      
|Accounts receivable, net                  |  | $                | 1,749
|Inventory, net                            |  |                  | 1,807
|Other current assets                      |  |                  | 16   
|                                          |  |                  |      
|Current assets of discontinued operations |  |                  | 3,572
|Property and equipment, net               |  |                  | 14   
|Other assets                              |  |                  | 14   
|                                          |  |                  |      
|Assets of discontinued operations         |  | $                | 3,600
|                                          |  |                  |      
|Liabilities:                              |  |                  |      
|Accounts payable                          |  | $                | 487  
|Deferred revenue                          |  |                  | 445  
|Accrued liabilities                       |  |                  | 434  
|                                          |  |                  |      
|Total current liabilities                 |  |                  | 1,366
|Deferred revenue, net of current portion  |  |                  | 3    
|                                          |  |                  |      
|Liabilities of discontinued operations    |  | $                | 1,369
|                                          |  |                  |      



|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 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 materially differ from the Companys current estimates.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                           |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------ |  | ----------------------------- | ----- | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                           |  | Three Months EndedOctober 31, |       |   | Nine Months EndedOctober 31, |  
|                                           |  | 2008                          |       |   | 2007                         |   |       | 2008 |  |   | 2007  |  
|Compensation expense relating to SFAS 123R |  | $                             | 16    |   |                              | $ | 167   |      |  | $ | 208   |   |  | $ | 427   |  
|Impact on diluted earnings per share       |  | $                             | (0.00 | ) |                              | $ | (0.02 | )    |  | $ | (0.03 | ) |  | $ | (0.06 | )

The total compensation cost related to nonvested awards not yet recognized is approximately
$504,000, which will be expensed over a weighted average remaining life of 16.6 months.

The fair value of options granted under the
Companys stock option plans during the nine months ended October 31, 2008 and 2007 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:



|                                         |  |                              |   |  |      |  
|---------------------------------------- |  | ---------------------------- | - |  | ---- | -
|                                         |  | Nine Months EndedOctober 31, |  
|                                         |  | 2008                         |   |  | 2007 |  
|Weighted average risk-free interest rate |  | 3.0                          | % |  | 4.8  | %
|Expected life (in years)                 |  | 5.9                          |   |  | 5.8  |  
|Expected stock volatility                |  | 38.1                         | % |  | 40.1 | %
|Dividend yield                           |  | None                         |   |  | None |  
|Expected forfeitures                     |  | 8.2                          | % |  | 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 3,354,337.

The Companys Director Stock Option 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, and subsequently amended at its annual shareholders meeting in June
2008 to increase the number of shares issuable under the plan from 450,000 shares to 1,100,000 shares. Under the 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance
based awards. Under all plans, the options are exercisable in installments determined by the compensation committee of the Companys Board of Directors unless vesting occurs based on achievement of performance measures, as defined. The options
of the Director Plan and the Employee Plan expire as determined by the Compensation 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 Compensation Committee, but no later than ten years after the date of grant (five years for 10 percent shareholders).



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Transactions and other information related to these plans for the nine months ended October 31,
2008 are summarized below:



|                            |  |                     |   |  |                                |      
|--------------------------- |  | ------------------- | - |  | ------------------------------ | -----
|                            |  | Outstanding Options
|                            |  | Number of Shares    |   |  | Weighted-AverageExercise Price
|Balance, January 31, 2008   |  | 842,000             |   |  | $                              | 11.59
|Options granted             |  | 45,000              |   |  |                                | 4.57 
|Options canceled or expired |  | (471,500            | ) |  |                                | 12.02
|Options exercised           |  |                    |   |  |                                |     
|                            |  |                     |   |  |                                |      
|Balance, October 31, 2008   |  | 415,500             |   |  | $                              | 10.33
|                            |  |                     |   |  |                                |      

The average fair value of each of the options granted during the nine months ended
October 31, 2008 was $1.88. As of October 31, 2008, the stock options outstanding have no intrinsic value, based on a closing market price of $1.15 per share on October 31, 2008. The following table summarizes information about the
Companys stock options outstanding at October 31, 2008:



|                        |  |                     |  |                                        |  |                                 |       |                   |         |                                 |   |      
|----------------------- |  | ------------------- |  | -------------------------------------- |  | ------------------------------- | ----- | ----------------- | ------- | ------------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                   
|Range ofExercise Prices |  | NumberOutstanding   |  | Weighted-Avg.RemainingContractual Life |  | Weighted-Avg.    Exercise Price |       | NumberExercisable |         | Weighted-Avg.    Exercise Price
|$3.91 to 9.89           |  | 257,500             |  | 5.74                                   |  | $                               | 7.15  |                   | 179,750 |                                 | $ | 7.69 
|10.43 to 12.41          |  | 72,000              |  | 6.35                                   |  |                                 | 10.77 |                   | 57,000  |                                 |   | 10.86
|13.21 to 17.50          |  | 30,500              |  | 2.00                                   |  |                                 | 14.77 |                   | 30,500  |                                 |   | 14.77
|19.33 to 23.67          |  | 55,500              |  | 1.55                                   |  |                                 | 22.08 |                   | 55,500  |                                 |   | 22.08
|                        |  |                     |  |                                        |  |                                 |       |                   |         |                                 |   |      
|                        |  | 415,500             |  | 5.02 years                             |  |                                 | 10.33 |                   | 322,750 |                                 |   | 11.39
|                        |  |                     |  |                                        |  |                                 |       |                   |         |                                 |   |      

Stock options exercisable at October 31, 2008 were 322,750 at a weighted-average exercise
price of $11.39. At October 31, 2008, shares available for future grants under the 2005 Plan were 939,500 and under the Director Plan were 625.

On November 12, 2008, the Board of Directors granted 750,000 stock options under the 2005 Plan to certain employees at an exercise price of $1.09 per share (see Note 16).

As of October 31, 2008, CWT also had a subsidiary stock option plan. Under this plan, officers and key employees of CWT could have been granted
options to purchase up to 600,000 shares of common stock of CWT at not less than 100 percent of the fair market value at the date of grant.

As of October 31, 2008, the Company owned all of the 3,353,000 outstanding shares of CWT common stock. During the three and nine months ended October 31, 2008, no options were granted or exercised under the CWT option plan.
Although the plan had 198,000 shares available for future grant at October 31, 2008, no options were outstanding under this plan. Subsequent to October 31, 2008, the Companys Board of Directors took action to terminate the CWT stock
option plan.



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

In March 2008,
the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  An Amendment of SFAS No. 133 (SFAS No. 161). SFAS
No. 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding their impact on financial position, financial performance, and cash flows. To achieve this increased
transparency, SFAS No. 161 requires (1) the disclosure of the fair value of derivative instruments and



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the
footnotes. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company is in the process of evaluating the
new disclosure requirements under SFAS No. 161, but does not expect adoption of SFAS No. 161 to have an impact on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). This Statement will not have a material effect on the Companys consolidated results of
operations or financial position.



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

During 1992, the
Companys Board of Directors authorized a stock repurchase program of up to 3.0 million shares of the Companys common stock. From program inception through October 31, 2008, the Company repurchased approximately 2.7 million
shares for an average price of $8.20 per share. During the three and nine months ended October 31, 2008, the Company did not repurchase any shares of common stock. During the three months ended October 31, 2007, the Company did not
repurchase any shares of common stock. During the nine months ended October 31, 2007, the Company repurchased 57,637 shares of common stock at an average price of $6.70 per share.



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

The Company calculates
net earnings (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Since the
Company incurred a net loss for the three and nine months ended October 31, 2008 and 2007, 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 0 and 1,366 have been excluded from diluted weighted average common shares for
the three and nine months ended October 31, 2007, as the effect would have been antidilutive. There were no potentially dilutive common shares related to outstanding stock options for the three and nine months ended October 31, 2008.

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):



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedOctober 31, |        |   | Nine Months EndedOctober 31, |  
|                                                                  |  | 2008                          |        |   | 2007                         |   |        | 2008 |  |   | 2007   |  
|Basic and diluted:                                                |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net loss from continuing operations                               |  | $                             | (4,409 | ) |                              | $ | (2,992 | )    |  | $ | (8,646 | ) |  | $ | (8,413 | )
|Weighted average shares outstanding                               |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,342  |  
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share from continuing operations       |  | $                             | (0.60  | ) |                              | $ | (0.41  | )    |  | $ | (1.18  | ) |  | $ | (1.14  | )
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net income from discontinued operations                           |  | $                             | 50     |   |                              | $ | 411    |      |  | $ | 981    |   |  | $ | 1,996  |  
|Weighted average shares outstanding                               |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,343  |  
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted earnings per share from discontinued operations |  | $                             | 0.01   |   |                              | $ | 0.06   |      |  | $ | 0.13   |   |  | $ | 0.27   |  
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                                          |  | $                             | (4,359 | ) |                              | $ | (2,581 | )    |  | $ | (7,665 | ) |  | $ | (6,417 | )
|Weighted average shares outstanding                               |  |                               | 7,327  |   |                              |   | 7,327  |      |  |   | 7,327  |   |  |   | 7,342  |  
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share                                  |  | $                             | (0.59  | ) |                              | $ | (0.35  | )    |  | $ | (1.05  | ) |  | $ | (0.87  | )
|                                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



|8. | Customer Concentrations
|-- | -----------------------

A significant portion of
the Companys revenue is derived from a limited number of customers. The customers providing 10 percent or more of the Companys revenue for the periods presented below are listed here:



|                                      |  |                                |       |  |      |   |  |   |       |  |     |  
|------------------------------------- |  | ------------------------------ | ----- |  | ---- | - |  | - | ----- |  | --- | -
|                                      |  | Three Months Ended October 31, |      
|                                      |  | 2008                           |       |  | 2007 |  
|                                      |  | (In thousands)                 |      
|Total revenue                         |  | $                              | 4,236 |  | 100  | % |  | $ | 3,099 |  | 100 | %
|                                      |  |                                |       |  |      |   |  |   |       |  |     |  
|Customer concentration:               |  |                                |       |  |      |   |  |   |       |  |     |  
|Lenovo Information Products Co., Ltd. |  |                                | 2,521 |  | 60   | % |  |   |      |  |    |  
|Trust International B.V.              |  |                                | 521   |  | 12   | % |  |   |      |  |    |  
|Kensington Technology Group           |  |                                | 125   |  | 3    | % |  |   | 1,780 |  | 57  | %
|                                      |  |                                |       |  |      |   |  |   |       |  |     |  
|                                      |  | $                              | 3,167 |  | 75   | % |  | $ | 1,780 |  | 57  | %
|                                      |  |                                |       |  |      |   |  |   |       |  |     |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                                      |  |                               |        |  |      |   |  |   |       |  |     |  
|------------------------------------- |  | ----------------------------- | ------ |  | ---- | - |  | - | ----- |  | --- | -
|                                      |  | Nine Months Ended October 31, |       
|                                      |  | 2008                          |        |  | 2007 |  
|                                      |  | (In thousands)                |       
|Total revenue                         |  | $                             | 21,763 |  | 100  | % |  | $ | 8,184 |  | 100 | %
|                                      |  |                               |        |  |      |   |  |   |       |  |     |  
|Customer concentration:               |  |                               |        |  |      |   |  |   |       |  |     |  
|AT&T Wireless Services                |  |                               | 8,577  |  | 39   | % |  |   |      |  |    |  
|Verizon Wireless                      |  |                               | 969    |  | 5    | % |  |   | 2,484 |  | 30  | %
|Lenovo Information Products Co., Ltd. |  |                               | 8,447  |  | 39   | % |  |   |      |  |    |  
|Kensington Technology Group           |  |                               | 946    |  | 4    | % |  |   | 2,431 |  | 30  | %
|                                      |  |                               |        |  |      |   |  |   |       |  |     |  
|                                      |  | $                             | 18,939 |  | 87   | % |  | $ | 4,915 |  | 60  | %
|                                      |  |                               |        |  |      |   |  |   |       |  |     |  

The AT&T revenue amount reported above for the nine months ended October 31, 2008 is net
of $2.2 million in revenue sharing due to Ascom (Schwiez) AG (Ascom) and net of assessed sales tax and deferred revenue.

In November 2006, the Company entered into a development and sales agreement with Ascom whereby Ascom receives 30 percent to 40 percent of the revenue on jointly developed products, less associated hardware costs. During the first
quarter of fiscal 2009, the Company sold the first jointly developed product, the Symphony Multi, to AT&T, and associated revenue sharing amounts have been paid to Ascom.

The Verizon Wireless revenue amounts reported above are net of $38,000 and $704,000 of revenue sharing amounts payable to SwissQual AG
(SwissQual) for the nine months ended October 31, 2008 and 2007, respectively.

The customers comprising 10 percent
or more of the Companys gross accounts receivable at either October 31, 2008 or January 31, 2008 are listed below (in thousands):



|                                      |  |                 |       |  |                 |   |  |   |       |  |     |  
|------------------------------------- |  | --------------- | ----- |  | --------------- | - |  | - | ----- |  | --- | -
|                                      |  | October 31,2008 |       |  | January 31,2008 |  
|Total gross accounts receivable       |  | $               | 4,271 |  | 100             | % |  | $ | 3,022 |  | 100 | %
|                                      |  |                 |       |  |                 |   |  |   |       |  |     |  
|Customer concentration:               |  |                 |       |  |                 |   |  |   |       |  |     |  
|Lenovo Information Products Co., Ltd. |  |                 | 2,614 |  | 61              | % |  |   |      |  |    |  
|Trust International B.V.              |  |                 | 521   |  | 12              | % |  |   |      |  |    |  
|Kensington Technology Group           |  |                 | 11    |  | 1               | % |  |   | 1,209 |  | 40  | %
|                                      |  |                 |       |  |                 |   |  |   |       |  |     |  
|                                      |  | $               | 3,146 |  | 74              | % |  | $ | 1,209 |  | 40  | %
|                                      |  |                 |       |  |                 |   |  |   |       |  |     |  



|9. | Inventory
|-- | ---------

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



|                |  |                 |       |                 |   |      
|--------------- |  | --------------- | ----- | --------------- | - | -----
|                |  | October 31,2008 |       | January 31,2008
|Raw materials   |  | $               | 2,872 |                 | $ | 2,018
|Work in process |  |                 | 75    |                 |   | 146  
|Finished goods  |  |                 | 1,846 |                 |   | 495  
|                |  |                 |       |                 |   |      
|                |  | $               | 4,793 |                 | $ | 2,659
|                |  |                 |       |                 |   |      



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|10. | Software Development Costs, Net
|--- | -------------------------------

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



|                                       |  |                 |     |                 |   |        |  
|-------------------------------------- |  | --------------- | --- | --------------- | - | ------ | -
|                                       |  | October 31,2008 |     | January 31,2008 |  
|Capitalized software development costs |  | $               | 688 |                 | $ | 8,444  |  
|Less: accumulated amortization         |  |                 |    |                 |   | (8,444 | )
|                                       |  |                 |     |                 |   |        |  
|                                       |  | $               | 688 |                 | $ |       |  
|                                       |  |                 |     |                 |   |        |  

The Company capitalized software development costs in the amount of $353,000 and $688,000 during
the three and nine months ended October 31, 2008, respectively. The Company did not capitalize software development costs during the comparable periods of the prior fiscal year. Amortization of software development costs for the nine months
ended October 31, 2008 and 2007 totaled $0 and $224,000, respectively, and have been reported in cost of revenue in the accompanying unaudited interim condensed consolidated financial statements. Amortization of software development costs for
the three months ended October 31, 2008 and 2007 totaled $0 and $20,000, respectively. During the first quarter of fiscal 2009, the Company retired fully amortized capitalized software development costs of $8.4 million from its books. The
engineering costs capitalized during fiscal 2009 relate to our WTS Opti product currently under development, and therefore the Company is uncertain when capitalization of costs will cease and amortization will begin. During the third quarter of
fiscal 2009, the Company also began capitalizing software development related to our WTS QuOTA product upon completion of a working model.



|11. | Goodwill and Acquired Intangible Assets, Net
|--- | --------------------------------------------

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



|                                  |  |                 |       |   |                 |   |        |  
|--------------------------------- |  | --------------- | ----- | - | --------------- | - | ------ | -
|                                  |  | October 31,2008 |       |   | January 31,2008 |  
|Goodwill                          |  | $               | 1,898 |   |                 | $ | 1,898  |  
|                                  |  |                 |       |   |                 |   |        |  
|Acquired intangible assets:       |  |                 |       |   |                 |   |        |  
|Definite-lived intangible assets: |  |                 |       |   |                 |   |        |  
|License rights                    |  | $               | 82    |   |                 | $ | 1,440  |  
|Intellectual property rights      |  |                 | 1,244 |   |                 |   | 1,244  |  
|                                  |  |                 |       |   |                 |   |        |  
|                                  |  |                 | 1,326 |   |                 |   | 2,684  |  
|Less: accumulated amortization    |  |                 | (918  | ) |                 |   | (2,159 | )
|                                  |  |                 |       |   |                 |   |        |  
|                                  |  | $               | 408   |   |                 | $ | 525    |  
|                                  |  |                 |       |   |                 |   |        |  

During the first quarter of fiscal 2009, fully amortized license rights related to mobile phone
technologies in the amount of $1.4 million were retired.

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



|                               |  |               |   |                        |   |       |  |   |      
|------------------------------ |  | ------------- | - | ---------------------- | - | ----- |  | - | -----
|                               |  | ChargeSource® |   | Wireless TestSolutions |   | Total
|Balance as of October 31, 2008 |  | $             |  |                        | $ | 1,898 |  | $ | 1,898
|                               |  |               |   |                        |   |       |  |   |      
|Balance as of January 31, 2008 |  | $             |  |                        | $ | 1,898 |  | $ | 1,898
|                               |  |               |   |                        |   |       |  |   |      



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                     |  |                     |    
|------------------------------------ |  | ------------------- | ---
|                                     |  | AmortizationExpense
|Fiscal year:                         |  |                     |    
|2009                                 |  | $                   | 61 
|2010                                 |  |                     | 178
|2011                                 |  |                     | 126
|2012                                 |  |                     | 43 
|                                     |  |                     |    
|Total estimated amortization expense |  | $                   | 408
|                                     |  |                     |    

Amortization of definite-lived acquired intangible assets for the three months ended
October 31, 2008 and 2007 totaled $69,000 and $66,000, respectively. For the nine months ended October 31, 2008 and 2007, amortization of definite-lived acquired intangible assets totaled $198,000 and $244,000, respectively. The Company
ceased amortizing goodwill beginning February 1, 2002 upon adoption of SFAS No. 142, Goodwill and Other Intangible Assets.



|12. | Warranty Arrangements
|--- | ---------------------

Standard Warranty

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



|                                                 |  |                              |     |   |      |   |      |  
|------------------------------------------------ |  | ---------------------------- | --- | - | ---- | - | ---- | -
|                                                 |  | Nine Months EndedOctober 31, |    
|                                                 |  | 2008                         |     |   | 2007 |  
|Beginning balance                                |  | $                            | 46  |   |      | $ | 113  |  
|Accruals for warranties issued during the period |  |                              | 106 |   |      |   | 30   |  
|Utilization                                      |  |                              | (70 | ) |      |   | (100 | )
|                                                 |  |                              |     |   |      |   |      |  
|                                                 |  | $                            | 82  |   |      | $ | 43   |  
|                                                 |  |                              |     |   |      |   |      |  

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):



|                                      |  |                              |      |   |      |   |      |  
|------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Nine Months EndedOctober 31, |     
|                                      |  | 2008                         |      |   | 2007 |  
|Beginning balance                     |  | $                            | 200  |   |      | $ | 551  |  
|Deferral of revenue for new contracts |  |                              | 811  |   |      |   | 335  |  
|Recognition of revenue                |  |                              | (532 | ) |      |   | (647 | )
|                                      |  |                              |      |   |      |   |      |  
|                                      |  | $                            | 479  |   |      | $ | 239  |  
|                                      |  |                              |      |   |      |   |      |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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):



|                                      |  |                              |       |   |      |   |       |  
|------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                      |  | Nine Months EndedOctober 31, |      
|                                      |  | 2008                         |       |   | 2007 |  
|Beginning balance                     |  | $                            | 2,437 |   |      | $ | 2,952 |  
|Deferral of revenue for new contracts |  |                              | 187   |   |      |   | 617   |  
|Recognition of revenue                |  |                              | (704  | ) |      |   | (906  | )
|                                      |  |                              |       |   |      |   |       |  
|                                      |  | $                            | 1,920 |   |      | $ | 2,663 |  
|                                      |  |                              |       |   |      |   |       |  



|13. | Supplemental Disclosures of Cash Flow Information and Noncash Investing and Financing Activities
|--- | ------------------------------------------------------------------------------------------------

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



|14. | Business Segment Information
|--- | ----------------------------

The Company has two reportable operating segments: ChargeSource® and Wireless Test Solutions.

The ChargeSource® 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.

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, except percentages):



|                    |  |                                     |       |   |                        |   |       |       |  |   |       |  
|------------------- |  | ----------------------------------- | ----- | - | ---------------------- | - | ----- | ----- |  | - | ----- | -
|                    |  | Three Months Ended October 31, 2008 |      
|                    |  | ChargeSource®                       |       |   | Wireless TestSolutions |   |       | Total | 
|Revenue             |  | $                                   | 3,236 |   |                        | $ | 1,000 |       |  | $ | 4,236 |  
|Cost of revenue     |  |                                     | 3,237 |   |                        |   | 540   |       |  |   | 3,777 |  
|                    |  |                                     |       |   |                        |   |       |       |  |   |       |  
|Gross profit (loss) |  | $                                   | (1    | ) |                        | $ | 460   |       |  | $ | 459   |  
|                    |  |                                     |       |   |                        |   |       |       |  |   |       |  
|Gross margin        |  |                                     | 0.0   | % |                        |   | 46.0  | %     |  |   | 10.8  | %
|                    |  |                                     |       |   |                        |   |       |       |  |   |       |  



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|------------------- |  | ----------------------------------- | ------ | -- | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                    |  | Nine Months Ended October 31, 2008  |       
|                    |  | ChargeSource®                       |        |    | Wireless TestSolutions |   |        | Total | 
|Revenue             |  | $                                   | 10,215 |    |                        | $ | 11,548 |       |  | $ | 21,763 |  
|Cost of revenue     |  |                                     | 10,403 |    |                        |   | 4,495  |       |  |   | 14,898 |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross profit (loss) |  | $                                   | (188   | )  |                        | $ | 7,053  |       |  | $ | 6,865  |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross margin        |  |                                     | (1.8   | %) |                        |   | 61.1   | %     |  |   | 31.5   | %
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|                    | 
|                    |  | Three Months Ended October 31, 2007 |       
|                    |  | ChargeSource®                       |        |    | Wireless TestSolutions |   |        | Total | 
|Revenue             |  | $                                   | 1,893  |    |                        | $ | 1,206  |       |  | $ | 3,099  |  
|Cost of revenue     |  |                                     | 2,153  |    |                        |   | 664    |       |  |   | 2,817  |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross profit (loss) |  | $                                   | (260   | )  |                        | $ | 542    |       |  | $ | 282    |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross margin        |  |                                     | (13.7  | %) |                        |   | 44.9   | %     |  |   | 9.1    | %
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|                    | 
|                    |  | Nine Months Ended October 31, 2007  |       
|                    |  | ChargeSource®                       |        |    | Wireless TestSolutions |   |        | Total | 
|Revenue             |  | $                                   | 2,980  |    |                        | $ | 5,204  |       |  | $ | 8,184  |  
|Cost of revenue     |  |                                     | 4,009  |    |                        |   | 2,896  |       |  |   | 6,905  |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross profit (loss) |  | $                                   | (1,029 | )  |                        | $ | 2,308  |       |  | $ | 1,279  |  
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  
|Gross margin        |  |                                     | (34.5  | %) |                        |   | 44.3   | %     |  |   | 15.6   | %
|                    |  |                                     |        |    |                        |   |        |       |  |   |        |  



|                           |  |               |       |                        |   |                                 |  |           |       |       |   |        |  |   |       
|-------------------------- |  | ------------- | ----- | ---------------------- | - | ------------------------------- |  | --------- | ----- | ----- | - | ------ |  | - | ------
|                           |  | ChargeSource® |       | Wireless TestSolutions |   | Assets ofDiscontinuedOperations |  | Corporate |       | Total
|Assets at October 31, 2008 |  | $             | 6,701 |                        | $ | 6,169                           |  | $         |      |       | $ | 9,834  |  | $ | 22,704
|                           |  |               |       |                        |   |                                 |  |           |       |       |   |        |  |   |       
|Assets at January 31, 2008 |  | $             | 2,972 |                        | $ | 6,292                           |  | $         | 3,600 |       | $ | 19,717 |  | $ | 32,581
|                           |  |               |       |                        |   |                                 |  |           |       |       |   |        |  |   |       

The following table presents revenue by geographic region for the three and nine months ended
October 31, 2008 and 2007 (in thousands):

Revenue by Region:



|               |  |                               |       |                              |   |       |  |      |        |  |   |      
|-------------- |  | ----------------------------- | ----- | ---------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|               |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31,
|(in thousands) |  | 2008                          |       | 2007                         |   | 2008  |  | 2007
|North America  |  | $                             | 958   |                              | $ | 2,017 |  | $    | 11,115 |  | $ | 5,539
|Europe         |  |                               | 696   |                              |   | 604   |  |      | 1,505  |  |   | 1,218
|Asia           |  |                               | 2,531 |                              |   | 210   |  |      | 8,787  |  |   | 552  
|Latin America  |  |                               | 51    |                              |   | 268   |  |      | 356    |  |   | 875  
|               |  |                               |       |                              |   |       |  |      |        |  |   |      
|               |  | $                             | 4,236 |                              | $ | 3,099 |  | $    | 21,763 |  | $ | 8,184
|               |  |                               |       |                              |   |       |  |      |        |  |   |      



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|15. | 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.

Executive Severance Commitments

The Company has 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, the amount of their then current annual base salary and 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 unaudited interim condensed consolidated financial statements. During the nine months ended October 31, 2008, severance of approximately
$1.0 million was incurred relating to the departure of three corporate officers. No severance accruals were made during the three months ended October 31, 2008.

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. In November 2007, the letter of credit was reduced to $250,000 pursuant to the provisions of the lease. The letter of credit is secured by a
certificate of deposit with a 6-month maturity, which is reflected as restricted cash on the condensed consolidated balance sheets.

Legal Contingencies

On June 8, 2007, iGo, Inc. (formerly Mobility Electronics, Inc.) (iGo) filed a complaint against Comarco and its
subsidiary CWT in the United States District Court for the Eastern District of Texas, Case No. 5:07cv84, alleging that two iGo patents are infringed by the mechanical keying arrangement between power adapters and programming tips used by the
Company in its mobile power products sold through its distributors and sold to a computer maker. The complaint seeks an unspecified amount of treble damages and injunctive relief. The Company has denied liability and countersued alleging that iGo
breached a settlement agreement (the Settlement Agreement) entered into between the parties in 2003 settling a previous patent infringement lawsuit, and that iGo is liable for infringement of at least three of the Companys patents.
iGo has denied liability and amended its claims to further allege that the Company breached the Settlement Agreement by asserting claims against iGo. The Company has denied liability as to the additional claim made by iGo. On March 5, 2008,
both parties attended mediation without reaching a settlement.

On June 25, 2008, the parties jointly requested that the U.S. District
Court for the Eastern District of Texas (the Texas Court) transfer the lawsuit to the U.S. District Court for the District of Arizona, the court in which the parties previous patent infringement lawsuit had been filed (the
Arizona Court). The parties joint request also sought, following transfer, a stay of proceedings until January 2009 so that the parties could pursue settlement. On June 30, 2008, the Texas Court granted the parties joint
request for transfer, transferring the lawsuit to the Arizona Court under the terms and conditions requested, including the stay, Action No. CV 08-1224-PHX-MHM.



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COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



On November 30, 2007, SwissQual filed a lawsuit against CWT in the United States District Court
for the Central District of California, Case No. cv-07-07819, alleging fraud, intentional interference with prospective economic advantage, breach of contract, trademark infringement, unfair competition, trade secret misappropriation, and
seeking declaratory relief relating to the Distribution and Sales Agreement dated December 15, 2005 between the parties.

The Company
answered SwissQuals complaint and denied any and all liability. In addition, the Company asserted counterclaims against SwissQual alleging breach of contract, breach of the covenant of good faith and fair dealing, trade secret
misappropriation, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, unfair competition, conversion, unjust enrichment/restitution, an accounting for money owed due to
SwissQuals misconduct and seeking declaratory relief relating to SwissQuals failure to comply with its support obligations, indemnity, and trademark ownership.

On November 26, 2008, the Company entered into a Settlement Agreement and Release of Claims (the Settlement Agreement) with SwissQual
pursuant to which the parties agreed to dismiss their respective claims and counterclaims against each other. Among other terms, the Settlement Agreement contains general releases between the parties. As a result, this lawsuit has been dismissed
with prejudice.

The outcome of the iGo matter remains neither determinable nor estimable. The Company believes it has meritorious defenses
to the matter described above and intends to vigorously defend this action. In addition to the pending matter described above, the Company is from time to time involved in various legal proceedings incidental to the conduct of its business. The
Company believes that the outcome of all such legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.



|16. | Subsequent Events
|--- | -----------------

As previously announced, the
Company entered into an Asset Purchase Agreement on September 26, 2008 with Ascom Holding AG and its subsidiary Ascom Inc. to sell the WTS business and related assets. Comarcos shareholders approved the transaction on November 26,
2008 with approximately 85 percent of the Companys shareholders voting in favor of the transaction. The transaction is expected to close on January 5, 2009, following the satisfaction or waiver of the remaining closing conditions to
the obligations of the parties to the Asset Purchase Agreement.

The aggregate purchase price to be paid to Comarco in connection with the
transaction is $12,750,000 in cash, with $1,775,000 of the proceeds expected to be placed in escrow. Of the amounts placed in escrow, $1,275,000 will be held for one year from the closing date as security for general indemnification rights and
$500,000 will be held for two years from the date of close as security for excluded liabilities.

On November 12, 2008, the
Companys Board of Directors granted 750,000 stock options under the 2005 Plan, as amended, to certain employees at an exercise price of $1.09 per share. The options granted have 60 percent vesting ratably over the first four anniversaries
of the grant date and 40 percent vesting when the daily close price of Comarcos stock is $5.00 or greater for 90 consecutive days, if at all.

In November 2008, the Companys Board of Directors executed Unanimous Written Consents to terminate the CWT Stock Option Plan and the Comarco, Inc. Deferred Compensation Plan.



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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 interim condensed 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 27A of the Securities Act of 1933 and 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.

Forward-looking statements in this report include those related to our objectives; our products and the availability of future products; our sales, revenues, and costs; the timing of fulfillment of purchase orders and
completion of projects; demand for our products; the sufficiency of our cash and cash equivalent balances; our ability to obtain debt or equity financing; and the anticipated closing of the sale of substantially all of our wireless test solutions
(WTS) assets, including the timing thereof, and the estimated net proceeds from such anticipated transaction. Many important factors may cause the Companys actual results to differ materially from those discussed in any such
forward-looking statements, including but not limited to the effects of consolidation in the wireless communications industry; the current economic slowdown which adversely impacts our customers demand for our products and services and the
difficulty of accurately estimating demand; our reliance on a limited number of customers for a significant portion of our revenue; increased competition; fluctuation in demand for our products; our ability to develop and introduce new products
successfully; the risk of third parties infringing our intellectual property; difficulties and delays associated with our efforts to obtain cost reductions and to reduce the time to market for our ChargeSource® products; general economic, political, and market conditions; risks associated with the volatility and uncertainty in the capital markets that may adversely impact our results of operations and our ability to raise
additional capital; the risk that the proposed sale of WTS assets may fail to close for any reason, including the failure to satisfy the remaining closing conditions, and that actual taxes and transaction costs and fees may exceed our estimates; and
litigation. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking statements
will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any
other person that our objectives or plans will be achieved. Accordingly, investors are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as required by law.

In addition to the risks, uncertainties,
and other factors discussed elsewhere in this Form 10-Q, the risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include,
without limitation, those set forth under Part I, Item 1A Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2008 filed with the SEC, those contained in the Companys
other filings with the SEC, and those set forth above. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.



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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, BlackBerry® smartphones, iPods®, and other handheld devices. Comarco is also a provider of wireless test solutions
for the wireless industry. 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® products and wireless test solutions (WTS) products. We have two reportable segments: ChargeSource® and WTS. Performance
measurement and resource allocation for the reportable segments are based on many factors and the primary financial measures utilized are revenue and gross profit. See Business Segment Information in Note 14 of the Notes to
Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

The following table sets forth our
revenue for the business segments for the three and nine months ended October 31, 2008 and 2007:



|              |  |                               |       |      |                              |         |                |     |      |  |      |        |         |   |       |  |     |  
|------------- |  | ----------------------------- | ----- | ---- | ---------------------------- | ------- | -------------- | --- | ---- |  | ---- | ------ | ------- | - | ----- |  | --- | -
|              |  | Three Months EndedOctober 31, |       |      | Nine Months EndedOctober 31, |        
|              |  | 2008                          |       | 2007 |                              | %Change |                |     | 2008 |  | 2007 |        | %Change |  
|              |  | (in thousands)                |       |      |                              |         | (in thousands) |     |      | 
|Revenue:      |  |                               |       |      |                              |         |                |     |      |  |      |        |         |   |       |  |     |  
|ChargeSource® |  | $                             | 3,236 |      | $                            | 1,893   |                | 71  | %    |  | $    | 10,215 |         | $ | 2,980 |  | 243 | %
|WTS           |  |                               | 1,000 |      |                              | 1,206   |                | (17 | %)   |  |      | 11,548 |         |   | 5,204 |  | 122 | %
|              |  |                               |       |      |                              |         |                |     |      |  |      |        |         |   |       |  |     |  
|              |  | $                             | 4,236 |      | $                            | 3,099   |                | 37  | %    |  | $    | 21,763 |         | $ | 8,184 |  | 166 | %
|              |  |                               |       |      |                              |         |                |     |      |  |      |        |         |   |       |  |     |  

Management currently considers the following events, trends, and uncertainties to be important to
understanding our two business segments and corresponding operating results for the three and nine months ended October 31, 2008.

ChargeSource®



| |  |  | During the first quarter of fiscal 2008, we entered into a non-exclusive distribution arrangement with Kensington Technology Group (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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In late January 2008, we began volume production of a small form factor 90-watt alternating current/direct current (AC/DC) external power adapter
designed to the stringent specifications of Lenovo, a leading notebook computer original equipment manufacturer (OEM) headquartered in Beijing, China. This product is currently being marketed and sold as an OEM-branded aftermarket
accessory.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first quarter of fiscal 2009, we entered into an additional non-exclusive distribution agreement with Trust
International B.V. (Trust) for our ChargeSource® products. We began
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | shipping to Trust during the third quarter of fiscal 2009 and recorded revenue of $0.5 million during the third quarter as a result of such sales.
| | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ChargeSource® revenue for the third quarter of fiscal 2009
increased to $3.2 million compared to $1.9 million for the third quarter of fiscal 2008. ChargeSource® revenue for the nine months ended October 31, 2008 increased to
$10.2 million compared to $3.0 million for the comparable prior fiscal year period. Sequentially, for the second and third quarters of fiscal 2009, ChargeSource® revenue remained
flat.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The current level of ChargeSource® sales is insufficient to
fully absorb our fixed manufacturing and supply chain overhead. We believe that 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 external power adapter products designed to address the requirements of our retail and
OEM accessories channels;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securing additional OEM customers and retail distribution partners under non-exclusive arrangements;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Market and customer acceptance of our new products expected to be available by early fiscal 2010;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Successfully executing our cost reduction initiatives, which include reducing our component costs; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Reducing manufacturing lead-time from demand to delivery.
| | - |  | ---------------------------------------------------------



| |  |  | Our ChargeSource® products are based on proprietary patented
construction technology that enables the production of slim and light power sources which can charge low power and high power mobile devices simultaneously from standard wall outlets, as well as power outlets in airplanes, cars, and other modes of
transportation. Our new power adapter designed for the retail market was made available in the third quarter of fiscal 2009, and we shipped our first units of these new adapters to Trust.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Wireless Test Solutions



| |  |  | During fiscal 2007, we entered into a cooperative alliance with Ascom (Schweiz) AG (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 have developed harmonized test and measurement systems and solutions for 3G and 4G wireless
standards. These harmonized products and solutions are now available to the worldwide marketplace.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Late in the fourth quarter of fiscal 2008, we received a purchase order from AT&T valued at approximately $10.1 million for the Symphony Multi
system, jointly developed by Ascom and Comarco. We began delivery on this order during the first quarter of fiscal 2009, and completed delivery during the second quarter of fiscal 2009. We generated revenue during the first half of fiscal 2009
relating to this order of $8.2 million, net of revenue sharing payable to Ascom of $1.9 million. This excludes amounts deferred relating to post-contract support and warranty. Since receiving this original order from AT&T, we have
continued to receive and deliver on additional purchase orders for single systems.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand for our next-generation mobile test equipment remains unpredictable. Although we are encouraged by interest we have received for the Symphony Multi
system, the timing and amount of anticipated orders from our customer base remains uncertain. WTS revenue for the nine months ended October 31, 2008 increased $6.3 million compared to the comparable period of the prior fiscal year due to
the deliveries on the AT&T order during the first six months of fiscal 2009 discussed above. Revenue for the three months ended October 31, 2008 decreased $0.2 million from the comparable period of the prior year, reflective of the
current economic downturn and the unpredictable demand in
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | this market. 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On September 26, 2008, we entered into an Asset Purchase Agreement to sell substantially all of our WTS assets to Ascom for a cash payment of $12,750,000, with
$1,775,000 of the proceeds expected to be placed in escrow. At a special shareholders meeting held on November 26, 2008, the proposal to approve the anticipated asset sale was approved by approximately 85 percent of our shareholders. The
Asset Purchase Agreement for the transaction provides that the closing of the contemplated asset sale is to take place on January 5, 2009, following the satisfaction or waiver of the remaining closing conditions to the obligations of the
parties to the purchase agreement, or such other time as agreed upon by the parties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim 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 unaudited interim 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 nine months ended October 31, 2008 that required us to test goodwill for impairment. Management believes there have been no significant
changes during the three and nine months ended October 31, 2008 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, 2008.

Results of Operations

Consolidated

Revenue



|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |         |   |            |     |    |  |     |   
|---------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---------------------- |  | - | ------ | - |  | ----------- | ------- | - | ---------- | --- | -- |  | --- | --
|                             |  | Three Months EndedOctober 31, |        |   | Nine Months EndedOctober 31, |   |        | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |        |   | 2007                         |   |        | 2008                   |  |   | 2007   |   |  | ThreeMonths |         |   | NineMonths |    
|Revenue:                     |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |         |   |            |     |    |  |     |   
|Products                     |  | $                             | 4,222  |   |                              | $ | 3,053  |                        |  | $ | 21,720 |   |  | $           | 7,971   |   |            | 38  | %  |  | 172 | % 
|Services                     |  |                               | 14     |   |                              |   | 46     |                        |  |   | 43     |   |  |             | 213     |   |            | (70 | %) |  | (80 | %)
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |         |   |            |     |    |  |     |   
|                             |  | $                             | 4,236  |   |                              | $ | 3,099  |                        |  | $ | 21,763 |   |  | $           | 8,184   |   |            | 37  | %  |  | 166 | % 
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |         |   |            |     |    |  |     |   
|Operating loss               |  | $                             | (4,466 | ) |                              | $ | (4,322 | )                      |  | $ | (9,383 | ) |  | $           | (11,828 | ) |            |     |    |  |     |   
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |         |   |            |     |    |  |     |   



23



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##### Table of Contents

Revenue by Region



|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |       |   
|---------------------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ------ | ----------- | - | ----- | ---------- | ----- | -- |  | ----- | --
|                             |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |       | 2007                         |   | 2008                   |  | 2007 |        | ThreeMonths |   |       | NineMonths |      
|Revenue:                     |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |       |   
|North America                |  | $                             | 958   |                              | $ | 2,017                  |  | $    | 11,115 |             | $ | 5,539 |            | (53   | %) |  | 101   | % 
|Europe                       |  |                               | 696   |                              |   | 604                    |  |      | 1,505  |             |   | 1,218 |            | 15    | %  |  | 24    | % 
|Asia                         |  |                               | 2,531 |                              |   | 210                    |  |      | 8,787  |             |   | 552   |            | 1,105 | %  |  | 1,492 | % 
|Latin America                |  |                               | 51    |                              |   | 268                    |  |      | 356    |             |   | 875   |            | (81   | %) |  | (59   | %)
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |       |   
|                             |  | $                             | 4,236 |                              | $ | 3,099                  |  | $    | 21,763 |             | $ | 8,184 |            | 37    | %  |  | 166   | % 
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |       |   

Revenue for the three and nine months ended
October 31, 2008 increased by $1.1 million, or 37 percent, and $13.6 million, or 166 percent, respectively, compared to the corresponding periods of fiscal 2008. The increase is primarily attributable to an increase in
revenue in our ChargeSource® business of $1.3 million for the three months ended October 31, 2008. The increase in revenue for the nine months ended October 31, 2008 is
attributable to ChargeSource® and WTS revenue increases of $7.2 million and $6.3 million, respectively, compared to the same periods of the prior fiscal year. The increase in
ChargeSource® revenue relates primarily to shipments to Lenovo that began in late January 2008 and sales to Trust of approximately $0.5 million in the third quarter of fiscal 2009. The
year to date increase in WTS revenue primarily relates to deliveries in the first and second quarters of fiscal 2009 of the Symphony Multi units sold to AT&T.



24



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##### Table of Contents

Cost of Revenue and Gross Margin



|                                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|--------------------------------------- |  | ------------------------------ | ----- | ------------------ | ----------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ------ |  | --- | - | ------------------ | - | ----- | ----------- | --- | - | ---------- | ---- | -- |  | ---- | --
|                                        |  | Three Months Ended October 31, |       |                    | Nine Months Ended October 31, |   |  | Year over Year% Change |                   
|                                        |  | 2008                           |       |                    | 2007                          |   |  | 2008                   |                    |  | 2007 |   | 
|(in thousands except margin and change) |  |                                |       | % ofRelatedRevenue |                               |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |        |  |     |   | % ofRelatedRevenue |   |       | ThreeMonths |     |   | NineMonths |     
|Cost of revenue:                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|Products                                |  | $                              | 3,777 |                    | 89                            | % |  | $                      | 2,717              |  | 89   | % |  | $                  | 14,779 |  | 68  | % |                    | $ | 6,440 |             | 81  | % |            | 39   | %  |  | 129  | % 
|Amortization  software development     |  |                                |      |                    |                              |   |  |                        | 20                 |  | 1    | % |  |                    |       |  |    |   |                    |   | 212   |             | 3   | % |            | (100 | %) |  | (100 | %)
|                                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|                                        |  |                                | 3,777 |                    | 89                            | % |  |                        | 2,737              |  | 90   | % |  |                    | 14,779 |  | 68  | % |                    |   | 6,652 |             | 84  | % |            | 38   | %  |  | 122  | % 
|                                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|Services                                |  |                                |      |                    |                              |   |  |                        | 80                 |  | 174  | % |  |                    | 119    |  | 277 | % |                    |   | 253   |             | 119 | % |            | (100 | %) |  | (53  | %)
|                                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|                                        |  | $                              | 3,777 |                    | 89                            | % |  | $                      | 2,817              |  | 91   | % |  | $                  | 14,898 |  | 69  | % |                    | $ | 6,905 |             | 84  | % |            | 34   | %  |  | 116  | % 
|                                        |  |                                |       |                    |                               |   |  |                        |                    |  |      |   |  |                    |        |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   



|                      |  |                               |   |  |                              |    |  |                          |    |  |      |    |  |             |  |            |  
|--------------------- |  | ----------------------------- | - |  | ---------------------------- | -- |  | ------------------------ | -- |  | ---- | -- |  | ----------- |  | ---------- | -
|                      |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |    |  | Year over Yearppt Change |   
|                      |  | 2008                          |   |  | 2007                         |    |  | 2008                     |    |  | 2007 |    |  | ThreeMonths |  | NineMonths |  
|Gross margin:         |  |                               |   |  |                              |    |  |                          |    |  |      |    |  |             |  |            |  
|Products              |  | 11                            | % |  | 10                           | %  |  | 32                       | %  |  | 16   | %  |  | 1           |  | 16         |  
|Services              |  |                              |   |  | (74                          | %) |  | (177                     | %) |  | (19  | %) |  | 74          |  | (158       | )
|Combined gross margin |  | 11                            | % |  | 9                            | %  |  | 31                       | %  |  | 16   | %  |  | 2           |  | 15         |  

Cost of revenue for the three and nine months ended October 31, 2008 increased by
$1.0 million, or 34 percent, and $8.0 million, or 116 percent, respectively, compared to the corresponding periods of fiscal 2008. These increases are consistent with the revenue increases for the three and nine months ended
October 31, 2008. Combined gross margin is comparable for the three months ended October 31, 2008 compared to the prior year period. Combined gross margin for the nine months ended October 31, 2008 increased 15 percentage points from
16 percent to 31 percent compared to the comparable period of the prior year. As combined revenues increase, the Company is better able to absorb its fixed manufacturing overhead.



25



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##### Table of Contents

Operating Costs and Expenses



|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |        |             |     |   |            |     |    |  |    |  
|-------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | --- | -- | ---------------------- | - | ----------- | ---- | --- | - |  | - | ----------- | - |  | -- | -- | ----------- | - | ------ | ----------- | --- | - | ---------- | --- | -- |  | -- | -
|                                       |  | Three Months Ended October 31, |       |   | Nine Months Ended October 31, |     |    | Year over Year% Change |  
|                                       |  | 2008                           |       |   | 2007                          |     |    | 2008                   |   |             | 2007 |     |  
|(in thousands except change)           |  |                                |       |   | % ofRevenue                   |     |    |                        |   | % ofRevenue |      |     |   |  |   | % ofRevenue |   |  |    |    | % ofRevenue |   |        | ThreeMonths |     |   | NineMonths |    
|Operating expenses:                    |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |        |             |     |   |            |     |    |  |    |  
|SG&A expenses                          |  | $                              | 964   |   |                               | 23  | %  |                        | $ | 1,131       |      | 37  | % |  | $ | 4,289       |   |  | 20 | %  |             | $ | 3,229  |             | 40  | % |            | (15 | %) |  | 33 | %
|Allocated corporate overhead           |  |                                | 2,136 |   |                               | 50  | %  |                        |   | 1,297       |      | 42  | % |  |   | 6,005       |   |  | 28 | %  |             |   | 3,782  |             | 46  | % |            | 65  | %  |  | 59 | %
|Gross engineering and support expenses |  |                                | 2,177 |   |                               | 51  | %  |                        |   | 2,176       |      | 70  | % |  |   | 6,642       |   |  | 30 | %  |             |   | 6,096  |             | 74  | % |            |    |    |  | 9  | %
|Capitalized software development       |  |                                | (352  | ) |                               | (8  | %) |                        |   |            |      |    |   |  |   | (688        | ) |  | (3 | %) |             |   |       |             |    |   |            |    |    |  |   |  
|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |        |             |     |   |            |     |    |  |    |  
|                                       |  | $                              | 4,925 |   |                               | 116 | %  |                        | $ | 4,604       |      | 149 | % |  | $ | 16,248      |   |  | 75 | %  |             | $ | 13,107 |             | 160 | % |            | 7   | %  |  | 24 | %
|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |        |             |     |   |            |     |    |  |    |  

Selling, general, and administrative expenses for the three months ended October 31, 2008
decreased $0.2 million, or 15 percent, compared to the corresponding period of fiscal 2008. Selling, general, and administrative expenses for the nine months ended October 31, 2008 increased $1.1 million, or 33 percent,
compared to the corresponding period of fiscal 2008. The increase was primarily caused by increased legal fees for the nine months ended October 31, 2008 related to the SwissQual and iGo litigation described in Note 15 of the Notes to
Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

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 two segments based on each businesss percentage share of total Company costs and expenses. Allocated corporate overhead increased $0.8 million and $2.2 million, respectively,
for the three and nine months ended October 31, 2008. The increase for the three months ended October 31, 2008 relates primarily to increased legal fees, compared to the corresponding period of fiscal 2008, in support of the pending sale
of our WTS assets to Ascom. The increase of $2.2 million for the nine months ended October 31, 2008 relates to $1.0 million of non-recurring severance costs as well as increased legal fees of $1.0 million and increased consulting
fees of $0.3 million compared to the same period of fiscal 2008.

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 costs remained flat during the three months ended October 31, 2008
compared to the corresponding period of fiscal 2008. Engineering and support expenses for the nine months ended October 31, 2008 increased $0.5 million, or 9 percent, compared to the corresponding period of fiscal 2008. 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.

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. During the three and nine months ended October 31, 2008, we capitalized



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##### Table of Contents

software development costs related to Opti and QuOTA in the amount of $352,000 and $688,000, respectively. During the corresponding periods of fiscal 2008 we
did not capitalize any software product development costs.

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 nine months ended October 31, 2008 totaled $25,000 and $105,000, respectively. For the three and nine months ended October 31, 2007, interest income totaled $207,000 and $699,000, respectively. The current year decrease in interest
income is due to decreased invested cash balances and decreased interest rates earned on invested cash balances.

Gain on Sale of Equipment, net

The gain on sale of equipment recorded during the first quarter of fiscal 2008 relates to the sale of WTS equipment, the majority of which
was previously leased to outsourced engineering services providers. No similar transactions occurred during fiscal 2009.

Gain on Sale of Investment in
SwissQual, net

For the three and nine months ended October 31, 2007, we received additional consideration totaling
$0.3 million and $0.6 million, respectively, net of transaction costs, from Spirent plc, the acquirer of our 18 percent interest in SwissQual AG.

Income Tax Expense

Significant management judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities, and any required valuation allowance. The Company continues to have a fully reserved deferred tax asset. This valuation allowance was previously 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 and carry forward temporary differences. Due to the losses in the current fiscal year, the adjusted
net deferred tax assets remain fully reserved as of October 31, 2008. In accordance with paragraph 140 of Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, a tax benefit has been recorded
utilizing a combined effective rate of 39.2 percent and 38.3 percent for the three and nine months ended October 31, 2008 and the three and nine months ended October 31, 2007, respectively, to reflect the utilization of losses
from current operations to offset the gain and income from discontinued operations.

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. The FIN 48 liability recorded during the first quarter of fiscal 2008 had not changed as of October 31, 2008.



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##### Table of Contents

Discontinued Operations, net of income taxes

Income from Discontinued Operations



|                                                          |  |                               |    |      |                              |       |      |                        |   |       |   |  |             |        |   |            |      |    |  |     |   
|--------------------------------------------------------- |  | ----------------------------- | -- | ---- | ---------------------------- | ----- | ---- | ---------------------- | - | ----- | - |  | ----------- | ------ | - | ---------- | ---- | -- |  | --- | --
|                                                          |  | Three Months EndedOctober 31, |    |      | Nine Months EndedOctober 31, |       |      | Year over Year% Change |  
|(in thousands except change)                              |  | 2008                          |    | 2007 |                              |       | 2008 |                        |   | 2007  |   |  | ThreeMonths |        |   | NineMonths |     
|Revenues                                                  |  | $                             |   |      | $                            | 1,915 |      |                        | $ | 3,680 |   |  | $           | 8,165  |   |            | (100 | %) |  | (55 | %)
|                                                          |  |                               |    |      |                              |       |      |                        |   |       |   |  |             |        |   |            |      |    |  |     |   
|Income from discontinued operations:                      |  |                               |    |      |                              |       |      |                        |   |       |   |  |             |        |   |            |      |    |  |     |   
|Gain on sale, net of income taxes of $32,000 and $182,000 |  | $                             | 50 |      | $                            |      |      |                        | $ | 282   |   |  | $           |       |   |            | 100  | %  |  | 100 | % 
|Income from discontinued operations, before taxes         |  |                               |   |      |                              | 666   |      |                        |   | 1,149 |   |  |             | 3,287  |   |            | (100 | %) |  | (65 | %)
|Income tax expense                                        |  |                               |   |      |                              | (255  | )    |                        |   | (450  | ) |  |             | (1,291 | ) |            | 100  | %  |  | 65  | % 
|                                                          |  |                               |    |      |                              |       |      |                        |   |       |   |  |             |        |   |            |      |    |  |     |   
|Income from discontinued operations                       |  | $                             | 50 |      | $                            | 411   |      |                        | $ | 981   |   |  | $           | 1,996  |   |            | (88  | %) |  | (51 | %)
|                                                          |  |                               |    |      |                              |       |      |                        |   |       |   |  |             |        |   |            |      |    |  |     |   

The sale of the call box business was completed on July 10, 2008, which resulted in a pre-tax
gain of $382,000. The call box business experienced a decline in revenues and income for the nine months ended October 31, 2008 as compared to the corresponding period of the prior fiscal year due to the completion of non-recurring contracts to
upgrade emergency call boxes from analog to digital. Additionally, the call box business was only operated for five months during fiscal 2009. The Company historically allocated certain fixed manufacturing costs, indirect engineering costs, and
corporate overhead based upon analysis of actual percentage share of Company costs and expenses to each of its three businesses. The two remaining businesses presented below now reflect allocations of the amounts previously allocated to the call box
business segment.

During the third quarter of fiscal 2009, the Company recorded an additional pre-tax gain on the sale of the call box
business of $150,000 in conjunction with the execution of a subcontractor agreement that provides for a monthly cash payment of $12,500 to the Company from the buyer of the call box business over a 12-month period. Offsetting the gain of $150,000 in
the third quarter were additional pre-tax expenses incurred relating to the sale of the business of approximately $68,000.

ChargeSource®

Revenue



|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |    |   |  |     |  
|---------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---------------------- |  | - | ------ | - |  | ----------- | ------ | - | ---------- | -- | - |  | --- | -
|                             |  | Three Months EndedOctober 31, |        |   | Nine Months EndedOctober 31, |   |        | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |        |   | 2007                         |   |        | 2008                   |  |   | 2007   |   |  | ThreeMonths |        |   | NineMonths |   
|Revenue:                     |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |    |   |  |     |  
|Products                     |  | $                             | 3,236  |   |                              | $ | 1,893  |                        |  | $ | 10,215 |   |  | $           | 2,980  |   |            | 71 | % |  | 243 | %
|Services                     |  |                               |       |   |                              |   |       |                        |  |   |       |   |  |             |       |   |            |   |   |  |    |  
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |    |   |  |     |  
|                             |  | $                             | 3,236  |   |                              | $ | 1,893  |                        |  | $ | 10,215 |   |  | $           | 2,980  |   |            | 71 | % |  | 243 | %
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |    |   |  |     |  
|Operating loss               |  | $                             | (2,532 | ) |                              | $ | (2,287 | )                      |  | $ | (8,327 | ) |  | $           | (5,824 | ) |            |    |   |  |     |  
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |    |   |  |     |  



28



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##### Table of Contents

Revenue by Region



|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |        |   
|---------------------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ------ | ----------- | - | ----- | ---------- | ----- | -- |  | ------ | --
|                             |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |       | 2007                         |   | 2008                   |  | 2007 |        | ThreeMonths |   |       | NineMonths |      
|Revenue:                     |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |        |   
|North America                |  | $                             | 74    |                              | $ | 1,355                  |  | $    | 466    |             | $ | 1,906 |            | (95   | %) |  | (76    | %)
|Europe                       |  |                               | 647   |                              |   | 513                    |  |      | 1,329  |             |   | 1,049 |            | 26    | %  |  | 27     | % 
|Asia                         |  |                               | 2,515 |                              |   | 25                     |  |      | 8,420  |             |   | 25    |            | 9,960 | %  |  | 33,580 | % 
|Latin America                |  |                               |      |                              |   |                       |  |      |       |             |   |      |            |      |    |  |       |   
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |        |   
|                             |  | $                             | 3,236 |                              | $ | 1,893                  |  | $    | 10,215 |             | $ | 2,980 |            | 71    | %  |  | 243    | % 
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |       |    |  |        |   

Revenue by Customer



|                             |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |     |    |  |     |   
|---------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ------ |  | --- | - | ----------- | - | ----- | ----------- | --- | - | ---------- | --- | -- |  | --- | --
|                             |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                             |  | 2008                           |       |             | 2007                          |   |  | 2008                   |             |  | 2007 |   | 
|(in thousands except change) |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |        |  |     |   | % ofRevenue |   |       | ThreeMonths |     |   | NineMonths |    
|Revenue:                     |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |     |    |  |     |   
|Kensington                   |  | $                              | 125   |             | 4                             | % |  | $                      | 1,780       |  | 94   | % |  | $           | 946    |  | 9   | % |             | $ | 2,431 |             | 82  | % |            | (93 | %) |  | (61 | %)
|Lenovo                       |  |                                | 2,521 |             | 78                            | % |  |                        |            |  |     |   |  |             | 8,447  |  | 83  | % |             |   |      |             |    |   |            |    |    |  |    |   
|Trust                        |  |                                | 521   |             | 16                            | % |  |                        |            |  |     |   |  |             | 530    |  | 5   | % |             |   |      |             |    |   |            |    |    |  |    |   
|Other                        |  |                                | 69    |             | 2                             | % |  |                        | 113         |  | 6    | % |  |             | 292    |  | 3   | % |             |   | 549   |             | 18  | % |            | (39 | %) |  | (47 | %)
|                             |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |     |    |  |     |   
|                             |  | $                              | 3,236 |             | 100                           | % |  | $                      | 1,893       |  | 100  | % |  | $           | 10,215 |  | 100 | % |             | $ | 2,980 |             | 100 | % |            | 71  | %  |  | 243 | % 
|                             |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |     |    |  |     |   

Revenue for ChargeSource® for the three and nine months ended October 31, 2008 increased by $1.3 million, or 71 percent, and $7.2 million, or 243 percent, respectively, compared to corresponding
periods of fiscal 2008. The increase in revenue relates primarily to shipments to Lenovo that began in late January 2008 and sales to Trust in the third quarter of fiscal 2009. During the three and nine months ended October 31, 2008, we shipped
approximately 52,000 and 171,000 90-watt adapters, respectively, and 8,000 and 32,000 120-watt adapters, respectively. Sales to Lenovo expanded our presence in the Asia-Pacific market.

Cost of Revenue and Gross Margin



|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |    |   |  |     |  
|----------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ------ |  | --- | - | ----------- | - | ----- | ----------- | --- | - | ---------- | -- | - |  | --- | -
|                                    |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                    |  | 2008                           |       |             | 2007                          |   |  | 2008                   |             |  | 2007 |   | 
|(in thousands except change)        |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |        |  |     |   | % ofRevenue |   |       | ThreeMonths |     |   | NineMonths |   
|Cost of revenue:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |    |   |  |     |  
|Products                            |  | $                              | 3,237 |             | 100                           | % |  | $                      | 2,153       |  | 114  | % |  | $           | 10,403 |  | 102 | % |             | $ | 4,009 |             | 135 | % |            | 50 | % |  | 159 | %
|Amortization  software development |  |                                |      |             |                              |   |  |                        |            |  |     |   |  |             |       |  |    |   |             |   |      |             |    |   |            |   |   |  |    |  
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |    |   |  |     |  
|                                    |  |                                | 3,237 |             | 100                           | % |  |                        | 2,153       |  | 114  | % |  |             | 10,403 |  | 102 | % |             |   | 4,009 |             | 135 | % |            | 50 | % |  | 159 | %
|Services                            |  |                                |      |             |                              |   |  |                        |            |  |     |   |  |             |       |  |    |   |             |   |      |             |    |   |            |   |   |  |    |  
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |    |   |  |     |  
|                                    |  | $                              | 3,237 |             | 100                           | % |  | $                      | 2,153       |  | 114  | % |  | $           | 10,403 |  | 102 | % |             | $ | 4,009 |             | 135 | % |            | 50 | % |  | 159 | %
|                                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |        |  |     |   |             |   |       |             |     |   |            |    |   |  |     |  



|                      |  |                               |  |      |                              |  |      |                          |  |      |    |  |             |  |           
|--------------------- |  | ----------------------------- |  | ---- | ---------------------------- |  | ---- | ------------------------ |  | ---- | -- |  | ----------- |  | ----------
|                      |  | Three Months EndedOctober 31, |  |      | Nine Months EndedOctober 31, |  |      | Year over Yearppt Change
|                      |  | 2008                          |  | 2007 |                              |  | 2008 |                          |  | 2007 |    |  | ThreeMonths |  | NineMonths
|Gross margin:         |  |                               |  |      |                              |  |      |                          |  |      |    |  |             |  |           
|Products              |  |                              |  | (14  | %)                           |  | (2   | %)                       |  | (35  | %) |  | 14          |  | 33        
|Services              |  |                              |  |     |                              |  |     |                          |  |     |    |  |            |  |          
|Combined gross margin |  |                              |  | (14  | %)                           |  | (2   | %)                       |  | (35  | %) |  | 14          |  | 33        



29



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##### Table of Contents

Cost of revenue for the three and nine months
ended October 31, 2008 increased by $1.1 million, or 50 percent, and $6.4 million, or 159 percent, respectively, compared to the corresponding periods of fiscal 2008. The increase in cost of revenue is primarily due to the
increase in revenue for the three and nine months ended October 31, 2008 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 nine months ended October 31, 2008 included approximately $0.2 million and $1.0 million, respectively, of under-absorbed fixed
manufacturing overhead. Cost of revenue for the three and nine months ended October 31, 2007 included approximately $0.5 million and $1.6 million of under-absorbed fixed manufacturing overhead. As revenues increase, the amount of
under-absorption of fixed manufacturing costs decreases.

Operating Costs and Expenses



|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |    |   |             |   |       |             |     |   |            |     |    |  |     |  
|-------------------------------------- |  | ------------------------------ | ----- | ----------- | ----------------------------- | - |  | ---------------------- | ----------- |  | ---- | - |  | ----------- | ----- |  | -- | - | ----------- | - | ----- | ----------- | --- | - | ---------- | --- | -- |  | --- | -
|                                       |  | Three Months Ended October 31, |       |             | Nine Months Ended October 31, |   |  | Year over Year% Change |            
|                                       |  | 2008                           |       |             | 2007                          |   |  | 2008                   |             |  | 2007 |   | 
|(in thousands except change)           |  |                                |       | % ofRevenue |                               |   |  |                        | % ofRevenue |  |      |   |  | % ofRevenue |       |  |    |   | % ofRevenue |   |       | ThreeMonths |     |   | NineMonths |    
|Operating expenses:                    |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |    |   |             |   |       |             |     |   |            |     |    |  |     |  
|SG&A expenses                          |  | $                              | 443   |             | 14                            | % |  | $                      | 634         |  | 33   | % |  | $           | 2,540 |  | 25 | % |             | $ | 1,440 |             | 48  | % |            | (30 | %) |  | 76  | %
|Allocated corporate overhead           |  |                                | 1,358 |             | 42                            | % |  |                        | 720         |  | 38   | % |  |             | 3,546 |  | 35 | % |             |   | 1,700 |             | 57  | % |            | 89  | %  |  | 109 | %
|Gross engineering and support expenses |  |                                | 730   |             | 22                            | % |  |                        | 673         |  | 36   | % |  |             | 2,053 |  | 20 | % |             |   | 1,655 |             | 56  | % |            | 9   | %  |  | 24  | %
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |    |   |             |   |       |             |     |   |            |     |    |  |     |  
|                                       |  | $                              | 2,531 |             | 78                            | % |  | $                      | 2,027       |  | 107  | % |  | $           | 8,139 |  | 80 | % |             | $ | 4,795 |             | 161 | % |            | 25  | %  |  | 70  | %
|                                       |  |                                |       |             |                               |   |  |                        |             |  |      |   |  |             |       |  |    |   |             |   |       |             |     |   |            |     |    |  |     |  

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 months ended October 31, 2008 decreased by
approximately $0.2 million, or 30 percent, when compared to the three months ended October 31, 2007. Selling, general, and administrative expenses in the nine months ended October 31, 2008 increased by approximately
$1.1 million, or 76 percent, compared to the corresponding period of fiscal 2008. The increase in expenses for the 2009 fiscal year to date period is primarily due to increased legal fees related to the iGo litigation (see Note 15 of
the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this report). The decrease in expenses for the third quarter of fiscal 2009 compared to the prior year comparable period is primarily due to reduced
legal fees due to the stay of proceedings obtained on June 30, 2008.

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 nine months ended October 31, 2008 increased $0.1 million, or 9 percent, and $0.4 million, or 24 percent, respectively, compared to the corresponding prior
year periods. The increase in gross engineering and support expenses is due to increased material usages and lab costs as new products are currently in development.



30



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##### Table of Contents

Wireless Test Solutions (WTS)

Revenue



|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |    |  |     |   
|---------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---------------------- |  | - | ------ | - |  | ----------- | ------ | - | ---------- | --- | -- |  | --- | --
|                             |  | Three Months EndedOctober 31, |        |   | Nine Months EndedOctober 31, |   |        | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |        |   | 2007                         |   |        | 2008                   |  |   | 2007   |   |  | ThreeMonths |        |   | NineMonths |    
|Revenue:                     |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |    |  |     |   
|Products                     |  | $                             | 986    |   |                              | $ | 1,160  |                        |  | $ | 11,505 |   |  | $           | 4,991  |   |            | (15 | %) |  | 131 | % 
|Services                     |  |                               | 14     |   |                              |   | 46     |                        |  |   | 43     |   |  |             | 213    |   |            | (70 | %) |  | (80 | %)
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |    |  |     |   
|                             |  | $                             | 1,000  |   |                              | $ | 1,206  |                        |  | $ | 11,548 |   |  | $           | 5,204  |   |            | (17 | %) |  | 122 | % 
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |    |  |     |   
|Operating loss               |  | $                             | (1,934 | ) |                              | $ | (2,035 | )                      |  | $ | (1,056 | ) |  | $           | (6,004 | ) |            |     |    |  |     |   
|                             |  |                               |        |   |                              |   |        |                        |  |   |        |   |  |             |        |   |            |     |    |  |     |   

Revenue by Region



|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |     |    |  |     |   
|---------------------------- |  | ----------------------------- | ----- | ---------------------------- | - | ---------------------- |  | ---- | ------ | ----------- | - | ----- | ---------- | --- | -- |  | --- | --
|                             |  | Three Months EndedOctober 31, |       | Nine Months EndedOctober 31, |   | Year over Year% Change | 
|(in thousands except change) |  | 2008                          |       | 2007                         |   | 2008                   |  | 2007 |        | ThreeMonths |   |       | NineMonths |    
|Revenue:                     |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |     |    |  |     |   
|North America                |  | $                             | 884   |                              | $ | 662                    |  | $    | 10,649 |             | $ | 3,633 |            | 34  | %  |  | 193 | % 
|Europe                       |  |                               | 49    |                              |   | 91                     |  |      | 176    |             |   | 169   |            | (46 | %) |  | 4   | % 
|Asia                         |  |                               | 16    |                              |   | 185                    |  |      | 367    |             |   | 527   |            | (91 | %) |  | (30 | %)
|Latin America                |  |                               | 51    |                              |   | 268                    |  |      | 356    |             |   | 875   |            | (81 | %) |  | (59 | %)
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |     |    |  |     |   
|                             |  | $                             | 1,000 |                              | $ | 1,206                  |  | $    | 11,548 |             | $ | 5,204 |            | (17 | %) |  | 122 | % 
|                             |  |                               |       |                              |   |                        |  |      |        |             |   |       |            |     |    |  |     |   

Revenue for the three months ended October 31, 2008 decreased by $0.2 million, or
17 percent, compared to the corresponding period of fiscal 2008. The third quarter revenue decrease is a reflection of the current general economic downturn as well as delays in customers capital spending and is reflective of the
unpredictable nature of our WTS business.

Revenue for the nine months ended October 31, 2008 increased by $6.3 million, or
122 percent, compared to the corresponding period of fiscal 2008. The fiscal 2009 increase in revenue is due to the Symphony Multi units sold to AT&T. The revenue recognized on this single order totaled $8.2 million, net of
revenue sharing of $1.9 million. This excludes amounts deferred relating to post-contract support and warranty.

Cost of Revenue and Gross
Margin



|                                        |  |                                |     |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|--------------------------------------- |  | ------------------------------ | --- | ------------------ | ----------------------------- | - |  | ---------------------- | ------------------ |  | ---- | - |  | ------------------ | ----- |  | --- | - | ------------------ | - | ----- | ----------- | --- | - | ---------- | ---- | -- |  | ---- | --
|                                        |  | Three Months Ended October 31, |     |                    | Nine Months Ended October 31, |   |  | Year over Year% Change |                   
|                                        |  | 2008                           |     |                    | 2007                          |   |  | 2008                   |                    |  | 2007 |   | 
|(in thousands except margin and change) |  |                                |     | % ofRelatedRevenue |                               |   |  |                        | % ofRelatedRevenue |  |      |   |  | % ofRelatedRevenue |       |  |     |   | % ofRelatedRevenue |   |       | ThreeMonths |     |   | NineMonths |     
|Cost of revenue:                        |  |                                |     |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|Products                                |  | $                              | 540 |                    | 55                            | % |  | $                      | 564                |  | 49   | % |  | $                  | 4,376 |  | 38  | % |                    | $ | 2,431 |             | 49  | % |            | (4   | %) |  | 80   | % 
|Amortization  software development     |  |                                |    |                    |                              |   |  |                        | 20                 |  | 2    | % |  |                    |      |  |    |   |                    |   | 212   |             | 4   | % |            | (100 | %) |  | (100 | %)
|                                        |  |                                |     |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|                                        |  |                                | 540 |                    | 55                            | % |  |                        | 584                |  | 50   | % |  |                    | 4,376 |  | 38  | % |                    |   | 2,643 |             | 53  | % |            | (8   | %) |  | 66   | % 
|Services                                |  |                                |    |                    |                              |   |  |                        | 80                 |  | 174  | % |  |                    | 119   |  | 277 | % |                    |   | 253   |             | 119 | % |            | (100 | %) |  | (53  | %)
|                                        |  |                                |     |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   
|                                        |  | $                              | 540 |                    | 54                            | % |  | $                      | 664                |  | 55   | % |  | $                  | 4,495 |  | 39  | % |                    | $ | 2,896 |             | 56  | % |            | (19  | %) |  | 55   | % 
|                                        |  |                                |     |                    |                               |   |  |                        |                    |  |      |   |  |                    |       |  |     |   |                    |   |       |             |     |   |            |      |    |  |      |   



31



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##### Table of Contents

|                      |  |                               |   |  |                              |    |  |                          |    |  |      |    |  |             |   |  |            |  
|--------------------- |  | ----------------------------- | - |  | ---------------------------- | -- |  | ------------------------ | -- |  | ---- | -- |  | ----------- | - |  | ---------- | -
|                      |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |    |  | Year over Yearppt Change |   
|                      |  | 2008                          |   |  | 2007                         |    |  | 2008                     |    |  | 2007 |    |  | ThreeMonths |   |  | NineMonths |  
|Gross margin:         |  |                               |   |  |                              |    |  |                          |    |  |      |    |  |             |   |  |            |  
|Products              |  | 45                            | % |  | 50                           | %  |  | 62                       | %  |  | 47   | %  |  | (5          | ) |  | 15         |  
|Services              |  | 100                           | % |  | (74                          | %) |  | (177                     | %) |  | (19  | %) |  | 174         |   |  | (158       | )
|Combined gross margin |  | 46                            | % |  | 45                           | %  |  | 61                       | %  |  | 44   | %  |  | 1           |   |  | 17         |  

Cost of revenue for the three months ended October 31, 2008 decreased by $0.1 million,
or 19 percent, compared to the corresponding period of fiscal 2008. The decrease in cost of revenue is consistent with the decrease in revenue for the same period. The gross margin for the third quarter of fiscal 2009 remained flat in
comparison to the third quarter of fiscal 2008. Cost of revenue for the nine months ended October 31, 2008 increased by $1.6 million, or 55 percent, compared to the corresponding period of fiscal 2008. The increase in cost of revenue
for the year to date period is driven by increased sales volume. The cost of services relates to amortization on Seven.Five units previously leased. The combined gross margin increased by 1 and 17 percentage points in the three and nine months ended
October 31, 2008, respectively, compared to the corresponding periods of the prior fiscal year because the increased revenue allows for greater absorption of fixed manufacturing overhead expenses. Additionally, the Company incurred amortization
of software development costs of $0.2 million during the nine months ended October 31, 2007 and had no similar expense during fiscal 2009.

Operating Costs and Expenses



|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |       |             |     |   |            |    |    |  |    |   
|-------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | --- | -- | ---------------------- | - | ----------- | ---- | --- | - |  | - | ----------- | - |  | -- | -- | ----------- | - | ----- | ----------- | --- | - | ---------- | -- | -- |  | -- | --
|                                       |  | Three Months Ended October 31, |       |   | Nine Months Ended October 31, |     |    | Year over Year% Change |  
|                                       |  | 2008                           |       |   | 2007                          |     |    | 2008                   |   |             | 2007 |     |  
|(in thousands except change)           |  |                                |       |   | % ofRevenue                   |     |    |                        |   | % ofRevenue |      |     |   |  |   | % ofRevenue |   |  |    |    | % ofRevenue |   |       | ThreeMonths |     |   | NineMonths |   
|Operating expenses:                    |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |       |             |     |   |            |    |    |  |    |   
|SG&A expenses                          |  | $                              | 521   |   |                               | 52  | %  |                        | $ | 497         |      | 41  | % |  | $ | 1,749       |   |  | 15 | %  |             | $ | 1,789 |             | 35  | % |            | 5  | %  |  | (2 | %)
|Allocated corporate overhead           |  |                                | 778   |   |                               | 78  | %  |                        |   | 577         |      | 48  | % |  |   | 2,459       |   |  | 21 | %  |             |   | 2,082 |             | 40  | % |            | 35 | %  |  | 18 | % 
|Gross engineering and support expenses |  |                                | 1,447 |   |                               | 144 | %  |                        |   | 1,503       |      | 125 | % |  |   | 4,589       |   |  | 40 | %  |             |   | 4,441 |             | 85  | % |            | (4 | %) |  | 3  | % 
|Capitalized software development costs |  |                                | (352  | ) |                               | (35 | %) |                        |   |            |      |    |   |  |   | (688        | ) |  | (6 | %) |             |   |      |             |    |   |            |   |    |  |   |   
|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |       |             |     |   |            |    |    |  |    |   
|                                       |  | $                              | 2,394 |   |                               | 239 | %  |                        | $ | 2,577       |      | 214 | % |  | $ | 8,109       |   |  | 70 | %  |             | $ | 8,312 |             | 160 | % |            | (7 | %) |  | (2 | %)
|                                       |  |                                |       |   |                               |     |    |                        |   |             |      |     |   |  |   |             |   |  |    |    |             |   |       |             |     |   |            |    |    |  |    |   

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. The
selling, general, and administrative expenses incurred for the three and nine months ended October 31, 2008 are consistent with the prior period.

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



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incurred in the development and support of our WTS business. Engineering and support costs for the three and nine months ended October 31, 2008 were
consistent with amounts incurred in the respective prior period.

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 capitalized software development costs in the three and nine months ended October 31, 2008 in the amount of $352,000 and $688,000, respectively, related to Opti product development,
as well as QuOTA development that we began capitalizing in the third quarter of fiscal 2009. We did not capitalize any software development costs in the three and nine months ended October 31, 2007.

Liquidity and Capital Resources

Cash and cash
equivalents at October 31, 2008 decreased $9.4 million to $7.6 million as compared to $17.0 million at January 31, 2008. The following table is a summary of our Condensed Consolidated Statements of Cash Flows.



|                            |  |                              |        |   |      |   |        |  
|--------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                            |  | Nine Months EndedOctober 31, |       
|                            |  | 2008                         |        |   | 2007 |  
|                            |  | (in thousands)               |       
|Cash provided by (used in): |  |                              |        |  
|Operating activities        |  | $                            | (8,076 | ) |      | $ | (1,050 | )
|Investing activities        |  |                              | (1,328 | ) |      |   | 526    |  
|Financing activities        |  |                              |       |   |      |   | (7,673 | )

Operating Activities

Cash used in operating activities of $8.1 million for the nine months ended October 31, 2008 was driven by our net loss from continuing operations of $8.7 million partially offset by non-cash
depreciation and amortization of $1.2 million and cash provided by discontinued operations of $3.2 million, including proceeds of $2.7 million from the sale of our call box business in July 2008. Additionally, our cash flow declined
due to increases in accounts receivable and inventory balances of $1.3 million and $2.2 million, respectively.

Included in our year to date loss is non-recurring severance costs totaling $1.0 million.
Additionally, our receivable balance has grown as a result of increased sales for the third quarter of fiscal 2009 compared to the same period of the prior fiscal year. The increase in inventory is due to filling our ChargeSource® contract manufacturers warehouse with a minimum 10-day supply of finished goods inventory.

Cash used in operating activities of $1.1 million for the nine months ended October 31, 2007 was driven by our net loss from continuing operations of $8.4 million, a decrease in deferred revenue of
$0.7 million, and a reduction in accrued liabilities of $1.7 million, primarily due to vendor payments for inventory, income taxes and the distribution of incentive compensation. These decreases were offset primarily by cash generated from
discontinued operations of $5.1 million and collection of accounts receivable of $4.6 million.

Investing Activities

During the nine months ended October 31, 2008, we purchased $0.6 million of property and
equipment, primarily tooling, and equipment used for the manufacture of our ChargeSource® products. We also capitalized software development costs incurred related to our WTS Opti and QuOTA
product development in the amount of $0.7 million.

During the nine months ended October 31, 2007 we received $0.4 million
relating primarily to the sale of WTS equipment that had been previously leased, and we collected $0.6 million in contingent consideration from



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SwissQual relating to the January 2006 sale to Spirent. During the first nine months of fiscal 2008 we spent $0.4 million of capitalized expenditures,
mostly relating to tooling and other equipment for ChargeSource®.

Financing Activities

During the nine months ended October 31, 2008, the Company did not engage in any 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 nine months ended October 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.

We believe that the proceeds we expect to
receive from the contemplated sale of the WTS assets (see Note 16 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report), together with our existing cash and cash equivalent balances, will
provide us sufficient funds to satisfy our cash requirements for the next 12 months. If the anticipated proceeds contemplated from the sale of the WTS assets together with our existing cash and cash equivalent balances do not satisfy our cash
requirements, or if the contemplated sale of the WTS assets does not occur as we expect, we expect that we will need to implement further cost reduction strategies or attempt to raise additional capital through debt or the issuance of additional
equity. We are unable at this time to predict the impact that the recent disruption in the financial and credit markets may have on our ability to raise such additional capital or the probability of our success should we need to attempt to raise
additional capital.



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

Currency Risk

We are exposed to the risk of changes in currency exchange rates. As of October 31, 2008, 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 condensed consolidated 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 condensed consolidated 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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|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 end 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

Internal control over financial reporting is a process designed by, or under the supervision of, the issuers principal executive and
financial officers, and effected by the issuers board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| | (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuers assets that could have a material effect
on the financial statements.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There was no change in our internal control over financial reporting during the fiscal quarter
ended October 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION



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

On June 8, 2007, iGo, Inc.
(formerly Mobility Electronics, Inc.) (iGo) filed a complaint against us and our subsidiary CWT in the United States District Court for the Eastern District of Texas, Case No. 5:07cv84, alleging that two iGo patents are infringed by
the mechanical keying arrangement between power adapters and programming tips used by us in the mobile power products sold through our distributors and sold to a computer maker. The complaint seeks an unspecified amount of treble damages and
injunctive relief. We have denied liability and countersued alleging that iGo breached a settlement agreement (the Settlement Agreement) entered into between the parties in 2003 settling a previous patent infringement lawsuit, and that
iGo is liable for infringement of at least three of our patents. iGo has denied liability and amended its claims to further allege that we breached the Settlement Agreement by asserting claims against iGo. We have denied liability as to the
additional claim made by iGo. On March 5, 2008, both parties attended mediation without reaching a settlement.

On June 25, 2008,
the parties jointly requested that the U.S. District Court for the Eastern District of Texas (the Texas Court) transfer the lawsuit to the U.S. District Court for the District of Arizona, the court in which the parties previous
patent infringement lawsuit had been filed (the Arizona Court). The parties joint request also sought, following transfer, a stay of proceedings until January 2009 so that the parties could pursue settlement. On June 30, 2008,
the Texas Court granted the parties joint request for transfer, transferring the lawsuit to the Arizona Court under the terms and conditions requested, including the stay, Action No. CV 08-1224-PHX-MHM.

On November 30, 2007, SwissQual filed a lawsuit against our subsidiary CWT in the United States District Court for the Central District of
California, Case No. cv-07-07819, alleging fraud, intentional interference with prospective economic advantage, breach of contract, trademark infringement, unfair competition, trade secret misappropriation, and seeking declaratory relief
relating to the Distribution and Sales Agreement dated December 15, 2005 between the parties.

We have answered SwissQuals
complaint and denied any and all liability. In addition, we asserted counterclaims against SwissQual alleging breach of contract, breach of the covenant of good faith and fair dealing, trade secret misappropriation, intentional interference with
prospective economic advantage, negligent interference with prospective economic advantage, unfair competition, conversion, unjust enrichment/restitution, an accounting for money owed due to SwissQuals misconduct and seeking declaratory relief
relating to SwissQuals failure to comply with its support obligations, indemnity, and trademark ownership.

On November 26,
2008, we entered into a Settlement Agreement and Release of Claims (the Settlement Agreement) with SwissQual pursuant to which the parties agreed to dismiss their respective claims and counterclaims against each other. Among other terms,
the Settlement Agreement contains general releases between the parties. As a result, this lawsuit has been dismissed with prejudice.

The
outcome of the iGo matter remains neither determinable nor estimable. We believe we have meritorious defenses to the matter described above and intend to vigorously defend this action. In addition to the pending matter described above, we are from
time to time involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all such legal proceedings will not in the aggregate have a material adverse effect on our consolidated results of
operations and financial position.



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

None.



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

None.



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

None.



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

None.



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



|     |  |                                                                                                                                                                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless Technologies, Inc., Ascom Holding AG and Ascom Inc. dated as of September 26, 2008 (incorporated by reference to
Exhibit 2.1 of the Companys Current Report on Form 8-K filed with the SEC on September 29, 2008)  
|     | 
|10.1 |  | Form of Escrow Agreement by and among Comarco, Inc., Comarco Wireless Technologies, Inc., Ascom Holding AG, Ascom Inc. and U.S. Bank National Association (incorporated by reference to Exhibit
99.1 of the Companys Current Report on Form 8-K filed with the SEC on September 29, 2008)
|     | 
|10.2 |  | 2005 Equity Incentive Plan, As Amended, is filed herewith                                                                                                                                                                                                                                 
|     | 
|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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SIGNATURES

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



|                        |  |  |  |                                           
|----------------------- |  |  |  | ------------------------------------------
|                        |  |  |  | COMARCO, INC.                             
|                        |  | 
|Date: December 12, 2008 |  |  |  | /s/ Samuel M. Inman, III                  
|                        |  |  |  | Samuel M. Inman, III                      
|                        |  |  |  | President and Chief Executive Officer     
|                        |  | 
|Date: December 12, 2008 |  |  |  | /s/ Winston E. Hickman                    
|                        |  |  |  | Winston E. Hickman                        
|                        |  |  |  | Vice President and Chief Financial Officer



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                               
|               | 
|2.1            |  | Asset Purchase Agreement by and among Comarco, Inc., Comarco Wireless Technologies, Inc., Ascom Holding AG and Ascom Inc. dated as of September 26, 2008 (incorporated by reference to
Exhibit 2.1 of the Companys Current Report on Form 8-K filed with the SEC on September 29, 2008)  
|               | 
|10.1           |  | Form of Escrow Agreement by and among Comarco, Inc., Comarco Wireless Technologies, Inc., Ascom Holding AG, Ascom Inc. and U.S. Bank National Association (incorporated by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K filed with the SEC on September 29, 2008)
|               | 
|10.2           |  | 2005 Equity Incentive Plan, As Amended, is filed herewith                                                                                                                                                                                                                                 
|               | 
|31.1           |  | Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       
|               | 
|31.2           |  | Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       
|               | 
|32.1           |  | Principal Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       
|               | 
|32.2           |  | Principal Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       



40