Form 10-Q


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


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


For Quarter Ended October 31, 1996                 Commission File Number 0-5449



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

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

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

Registrant's telephone number, including area code               (714) 282-3832
                                                                 ---------------




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

                                                      Yes      X      No
                                                              ---         ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of November 30, 1996.

                Common Stock,
                $.10 Par Value                   4,800,309 Shares
                --------------                   ----------------


<PAGE>


                                      
Index to Form 10-Q

                                                                    Page No.
                                                                    --------
Part I.        Financial Information


 Condensed Consolidated Balance Sheets
     October 31, 1996 and January 31, 1996                               1

 Condensed Consolidated Statements of Income
     Quarters ended and Three Quarters ended October 31, 1996
     and October 29, 1995                                                2

 Condensed Consolidated Statements of Cash Flows
     Three Quarters ended October 31, 1996 and October 29, 1995          3

 Notes to Condensed Consolidated Financial Statements                  4-5

 Management's Discussion and Analysis of Financial
     Condition and Results of Operations                              6-12



 PART II.       OTHER INFORMATION

 Item 6.     Exhibits and Reports on Form 8-K                           13

 Signature                                                              14


<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                         COMARCO, Inc. and Subsidiaries
                      Condensed Consolidated Balance Sheets
<TABLE>
                                                  October 31, 1996           January 31, 1996
                                                     (Unaudited)                     *
                                                  -----------------          ----------------
ASSETS
<S>                                               <C>                        <C> 
Current assets:
         Cash and cash equivalents                $       6,851,000          $     11,801,000
         Short-term investments                           2,194,000                 2,657,000
         Accounts receivable, net                        13,342,000                 7,335,000
         Inventory                                        2,949,000                 1,361,000
         Other current assets                             1,366,000                   573,000
                                                  -----------------          ----------------

Total current assets                                     26,702,000                23,727,000

Long-term investments                                     1,962,000                   841,000
Property and equipment, net                               1,732,000                 1,174,000
Software development costs, net                           2,181,000                 1,401,000
Intangible assets, net                                    2,700,000                 2,578,000
Other assets                                                298,000                   268,000
                                                  -----------------          ----------------

TOTAL ASSETS                                      $      35,575,000          $    29,989,000
                                                  =================          ===============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
         Accounts payable                         $         385,000          $        547,000
         Deferred revenue                                 1,687,000                 1,410,000
         Accrued liabilities                              7,284,000                 5,721,000
                                                  -----------------          ----------------

Total current liabilities                                 9,356,000                 7,678,000

Deferred income taxes                                       701,000                   573,000

Stockholders' equity:
         Common stock, $.10 par value,
           33,705,000 shares authorized,
           4,800,309 and 4,707,709 shares
           outstanding at October 31, 1996 and
           January 31, 1996, respectively                   480,000                   471,000
         Capital contributed in excess
           of par value                                   4,375,000                 3,883,000
         Retained earnings                               20,663,000                17,384,000
                                                  -----------------          ----------------

Total stockholders' equity                               25,518,000                21,738,000
                                                  -----------------          ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $      35,575,000          $     29,989,000
                                                  =================          ================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.

*The  condensed  consolidated  balance  sheet as of  January  31,  1996 has been
summarized  from the  Company's  audited  consolidated  balance sheet as of that
date.
<PAGE>

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

<TABLE>
                                ------------ Quarter Ended --------------       --------- Three Quarters Ended -------
                                October 31, 1996         October 29, 1995       October 31, 1996      October 29, 1995
                                ----------------         ----------------       ----------------      ----------------
<S>                                <C>                     <C>                    <C>                     <C> 
Revenues:
   Contract revenues               $ 14,181,000            $ 14,187,000           $ 37,650,000            $ 42,376,000
   Product sales                      4,189,000               4,299,000             13,226,000              10,684,000
                                      ---------               ---------             ----------              ----------
                                     18,370,000              18,486,000             50,876,000              53,060,000
                                     ----------              ----------             ----------              ----------

Direct costs:
   Contract costs                    10,033,000               9,726,000             25,532,000              28,594,000
   Cost of product sales              1,760,000               2,113,000              4,902,000               4,961,000
                                      ---------               ---------              ---------               ---------
                                     11,793,000              11,839,000             30,434,000              33,555,000

Indirect costs                        5,056,000               5,230,000             15,745,000              15,572,000
                                      ---------               ---------             ----------              ----------

                                     16,849,000              17,069,000             46,179,000              49,127,000
                                     ----------              ----------             ----------              ----------

Operating income                      1,521,000               1,417,000              4,697,000               3,933,000

Net interest income                     126,000                 114,000                426,000                 346,000
                                        -------                 -------                -------                 -------

Income before income taxes            1,647,000               1,531,000              5,123,000               4,279,000

Income taxes                            558,000                 511,000              1,844,000               1,583,000
                                   ------------            ------------           ------------            ------------


Net income                         $  1,089,000            $  1,020,000           $  3,279,000            $  2,696,000
                                   ============            ============           ============            ============

Earnings per share*
   Primary                            $     .20               $     .20              $     .61              $      .53
                                      =========               =========              =========              ==========
</TABLE>
*Fully  diluted  earnings  per share  has not been  presented  as the  effect is
immaterial.

See accompanying notes to the condensed consolidated financial statements.
<PAGE>
                         COMARCO, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
                                                                 --------- Three Quarters Ended --------
                                                                 October 31, 1996       October 29, 1995
                                                                 ----------------       ----------------
<S>                                                                 <C>                   <C>
Cash flows from operating activities:
    Net income                                                      $  3,279,000          $  2,696,000
    Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation and amortization                                   1,708,000             1,684,000
       Loss on disposal of property and equipment                          6,000                 9,000
       Deferred income taxes                                            (359,000)               38,000
       Provision for doubtful accounts receivable                         28,000                23,000
       Net purchases of trading securities                              (648,000)              (52,000)
       Increase in accounts receivable                                (4,536,000)             (200,000)
       Increase in inventory                                            (961,000)             (435,000)
       Increase in other current assets                                 (288,000)              (34,000)
       Increase in other assets                                           (2,000)              (11,000)
       Increase (decrease) in accounts payable                          (162,000)               90,000
       Increase in deferred revenue                                      277,000               176,000
       Increase (decrease) in accrued liabilities                        834,000            (1,037,000)
                                                                    ------------          -------------

    Net cash provided (used) by operating activities                    (824,000)            2,947,000

Cash flows from investing activities:
    Purchases of investments                                          (1,572,000)           (1,430,000)
    Proceeds from sales of investments                                 1,562,000               984,000
    Purchases of property and equipment                                 (632,000)             (581,000)
    Software development costs                                        (1,725,000)           (1,525,000)
    Payment for purchase of assets of RAL Consulting and              (1,197,000)                 -
       Staffing Services, net of cash acquired
    Payment for purchase of callbox assets of GTE Cellular            (1,063,000)                 -
       Communications Corp., net of cash acquired

    Net cash used in investing activities                             (4,627,000)           (2,552,000)

Cash flows from financing activities:
    Proceeds from issuance of common stock                               590,000               291,000
    Purchase of common stock                                             (89,000)                   -
    Purchase of subordinated debentures                                       -               (844,000)
                                                                    -------------         -------------

    Net cash provided (used) by financing activities                     501,000              (553,000)
                                                                    ------------          -------------

Net decrease in cash and cash equivalents                           $ (4,950,000)         $   (158,000)
                                                                    =============         =============


Supplemental disclosures of cash flow information:
  Cash paid during the three quarters for:
       Interest                                                     $         -           $     41,000
       Income taxes                                                    1,677,000             1,702,000
</TABLE>

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

                         COMARCO, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                      October 31, 1996 and October 29, 1995
                                   (Unaudited)

1.     General

       The financial statements have been prepared without audit.  However, they
       reflect all adjustments  which in the opinion of management are necessary
       to fairly state the Company's  financial position at October 31, 1996 and
       October 29, 1995 and the results of its operations and cash flows for the
       quarter ended and three  quarters  ended October 31, 1996 and October 29,
       1995.  The  information  has been prepared in  accordance  with Form 10-Q
       instructions,  but does  not  necessarily  include  all  information  and
       footnotes  required  by  generally  accepted  accounting  principles  for
       complete financial statements. The results of the quarter ended and three
       quarters  ended  October 31, 1996 are not  necessarily  indicative of the
       results to be obtained for the full fiscal year.

2.     Asset Acquisitions

       The  Condensed  Consolidated  Balance  Sheet  includes  the assets of RAL
       Consulting  and  Staffing  Services,  Inc.,  acquired  by a  newly-formed
       subsidiary of the Company,  CoSource  Solutions,  Inc.,  ("CoSource")  in
       August 1996, and the Condensed  Consolidated Statement of Income includes
       CoSource's  operations since August 1, 1996.  CoSource is an engineering,
       technical  and  administrative  staffing  company  serving  primarily the
       commercial marketplace. CoSource has annual revenues of approximately $10
       million. The acquisition has been accounted for using the purchase method
       of accounting,  and accordingly,  the purchase price was allocated to the
       acquired  share of the tangible and  identifiable  intangible  assets and
       assumed  liabilities based on their respective fair values.  The purchase
       price  could be  increased  based upon the  achievement  by  CoSource  of
       certain performance objectives over the next three years.

       In  addition,  the  Condensed  Consolidated  Balance  Sheet  includes the
       callbox assets of GTE Cellular  Communications  Corporation,  ("GTE-CCC")
       acquired by Comarco  Wireless  Technologies,  Inc., a  subsidiary  of the
       Company,  in October 1996,  and the Condensed  Consolidated  Statement of
       Income includes GTE-CCC  operations  since October 1, 1996.  GTE-CCC is a
       wireless  communications  company  which  sells and  maintains  emergency
       cellular callboxes for the public and private sectors. GTE-CCC has annual
       revenues of approximately $5 million.  The acquisition has been accounted
       for using  the  purchase  method  of  accounting,  and  accordingly,  the
       purchase  price was  allocated to the acquired  share of the tangible and
       identifiable  intangible  assets and assumed  liabilities  based on their
       respective fair values.  The purchase price could be increased based upon
       certain sales activities over the next three years.

3.     Significant Accounting Policies - Per Share Information

       The outstanding  shares used for earnings per share  calculations for all
       years presented  include the weighted average effect of common shares and
       common  share  equivalents  outstanding  during  the year.  Common  share
       equivalents  include  dilutive stock options  computed using the treasury
       stock method. Convertible subordinated debentures,  which were retired in
       the first quarter of Fiscal Year 1996,  are not  considered  common stock
       equivalents  and are not  considered in the  computation of fully diluted
       earnings per share since the effect would be  antidilutive.  Consolidated
       net income of the Company used for earnings per share purposes is diluted
       as a result of stock options issued by the Company's  subsidiaries  which
       enable their holders to obtain the  subsidiaries'  common stock.  Primary
       earnings per share is calculated as follows:

<TABLE>
                                  ------------ Quarter Ended -------------        --------- Three Quarters Ended --------
                                  October 31, 1996        October 29, 1995        October 31, 1996       October 29, 1995
                                  ----------------        ----------------        ----------------       ----------------
 <S>                                <C>                      <C>                     <C>                     <C>  
 Net income                         $ 1,089,000              $ 1,020,000             $ 3,279,000             $ 2,696,000
 less - net income
   allocated to subsidiary
   dilutive stock options
   outstanding                          (49,000)                 (29,000)               (158,000)                (58,000)
                                    ------------             ------------            ------------            ------------

 Net income used in
   calculation of primary
   income per share                 $ 1,040,000              $   991,000             $ 3,121,000             $ 2,638,000
                                    ===========              ===========             ============            ============

 Weighted average number
   of common shares used in
   calculation of primary
   income per share                   5,132,000                4,977,000               5,121,000               4,957,000
                                    ===========                =========             ============            ============

 Primary income per
   common share                     $       .20              $       .20             $       .61             $       .53
                                    ===========              ===========             ============            ============
</TABLE>
4.     Reclassifications

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

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

              This  quarterly  report  on  Form  10-Q  contains  forward-looking
              statements  within the  meaning of Section  27A of the  Securities
              Exchange  Act of 1933 and Section 21E of the  Securities  Exchange
              Act of 1934.  These are in  paragraphs  9, 10, 11, 15, 17, 18, 20,
              24, 25, 30, 31, 33 and 34 of Management's  Discussion and Analysis
              of Results of Operations and Financial  Condition  (paragraphs are
              numbered  beginning  with the first  paragraph  under  "Results of
              Operations").  A more  complete  discussion  of business  risks is
              included in the Company's  Annual Report on Form 10-K for the year
              ended January 31, 1996.

       (a)    Results of Operations

              The Company operates primarily in two business areas:  wireless
              communications products and outsourced staffing services.

              During the third quarter of Fiscal Year 1997 (year ending  January
              31, 1997),  the Company  recorded total revenues of $18.4 million,
              down .5% from the  revenues of $18.5  million  for the  comparable
              period of the prior  fiscal  year.  Revenues  for the first  three
              quarters of Fiscal  Year 1997 of $50.9  million are down 4.1% from
              $53.1 million for the comparable  period of the prior fiscal year.
              Decreased year-to-year revenues are primarily due to:
                    o substantial completion as of September 30, 1995, of the
                      Company's contract with the Naval Air Warfare Center
                      ("NAWC") at China Lake, California,
              partially offset by:
                    o increased   sales  of  the   Company's   wireless
                      communications   products, and
                    o increased other outsourced staffing services revenue
                      (other than the China Lake contract).

              Revenues from the  operations  acquired from RAL  Consulting  and
              Staffing  Services,  Inc. and GTE Cellular  Communications  Corp.
              (see  footnote  2) were  approximately  $3  million  in the third
              quarter of Fiscal Year 1997.  These  revenues are included in the
              accompanying Condensed Consolidated Statements of Income.

              Total  direct  costs of $11.8  million  for the third  quarter  of
              Fiscal Year 1997 are unchanged from the  comparable  period of the
              prior year.  Direct  costs for the first three  quarters of Fiscal
              Year 1997 of $30.4  million are down $3.2 million,  or 9.5%,  from
              $33.6 million for the comparable  period of the prior fiscal year.
              The  year-to-year  decrease is due to the  completion of the China
              Lake   contract,   offset   by   increased   sales   of   wireless
              communications  products,  as discussed  above.  The  year-to-year
              decrease  in the  amount  of  direct  costs  is  greater  than the
              decrease in revenues since the Company's  wireless  communications
              products  business  requires a smaller  component  of direct costs
              than the outsourced staffing services business.

              Total  indirect  costs of $5.1  million  for the third  quarter of
              Fiscal Year 1997 are down $.1 million,  or 1.9%, from $5.2 million
              for the comparable period of the prior fiscal year. Indirect costs
              for the first three  quarters of Fiscal Year 1997 of $15.7 million
              are up $.1 million,  or .6%, from $15.6 million for the comparable
              period of the prior fiscal year. The slight increase is due to the
              completion of the China Lake contract,  offset by increased  sales
              of wireless communications products, as discussed above.

              Net  interest  income  (interest  income,   less  amortization  of
              offering  costs and  interest  expense)  for the third  quarter of
              Fiscal Year 1997 amounted to $126,000, as compared to $114,000 for
              the  comparable  period of the prior  fiscal  year.  Net  interest
              income for the first three  quarters of Fiscal Year 1997  amounted
              to $426,000,  as compared to $346,000 for the comparable period of
              the prior fiscal year.  The increase in the three  quarter  period
              amount  is  principally  due to the  repurchase  of the  Company's
              convertible    subordinated   debentures   outstanding   and   the
              accelerated   amortization   of  offering  costs  related  to  the
              Company's  purchase  of its  convertible  subordinated  debentures
              during  the first  quarter  of  Fiscal  Year  1996,  as well as an
              increase  in the  amount  of the  Company's  invested  funds.  The
              Company recorded accelerated offering cost amortization of $23,000
              in the first quarter of Fiscal Year 1996, when the Company retired
              the remaining $844,000 of its convertible  subordinated debentures
              on April 15, 1995.

              The Company's  effective tax rate for the first three  quarters of
              Fiscal  Year 1997 is 36% versus an  effective  tax rate of 37% for
              the comparable period of the prior fiscal year.

              The overall  increase in net income from the prior  fiscal year is
              primarily due to the significant increase in the sales of wireless
              communications  products at higher  operating  income margins,  as
              well as increased net interest income.

              Wireless Communications Products

              Wireless  communications  products revenues decreased 2.4% to $4.0
              million  for the  third  quarter  of  Fiscal  Year  1997 from $4.1
              million  for the  comparable  period  of the  prior  fiscal  year.
              Revenues  increased  24.5% to $12.2 million for the three quarters
              ended October 31, 1996 from $9.8 million for the comparable period
              of  the  prior   fiscal   year.   The   nature  of  the   wireless
              communications  products  business is inherently less  predictable
              (than  the  Company's  traditional  outsourced  staffing  services
              business)  as the Company  will  normally  not have a  significant
              amount  of  unfilled  product  orders  at  the  end  of a  period.
              Therefore,  the amount of orders,  sales  levels,  and profits are
              more  difficult to predict and may  fluctuate  significantly  from
              quarter to quarter.

              Sales from  foreign  sources were $.4 million and $4.3 million for
              the third quarter and the three  quarters  ended October 31, 1996,
              respectively. In comparison,  foreign sales for all of Fiscal Year
              1996 were $1.4 million.  The Company is  continuing  its expansion
              into the international  marketplace with planned marketing offices
              in the United Kingdom and Singapore by the first quarter of Fiscal
              Year 1998.

              In addition,  the Company is  continuing  its product  development
              effort,  with the  development  of products  supporting  the CDMA,
              TDMA, NAMPS, ETACS and GSM air interfaces.

              Summary operating results for Comarco Wireless Technologies, Inc.,
              the Company's wireless communications products subsidiary,  are as
              follows:
              <TABLE>
                                            Three Quarters Ended     Three Quarters Ended
                                              October 31, 1996         October 29, 1995
                                              ----------------         ----------------
              <S>                                  <C>                      <C> 
              Revenues                             $12,244,000              $9,820,000
              Cost of product sales                  4,691,000               4,253,000
                                                     ---------               ---------

              Gross income                           7,553,000               5,567,000
              Gross income percentage                    61.7%                   56.7%

              Indirect costs*                        4,370,000               3,161,000
                                                     ---------               ---------

              Operating income                      $3,183,000              $2,406,000
                                                    ==========              ==========
              </TABLE>
              *Indirect  costs  include  selling,  general,  and  administrative
               expenses as well as research and development expenses.

              The Company has made certain reclassifications of expenses to more
              accurately  reflect the  composition  of direct and indirect costs
              related to product sales.

              In the first three  quarters of Fiscal Year 1997, the gross income
              percentage  increased to 61.7% of revenues  from 56.7% of revenues
              for the comparable  period of the prior fiscal year. The increased
              gross  income  percentage  is due to the  incremental  benefit  of
              spreading  the fixed costs of  operations  over a larger  activity
              base.

              The  increase  in  indirect  costs of 38.2%  for the  first  three
              quarters  of Fiscal  Year 1997 over the  comparable  period of the
              prior fiscal year is a result of the increase in revenues, as well
              as an increase in  infrastructure to support  anticipated  growth.
              Selling,  general and administrative expenses increased 64.9% from
              the first  three  quarters  of Fiscal Year 1996 to the first three
              quarters  of  Fiscal  Year  1997,  while  expensed   research  and
              development  decreased  17.7% to  $839,000  from the  first  three
              quarters of Fiscal Year 1996 to the first three quarters of Fiscal
              Year 1997. As part of its product development program, the Company
              is  continuing  its software  product  development  program in its
              wireless  communications  products  business.  In accordance  with
              Financial  Accounting Standard No. 86, Accounting for the Costs of
              Computer Software to be Sold, Leased, or Otherwise  Marketed,  the
              Company  capitalized $1.7 million and $1.0 million,  respectively,
              during the first  three  quarters  of Fiscal  Years 1997 and 1996,
              respectively.  Corresponding  amounts  amortized were $875,000 and
              $925,000,  respectively.  The Company's  future product  prospects
              will depend in part on its ability to enhance the functionality of
              its existing products in a timely and cost-effective manner and to
              identify,  develop, and achieve market acceptance of new products.
              There can be no assurance that the Company will be able to respond
              to technological  advances,  changes in customer requirements,  or
              changes in regulatory requirements or industry standards,  and any
              significant  delays in  development,  introduction  or shipment of
              products, or achievement of acceptable product costs, could have a
              material  adverse  effect  on the  Company's  business,  operating
              results and financial condition.

              Operating  income as a  percentage  of  revenues  is 24.4% for the
              third  quarter  of Fiscal  Year  1997,  compared  to 24.8% for the
              comparable period of the prior fiscal year.  Operating income as a
              percentage  of revenues  is 26.0% for the first three  quarters of
              Fiscal Year 1997,  compared to 24.5% for the comparable  period of
              the prior fiscal year.

              The Company's orders for wireless communications products totalled
              $8.3  million for the third  quarter of Fiscal Year 1997,  up from
              $2.9 million from the comparable prior period. Because of the long
              sales cycle  involved in selling these  products and the high unit
              sales price, the Company believes that orders are best analyzed by
              looking at a twelve  month time  period,  as orders can  fluctuate
              significantly  from  quarter  to  quarter.  For the  twelve  month
              periods  ended October 1996 and 1995,  orders  received were $19.9
              million  and $13.5  million,  respectively.  The value of unfilled
              product orders at October 31, 1996 totalled $5.1 million.  Of this
              amount,  $4.0  million  relates to an order  received to modify an
              installed base of callboxes over an 18 month period.  In addition,
              $10.5 million of contract value was received from the  acquisition
              of the GTE callbox  business (see footnote 2). Deferred revenue of
              $1.5 million has been recorded for anticipated  customer  warranty
              obligations.

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

              Outsourced Staffing Services Revenue

              Revenues  provided by the Company's  outsourced  staffing services
              business area were unchanged from the third quarter of Fiscal Year
              1996 to the third  quarter of Fiscal  Year 1997 at $14.4  million.
              Revenues  from this  business  area  decreased  10.6%,  from $43.3
              million for the first three  quarters of Fiscal Year 1996 to $38.7
              million for the first three quarters of Fiscal Year 1997. Revenues
              in this business area decreased from 81.5% of the Company's  total
              revenues in the first three  quarters of Fiscal Year 1996 to 76.0%
              of the  Company's  total  revenues in the first three  quarters of
              Fiscal Year 1997. These decreases are due to the completion of the
              Company's  contract  with the  Naval Air  Warfare  Center at China
              Lake,  California,  on September 30, 1995. The China Lake contract
              accounted for  approximately  15% of the Company's total operating
              income and approximately 14% of the Company's total revenue in the
              first  three  quarters  of  Fiscal  Year  1996.  The  loss of this
              contract required the Company to reduce the indirect  organization
              supporting  this  business in line with the reduced  revenue base.
              Revenues derived from CoSource Solutions,  Inc., the Company's new
              staffing  subsidiary  (see  footnote  2), in the third  quarter of
              Fiscal  Year 1997  were  $2.6  million.  The  Company's  remaining
              services  revenue  increased  3% in the first  three  quarters  of
              Fiscal Year 1997 over the  comparable  period of the prior  fiscal
              year.

              Sales  to the  U.S.  Government  as  well as to  government  prime
              contractors were 53% and 42% of the Company's total revenue during
              the  first  three   quarters  of  Fiscal   Years  1996  and  1997,
              respectively.  In  the  course  of  the  Company's  business,  its
              government  contracts are periodically opened for competition.  In
              the  current  fiscal  year,  the  Company  has  won  two  contract
              recompetition   efforts  to  continue  its  support  to  the  U.S.
              Government  at Fort Hood,  Texas and Ft.  Huachuca,  Arizona.  The
              Company's next significant  contract completion is scheduled to be
              in March 1998. The Company plans to  aggressively  compete for all
              work opened for competition to the extent possible and selectively
              pursue certain high value Government procurements. There can be no
              assurance  that the Company  will be selected and awarded the work
              associated with any outstanding proposals. In addition, government
              agencies  may  terminate  their  contracts  in whole or in part at
              their   convenience.   Government   agencies  may  remove  funding
              previously provided or may not exercise option periods. Therefore,
              there  can be no  assurance  that  the  Government  will  fund the
              portions  of existing  contracts  that are  unfunded,  or that the
              Governmental agencies will exercise any options.

              Operating income (revenues less direct costs,  indirect costs, and
              depreciation and amortization) for outsourced staffing services is
              up 42.3% from $390,000 in the third quarter of Fiscal Year 1996 to
              $555,000  in the third  quarter  of Fiscal  Year  1997.  Operating
              income  for  outsourced   staffing   services  is  down  .9%  from
              $1,527,000  in the first  three  quarters  of Fiscal  Year 1996 to
              $1,514,000  in the first three  quarters of Fiscal Year 1997.  The
              increased  operating  income for the third  quarter of Fiscal Year
              1996  to  the  third  quarter  of  Fiscal  Year  1997  is due to a
              reduction  in  the  operating  loss  for  the  Company's  software
              products  line,  combined with the operating  income  generated by
              CoSource  Solutions,  Inc., offset by the impact of the completion
              of the China Lake contract.

              New Accounting Standards

              In March 1995,  the Financial  Accounting  Standards  Board issued
              Statement of Financial  Accounting  Standards No. 121,  Accounting
              for the Impairment of Long-Lived  Assets and for Long-Lived Assets
              to be Disposed of ("Statement  121").  Statement 121 requires that
              the Company review its long-lived  assets for impairment  whenever
              events or  circumstances  indicate that the carrying  amount of an
              asset  may not be  recoverable.  To the  extent  that  the  future
              undiscounted net cash flows expected to be generated from an asset
              are less than the carrying amount of the asset, an impairment loss
              is recognized based on the difference between the asset's carrying
              amount and its fair market value.  The Company  adopted  Statement
              121 as of February 1, 1996.  The adoption of Statement 121 did not
              have a material  impact on the  Company's  financial  condition or
              results  of  operations.   The  Company  continually  reviews  its
              long-lived assets for purposes of compliance with Statement 121.

              In October 1995, the Financial  Accounting  Standards Board issued
              Statement of Financial  Accounting  Standards No. 123,  Accounting
              for  Stock-based  Compensation  ("Statement  123").  Statement 123
              recommends,  but does not  require,  the  adoption of a fair value
              based  method  of  accounting  for  stock-based   compensation  of
              employees,  including common stock options. Statement 123 requires
              a  fair  value  based  method  of   accounting   for   stock-based
              compensation  to  individuals  other than  employees.  The Company
              currently intends to continue recording  stock-based  compensation
              to employees  under the intrinsic value method and does not intend
              to adopt the fair value based method of accounting for stock-based
              compensation  to employees as permitted by Statement 123.  Certain
              pro forma disclosures will be required in the Company's  financial
              statements  for the year  ending  January  31, 1997 as if the fair
              value based method had been adopted.

       (b)    Financial Condition

              The  Company  signed  a  loan  agreement  with  a  bank  effective
              September 26, 1994,  which was amended  effective  August 1, 1996.
              The loan agreement  consists of (1) an $8 million revolving credit
              facility,  which  expires  June  30,  1998,  and (2) a $5  million
              guidance  line  of  credit,  which  expires  June  30,  1997.  The
              revolving  credit  facility  and the  guidance  line of credit are
              unsecured  provided that the Company maintains certain  covenants.
              Currently,  management anticipates that cash flow will remain at a
              level which will enable the Company to avoid  utilizing the credit
              facility  except to  support  letters  of credit  and  acquisition
              financing,   and  that  the  Company  will  be  able  to  purchase
              investments on a regular basis.  The Company's cash and investment
              balances  averaged $15 million  (includes  highly liquid long-term
              investments  with  maturities of 12 to 36 months) during the first
              two quarters of Fiscal Year 1997 and $13 million  during the third
              quarter of Fiscal Year 1997. The decrease during the third quarter
              was due to the cost of financing the  acquisitions  which occurred
              during  the  quarter  (see  footnote  2).  Maintaining  such  cash
              balances is  predicated  on the Company  maintaining  its business
              base  and is  subject  to the  cost of  financing  new  contracts,
              acquisitions, and software product development costs.

              During  the third  quarter  of Fiscal  Year  1997,  the  Company's
              average  days'  sales in accounts  receivable  have  increased  to
              approximately 59 days. This increase is due to accounts receivable
              recorded as a result of the  acquisitions  in the quarter,  and in
              addition, due to the international sales of the Company's wireless
              communications  products.  The Company's experience has shown that
              international  sales  require  a  longer  collections  cycle  than
              domestic sales.  The Company  anticipates that average days' sales
              will  decrease  during the fourth  quarter,  however,  a return to
              historical  levels  of 45 to 50 days  will be  dependent  upon the
              Company's international sales activity.

              Several additional key factors indicating the Company's  financial
              condition include:
             
                                            October 31, 1996    January 31, 1996
                                            ----------------    ----------------
 
              Current ratio                             2.85                3.09
              Working capital                    $17,346,000         $16,049,000
              Book value per share                     $5.32               $4.62

              The Company continues to demonstrate  overall  improvements in the
              above financial  factors during the first three quarters of Fiscal
              Year 1997,  primarily  due to  increased  operating  margins  from
              increased sales of wireless communications products.

              The Company  completed the asset acquisition of RAL Consulting and
              Staffing  Services,  Inc. ("RAL"),  an engineering,  technical and
              administrative  staffing company serving  primarily the commercial
              marketplace,  on  August  1,  1996.  The  terms  of  the  purchase
              agreement  required the Company to make an initial payment of $1.2
              million to RAL at closing,  and provide  for  additional  payments
              subject to the business attaining certain profitability objectives
              over the next three years.  The  activity for CoSource  Solutions,
              Inc., the newly-formed,  wholly-owned  subsidiary of COMARCO, Inc.
              which purchased RAL's assets, is consolidated with the rest of the
              Company's operations as of August 1, 1996.

              The Company also  completed the asset  acquisition of GTE Cellular
              Communications  Corporation ("GTE-CCC"),  the callbox operation of
              GTE, during the third quarter of Fiscal Year 1997, effective as of
              October 1, 1996. The terms of the GTE-CCC  agreement  required the
              Company  to make an  initial  payment  of $1.1  million  to GTE at
              closing,  and provide  for  additional  payments  based on certain
              sales activities over the ensuing two years. The activity for this
              acquisition  is  consolidated  with  the  rest  of  the  Company's
              operations as of October 1, 1996.

              The two above stated  acquisitions  were funded from the Company's
              internal working capital and did not have a significant  impact on
              the  Company's  financial   condition.   Any  contingent  payments
              provided in the acquisition  agreements are also anticipated to be
              funded from the Company's  working  capital,  with no  significant
              impact on the Company's financial condition.

              The Company has a significant  commitment for capital expenditures
              at October 31, 1996 for Comarco  Wireless  Technologies,  Inc. The
              Company  has  developed  and  intends to  continue  to develop new
              product line extensions for the wireless communications  industry.
              This product development program is expected to be funded from the
              Company's current working capital.  Under the software development
              portion of the Company's product development  program, the Company
              capitalized and amortized in accordance with Financial  Accounting
              Standard No. 86,  Accounting for the Costs of Computer Software to
              be Sold, Leased, or Otherwise Marketed, $1.7 million and $875,000,
              respectively, in the first three quarters of Fiscal Year 1997.

              The  Company's   Board  of  Directors   has   authorized  a  stock
              re-purchase  program of up to 1,000,000  shares. As of October 31,
              1996,  the Company  has  re-purchased  and  retired  approximately
              803,000  shares,  which includes 6,000 shares  re-purchased in the
              first three  quarters of Fiscal Year 1997.  The average price paid
              per share re-purchased under the program was $4.82.

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

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

<PAGE>
                          PART II - OTHER INFORMATION

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

       (a)    Exhibits

              The following exhibits are included herewith:

              ll.          Schedule of Computation of Net Income Per Share

       (b)    Reports on Form 8-K

              None.


<PAGE>


                                    SIGNATURE



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                 COMARCO, Inc.
                                ------------------------------------------------
                                                  (Registrant)




December 12, 1996




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