COMARCO INC, 10-K, 2000-04-28

COMARCO INC
10-K, 2000-04-28
ENGINEERING SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K

[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 ---- For the fiscal year ended January 31, 2000 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.)

2 Cromwell
Irvine, California 92618
(Address of principal executive office) (Zip Code)

(949) 599-7400
(Registrant's telephone number, including area
code) Securities registered pursuant to Section
12(b) of the Act:
none

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)

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

Yes X No
---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

Common stock outstanding at March 31, 2000 - 4,373,712
shares.
Aggregate market value of
Class shares held by non-affiliates

Common Stock................................. $43,331,380

The total number of shares held by non-affiliates on March 31, 2000 was
1,269,598. This number was multiplied by $34.13 per share (the closing sale
price of the Common Stock on March 31, 2000 in the NASDAQ National Market
System, as reported by NASDAQ) to determine the aggregate market value of
non-affiliate shares set forth above. (The assumption is made, solely for
purposes of the above computation, that all Officers, Directors and holders of
more than 5% of the outstanding Common Stock of registrant are affiliates.)

DOCUMENTS INCORPORATED BY REFERENCE

The Company intends to file with the Securities and Exchange Commission by
May 30, 2000 a definitive Proxy Statement (the "2000 Proxy Statement") relating
to its 2000 Annual Meeting of Stockholders, which meeting involves the election
of directors and certain related matters. The 2000 Proxy Statement is
incorporated by reference in Part III of this Form 10-K and shall be deemed to
be a part hereof.

CROSS REFERENCE SHEET

The following table indicates the headings in the 2000 Proxy Statement
under which the information required in Part III of this Form 10-K may be found.
<TABLE>

Form
10-K
Item No.
Item in Form 10-K Item in 2000 Proxy Statement
----------------- ----------------------------
<S> <C>
10. "Directors and Executive Officers of the Registrant".............. "Election of Directors and Officers"
11. "Executive Compensation".......................................... "Executive Compensation"
12. "Security Ownership of Certain Beneficial Owners
and Management"............................................... "Ownership of Securities"
13. "Certain Relationships and Related Transactions".................. "Executive Compensation"

</TABLE>

Copies of all documents incorporated by reference other than exhibits to
such documents will be provided without charge to each person who receives a
copy of this Annual Report on Form 10-K upon written request.

<PAGE>

PART I

Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, that involve risks and uncertainties. The
actual results that the Company achieves may differ materially from any
forward-looking projections due to such risks and uncertainties. Factors which
could cause a material difference in results include, but are not limited to,
the following: regional and national economic conditions; changes in interest
rates; changes in government spending policies and/or decisions concerning
specific programs; individual business decisions of customers and business
partners; developments in technology; new and expanding product lines;
competition for employee resources; competitive factors and pricing pressures;
the Company's ability to achieve the objectives of its business plans, including
the disposal of its discontinued businesses; and changes in government laws or
regulations. Words such as "believes," "anticipates," "expects," "future,"
"intends," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.

ITEM 1. Business

COMARCO, Inc. and its subsidiaries (the "Company", "COMARCO", or the
"registrant") is a California corporation whose common stock has been publicly
traded since 1971 when it was spun-off from Genge Industries, Inc. Active
subsidiaries of the parent company include: Comarco Wireless Technologies, Inc.
("Comarco Wireless"), which was formed in January 1994 to further develop the
Company's wireless communications products business; Manufacturing Technology
Training Center, Inc. (MTTC), which was formed in January 1996 to further
develop the Company's technology training business; Comarco Wireless
International, Inc. (formerly known as Comarco Wireless Europe, Inc.), a
wholly-owned subsidiary of Comarco Wireless Technologies, Inc., which was formed
in April 1996 to market and provide post-contract customer support for the
Company's wireless communications products to international customers; Comarco
Staffing, Inc. (formerly known as CoSource Solutions, Inc.), which was formed in
August 1996 to acquire the assets of a commercial outsourced staffing services
company; Comarco Systems, Inc., which was formed in January 1997 to further
develop the Company's information technology and staffing services business; and
Comarco Services, Inc., which was formed in January 1999 to further develop the
Company's airport management services and staffing business. In July 1999, the
Company announced that it was embarking on a plan to strengthen the Company's
focus on the wireless communications products and services business area. This
plan, which was formalized at the end of the quarter ended October 31, 1999,
involves selling the Company's information technology and staffing services
product lines. Therefore, this segment is presented as discontinued operations
and prior periods have been restated. Subsequent to fiscal year end and as of
April 24, 2000, the Company has closed three out of six currently planned
divestiture transactions. The aggregate consideration received to date is $3.5
million. The remaining transactions are in varying stages of completion. The
Company does not expect to realize a loss on the sale of the discontinued
segment, however at this time, management cannot determine the amount of gain
that may result from the sale. At the conclusion of the divestiture process, the
Company will consist of the parent company, Comarco Wireless, and its
wholly-owned subsidiary, Comarco Wireless International, Inc. The Company is
operating in one business segment, wireless communications products and
services.

BUSINESS AREAS

The business and major customer information provided in the Company's
Consolidated Financial Statements contained in this report are incorporated
herein by reference. In particular, see Notes 1 and 19 of the Notes to
Consolidated Financial Statements and Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition.

o Continuing Operations

The Company's continuing operations consist of one business segment, wireless
communications products and services. The Company provides test and measurement
products and services for wireless telephone carriers, systems for the wireless
transmission of voice and data, and advanced technology products for portable
wireless appliances such as notebook computers, cellular telephones and personal
organizers. During the past six years, the Company, through its subsidiary,
Comarco Wireless, has invested more of its corporate resources in expanding this
wireless communication business area. The Company is accelerating this
investment in the wireless segment by divesting its legacy business area,
information technology and staffing services, and concentrating exclusively in
the wireless communications business area.

Summarized financial information for the Company's continuing operations for the
years ended January 31, 2000, 1999, and 1998 is as follows:
<TABLE>

Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Revenues.................... $ 39,224 $ 34,004 $ 29,524
Operating income............ 5,419 5,956 5,943
Identifiable assets......... 36,787 32,129 31,858
</TABLE>

o Wireless Communications Products and Services

The Company's wireless communications products and services are in
the marketplace which today involves the convergence of wireless voice
and data, broadband and the Internet. Wireless telecommunication
networks use a variety of radio frequencies to transmit voice and
data. Wireles telecommunication networks include two-way radio
applications, such as trunking radio; multiple access technologies
such as cellular, PCS and iDEN networks; and messaging applications,
such as paging services. Although cellular, PCS and iDEN represent the
largest segment of the wireless communications industry, other wireless
technologies are expected to grow significantly. These technologies
all require radio frequency engineering expertise for design and
optimization. The Company's wireless communications products and
services business, sold through its subsidiary, Comarco Wireless,
is presently comprised of five product families: wireless test and
measurement; benchmarking and engineering information services;
wireless revenue assurance information; wireless vertical applications
and terminals; and mobile power products.

o The wireless test and measurement marketplace is covered by the LT
product family used to monitor network performance, the X-series family
used to solve complex engineering problems, and the BaseLINE(TM) family
used to collect quality of service information. These products provide
a method for monitoring, analyzing, and benchmarking the performance of
wireless system networks. These products currently or in the future
will address all major cellular technologies including CDMA, TDMA, GSM,
iDEN and data.

o The Company has also developed and deployed a large scale mobile
testing network and is now providing this service nationally. This
testing is aimed at the collection and analysis of information related
to the quality of service as experienced by wireless phone users, which
is critical to wireless service providers, infrastructure vendors and
other wireless industry participants.

o The wireless revenue assurance information marketplace is covered by
RAP(TM) Central which automates data collection, analysis, and delivery
of revenue assurance information for wireless service providers. This
system improves revenue capture by assisting carriers in billing for
every minute of use.

o The wireless vertical applications and terminals marketplace is covered
by a number of callbox products that provide emergency service over
wire-line and wireless backbones. In addition to providing the callbox
product, Comarco Wireless also provides project installation and
long-term maintenance services. In October 1996, the Company purchased
certain callbox product line assets from GTE. The installed base
purchased from GTE consists of over 14,000 units, of which approximate-
ly 11,000 are being serviced by the Company under long-term maintenance
contracts. In addition, in February 1997, the Company acquired certain
assets of the Cubic Communications, Inc. callbox product line. The
installed base purchased from Cubic Communications consists of
approximately 5,200 units. Management believes that the combination
of these two acquired product lines establishes the Company as a major
vendor to this niche of the wireless vertical applications and
terminals products marketplace.

o The mobile power products marketplace was addressed during the year
with the Company's introduction of a 35-watt universal power adapter
for cellular phones, laptop computers, personal assistants and other
portable devices. Development continues on a 70-watt universal power
adapter which will meet the power needs of the Pentium III and
equivalent chipsets currently available in high-end portable computers.
The 70-watt unit, with just a change in the Company's patented tips,
will be able to charge virtually all cellular telephones, laptop
computers, personal assistants and other portable devices.

The Company expects a rapid proliferation of portable and stationary computing
and communications systems and appliances that are connected by wireless
communication networks to the public internet, private intranets, private local
area networks, servers and other terminal devices. The Company currently
provides the above-stated products and services for these markets, and the
Company is developing strategies and plans to provide additional products and
services to end-users and network operators. Based on its current strategy, the
Company forecasts that a growing percentage of its revenues and profit will come
from services in the future.

Continuing operations' Fiscal Year 2000 revenues totaled $39.2 million,
representing an increase of 15% over the prior fiscal year. Operating income for
Fiscal Year 2000 totaled $5.4 million compared with $6.0 million a year ago.
Reduced year-to-year operating income was affected by a major product transition
to the new X-series wireless test and measurement platform and increased
engineering expenditures to build engineering and operations infrastructure
needed to support expected growth in the Company's wireless test and measurement
products and services and next generation ChargeSource(TM) power adapter product
line. The first of the X-series product family shipped in March 2000 (CDMA) and
will eventually support all multiple access technologies: CDMA, IS-136, GSM, and
iDEN. Continued growth in Comarco Wireless revenues and income is predicated on
a number of factors, including the continued success of the Company's product
development efforts, continued geographical expansion to international markets,
continued growth and increased availability of cellular and other wireless
communications services, including PCS, in the United States and
internationally, and continued acceptance of the Company's products by its
customers, none of which can be assured.

International revenues in Fiscal Year 2000 totaled $3.9 million, down from $5.6
million in the prior fiscal year. International revenues in Fiscal Year 1998
totaled $8.9 million. Year-to-year decreased international revenues are due to
lower activity in Asia due to the general economic conditions and lower activity
in Europe. The majority of these sales have been made to Europe, Asia-Pacific
and Latin America. The Company expects that international revenues will continue
to be a key area of growth, although the activity may continue to be weak in the
near term. Marketing and post-contract customer support offices are staffed in
Singapore, England, and Mexico.

PRODUCT DEVELOPMENT

The Company continues its product development program in its wireless
communications business. The Company's core technologies are currently in three
areas: wireless network design (antenna systems, RF propagation, coverage
analysis, base station radio, network dynamics, optimization, switch operations,
billing systems); wireless appliances interfaces (cellular telephones, fixed
cellular terminals, personal digital assistants, laptop computers); and wireless
product design technologies (digital signal processing, RF scanning receivers,
CDMA, IS-136, GSM, iDEN, power conversion). Because a common thread of
technology runs through all of its product lines, the Company believes that it
can leverage its investment and maintain the focus and concentration of its
technical and marketing resources, although there can be no assurance in that
regard. The Company in general has been developing and plans to continue
developing products that will be compatible with all wireless communications air
interfaces worldwide. New product introductions this year included adding other
air interfaces to the Company's line of wireless test and measurement and
RAP(TM) Central products including CDMA, GSM, PC 1800/1900, IS-136 and iDEN;
further expansion of the Company's LT line and the BaseLINE(TM) range of
products which represent state of the art technology in comparative network
analysis. The BaseLINE(TM) product also includes Comarco Wireless' innovative
Q-MOS(TM) technology, which permits wireless carriers to assess the audio
quality of their networks and compare it directly with that offered by competing
carriers. The Company's wireless product life cycle is estimated to be two to
five years, depending on the product.

The Company is also continuing its development of a second-generation power
adapter for laptop computers, cellular telephones and other mobile power
products. The objective of this product is to be smaller, lighter and more
versatile than existing products on the market and is based on the Company's
patented power conversion technology. The Company commenced sales of the first
version of this product in late Fiscal Year 1999, with a more powerful 70-watt
version currently under development. Potential customers are replacement market
buyers and original equipment manufacturers. The Company's initial product was
focused on replacement market buyers. The power requirements of laptop computers
are increasing due to the introduction of more powerful microprocessors and more
advanced battery technologies. This requires the Company to continue its product
development program to increase the power capacity of its power adapter
products. The Company recently received preliminary approval of the power
adapter from UL and is proceeding aggressively toward a 70-watt product
introduction within a few months. Introduction of this next generation product
expands the available market coverage to include essentially all IBM, Toshiba,
Compaq, Dell, Apple and other popular portable computers as well as all leading
cell phones, Palm and handheld computers, and portable printers. There can be no
assurance that the higher power adapter product will be successful. The Company
is aware that the power supply market is extremely competitive. If the Company
is successful, the production, marketing, and sale of this product will require
a significant amount of working capital for the financing of inventory and
accounts receivable arising from sales of the product.

The Company plans to continue to invest substantially in product development
efforts. Its products are characterized by rapidly changing technologies,
evolving standards, and continuous improvements in products and services. The
Company's future 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 that address
new technologies and standards and meet customer needs in the wireless
communications marketplace. 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.

As part of its product development program, the Company is continuing its
software product development program in its wireless communications business.
During Fiscal Year 2000 and Fiscal Year 1999, the Company's wireless
communications business capitalized approximately $3.6 million and $2.9 million
of software product development costs, respectively, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Of the
amounts capitalized, $1.9 million, $1.9 million, and $1.4 million, respectively,
were amortized in Fiscal Years 2000, 1999 and 1998 against product sales in
accordance with SFAS 86.

In addition, during Fiscal Years 2000, 1999, and 1998, Comarco Wireless had
expenditures of $0.6 million, $0.8 million and $1.2 million, respectively, for
research and development expenses (including Company-sponsored software
development costs prior to determination of technological feasibility), for
product design and development expenses, as well as design expenses associated
with component replacements, reducing the cost, and improving the
manufacturability of existing products. The reduced Fiscal Year 1999 and 2000
research and development expenses are due to the transition of the universal
power adapter development to initial production and market trial shipments
during the year.

Although the Company performs extensive testing of its software prior to
releasing its products, such products may contain undetected errors or bugs when
first released. These may not be discovered until the product has been used by
customers in different application environments. Failure to discover product
deficiencies or bugs could delay product introductions, require design
modifications to previously shipped products, and negatively impact shipments,
any of which could result in a material adverse effect on the Company's
business.

BACKLOG

The Company's orders for wireless communications products and services totaled
$43.3 million for Fiscal Year 2000, compared with $33.5 million for Fiscal Year
1999. Unfilled orders at Comarco Wireless as of January 31, 2000 are
approximately $21.2 million, compared to $17.2 million as of January 31, 1999.
The current year balance includes $2.8 million of product and service orders for
the wireless test and measurement, revenue assurance information, and mobile
power product lines, and $2.8 million of deferred revenue for basic and extended
warranty commitments. Since the rollout of the Company's large-scale mobile
testing network, two national wireless providers have contracted with the
Company for quality of service information services. The Company is in
discussions with several additional potential customers and expects continued
growth for its wireless test and measurement services. Management believes that
substantially all of the products and services backlog amount (of $5.6 million)
will result in revenue during Fiscal Year 2001. In general, most of the
Company's product orders are filled within months from receipt of the order. The
remaining unfilled orders of $15.6 million are related to the wireless vertical
applications and terminals product line. This backlog balance consists of $0.9
million of new product orders and $14.7 million of long-term maintenance
agreements. The Company is well into the process of negotiating new multi-year
agreements for the maintenance and operation of the California installed base.
The first two contracts, worth approximately $11 million, were negotiated and
are part of the year-end backlog in Fiscal Year 2000. Additionally, since the
end of Fiscal Year 2000, the Company has signed an upgrade contract and new
maintenance and operation agreements with Orange County, California that
together are valued at approximately $2.9 million. In this wireless vertical
applications and terminals area, the Company also continues to invest heavily in
a number of large opportunities such as the Pennsylvania Turnpike Authority, and
the states of Texas, Louisiana, Florida, Georgia, Nevada, Utah and Colorado.

Two customers each accounted for 12% of total revenues, and one additional
customer accounted for 10% of revenues in Fiscal Year 2000. Two of these
customers' revenues were higher in Fiscal Year 2000 due to one-time major
upgrade contracts for the Los Angeles County and the San Francisco Bay areas. No
one customer accounted for more than 10% of revenues in Fiscal Years 1999 and
1998.

SEASONALITY/FLUCTUATION IN QUARTERLY RESULTS

Comarco Wireless has experienced, in each of the past six years, a seasonal
fluctuation in wireless communications products activity, with greater sales in
the latter half of its fiscal year and lesser amounts in the first half of its
fiscal year, although this trend has been declining over the same six years.
This fluctuation may or may not continue due to a number of factors, including:
the timing, cancellation, or delay of customer orders; the timing of new product
introductions by the Company or its competitors; the deployment schedule of
wireless network operators in both North American and international markets,
which can be delayed by both economic and political issues; the size of
customers' capital budgets, which are the traditional source of customer funding
for the purchase of the Company's products; market acceptance of the Company and
its customers' products; variations in manufacturing capacities, efficiencies
and costs; the availability and cost of components; capacity and production
constraints associated with single source component suppliers; and other
competitive factors. Historically, the Company has often recognized a
substantial portion of its revenues in the last month of any given quarter.
Because the Company's operating expenses are based on anticipated revenue levels
and because a high percentage of the Company's expenses are relatively fixed, a
small variation in the timing of the recognition of revenues could cause
significant variations in operating results from quarter to quarter. Therefore,
the nature of the wireless communications products business is inherently
unpredictable; sales and profits may fluctuate significantly from quarter to
quarter; and therefore, period-to-period comparisons of its operating results
are not necessarily meaningful and such comparisons cannot be relied upon as
indicators of future performance.

MARKETING, SALES DISTRIBUTION, FOREIGN SALES

Comarco Wireless maintains its own internal sales force for the marketing and
sales of the Company's product offerings in the United States. In addition, the
Company has opened and staffed direct sales and customer support offices in
Singapore, England, and Mexico to service Asia-Pacific, Europe, and Latin
America, respectively. The international offices manage a network of agents and
distributors for the coordination of sales activity outside of the United
States. This expansion overseas faces a number of inherent barriers, including:
the need for export licenses; tariffs and other potential trade restrictions;
changes in laws governing the imposition of duties, quotas, taxes, or other
charges relating to the import or export of its products; political and economic
instability; the difficulty of administering business globally; longer accounts
receivable cycles; and currency exchange fluctuations. The Company currently has
limited experience in penetrating the foreign marketplace and, therefore,
companies having a presence or already doing business overseas may have a
competitive advantage over the Company. There can be no assurance that the
Company's international sales efforts will be successful.

The Company currently sells to its major customers under purchase orders that
are usually placed with short-term delivery requirements. Therefore, the Company
maintains significant inventory levels and associated production and technical
staff in order to respond to the short-term delivery requirements. If the
customer orders, as forecasted, do not materialize or are delayed, the Company
will have higher levels of inventory than otherwise needed, increasing the risk
of obsolescence. The higher levels of inventory and production and technical
staffing would also reduce the Company's liquidity and profitability.

The Company's target marketplace for ChargeSource(TM), its patented universal AC
power adapter and recharger, includes: direct to original equipment
manufacturers; distribution to retail and corporate customers; and E-commerce,
direct to customers. Distribution to retail and corporate customers is handled
through an agreement with Targus International using traditional purchase
orders. To reach the business traveler, the Company recently began a direct
marketing campaign through its website, ChargeSource.com, and print ads.

The Company's standard terms require foreign customers to pay for the Company's
products with U.S. dollars. As such, a strengthening of the U.S. dollar as
compared to a foreign customer's local currency effectively increases the cost
of the Company's products for that customer, thereby making the Company's
products less attractive to that customer. For those orders denominated in
foreign currencies, the Company may limit its exposure to losses from foreign
currency transactions by the purchase of forward foreign exchange contracts.
Such activity to date has been insignificant. There can be no assurance that a
currency hedging strategy will be successful in avoiding exchange-related losses
in the future.

Significant weakness in foreign currency exchange rates can also create economic
uncertainty, including weakness in banking systems and equity markets. Such
weaknesses can impact customers' demand for the Company's products and their
ability to pay for the Company's products with U.S. dollars. Therefore, any
significant change in a foreign country's exchange rates, economy, or a
deterioration of U.S. trade relations or the economies or political stability of
foreign locations in which the Company sells its products could have a material
adverse effect on the Company's business, operating results, and financial
condition.

The Company has received its ISO 9002 certification, a uniform worldwide
quality-control standard, on its headquarters and manufacturing facility located
in Irvine, California. Customers and potential customers throughout the world,
particularly in Europe, may require that their suppliers be ISO certified. In
addition, some customers may require that their suppliers purchase components
only from subcontractors that are ISO certified. Therefore, the Company's
current status removes a potential barrier to its ability to successfully
compete in the international marketplace.

SERVICE AND WARRANTY

The Company's warranties vary by product type and typically cover defects in
materials and workmanship. Warranty obligations and other maintenance services
for the Company's products are primarily performed by the Company at its
facilities in California. The Company currently has service employees located in
Singapore, England, and Mexico to service their respective geographical regions.

CAPITAL REQUIREMENTS

Comarco Wireless' working capital needs primarily consist of the cost of the
upfront product development effort required to expand the Company's product
offerings, inventory requirements (including long lead time materials), and the
financing of accounts receivable, which will generally become longer upon the
Company's continued planned geographical expansion into Europe, Asia-Pacific and
Latin America. Certain components used by the Company in its existing products
are only available from single sources, and certain other components are
presently available or acquired only from a limited number of suppliers. The
radio interface devices designed into the Company's products are key purchased
components whose lack of availability could have a material adverse impact on
sales and profits. In the event that any of its single-source suppliers are
unable to fulfill Company requirements or discontinue the manufacture of a key
component, the Company would be required to purchase a comparable component from
other sources and modify its products to function properly with the replacement
component or redesign its products to use other components, either of which
could result in delays in production and delivery. Working capital requirements
are expected to be financed from operations and the financial resources of the
Company.

Comarco Wireless also operates from a single-site manufacturing operation. Any
material disruption in the manufacturing operations of Comarco Wireless, whether
due to fire, natural disasters, or otherwise, will have a material adverse
effect on the Company's business, operating results, and financial condition.

TECHNICAL REQUIREMENTS

Comarco Wireless is selling its products into a market that is growing rapidly
and subject to technological obsolescence. Market timing of product
introductions is critical for success. In the development of new or expanded
product offerings, the Company's access to the technical design of air interface
devices is essential for the Company to anticipate and develop compatible
wireless communications products. The inability to obtain the technical designs
on a timely basis will have a direct impact on product design and schedule and
could have a material adverse effect on the Company's business, operating
results, and financial condition.

EMPLOYEES

As of April 1, 2000, Comarco Wireless employed approximately 190 employees. The
Company believes its employee relations to be good. The majority of the
Company's employees are professional or technical personnel having training and
experience in engineering, computer science, and management. The Company's
future success depends in large part on the continued service of its key
technical, marketing, and management personnel, and on its ability to continue
to attract and retain qualified employees, particularly those highly skilled
design, process, and test engineers involved in the development of new products.
The competition for such personnel is intense, and the loss of key employees as
well as the failure to recruit and train additional technical personnel in a
timely manner could have a material adverse effect on the Company's business,
operating results, and financial condition.

The Company's success depends to a significant extent upon the contribution of
its executive officers and other key employees. No executive officer or key
employees have employment agreements. Recognizing this reality, the Company has
instituted a non-qualified stock option plan for key Comarco Wireless employees,
whereby they will directly participate in the success of Comarco Wireless (see
Note 13 of the Notes to Consolidated Financial Statements). The Company obtains
its employees through a variety of means including advertisements, technical job
fairs, engineering recruiters, and engineering temporary staffing firms.

COMPETITION

Comarco Wireless competes in niches of the wireless communications marketplace:
wireless test and measurement products and services; wireless revenue assurance
information products and services; wireless vertical applications and terminals;
and mobile power products. The business is competitive and there are other
companies, many of which are larger and have greater financial resources, which
provide or could provide the same type of products. Competitors include:
wireless test and measurement products and services (Ericsson, Allen Telecom,
Ascom, Agilent, Tektronix, LCC International, WFI, Decide.Com, Metapath Systems
International); wireless revenue assurance information products and services,
(Metapath Systems International, PWC, Andersen Consulting, TTC); wireless
vertical applications and terminals, (Alcatel, Siemens, Telefonica de Espana,
Gaitronics); and mobile power products (Motorola, Ericsson, Nokia, Aztec,
Delta). 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 domestic and international 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. While the Company believes that the price/performance
characteristics of its products and services are competitive, reduction in the
price of the Company's products or services without corresponding decreases in
manufacturing costs and operating costs would negatively affect operating
margins, which could in turn have a material adverse effect on the Company's
business. The Company also derives a significant portion of its revenues from
sales of product upgrades to its installed base. Increased competition for the
Company's products that results in lower product sales could also adversely
impact the Company's upgrade sales. The Company believes there are companies
that provide or have the ability to provide the products the Company is planning
for overseas users. Also, companies having a presence or already doing business
overseas may have an advantage in penetrating those markets. There can be no
assurance that the Company will be able to compete successfully in the future,
either domestically or internationally.

PROPRIETARY INFORMATION

The Company has three patents for its small power adapter for laptop computers
and cellular telephones, and patents covering its emergency roadside callbox
product. However, the Company currently relies primarily on a combination of
trade secrets, copyrights, and contractual rights to protect its intellectual
property in the wireless communications products area. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
or impede third-party development 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. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
operating results, and financial condition.

STOCK MARKET FLUCTUATION

In recent years, the stock market in general and the market for technology
stocks in particular, including the Company's common stock, have experienced
extreme price fluctuations. The market price of the Company's common stock may
be significantly affected by various factors such as quarterly variations in the
Company's operating results, changes in revenue growth rates for the Company as
a whole or for specific geographic areas or products, changes in earnings
estimates, the announcements of new products, product enhancements or services
by the Company or its competitors, speculation in the press or analyst
community, and general market conditions or market conditions specific to
particular industries. There can be no assurance that the market price of the
Company's common stock will not experience significant fluctuations in the
future.

o Discontinued Operations

o Information Technologies
o Intelligent Instrumentation and Automated Test Systems
o Ordnance and Weapon Systems Engineering Services
o Airport Management Services
o Commercial Staffing Services
o Manufacturing Training

As of April 24, 2000, the Company has closed three out of six currently planned
divestiture transactions. The aggregate consideration received to date is $3.5
million. The remaining transactions are in varying stages of completion. The
Company does not expect to realize a loss on the sale of the discontinued
segment, however at this time, management cannot determine the amount of gain
that may result from the sale.

During Fiscal Year 2000, discontinued operations' revenues were $51.7 million
with a net after tax loss of $433,000. The net after tax loss is due to the
recording of a final pre-tax $1.3 million loss to terminate two fixed price
contracts with a single government agency and an additional pre-tax loss of $1.4
million related to a change in management's estimate to complete a multi-year
fixed price contract after completion of protracted negotiations with the U.S.
Air Force over the Company's request for equitable adjustment. The negotiation
resulted in additional funding of $5.1 million and a 30-month contract
extension. This modified contract now ends in March 2002.

Information Technologies

The Company specializes in the application of information technologies to
support agencies of the U.S. Department of Defense, other Federal Government
agencies, local governments, and various commercial customers. This includes:

o Creating and operating computer-based environments that simulate,
emulate, and stimulate communications and target computer-based
systems.
o Designing, building, and employing instrumentation for testing
information systems.
o Designing, engineering, integrating, testing, administering, and
maintaining local- and wide-area network and office automation
systems.
o Designing, populating, and maintaining complex databases.
o Specifying, developing, testing, integrating, and supporting
communications protocols, links, and application software.
o Developing and employing data reduction and analysis techniques and
records management systems, including image processing systems.
o Developing and integrating Geographic Information Systems.

The Company also designs, specifies, acquires, integrates, tests, installs,
operates, and maintains systems for its customers' uses.

Intelligent Instrumentation and Automated Test Systems

The Company also specializes in the development and application of
computer-based test instruments and automated test systems with particular focus
on:

o Interoperability testing of communications and information systems;
o Developmental and operational testing of C4I, ordnance, tactical
weapon and data systems; and o Automated Test Systems (ATS).

The Company provides engineering and testing support to assure that
communications and computer-based systems interoperate effectively and reliably.

The Company provides design and fabrication of special purpose test support
software and hardware for testing aircraft, missile launchers, missiles, gun and
other complex electronics-based systems and their subsystems and components.

The Company develops test program sets (TPS's) and interface devices (ID's) for
operational performance verification and failure diagnosis of mission-critical
electronic assemblies and subassemblies.

Ordnance and Weapon Systems Engineering Services

The Company offers U.S. military customers a variety of specialized engineering
services applicable to ordnance and weaponry, including:
o System engineering for complex C4I, ordnance, weapon and
weapon-platform integration concepts. o Design and test engineering
of embedded computers, avionics, software, lasers, optics, seekers,
guidance and control systems, interior and exterior ballistics,
airframes, electronics, energetic materials, propulsion, warheads,
fuses, and insensitive munitions.
o Quality assurance, reliability, maintainability, system safety,
productibility, logistics, and standard engineering.
o Documentation, CAD/CAE (CALS and EDMICS compliant), configuration
and data management, and records archiving and management services.

The Company is providing environmental and safety engineering including:

o Pollution prevention studies
o Evaluation of site developments for environmental compliance o Air,
water, and soil sampling and analysis
o Waste system analysis
o Permit renewal preparation o Other environmental support

Current customers for information technologies, intelligent instrumentation and
automated test systems and ordnance and weapons systems engineering services
include agencies of the U.S. Government and government prime contractors.

Airport Management Services

The Company provides airport management services for local government agencies.
The Company has a long-term contract to manage five general aviation airports in
Los Angeles County. Support in this area includes managing airport operations,
ground transportation services, computerized revenue collection, and general
management support functions. In addition, the Company has similar long-term
airport services contracts with Riverside County, California; Tacoma Narrows
Airport, Tacoma, Washington; and Altoona-Blair County Airport, Altoona,
Pennsylvania.

Commercial Staffing Services

In August 1996 the Company acquired the assets of RAL Consulting and Staffing
Services, Inc. This operation provides engineering, technical, light industrial,
and administrative staffing services to the commercial marketplace. Specific
areas of expertise include: temporary personnel, general recruitment, substance
abuse testing, OSHA compliance, and human resources consulting. The main office
is in Victorville, California, serving the Apple Valley area of the High Desert.
The Company also has an office in Corona, California. This business has been
sold subsequent to the year ended January 31, 2000.

Manufacturing Training

Created under a Cooperative Research and Development Agreement (CRADA) with the
Navy, the Company's subsidiary, MTTC, Inc., operates a school to provide
training in world-class electronics manufacturing. Specializing in both manual
and automated electronics interconnection methods, the Company offers
certification and operator training in accordance with the commercial standard,
IPC A-610. This business has been sold subsequent to the year ended January 31,
2000.

BACKLOG

The Company's backlog from information technology and staffing services revenue
believed to be firm as of January 31, 2000 was $31 million, compared to $47
million as of January 31, 1999. The source of backlog is primarily contracts
with the U.S. and local governments. Government contracts normally have base and
option periods totaling three to five years in duration. In many instances,
government entities must issue work orders, delivery orders, or task orders
prior to the Company commencing work. These entities have the discretion to
terminate any contract at their convenience, and are normally obligated only to
pay for costs incurred to date under a contract. In addition, these entities may
elect to remove funding previously attached to a contract. Many of the Company's
contracts are multi-year, with options to provide services for additional
periods of time. There can be no assurances that government entities will
exercise the options, will not withdraw funds already committed, or that the
entities will fund the unfunded portions of the Company's contracts. It is
estimated that approximately 83% of the firm backlog will be realized in Fiscal
Year 2001.

GOVERNMENT CONTRACTS

A significant portion of the Company's total revenues from continuing and
discontinued operations (approximately 37% in Fiscal Year 2000, 34% in Fiscal
Year 1999, and 32% in Fiscal Year 1998) was derived from contracts with the
United States Government, principally agencies of the Department of Defense.
Significant portions of the Company's Fiscal Year 2000 revenues were derived
from contracts with the U.S. military services: Department of Defense, 8%; U.S.
Army, 9%; U.S. Navy, 15%; and U.S. Air Force, 5%. Should changes in procurement
policies or reductions in government expenditures occur, revenue and net income
of the Company could be adversely affected (see Management's Discussion and
Analysis of Results of Operations and Financial Condition). The Company's
government contracts business is not seasonal, however variations may occur at
the expiration of major contracts until such contracts are renewed or new
contracts obtained. Further, the Federal Government is increasing its use of
General Services Administration multiple award schedules (GSA MAS) and other
very broad-based contract vehicles to acquire information technology related
services. The Company has responded to this shift in its Federal Government
market by successfully obtaining awards of its own GSA MAS in February 1998 and
teaming with other companies on similar vehicles they have obtained. In the
course of the Company's business, its contracts are periodically opened for
competition. In March 1998, the Company announced the award of a five-year
Government contract (three-year base period with two one-year options) with an
estimated value of $75 million to continue to provide engineering and management
services to the U.S. Navy at Crane, Indiana. Contract periods are generally
three to five years, including options. The Company's airport management
services contract at Reagan Washington National Airport ended on September 30,
1998. The Company decided not to pursue the recompete of this contract since it
was marginally profitable, and it would have been unprofitable if reawarded to
the Company. The Company plans to aggressively compete for its existing work and
selectively pursue other high value Government procurements. There can be no
assurance that the Company will be selected and awarded work under any future
proposals.

COMPETITION

Approximately 80% of the Company's information technology and staffing services
business is awarded through competitive procurements. Government contracting
services industries consist of thousands of companies, many of which are larger
and have greater financial resources than the Company, who can provide the same
type of services. The business is highly competitive. The Company obtains much
of its business on the basis of submitted proposals to new and existing
customers. Competition generally centers on price, past performance, technical
capability, management plan, and personnel. There is no single company that
competes directly with the Company on all of the Company's services and
products.

PROPRIETARY INFORMATION

The United States Government has certain proprietary rights in software programs
and products developed by the Company in its performance of Government
contracts.

SEASONALITY

The Company's information technology and staffing services business in general
is not seasonal, although the summer and winter holiday seasons affect revenues
of the Company because of their impact on the Company's labor sales. Variations
in the Company's business may also occur at the expiration of major contracts
until such contracts are renewed or new contracts obtained.

EMPLOYEES

As of April 1, 2000, the Company employed approximately 740 full-time employees,
of which 550 were part of the information technology and staffing services
business area. The Company believes its employee relations to be good. The
majority of the Company's employees are professional or technical personnel
having training and experience in engineering, computer science, and management.

ITEM 2. Properties

The Company's principal facilities on January 31, 2000, aggregating
approximately 140,000 square feet, are located in the cities of Irvine, Santa
Ana, Camarillo, Victorville, Corona and Ridgecrest, California; Vienna and
Petersburg, Virginia; Sierra Vista, Arizona; Warner Robins, Georgia; Bloomfield,
Indiana; Colorado Springs, Colorado; Huntsville, Alabama; Germantown, Maryland;
London, England; and Singapore, and are occupied under leases expiring prior to
Fiscal Year 2006. The facilities in Irvine, California; London, England; and
Singapore relate to the continuing operations of the Company. With the exception
of an 8,000 square foot area used for light manufacturing, all facilities are
used for office space. The Company's aggregate annual property rent during
Fiscal Year 2000 was approximately $1.5 million. The aggregate annual property
rent in the year ending January 31, 2001 is expected to be approximately $1.5
million. Management believes that all facilities currently occupied by the
Company provide sufficient space for the Company's present needs, and that
suitable additional space will be available, if needed. Comarco Wireless
operates from a single-site manufacturing operation. Any material disruption in
the manufacturing operations of Comarco Wireless, whether due to fire, natural
disaster, or otherwise, will have a material adverse effect on the Company's
business, operating results, and financial condition.

ITEM 3. Legal Proceedings

The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
Company's operating results and financial condition. In particular, see Note 21
of the Notes to Consolidated Financial Statements.

ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable.

<PAGE>

PART II

ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters

The Company's Common Stock is traded in the over-the-counter market under the
NASDAQ symbol CMRO. The following table sets forth the range of high and low
closing prices in the NASDAQ National Market System for the Common Stock for the
periods indicated, as reported by the National Quotation Bureau Incorporated.
Prices represent actual reported sale prices.

Fiscal Years Ended January 31,
<TABLE>

Price
------------------------
High Low
-------- ---------
<S> <C> <C>
2000
First Quarter.......................... $ 24.75 $ 20.00
Second Quarter......................... 23.25 19.00
Third Quarter.......................... 20.50 18.13
Fourth Quarter......................... 26.38 17.00
1999
First Quarter.......................... $ 22.38 $ 20.50
Second Quarter......................... 23.19 19.63
Third Quarter.......................... 21.50 16.81
Fourth Quarter......................... 24.25 19.88
</TABLE>

The Company had approximately 490 shareholders of record on March 31, 2000.

The terms of the Company's current bank loan agreement limit the payment of
dividends under certain circumstances. The Company anticipates that dividends
will not be paid for the foreseeable future and that all earnings will be
retained for use in the Company's business and for stock repurchases.

<PAGE>

ITEM 6. Selected Financial Data

SELECTED FINANCIAL DATA
(Figures in thousands, except per share amounts)
<TABLE>

Years Ended January 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues:

Product sales.......................... $ 33,499 $ 28,849 $ 25,586 $ 18,433 $ 14,352
Services............................... 5,725 5,155 3,938 1,086 --
------------ ------------ ------------- ---------- -------------
39,224 34,004 29,524 19,519 14,352
------------ ------------ ------------- ---------- --------------
Cost of sales:

Product sales.......................... 16,983 11,569 8,704 5,877 5,679
Services............................... 3,811 3,473 2,751 748 --
------------ ------------ ------------- ---------- -------------
20,794 15,042 11,455 6,625 5,679
------------ ------------ ------------- ---------- -------------

Gross profit.............................. 18,430 18,962 18,069 12,894 8,673

Selling, general and administrative costs. 9,203 9,526 8,534 6,076 4,075
Engineering and support costs............... 3,808 3,480 3,592 2,536 2,037
------------ ------------- ------------- ---------- -------------

Operating income............................ 5,419 5,956 5,943 4,282 2,561

Interest income, net...................... 274 298 404 559 497

Minority interest in earnings............. (46) -- -- -- --
------------- ------------- ------------- ---------- -------------

Income before income taxes ............... 5,647 6,254 6,347 4,841 3,058

Income tax expense ....................... 2,061 2,283 2,317 1,622 1,046
------------ ------------- ------------- ---------- -------------

Net income from continuing operations..... 3,586 3,971 4,030 3,219 2,012

Net income (loss) from discontinued
operations.......................... (433) 1,712 845 1,446 1,873
------------- ------------- ------------- ---------- -------------
Net income ............................... $ 3,153 $ 5,683 $ 4,875 $ 4,665 $ 3,885
============= ============= ============= ========== =============
Earnings per share -
continuing operations:
Basic............................ $ .82 $ .86 $ .85 $ .68 $ .44
============= ============= ============= ========== =============
Diluted.......................... $ .74 $ .77 $ .72 $ .58 $ .38
============= ============= ============= ========== =============
Earnings (loss) per share -

discontinued operations:
Basic............................ $ (.10) $ .37 $ .18 $ .30 $ .40
============= ============= ============= ========== =============
Diluted.......................... $ (.10) $ .36 $ .17 $ .28 $ .37
============= ============= ============= ========== =============
Earnings per share:

Basic........................... $ .72 $ 1.23 $ 1.03 $ .98 $ .84
============ ============= ============= ========== =============
Diluted.......................... $ .64 $ 1.13 $ .89 $ .86 $ .75
============ ============= ============= ========== =============

Dividends declared per share.............. None None None None None

</TABLE>

SELECTED FINANCIAL DATA
(In thousands)
<TABLE>

January 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Working capital .......................... $ 23,457 $ 24,833 $ 23,763 $ 22,565 $ 16,049
Total assets.............................. 46,148 43,001 40,494 36,754 29,989
Borrowings under bank line of credit...... -- -- -- -- --
Long-term debt, including current
maturities............................... -- -- -- -- --
Stockholders' equity ..................... 31,754 31,202 30,470 26,977 21,738
</TABLE>

ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition

Results of Continuing Operations

The following tables set forth, for the periods indicated, the percentage which
certain items in the consolidated statements of income bear to revenues from
continuing operations, and the percentage change from period to period of these
items:

<TABLE>
Years Ended January 31,
----------------------------------------------------------------
2000 1999 1998
--------------- ----------------- -----------------
(Dollars in thousands)

<S> <C> <C> <C>
Revenues................... $ 39,224 $ 34,004 $ 29,524

Cost of sales.............. 20,794 15,042 11,455
--------------- --------------- ---------------

Gross profit............. 18,430 18,962 18,069

Percentage ................ 47% 56% 61%

Indirect costs* ........... 13,011 13,006 12,126
-------------- --------------- ---------------

Operating income........... $ 5,419 $ 5,956 $ 5,943
============== ============== ==============

Net income from continuing
operations............... $ 3,586 $ 3,971 $ 4,030
============== =============== ===============
</TABLE>

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

<PAGE>

Percentage of Revenues
<TABLE>

Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0%
Operating income................. 13.8 17.5 20.1
Interest expense................. -- -- --
Interest income.................. .7 .9 1.4
Income tax expense............... 5.3 6.7 7.8
Net income....................... 8.0 16.7 16.5

</TABLE>

Percentage Increase (Decrease)
<TABLE>

Years Ended January 31,
-------------------------------------
2000-1999 1999-1998
--------------- ---------------
<S> <C> <C>
Revenues........................... 15.4% 15.2%
Operating income................... (9.0) .2
Interest expense................... -- --
Interest income.................... (8.1) (26.2)
Income tax expense................. (9.7) (1.5)
Net income......................... (44.5) 16.6

</TABLE>

In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products and
services business area. This plan, which was formalized at the end of the
quarter ended October 31, 1999, involves selling the Company's information
technology and staffing services product lines. Therefore, this segment is
presented as discontinued operations and prior periods have been restated. As of
April 24, 2000, the Company has closed three out of six currently planned
divestiture transactions. The aggregate consideration received to date is $3.5
million. The remaining transactions are in varying stages of completion. The
Company does not expect to realize a loss on the sale of the discontinued
segment, however at this time, management cannot determine the amount of gain
that may result from the sale. At the conclusion of the divestiture process, the
Company will consist of the parent company, Comarco Wireless, and its
wholly-owned subsidiary, Comarco Wireless International, Inc. The Company is
operating in one business segment, wireless communication products and services.

Results of Continuing Operations

Fiscal Year Ended January 31, 2000 Compared to Fiscal Year Ended
January 31, 1999

Fiscal Year 2000 revenues from continuing operations totaled $39.2 million, up
15% from the prior year. Increased year-to-year revenue is primarily due to the
Company's completion of a number of wireless terminals callbox upgrade
contracts, shipments of the Company's first generation universal power adapter
and recharger, the initial rollout of the Company's wireless test and
measurement mobile testing services during the fourth quarter of Fiscal Year
2000, along with a reduction in the sale of wireless test and measurement
products to major cellular carriers, chiefly in the fourth quarter. This
reduction in the sales of wireless test and measurement products was due to a
major product transition to the new X-series test and measurement platform. The
first of the X-series family was released in March 2000. The X-50 platform will
support all multiple access technologies: CDMA, IS-136, GSM, and iDEN. The
Company expects the level of sales activity for its wireless terminals callboxes
will return to historical levels in Fiscal Year 2001, while services revenues
will increase significantly with the full rollout of its wireless test and
measurement mobile testing services.

The Company expects a rapid proliferation of portable and stationary computing
and communication systems and appliances that are connected by wireless
communication networks to the public internet, private intranet, private local
area networks, servers, and other terminal devices. The Company provides
products and services for these markets and with its core technologies
consisting of wireless network design, wireless appliance interfaces and
wireless design technologies, plans to provide additional products and services
to end-users and network operators. Based on this current strategy, the Company
forecasts that a growing percentage of its revenues and profit will come from
services in the future.

Gross profit from continuing operations decreased to $18.4 million in Fiscal
Year 2000 compared with $19.0 million in the prior year. Gross profit percentage
of revenue was 47% in Fiscal Year 2000 compared with 56% in the prior year. The
decreased gross profit dollars and percentage between years is due to the lower
margins the Company realized on its increased sales of wireless terminals
callboxes for the upgrade contracts for Los Angeles County, the San Francisco
Bay and the Sacramento areas of California; sales of its first generation
universal power adapters and rechargers; and lower sales of its higher margin
wireless test and measurement products.

Indirect costs were $13.0 million in Fiscal Years 2000 and 1999. During Fiscal
Year 2000, the Company increased sustaining engineering, research and
development and support expenditures by $0.3 million to $3.8 million to support
expected growth in its wireless test and measurement products and services along
with the product development of the second generation of the wireless accessory,
a portable power adapter and recharger, ChargeSource(TM). The Company expects
this trend to continue as the Company executes its current plan to develop
additional products and services for the marketplace which is converging
wireless voice and data, broadband and the internet. Selling and general and
administrative costs declined $0.3 million to $9.2 million, primarily due to a
reduction in international selling expenses in response to softness in the
international marketplace due to the well publicized effects of the economic and
currency problems experienced by a number of international markets over the past
eighteen months. The Company expects revenues and contribution from
international markets to gradually increase.

Operating income from continuing operations decreased to $5.4 million, from $6.0
million in the prior year. Operating income as a percentage of revenues was 14%
for Fiscal Year 2000, compared to 18% for the comparable prior period. The
year-to-year decrease in operating income percentage is primarily due to lower
gross profit contribution from the increased sales of wireless terminals callbox
and wireless accessory universal power adapter product lines, as discussed
above.

The Company is continuing its software product development program in its
continuing operation's wireless communications products business. In accordance
with Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the
Company's wireless communications products business capitalized and amortized
$3.6 million and $1.9 million, respectively, during Fiscal Year 2000. The
Company's wireless communications products business capitalized and amortized
$2.9 million and $1.9 million, respectively, in Fiscal Year 1999. These amounts
are in addition to the engineering, research and development and support expense
discussed above.

The Company's orders for wireless communications products and services totaled
$43.3 million for Fiscal Year 2000, compared with $33.5 million for Fiscal Year
1999. Unfilled orders at Comarco Wireless as of January 31, 2000 are
approximately $21.2 million, compared to $17.2 million as of January 31, 1999.
The current year balance includes $2.8 million of product and service orders for
the wireless test and measurement, revenue assurance information, and mobile
power product lines, and $2.8 million of deferred revenue for basic and extended
warranty commitments. Since the rollout of the Company's large-scale mobile
testing network, two national wireless providers have contracted with the
Company for quality of service information services. The Company is in
discussions with several additional potential customers and expects continued
growth for its wireless test and measurement services. Management believes that
substantially all of the products and services backlog amount (of $5.6 million)
will result in revenue during Fiscal Year 2001. In general, most of the
Company's product orders are filled within months from receipt of the order. The
remaining unfilled orders of $15.6 million are related to the wireless vertical
applications and terminals product line. This backlog balance consists of $0.9
million of new product orders and $14.7 million of long-term maintenance
agreements. The Company is well into the process of negotiating new multi-year
agreements for the maintenance and operation of the California installed base.
The first two contracts, worth approximately $11 million, were negotiated and
are part of the year-end backlog in Fiscal Year 2000. Additionally, since the
end of Fiscal Year 2000, the Company has signed an upgrade contract and new
maintenance and operation agreements with Orange County, California that
together are valued at approximately $2.9 million. In this wireless vertical
applications and terminals area, the Company continues to invest heavily in a
number of large opportunities such as the Pennsylvania Turnpike Authority, and
the states of Texas, Louisiana, Florida, Georgia, Nevada, Utah and Colorado.

Comarco Wireless has experienced, in each of the past six years, a seasonal
fluctuation in wireless communications products activity, with greater sales in
the latter half of its fiscal year and lesser amounts in the first half of the
fiscal year, although this trend has been declining over the same six years.
This fluctuation may or may not continue due to a number of factors, including:
the timing, cancellation, or delay of customer orders; the timing of new product
introductions by the Company or its competitors; the deployment schedule of
wireless network operators in both North American and international markets,
which can be delayed by both economic and political issues; the size of
customers' capital budgets, which are the traditional source of customer funding
for the purchase of the Company's products; market acceptance of the Company and
its customers' products; variations in manufacturing capacities, efficiencies
and costs; the availability and cost of components; capacity and production
constraints associated with single source component suppliers; and other
competitive factors. Historically, the Company has often recognized a
substantial portion of its revenues in the last month of any given quarter.
Because the Company's operating expenses are based on anticipated revenue levels
and because a high percentage of the Company's expenses are relatively fixed, a
small variation in the timing of the recognition of revenues could cause
significant variations in operating results from quarter to quarter. Therefore,
the nature of the wireless communications products business is inherently
unpredictable; sales and profits may fluctuate significantly from quarter to
quarter; and therefore, period-to-period comparisons of its operating results
are not necessarily meaningful and such comparisons cannot be relied upon as
indicators of future performance.

Net interest income (interest income, less interest expense) for Fiscal Year
2000 totaled $274,000 compared to $298,000 for the prior fiscal year. The
decrease is principally due to lower available investable balances year-to-year,
along with lower interest rates.

The Company's continuing operations' effective tax rate is 36.5% for Fiscal Year
2000, which is level with the 36.5% for the previous fiscal year.

The overall decrease in continuing operations' net income from the prior year is
primarily due to lower gross profit contribution dollars as noted above.

Fiscal Year Ended January 31, 1999 Compared to Fiscal Year Ended
January 31, 1998

Continuing operations' revenues increased 15% to $34.0 million for Fiscal Year
1999 from $29.5 million for the comparable period of the prior fiscal year. This
increase is due to increased sales of the Company's wireless test and
measurement, wireless revenue assurance information, and wireless terminals
callbox systems and the initial introduction and market trials of
ChargeSource(TM), a wireless accessory universal power adapter. The rapid growth
of cellular and PCS markets, proliferation of digital communication
technologies, and the expanding number of telephone carriers have created
greater demand for the Company's products. During Fiscal Year 1999, the
Company's product introductions included BaseLINE(TM), allowing wireless
carriers to track the quality of their networks as well as the quality of their
competitors' systems. The Company's wireless terminals callbox systems also had
significant growth in Fiscal Year 1999. Late in the year, the Company commenced
market trials of its universal power adapter, ChargeSource(TM), which is
designed to charge all portable electronic devices commonly used by a business
traveler.

Gross profit percentage of continuing operations' revenues was 56% in Fiscal
Year 1999 compared with 61% in the prior fiscal year. The decreased gross margin
percentage is due to greater sales of the Company's wireless terminals callbox
systems and market trial sales of the wireless accessory universal power adapter
product, which have lower gross margins than the wireless test and measurement
and revenue assurance information product families.

Indirect costs increased $0.9 million or 7% year to year. Selling and general
and administrative expenses totaled $9.5 million in Fiscal Year 1999, up 12%
from the comparable period last year. Research and development expense and
sustaining engineering and product support expenses totaled $3.5 million during
Fiscal Year 1999 compared with $3.6 million in the prior fiscal year.

Operating income for continuing operations was $6.0 million for Fiscal Year 1999
compared with $5.9 million in the prior fiscal year. Operating income as a
percentage of revenues was 18% for Fiscal Year 1999, compared to 20% for the
comparable prior period. The year-to-year decrease in operating income
percentage is primarily due to lower gross profit contribution from the
increased sales of wireless terminals callbox and wireless accessory universal
power adapter product lines, as discussed above.

The Company is continuing its software product development program in its
wireless communications products business. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, the Company's wireless
communications products business capitalized and amortized $2.9 million and $1.9
million, respectively, during Fiscal Year 1999. The Company's wireless
communications products business capitalized and amortized $2.5 million and $1.4
million, respectively, in Fiscal Year 1998. These amounts are in addition to the
research and development expense discussed above.

The Company's orders for wireless communications products totaled $33.5 million
for Fiscal Year 1999, compared with $27.6 million during Fiscal Year 1998.
Unfilled orders at January 31, 1999 totaled $17.2 million, of which $6.0 million
is associated with the long-term maintenance contracts and $2.7 million is
associated with post-contract customer support obligations which has been
recorded as deferred revenue.

In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2 entitled Software Revenue Recognition. This Statement updates SOP 91-1
which was issued in 1991, and it provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing, or otherwise
marketing computer software. The provisions of the new Statement were applied
prospectively in Fiscal Year 1999. The adoption of this Statement did not have a
material impact on the financial position or operating results of the Company.

The Company has experienced fluctuations in wireless communications products
activity in each of the past five years, with greater sales in the second half
of its fiscal year and lesser amounts in the first half, although this trend has
been declining over the same five years. This trend may or may not continue as
the Company broadens its wireless communications products offerings. The nature
of the wireless communications products business is inherently unpredictable;
sales and profits may fluctuate significantly from quarter to quarter; and
therefore, period-to-period comparisons of its operating results are not
necessarily meaningful and such comparisons cannot be relied upon as indicators
of future performance.

Results of Discontinued Operations

In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products and
services business area. This plan, which was formalized at the end of the
quarter ended October 31, 1999, involves selling the Company's information
technology and staffing services product lines. Therefore, this segment is
presented as discontinued operations and prior periods have been restated.
Subsequent to fiscal year end and as of April 24, 2000, the Company has closed
three out of six currently planned divestiture transactions. The aggregate
consideration received to date is $3.5 million. The remaining transactions are
in varying stages of completion. The Company does not expect to realize a loss
on the sale of the discontinued segment, however at this time, management cannot
determine the amount of gain that may result from the sale.

Revenues provided by the discontinued operations totaled $51.7 million in Fiscal
Year 2000 compared to $58.0 million in Fiscal Year 1999. The decreased revenues
are due to the completion of the Company's contract at Reagan Washington
National Airport which ended on September 30, 1998, a 10% reduction in
commercial staffing services revenue, partially offset by increased information
technology staffing services revenues. Sales to the U.S. Government as well as
to government prime contractors were 37% of the Company's total revenues from
continuing and discontinued operations for the fiscal year ended January 31,
2000. 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. The Company is
experiencing a greater percentage of its information technology and staffing
services revenue from fixed-price and fixed labor rate contracts versus
cost-reimbursable contracts. Fixed-price and fixed labor-rate contracts shift
more of the performance risk to the Company. Therefore, if the Company's
assumptions or performance do not meet expectations, reduced profits or losses
could be realized. The operating loss (revenues less direct costs, indirect
costs, and depreciation and amortization) for discontinued operations was $0.6
million in Fiscal Year 2000 compared with operating income of $2.4 million in
the prior fiscal year. The current operating loss is due to the recording of a
final pre-tax $1.3 million loss to terminate two fixed price contracts with a
single government agency and an additional pre-tax loss of $1.4 million related
to the change in management's estimate to complete a multi-year fixed price
contract after completion of protracted negotiations with the U.S. Air Force
over the Company's request for equitable adjustment. The negotiation resulted in
additional funding of $5.1 million and a 30-month contract extension. The
modified contract now ends in March 2002. The $1.4 million provision is based on
the Company's assumptions and future performance expectations over the remaining
26-month contract performance period of the contract as of January 31, 2000. If
the Company's assumptions or performance do not meet expectations, additional
loss provisions would be required. Discontinued net loss was $0.4 million in
Fiscal Year 2000 compared with net income of $1.7 million a year ago.

Revenues provided by discontinued operations totaled $58.0 million in Fiscal
Year 1999 compared to $55.6 million in the prior year. The increased revenue of
4% year-to-year is due to a 17% increase in information technology staffing
services and a 22% increase in commercial staffing services, offset by a
reduction in airport management staffing services due to the completion of the
Company's contract at Reagan Washington National Airport, which ended on
September 30, 1998. This contract contributed $6.0 million in revenue in the
year ended January 31, 1999. The Company decided not to pursue the recompete of
this contract since it was marginally profitable, and it would have been
unprofitable if reawarded to the Company. Sales to the U.S. Government as well
as to government prime contractors were 34% of the Company's total revenues from
continuing and discontinued operations for the fiscal year ended January 31,
1999. In the course of the Company's business, its contracts are periodically
opened for competition. In March 1998, the Company announced the award of a
five-year Government contract (three-year base period with two one-year options)
with an estimated value of $75 million to continue to provide engineering and
management services to the U.S. Navy at Crane, Indiana. Contract periods are
generally three to five years, including options.

In Fiscal Year 1998, the Company recorded a $710,000 charge against operating
income from the impairment of certain assets of its information technology and
staffing services software development operation. This charge was recorded in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. Based upon marketing initiatives which proved unsuccessful in the fourth
quarter, the Company determined that the expected future cash flows were not
sufficient to cover the remaining unamortized intangible assets. Accordingly,
the complete impairment of these assets was recorded in the restated
discontinued operations results.

Operating income (revenues less direct costs, indirect costs, and depreciation
and amortization) for the discontinued segment was $2.4 million in Fiscal Year
1999 compared to $1.2 million in Fiscal Year 1998 (after giving effect to a $0.7
million non-recurring, non-cash charge for the write-off of the remaining
intangible assets associated with the Company's information technology and
staffing services software development operation). Net income from discontinued
operations was $1.7 million in Fiscal Year 1999 compared to $0.8 million a year
earlier.

Liquidity and Capital Resources

The Company signed a loan agreement with a bank effective September 26, 1994,
which was last amended effective August 21, 1998. The loan agreement consists of
a $10 million revolving credit facility, which expires June 30, 2000. The
Company expects to renew the loan agreement under similar terms and conditions.
The revolving credit facility is 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 $3.9 million (excludes investments in the
Company's deferred compensation plan for executives) during the fourth quarter
of Fiscal Year 2000. However, maintaining such cash balances is predicated on
the Company maintaining its business base and is subject to the cost of
financing new contracts, acquisitions, geographic expansion, software product
development costs, and stock re-purchases. In July 1999, the Company announced
that it was embarking on a plan to strengthen the Company's focus on the
wireless communications products and services business area. This plan, which
was formalized at the end of the quarter ended October 31, 1999, involves
selling the Company's information technology and staffing services product
lines. Therefore, this segment is presented as discontinued operations and the
consolidated balance sheet reflects net assets available for sale of $9.4
million as of January 31, 2000. Subsequent to fiscal year end and as of April
24, 2000, the Company has closed three out of six planned divestiture
transactions. The aggregate consideration received to date is $3.5 million. The
remaining transactions are in varying stages of completion.

During Fiscal Year 2000, the Company's average days' sales in accounts
receivable for continuing operations have been reduced from 93 days at the end
of Fiscal Year 1999 to 58 days as of January 31, 2000. The reduction is due to
improved cash collection procedures and lower international sales activity whose
receivables on average, take longer to collect.

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

January 31, January 31,
-------------------------------------------
2000 1999
-------------------------------------------
<S> <C> <C>
Current 2.99 3.52
ratio.........................
Working $ 23,457,000 $ 24,833,000
capital.....................
Book value per $ 7.32 $ 7.00
share.............
</TABLE>

The Company continued to demonstrate solid financial strength in the above
financial factors during Fiscal Year 2000.

During Fiscal Year 2000, the Company generated $9.2 million of cash flows from
continuing operations' operating activities, up sharply from $6.0 million in the
prior fiscal year. The increase is due to better management of the Company's
working capital. Cash flows from operating activities, along with a portion of
the Company's investments, were used to fund a number of financing and investing
activities, as discussed below.

The Company has a significant commitment for capital expenditures at January 31,
2000 for Comarco Wireless. The Company has developed and intends to continue
developing numerous new product line extensions for the wireless communications
industry. This software product development program is expected to be funded
from the Company's current working capital. The amounts capitalized and
amortized in the Company's wireless communications products business in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,
totaled $3.6 million and $1.9 million, respectively, in Fiscal Year 2000.

The Company's Board of Directors has authorized a stock re-purchase program of
up to 2,000,000 shares. As of January 31, 2000, the Company has re-purchased and
retired approximately 1,456,000 shares of which 245,900 shares in the amount of
$4.8 million were re-purchased during Fiscal Year 2000. The average price paid
per share re-purchased under the program was $11.06.

The Company is subject to legal proceedings and claims that 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 (see Note 21 of the Notes to Consolidated
Financial Statements).

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 during Fiscal Year 2001.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Boards issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is effective
for fiscal years beginning after June 15, 2000. This standard establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not believe that the adoption of
this new standard will have a material impact on its financial position or
results of operations.

Year 2000 Issue

The Year 2000 Issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year (the
"Year 2000 Issue"). Software, hardware or firmware may recognize a date using
"00" as the year 1900, rather than the year 2000. Such an inability of computer
programs to recognize a year that begins with "00" could result in system
failures, miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

The Company undertook a program to address the Year 2000 Issue with respect to
the following: (i) the Company's information technology and operating systems;
(ii) the Company's non-information technology systems (such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology); (iii) certain systems of the Company's major
vendors and material service providers (insofar as they relate to the Company's
business activities with such parties); and (iv) the Company's material clients
(insofar as the Year 2000 Issue relates to the Company's ability to provide
services to such clients).

No public infrastructure problems or any other significant problems with respect
to any of the areas listed in the previous paragraph were encountered during
rollover to the year 2000. After system verification and testing, the Company's
systems are operating normally. The Company is not aware of any significant
issues related to the Year 2000 Issue.

The Company continues to monitor the status of its operations, major vendors,
material service providers and material clients to ensure that no significant
business interruptions occur.

Costs incurred to achieve year 2000 readiness were charged to expense as
incurred. Such costs included both internal resources dedicated to achieving
year 2000 compliance, as well as the costs of independent consultants retained
to assess the Company's year 2000 initiatives. Substantially all of the
Company's year 2000 costs were incurred prior to January 31, 2000. The year 2000
costs incurred were not material to the consolidated financial statements.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk, including changes in interest rates and
currency exchange rates. As of January 31, 2000, the Company had no accounts
receivable denominated in foreign currencies. The Company's standard terms
require foreign customers to pay for the Company's products with U.S. dollars.
For those orders denominated in foreign currencies, the Company may limit its
exposure to losses from foreign currency transactions by the purchase of forward
foreign exchange contracts. Such activity to date has been insignificant.

The Company's interest rate risk in the year ended January 31, 2000 was limited
to a minor amount of available-for-sale investments; these investments were sold
during the year ended January 31, 2000, and therefore, the interest rate risk
was eliminated.

<PAGE>

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----
Independent Auditors' Report.............................................. 25
Financial Statements:
Consolidated Balance Sheets, January 31, 2000 and 1999............... 26
Consolidated Statements of Income, Years Ended
January 31, 2000, 1999, and 1998..................................... 27
Consolidated Statements of Cash Flows, Years Ended
January 31, 2000, 1999, and 1998..................................... 28
Consolidated Statements of Comprehensive Income, Years Ended
January 31, 2000, 1999, and 1998..................................... 29
Notes to Consolidated Financial Statements,
January 31, 2000, 1999, and 1998..................................... 30
Financial Statement Schedule - II Reserves, Years Ended
January 31, 2000, 1999, and 1998.......................................... 54

All other schedules are omitted because the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the consolidated financial statements or the
notes thereto.

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
COMARCO, Inc.:

We have audited the consolidated financial statements of COMARCO, Inc. and
Subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of COMARCO,
Inc. and Subsidiaries as of January 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 2000, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

KPMG LLP

McLean, Virginia
March 20, 2000

<PAGE>

COMARCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

ASSETS
<TABLE>

January 31,
-------------------------------
2000 1999
-------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 5,064 $ 3,220
Short-term investments................................. 3,721 2,775
Accounts receivable, net............................... 6,695 11,231
Inventory.............................................. 4,852 4,157
Deferred tax asset..................................... 2,908 2,112
Net assets available for sale.......................... 9,361 10,872
Other current assets................................... 2,651 337
------------ ------------

Total current assets................................. 35,252 34,704

Long-term investments .................................... -- 526
Property and equipment, net............................... 2,763 1,948
Software development costs, net........................... 5,839 4,185
Intangible assets, net.................................... 2,222 1,545
Other assets.............................................. 72 93
------------ ------------
$ 46,148 $ 43,001
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 666 $ 499
Deferred revenue....................................... 3,077 2,902
Accrued liabilities.................................... 8,052 6,470
------------ ------------

Total current liabilities............................ 11,795 9,871
Deferred income taxes..................................... 2,599 1,928

Stockholders' equity:
Common stock, $.10 par value, 33,750,000 shares
authorized; shares outstanding of 4,340,362 in 2000 and
4,456,460 in 1999...................................... 434 446
Paid-in capital........................................ 4,692 2,795
Accumulated other comprehensive income:
Unrealized investment gains.......................... 3 16
Retained earnings...................................... 26,625 27,945
------------ -----------

Total stockholders' equity........................... 31,754 31,202

Commitments and contingencies (Notes 15 and 21)
------------ -----------
$ 46,148 $ 43,001
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

COMARCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

<TABLE>
Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Product sales.................................... $ 33,499 $ 28,849 $ 25,586
Services......................................... 5,725 5,155 3,938
----------- ----------- -----------
39,224 34,004 29,524
----------- ----------- -----------
Cost of sales:
Product sales.................................... 16,983 11,569 8,704
Services......................................... 3,811 3,473 2,751
----------- ----------- -----------
20,794 15,042 11,455
----------- ----------- -----------

Gross profit........................................ 18,430 18,962 18,069
Selling, general and administrative costs........... 9,203 9,526 8,534
Engineering and support costs....................... 3,808 3,480 3,592
----------- ----------- -----------

Operating income.................................... 5,419 5,956 5,943
Interest income..................................... 274 298 404

Minority interest in earnings....................... (46) --- ---
----------- ----------- -----------

Income before income taxes.......................... 5,647 6,254 6,347
Income tax expense.................................. 2,061 2,283 2,317
----------- ----------- -----------

Net income from continuing operations............... 3,586 3,971 4,030

Net income (loss) from discontinued operations...... (433) 1,712 845
----------- ----------- -----------

Net income.......................................... $ 3,153 $ 5,683 $ 4,875
=========== =========== ===========

Earnings per share - continuing operations:
Basic.......................................... $ .82 $ .86 $ .85
=========== =========== ===========
Diluted........................................ $ .74 $ .77 $ .72
=========== =========== ===========
Earnings (loss) per share - discontinued operations:
Basic.......................................... $ (.10) $ .37 $ .18
=========== =========== ===========
Diluted........................................ $ (.10) $ .36 $ .17
=========== =========== ===========
Earnings per share:
Basic.......................................... $ .72 $ 1.23 $ 1.03
=========== =========== ===========
Diluted........................................ $ .64 $ 1.13 $ .89
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
COMARCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)
<TABLE>
Years Ended January 31,
------------------------------------------------------
2000 1999 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations.................... $ 3,586 $ 3,971 $ 4,030
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Loss (gain) on disposal of property and equipment.... 85 (4) --
Depreciation and amortization........................ 3,159 2,925 3,469
Provision for doubtful accounts receivable........... 24 24 66
Minority interest in earnings of subsidiary.......... 46 -- --
Deferred income taxes................................ (125) (281) 205
Changes in operating assets and liabilities, net of
effects from the purchases of GTE & Cubic:
Increases in investments......................... (975) (980) (537)
Decrease (increase) in accounts receivable......... 4,512 (2,189) (3,425)
Decrease (increase) in inventory................... (695) 1,090 (1,644)
Decrease (increase) in other assets................ (2,293) 92 (184)
Increase in current liabilities.................... 1,924 1,327 69
-------------- ------------- -------------
Net cash provided by operating activities................ 9,248 5,975 2,049
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of investments................................. -- -- (1,204)
Proceeds from sales of investments....................... 542 2,407 712
Purchases of property and equipment...................... (1,876) (995) (1,293)
Proceeds from sales of property and equipment............ 29 4 14
Software development costs............................... (3,563) (2,936) (2,506)
Cost of acquisition of Cubic, net of cash acquired....... -- -- (1,717)
Cost of acquisition of ITI technology.................... -- (1,000) --
Cost of acquisition of CWT minority interest............. (433) -- --
-------------- ------------- -------------
Net cash used in investing activities.................... (5,301) (2,520) (5,994)
-------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of stock, including tax benefit... 1,456 227 453
Proceeds from issuance of subsidiary stock............... 179 -- --
Purchase of common stock................................. (4,816) (5,194) (1,835)
-------------- ------------- -------------
Net cash used by financing activities.................... (3,181) (4,967) (1,382)
-------------- ------------- -------------

Net increase (decrease) in cash and cash equivalents -
continuing operations................................... 766 (1,512) (5,327)

Net increase (decrease) in cash and cash equivalents -
discontinued operations................................. 1,078 (524) (2,128)
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents........ 1,844 (2,036) (7,455)

Cash and cash equivalents, beginning of year................ 3,220 5,256 12,711
-------------- ------------- -------------

Cash and cash equivalents, end of year...................... $ 5,064 $ 3,220 $ 5,256
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

COMARCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

<TABLE>

Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------

<S> <C> <C> <C>
Net income.................................................. $ 3,153 $ 5,683 $ 4,875
Other comprehensive income:
Unrealized holding gains (losses) on investments, net of tax (13) 16 --
------------- ------------- --------------

Comprehensive income........................................ $ 3,140 $ 5,699 $ 4,875
============= ============= ==============

</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

COMARCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2000 AND 1999 AND 1998

1. Significant Accounting Policies

a. The Company--COMARCO, Inc. and its subsidiaries (the "Company") provide
test and measurement products and services for wireless telephone carriers,
systems for the wireless transmission of voice and data, and wireless accessory
products for portable wireless appliances such as notebook computers, cellular
telephones and personal organizers. In October 1996, Comarco Wireless
Technologies, Inc. ("CWT") acquired the callbox assets of GTE Cellular
Communications Corporation. In February 1997, Comarco Wireless Technologies,
Inc. acquired the callbox assets of Cubic Communications, Inc. In May 1998,
Comarco Wireless Technologies, Inc. acquired certain intellectual property and
related software assets of Industrial Technology, Inc. ("ITI"). These
acquisitions were accounted for using the purchase method. The difference
between the estimated fair values of the acquired net tangible and identifiable
intangible assets and the assumed liabilities was recorded to negative goodwill
for the GTE purchase. The difference between identified tangible and intangible
assets and assumed liabilities was recorded as goodwill for the Cubic purchase.
The results of acquired operations have been included in the Company's
consolidated results of operations since the respective acquisition dates. The
acquisitions did not have a significant pro-forma impact on operations.

b. Principles of Consolidation--The accompanying financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany balances, transactions and profits have been eliminated in
consolidation.

c. Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

d. Revenues-- Revenues from product sales are recorded as products are
shipped or when customers have accepted the products, depending on the contract
terms. The estimated sales value of post contract customer support, which is
included as part of an initial warranty period, is deferred and amortized over
the warranty period. Revenues from extended warranty agreements are recognized
ratably over the term of the agreement.

Revenues from services are recorded as services are rendered. Certain of
the Company's services revenues are earned under long term agreements and are
recorded using the percentage-of-completion method. Under the
percentage-of-completion method, revenue is recorded as costs are incurred, and
profit is recognized on each contract based on the percentage that the incurred
costs bear to total estimated costs. Costs to complete are reviewed periodically
and revised as required. Provisions are made for the full amount of anticipated
losses, if any, on all contracts in the period in which they are first
determinable.

e. Cash and Cash Equivalents--For purposes of the consolidated financial
statements, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. Cash
equivalents of $4.7 million and $3.1 million at January 31, 2000 and 1999,
respectively, consist primarily of money market funds, which are stated at cost,
which approximates fair value.

f. Investments--Investments at January 31, 2000 and 1999 consist of
high-grade municipal debt and equity securities. The Company classifies its debt
and equity securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the security
until maturity. All securities not included in trading or held-to-maturity are
classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.

A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized and accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.

During Fiscal Year 1999, the Company reclassified its portfolio of
held-to-maturity securities to available-for-sale securities, as a portion of
these investments were needed to fund the unusually high level of Company stock
re-purchases during the year.

g. Inventory--Inventory is stated at the lower of cost or market. Cost is
determined using weighted-average cost, which approximates actual costs on a
first-in, first-out (FIFO) method. Inventory consists primarily of electronic
components, and the Company regularly assesses the need to adjust inventory
valuations for obsolescence due to rapid technological changes in the wireless
communications products industry.

h. Property and Equipment--Property and equipment are stated at cost and
are depreciated using the straight-line method. Office furnishings and fixtures
are depreciated over useful lives of five to seven years, and equipment and
software are depreciated over useful lives of two to five years.

i. Software Development Costs--Capitalization of internally developed
software begins upon the determination by the Company of a product's
technological feasibility, generally upon completion of a detail program design.
Capitalized software development costs are amortized over related sales on a
per-unit basis based upon estimated total sales, with a minimum amortization
based on a straight-line method over a two to five year useful life.

j. Intangible Assets--Intangible assets are being amortized over periods of
five to fifteen years. Costs in excess of net assets acquired are being
amortized over fifteen years. All such amortization is computed on the
straight-line basis.

The Company reviews its long-lived assets, including excess of purchase
price over net assets acquired and other intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company recognizes an impairment loss when
the sum of the expected, undiscounted future cash flows is less than the
carrying amount of the asset. The assessment of the recoverability of long-lived
assets will be impacted if estimated future operating cash flows are not
achieved.

k. Taxes on Income--Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Future tax benefits
recognized as deferred tax assets would be reduced by a valuation allowance
where it is more likely than not that the benefits may not be realized.

l. Minority interest--During the year ended January 31, 2000, the
Company issued 58,000 shares of CWT stock from the exercise of stock options,
which resulted in the creation of a minority interest in the amount of $297,000.
In December 1999, the Company elected to acquire the minority interest through
the payment of $433,000 in cash and the issuance of 46,177 shares of Company
stock. Under the purchase method of accounting, intangible assets of $980,000
were created in the acquisition of the minority interest. Future exercises of
CWT stock options will result in the creation of a new minority interest. If the
Company elects to acquire any future minority interests, additional intangible
assets will be recognized.

m. Per Share Information--During the year ended January 31, 1998, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share, and computes basic and diluted net income per share based on
the weighted-average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed using the treasury stock method or the if-converted method, as
applicable. Comparative earnings per share data have been restated for prior
periods. Consolidated net income of the Company used in computing diluted
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.

n. Stock Option Plans--Prior to February 1, 1996, the Company accounted for
its stock option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On February 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in the year ended January 31, 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

o. Fair Value of Financial Instruments--The estimated fair values of the
Company's financial instruments have been determined using available market
information. The estimates are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have an effect on the estimated
fair value amounts. The fair value of current financial assets, current
liabilities, and other assets are estimated to be equal to their carrying
amounts.

p. Comprehensive Income--As of February 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and net
unrealized gains on securities, net of income tax, and is presented in the
consolidated statements of comprehensive income. SFAS No. 130 requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior years'
consolidated financial statements have been reclassified to conform with the
requirements of SFAS No. 130.

q. Reclassifications--Certain reclassifications of 1999 and 1998 amounts
have been made to conform to the 2000 presentation.

2. Discontinued Operations

In July 1999, the Company announced that it was embarking on a plan to
strengthen the Company's focus on the wireless communications products and
services business segment. This plan, which was formalized at the end of the
quarter ended October 31, 1999, involves selling the Company's information
technology and staffing services product lines. Therefore, this segment is
reflected as discontinued operations and prior periods have been restated. The
Company has engaged an investment banking firm to market and sell the
discontinued segment. The Company expects the sale of the discontinued segment
to be completed during the year ended January 31, 2001. Revenues from the
discontinued segment were $51.7 million, $58.0 million, and $55.6 million in the
years ended January 31, 2000, 1999, and 1998, respectively. Net income (loss) of
the discontinued segment was $(0.4) million, $1.7 million, and $0.8 million,
which includes income tax expense (benefit) of $(0.2) million, $1.2 million and
$0.6 million, in the years ended January 31, 2000, 1999, and 1998, respectively.

The components of net assets available for sale of the discontinued operations
included in the Consolidated Balance Sheets were as follows:

<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net.................. $ 9,188 $ 11,920

Other current assets...................... 87 239
Property and equipment, net............... 385 476
Intangible assets, net.................... 2,460 2,042
Other assets.............................. 424 481
Accounts payable.......................... (353) (576)
Accrued liabilities....................... (2,830) (3,710)
----------- -----------
$ 9,361 $ 10,872
=========== ===========
</TABLE>

3. Investments

Securities classified as available for sale are as follows at January 31, 2000
and 1999:

<TABLE>
Gross Gross
Unrealized Unrealized Aggregate
Security Amortized Holding Holding Fair
Year Type Cost Gains Losses Value
- ---- -------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
2000 Equity $ 83 $ 4 -- $ 87
1999 Debt 512 14 -- 526
1999 Equity 102 14 -- 116
</TABLE>

Proceeds from the sales of available-for-sale securities in the years ended
January 31, 2000 and 1999 were $542,000 and $2.4 million, respectively. No gross
realized gains or losses were recorded on sales of available-for-sale securities
in the years ended January 31, 2000 and 1999.

Short-term investments at January 31, 2000 and 1999 included amounts of $3.6
million and $2.7 million, respectively, related to balances maintained in a
non-qualified deferred compensation plan for Company executives and directors.
These investments are classified as trading securities. The amount of net
unrealized holding gains on these trading securities recorded in the years ended
January 31, 2000 and 1999 were $173,000 and $281,000, respectively.

4. Accounts Receivable

Accounts receivable consist of the following:
<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------

(Dollars in thousands)
<S> <C> <C>
Commercial.................................... $ 6,733 $ 11,198
Other ........................................ 72 129
----------- -----------
6,805 11,327
Less: Allowances for doubtful accounts....... (110) (96)
----------- -----------
$ 6,695 $ 11,231
=========== ===========
</TABLE>

5. Inventory

Inventory consists of the following:
<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------

(Dollars in thousands)
<S> <C> <C>
Raw materials................................. $ 4,122 $ 3,819
Work-in-process............................... 274 196
Finished goods................................ 456 142
---------- -----------
$ 4,852 $ 4,157
=========== ===========
</TABLE>
6. Property and Equipment

Property and equipment consist of the following:
<TABLE>

January 31,
----------------------------
2000 1999
----------- -----------

(Dollars in thousands)
<S> <C> <C>
Office furnishings and fixtures................. $ 1,362 $ 976
Equipment....................................... 5,357 4,139
Software........................................ 281 228
----------- -----------
7,000 5,343
Less: Accumulated depreciation and amortization. (4,237) (3,395)
----------- -----------
$ 2,763 $ 1,948
=========== ===========
</TABLE>

7. Software Development Costs

Software development costs consist of the following:
<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------

(Dollars in thousands)
<S> <C> <C>
Software development costs........................ $ 7,944 $ 8,042
Less: Accumulated amortization.................... (2,105) (3,857)
----------- -----------
$ 5,839 $ 4,185
=========== ===========
</TABLE>

Capitalization of software development costs for the years ended January 31,
2000, 1999, and 1998 amounted to $3,563,000, $2,936,000, and $2,506,000,
respectively. Amortization of software development costs for the years ended
January 31, 2000, 1999, and 1998 amounted to $1,909,000, $1,882,000, and
$1,809,000, respectively.

8. Intangible Assets

Intangible assets consist of the following:
<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------

(Dollars in thousands)
<S> <C> <C>
Costs in excess of net assets acquired......................... $ 1,724 $ 744
Other intangible assets, based on allocated purchase price..... 1,000 1,000
----------- -----------
2,724 1,744
Accumulated amortization....................................... (502) (199)
----------- -----------
$ 2,222 $ 1,545
=========== ===========
</TABLE>

Amortization of intangible assets for the years ended January 31, 2000, 1999,
and 1998 amounted to $303,000, $149,000, and $50,000, respectively.

9. Bank Line of Credit

As a part of a loan agreement with a bank, the Company has a $10 million
revolving credit facility, which expires June 30, 2000. The revolving credit
facility is unsecured provided that the Company complies with certain covenants.
Outstanding loans under this agreement bear interest at no less than the bank's
prime rate or the London Interbank Offered Rate (LIBOR) plus 150 basis points,
at the Company's option. The interest rates can be increased by the bank
dependent upon the Company maintaining certain financial ratios. The bank's
prime rate was 8.75% at January 31, 2000. There were no borrowings under the
line of credit at January 31, 2000 or 1999. The loan agreement also includes
certain restrictive covenants.

10. Accrued Liabilities

Accrued liabilities consist of the following:
<TABLE>
January 31,
----------------------------
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accrued payroll and related expenses........................ $ 5,688 $ 4,575
Other....................................................... 2,364 1,895
----------- -----------
$ 8,052 $ 6,470
=========== ===========
</TABLE>

11. Stockholders' Equity

Changes in the components of stockholders' equity for the years ended January
31, 1998, 1999, and 2000 were as follows:
<TABLE>
Accumulated Other
Common Comprehensive Retained
Stock Par Paid-in Income, net Earnings
Value Capital Total
-------------- ------------ ------------------ ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1997,
4,777,959 shares................... $ 478 $ 4,450 $ -- $ 22,049 $ 26,977
Net income............................ -- -- -- 4,875 4,875
Exercise of stock options, 43,900
shares.............................. 4 214 -- -- 218
Tax benefit from exercise of stock
options............................. -- 235 -- -- 235
Purchase and retirement of common
stock, 103,149 shares............... (10) (1,825) -- -- (1,835)
-------------- ------------ ---------------- ------------ ------------
Balance at January 31, 1998,
4,718,710 shares................... 472 3,074 -- 26,924 30,470
Net income............................ -- -- -- 5,683 5,683
Exercise of stock options, 19,250
shares.............................. 2 85 -- -- 87
Tax benefit from exercise of stock
options............................. -- 140 -- -- 140
Purchase and retirement of common
stock, 281,500 shares............... (28) (504) -- (4,662) (5,194)
Recognition of unrealized holding gain
on available for sale securities.... -- -- 16 -- 16
-------------- ------------ ---------------- ------------ ------------
Balance at January 31, 1999,
4,456,460 shares.................. 446 2,795 16 27,945 31,202
Net income............................ -- -- -- 3,153 3,153
Exercise of stock options, 83,625
shares.............................. 8 583 -- -- 591
Tax benefit from exercise of stock
options............................. -- 865 -- -- 865
Purchase and retirement of common
stock, 245,900 shares............... (25) (436) -- (4,355) (4,816)
Minority interest resulting from
exercise of subsidiary options...... -- -- -- (118) (118)
Issuance of common stock to acquire
subsidiary minority interest, 46,177
shares.............................. 5 885 -- -- 890
Recognition of unrealized holding loss
on available for sale securities... -- -- (13) -- (13)
-------------- ------------ ---------------- ------------ -------------
Balance at January 31, 2000,
4,340,362 shares.................... $ 434 $ 4,692 $ 3 $ 26,625 $ 31,754
============== ============ ================ ============ =============
</TABLE>

12. ...................................Income Taxes

Income taxes consist of the following amounts:
<TABLE>
Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax:
Current............................................... $ 1,906 $ 1,869 $ 2,012
Deferred.............................................. (318) (52) (278)
State income taxes:
Current............................................... 538 477 640
Deferred.............................................. (65) (11) (57)
------------- ------------- --------------
$ 2,061 $ 2,283 $ 2,317
============= ============= ==============
</TABLE>

Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial statement reporting
purposes and such amounts recognized for tax filing purposes. The principal
items making up the deferred tax provision in the years ended January 31, 2000,
1999 and 1998 were differing depreciation methods, the amortization of
intangibles, accrued compensation, software development costs, and prepaid
expenses.

The differences between the effective income tax rate and the statutory federal
income tax rates for the years ended January 31, 2000, 1999, and 1998 are as
follows:
<TABLE>

Years Ended January 31,
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Percent Percent Percent
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- --------- --------- --------- --------- ---------

(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax on income before
income taxes........................... $ 1,976 35.0% $ 2,189 35.0% $ 2,221 35.0%
Surtax exemption.......................... (56) (1.0) (63) (1.0) (63) (1.0)
State tax, net of federal benefit......... 312 5.5 308 4.9 385 6.1
Other, net................................ (171) (3.0) (151) (2.4) (226) (3.6)
--------- --------- --------- --------- --------- ---------

Taxes on income........................... $ 2,061 36.5% $ 2,283 36.5% $ 2,317 36.5%
========= ========= ========= ========= ========= =========
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 31, 2000 and
1999 are presented below:

<TABLE>

January 31,
--------------------------------------------

2000 1999
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable.................................... $ 600 $ 385
Property and equipment, principally due to differing
depreciation methods.................................. 239 138
Employee benefits, principally due to accrual for
financial reporting purposes.......................... 2,265 1,745
Other.................................................. 233 61
------------- -------------
Total gross deferred tax assets........................ 3,337 2,329
Less valuation allowance............................... -- --
------------- -------------
Net deferred tax assets................................ $ 3,337 $ 2,329
------------- -------------

Deferred tax liabilities:
Prepaid expenses....................................... $ 91 $ 96
Long-term investments.................................. -- 12
Property and equipment, principally due to differing
depreciation methods.................................. 220 56
Software development costs............................. 2,452 1,716
Other.................................................. 265 265
------------- -------------
Total gross deferred tax liabilities................... $ 3,028 $ 2,145
------------- -------------
Net deferred tax asset................................ $ 309 $ 184
============= =============
</TABLE>

There was no valuation allowance for deferred tax assets as of February 1, 1999,
and no change in the valuation allowance for the year ended January 31, 2000.
The Company believes that deferred tax assets will be recoverable through normal
operations.

13. Stock Options

The Company has two employee stock option plans and a director stock option plan
under which officers, key employees, and directors may be granted options to
purchase up to 1,802,891 shares of common stock of the Company at not less than
100% of the fair market value at the date of grant, unless the optionee is a 10%
shareholder of the Company, in which case the price must not be less than 110%
of the fair market value. The options are exercisable in installments determined
by the compensation committee of the Company's Board of Directors, however no
option may be exercised prior to one year following the grant of the option. The
options expire as determined by the committee, but no later than ten years and
one week after the date of grant (five years for 10% shareholders). Transactions
and other information relating to these plans for the three years ended January
31, 2000 are summarized below:
<TABLE>

Outstanding Options
----------------------------------------------

Number of Shares Weighted-Average
Exercise Price
------------------ -----------------------------
<S> <C> <C>
Balance, January 31, 1997....................... 551,900 $ 7.01
Options granted.............................. 169,000 $ 19.95
Options canceled or expired.................. (25,125) $ 11.62
Options exercised............................ (43,900) $ 4.97
---------------

Balance, January 31, 1998....................... 651,875 $ 10.32
Options granted.............................. 64,000 $ 21.00
Options canceled or expired.................. (8,500) $ 22.39
Options exercised............................ (19,250) $ 4.48
---------------

Balance, January 31, 1999....................... 688,125 $ 11.33
Options granted.............................. 70,000 $ 20.17
Options canceled or expired.................. (15,500) $ 20.53
Options exercised............................ (83,625) $ 6.36
---------------
Balance, January 31, 2000....................... 659,000 $ 12.68
===============
</TABLE>

The following table summarizes information about stock options outstanding at
January 31, 2000:
<TABLE>

Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/00 Contractual Life Exercise Price at 1/31/00 Exercise Price
- -------------------------------------- ------------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.88 to 2.00 95,000 1.0 years $1.96 95,000 $1.96
4.56 to 6.25 131,000 3.2 5.31 131,000 5.31
8.63 to 11.50 69,500 5.1 9.04 69,500 9.04
14.50 to 17.625 188,250 6.9 16.12 108,250 15.76
19.81 to 23.31 175,250 8.6 21.75 47,500 22.52
---------------- ----------------
$1.88 to 23.31 659,000 5.5 $12.68 451,250 $9.50
================ ================

</TABLE>

Stock options exercisable at January 31, 2000, 1999, and 1998 were 451,250,
432,125, and 360,875 respectively, at weighted-average exercise prices of $9.50,
$7.31, and $5.18, respectively. Shares available under the plans for future
grants at January 31, 2000, 1999, and 1998 were 183,355, 237,855, and 293,355,
respectively.

The per share weighted-average fair value of employee and director stock options
granted during the years ended January 31, 2000, 1999, and 1998 was $8.40,
$8.89, and $8.93, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>

Years ended January 31,
-------------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 31.4% 32.5% 34.2%
Risk-free interest rate 5.5% 5.5% 6.1%
Expected life 6 years 6 years 6 years
</TABLE>

One of the Company's subsidiaries, Comarco Wireless Technologies, Inc. ("CWT"),
also has a stock option plan. Figures for this plan reflect a 10-for-1 stock
split declared during the year ended January 31, 1998. Under this plan, officers
and key employees of CWT may be granted options to purchase up to 600,000 shares
of common stock of CWT at not less than 100% of the fair market value at the
date of grant. As of January 31, 2000, all 3,058,000 outstanding shares of CWT
common stock are owned by the Company. The fair market value of the shares and
the exercise dates of the options are determined by the Compensation Committee
of the Company's Board of Directors, however, no option may be exercised prior
to one year following the grant of the option. The options expire as determined
by the Committee, but not later than ten years and one week after the date of
grant. In the fiscal year ended January 31, 1998, 11,000 options were granted at
an exercise price of $17.62. In the fiscal years ended January 31, 1999 and
2000, no options were granted. At January 31, 1999 and at January 31, 1998,
there were 419,000 outstanding options at a weighted-average exercise price of
$5.33. In the fiscal year ended January 31, 2000, 58,000 options were exercised
at a weighted-average exercise price of $3.08 per share, and 5,000 options were
canceled at a weighted-average exercise price of $13.22 per share. Stock options
exercisable at January 31, 2000, 1999 and 1998 were 345,500, 361,750, and
257,000, respectively, at weighted-average exercise prices of $5.28, $4.53, and
$4.20, respectively. Shares available under the plan for future grants at
January 31, 2000, 1999 and 1998 were 186,000, 181,000 and 181,000, respectively.

The following table summarizes information about CWT stock options outstanding
at January 31, 2000:
<TABLE>

Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 1/31/00 Contractual Life Exercise Price at 1/31/00 Exercise Price
- ------------------ --------------- ------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
$2.53 to 4.30 265,000 4.7 years $3.06 265,000 $3.06
11.97 to 13.22 80,000 5.9 12.28 75,000 12.22
17.62 11,000 7.1 17.62 5,500 17.62
------------- --------------
$2.53 to 17.62 356,000 5.1 $5.59 345,500 $5.28
============= ==============
</TABLE>

The per share weighted-average fair value of CWT stock options granted during
the year ended January 31, 1998 was $7.35 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0.0%
Expected volatility 35.6%
Risk-free interest rate 6.2%
Expected life 5 years
</TABLE>

The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
Years ended January 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------

(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C>
Net income: As reported $ 3,153 $ 5,683 $ 4,875
Pro forma.................................. 2,634 5,150 4,481
Earnings per common share - basic:
As reported................................ $ .72 $ 1.23 $ 1.03
Pro forma.................................. .60 1.12 .94
Earnings per common share - diluted:
As reported................................ $ .64 $ 1.13 $ .89
Pro forma............................... .......... .54 1.05 .86
</TABLE>

Pro forma net income and earnings per share reflect only options granted since
February 1, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income and earnings per share amounts presented above because compensation cost
is reflected over the options' vesting periods of four years and compensation
cost for options granted prior to February 1, 1995 is not considered.

14. Earnings per Share

The following tables present reconciliations of the numerators and denominators
of the basic and diluted earnings per share computations for net income. In the
tables below, "Income" represents the numerator (in thousands) and "Shares"
represent the denominator (in thousands):

<TABLE>
Year ended January 31, 2000
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income................. $ 3,153 4,381 $ .72

Effect of subsidiary options (216) --

Effect of dilutive securities:
Stock options.............. -- 177
----------- --------- ----------
Diluted Earnings per Share:
Net income................. $ 2,937 4,558 $ 64
=========== ========= ==========

Year ended January 31, 1999
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income................. $ 5,683 4,608 $ 1.23

Effect of subsidiary options (267) --

Effect of dilutive securities:
Stock options.............. -- 204
----------- ---------- ---------

Diluted Earnings per Share:
Net income................. $ 5,416 4,812 $ 1.13
=========== ========== ==========

Year ended January 31, 1998
----------------------------------
$ Per
Income Shares Share
----------- ----------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income................. $ 4,875 4,744 $ 1.03

Effect of subsidiary options (372) --

Effect of dilutive securities:
Stock options.............. -- 332
---------- ---------- ----------

Diluted Earnings per Share:
Net income................. $ 4,503 5,07 $ .89
=========== ========== ==========
</TABLE>

15. Lease Commitments

Rental commitments under noncancelable operating leases, principally on the
Company's office space, equipment and automobiles were $3,848,000 at January 31,
2000, payable as follows: $1,124,000, $981,000, $698,000, $654,000, and $391,000
in the years ended January 31, 2001, 2002, 2003, 2004, and 2005, respectively.
Certain of the rental commitments are subject to increases based on the change
in the Consumer Price Index. Rental expense for the years ended January 31,
2000, 1999, and 1998 was $2,078,000, $1,776,000, and $1,593,000, respectively.

16. Employee Benefit Plans

The Company has a Savings and Retirement Plan (the "Plan") which provides
benefits to eligible employees. Under the Plan, as amended effective January 1,
2000, employees who have been with the Company in excess of three months and are
at least 18 years of age may participate by contributing between 1% and 20% of
pre-tax earnings. Employees at one Company location are permitted to contribute
up to 25% of pre-tax earnings. Company contributions match employee
contributions at levels as specified in the Plan document. In addition, the
Company may contribute a portion of its net profits as determined by the Board
of Directors. Company contributions, which consist of matching contributions,
with respect to the Plan for the years ended January 31, 2000, 1999, and 1998
were approximately $904,000, $812,000, and $623,000, respectively.

17. Supplemental Disclosures of Cash Flow Information
<TABLE>

Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................... $ -- $ -- $ --
Income taxes................................ $3,648 $3,459 $2,656
</TABLE>

In February 1997, the Company acquired the assets of the callbox operation of
Cubic Communications, Inc., for approximately $1,717,000.

In May 1998, the Company acquired certain intellectual property and related
software assets of Industrial Technology, Inc. for approximately $1,000,000.

In December 1999, the Company acquired the minority interest of CWT that was
created from the exercise of CWT stock options through the payment of $433,000
in cash and the issuance of 46,177 shares of Company stock. Intangible assets of
$980,000 were created in the acquisition of the minority interest.

18. Research and Development Costs

The Company incurred research and development costs (includes Company-sponsored
software development costs prior to determination of technological feasibility)
of approximately $0.6 million, $0.8 million, and $1.7 million, in the years
ended January 31, 2000, 1999, and 1998, respectively, related to wireless
communications products and development of software tools. These costs were
expensed as incurred.

19. Business Segment Information

The Company provides test and measurement products and services for wireless
telephone carriers, systems for the wireless transmission of voice and data, and
advanced technology products for portable wireless appliances such as notebook
computers, cellular telephones and personal organizers.

Revenues by geographic area consisted of the following:

<TABLE>
Years Ended January 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
United States......................... $ 35,280 $ 28,411 $ 20,595
Canada................................ 753 1,223 558
Europe................................ 907 1,417 3,559
Asia.................................. 338 699 2,138
Latin America......................... 1,946 2,254 2,674
------------- ------------- --------------
$ 39,224 $ 34,004 $ 29,524
============= ============= ==============
</TABLE>

Long-lived assets outside of North America were insignificant at January 31,
2000, 1999, and 1998.

20. Intangible Asset Write-off

In January 1998, the Company recorded a $710,000 charge against earnings from
the impairment of certain assets of its information technology and staffing
services software development operation. This charge was recorded in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Based upon marketing initiatives which proved unsuccessful, the Company
determined that the expected future cash flows were not sufficient to cover the
remaining unamortized intangible assets. Accordingly, the complete impairment of
these assets was recorded in the consolidated statement of income as a component
of discontinued operations for the year ended January 31, 1998.

21. Commitments and Contingencies

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

Costs under cost-reimbursable contracts are subject to audit by the customer
upon contract completion. Therefore, all contract costs, including direct and
indirect costs, are potentially subject to adjustment prior to final
reimbursement. Audits have been completed through January 31, 1999.

In the fiscal year ended January 31, 2000, the Company recorded a final
discontinued operations' pre-tax $1.3 million loss to terminate two fixed price
contracts with a single government agency and an additional discontinued
operations' pre-tax loss of $1.4 million related to the change in management's
estimate to complete a multi-year fixed price contract after completion of
protracted negotiations with the U.S. Air Force over the Company's request for
equitable adjustment. The negotiation resulted in additional funding of $5.1
million and a 30-month contract extension. The modified contract now ends in
March 2002. The $1.4 million provision is based on the Company's assumptions and
future performance expectations over the remaining 26-month contract performance
period of the contract as of January 31, 2000. If the Company's assumptions or
performance do not meet expectations, additional loss provisions would be
required.

In addition, the Company's Fiscal Years 1997 and 1998 federal income tax returns
are being reviewed by the Internal Revenue Service.

Management believes that sufficient reserves have been established for its most
probable assessment of the potential outcomes of the above open matters.

22. Quarterly Financial Data (Unaudited)

Unaudited summarized financial data by quarter for Fiscal Years 2000 and 1999
are as follows (in thousands, except per share data):

<TABLE>
Fiscal Year 2000 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------
<S> <C> <C> <C>
Revenues from continuing operations.................. $ 7,842 $ 8,973 $ 11,959 $ 10,450
Gross profit from continuing operations.............. 3,861 3,979 5,701 4,889
Operating income from continuing operations.......... 879 815 2,315 1,410
Net income from continuing operations................ 609 580 1,482 915
Net income (loss).................................... 959 1,012 (412) 1,594

-------------- ------------- ------------- --------------
Basic earnings (loss) per share...................... $ .22 $ .23 $ (.09) $ .36
============== ============= ============= ==============

-------------- ------------- ------------- --------------
Diluted earnings (loss) per share.................... $ .20 $ .21 $ (.11) $ .34
============== ============= ============= ==============

Fiscal Year 1999 Quarter Ended
------------------------------------------------------------
April 30 July 31 October 31 January 31
-------------- ------------- ------------- --------------

Revenues from continuing operations.................. $ 7,311 $ 7,351 $ 8,435 $ 10,907
Gross profit from continuing operations.............. 3,815 4,209 4,927 6,011
Operating income from continuing operations.......... 404 1,230 1,735 2,587
Net income from continuing operations................ 331 842 1,127 1,671
Net income........................................... 840 1,281 1,576 1,986

-------------- ------------- ------------- --------------
Basic earnings per share............................. $ .18 $ .27 $ .34 $ .44
============== ============= ============= ==============

-------------- ------------- ------------- --------------
Diluted earnings per share........................... $ .17 $ .25 $ .31 $ .40
============== ============= ============= ==============
</TABLE>

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information concerning Directors and Executive Officers of the Company is
incorporated herein by reference from the Company's definitive proxy statement
for the 2000 annual meeting of shareholders, which the Company expects to file
with the SEC by May 30, 2000.

ITEM 11. Executive Compensation

Information regarding executive compensation is incorporated by reference from
the Company's definitive proxy statement for the 2000 annual meeting of
shareholders, which the Company expects to file with the SEC by May 30, 2000.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information regarding Security Ownership is incorporated by reference from
the section entitled "Ownership of Securities" in the Company's definitive proxy
statement for the 2000 annual meeting of shareholders, which the Company expects
to file with the SEC by May 30, 2000.

ITEM 13. Certain Relationships and Related Transactions

The information concerning certain relationships and related transactions of the
Registrant is incorporated by reference from the section entitled "Executive
Compensation" in the Company's definitive proxy statement for the 2000 annual
meeting of shareholders, which the Company expects to file with the SEC by May
30, 2000.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1. Financial Statements (See Item 8)

2. Financial Statement Schedule:

The following additional information for the fiscal years ended January
31, 2000, 1999, and 1998 is submitted herewith: II Reserves

All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the consolidated
financial statements or the notes thereto.

3. Exhibits

3.1 Articles of Incorporation. The Articles of Incorporation are
incorporated herein by reference from the Company's report on
Form 8 filed with the Securities and Exchange Commission on
November 16, 1988.

3.2 By-Laws. The By-Laws are incorporated by reference from the
Company's report on Form 10-Q for the quarter ended July 31,
1986.

10. Material Contracts

10.1 1982 Stock Option Plan. The restated 1982 Stock Option Plan is
incorporated herein by reference from Exhibit C to the
Company's definitive Proxy Materials filed with the Securities
and Exchange Commission on June 25, 1986.

10.2 Director Stock Option Plan dated July 1, 1987 is incorporated
by reference from the Company's report on Form 10-K for the
year ended January 31, 1988.

10.3 Contract dated January 22, 1991 between the Company and the
County of Los Angeles for the operation and maintenance of
County-owned general aviation airports is incorporated by
reference from the Company's report on Form 10-K for the year
ended January 31, 1991.

10.4 Agreement dated April 16, 1991 between the Company and Don M.
Bailey, President and Chief Executive Officer, regarding
employment termination in the event of a change in control of
the Company is incorporated by reference from the Company's
report on Form 10-K for the year ended January 31, 1992.

10.5 Agreement dated December 14, 1989 between the Company and
ManTech Engineering Corporation to establish the Interop Joint
Venture is incorporated by reference from the Company's report
on Form 10-K for the year ended January 31, 1992.

10.6 Agreement dated January 4, 1993 between the Company, DynCorp,
and Electronic Warfare Associates to establish the Tesco Joint
Venture is incorporated by reference from the Company's report
on Form 10-K for the year ended January 31, 1993.

10.7 Business Loan Agreement dated September 26, 1994 between the
Company and Bank of America, N.A. (formerly NationsBank of
Virginia, N.A.) to establish a $5,000,000 Guidance Line of
Credit and an $8,000,000 Master Line of Credit is incorporated
by reference from the Company's report on Form 10-Q for the
quarter ended October 30, 1994.

10.8 Guidance Line of Credit Note for $5,000,000 dated September
26, 1994 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended October 30, 1994.

10.9 Master Line of Credit for $8,000,000 dated September 26, 1994
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.) is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
October 30, 1994.

10.10 Nonqualified Employee Stock Option Plan for Comarco Wireless
Technologies, Inc. dated August 1994 is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended October 30, 1994.

10.11 Primary Stock Purchase Agreement among COMARCO, Inc. and the
prior shareholders of LCTI, Inc., dated August 9, 1994 is
incorporated by reference from the Company's report on Form
10-Q for the quarter ended October 30, 1994.

10.12 Second Stock Purchase Agreement among COMARCO, Inc. and the
prior shareholders of LCTI, Inc., dated August 9, 1994 is
incorporated by reference from the Company's report on For
10-Q for the quarter ended October 30, 1994.

10.13 1995 Employee Stock Option Plan is incorporated by reference
from the Company's report on Form S-8 filed with the
Securities and Exchange Commission on October 5, 1995.

10.14 First Amendment to Loan Agreement dated September 26, 1995
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.) is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
October 29, 1995.

10.15 Amended and Restated Master Line of Credit Note dated October
31, 1995 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended October 29, 1995.

10.16 Amended and Restated Guidance Line of Credit Note dated
October 31, 1995 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended October 29, 1995.

10.17 Second Amendment to Loan Agreement dated August 30, 1996
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.) is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
July 31, 1996.

10.18 Second Amended and Restated Master Line of Credit Note dated
August 30, 1996 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1996.

10.19 Second Amended and Restated Guidance Line of Credit Note dated
August 30, 1996 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1996.

10.20 Asset Purchase Agreement among COMARCO, Inc., CoSource
Solutions, Inc. (now known as Comarco Staffing, Inc.), R.A.L.
Consulting and Staffing Services, Inc., and Robert A.
Lovingood dated July 23, 1996 is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
July 31, 1996.

10.21 Employment Agreement betwee COMARCO, Inc., CoSource
Solutions, Inc. (now known as Comarco Staffing, Inc.), and
Robert A. Lovingood dated July 23, 1996 is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1996.

10.22 Noncompetition and Confidentiality Agreement between COMARCO,
Inc., CoSource Solutions, Inc., (now known as Comarco
Staffing, Inc.) and Robert A. Lovingood dated July 23,
1996 is incorporated by reference from the Company's report
on Form 10-Q for the quarter ended July 31, 1996.

10.23 Third Amendment to Loan Agreement dated August 15, 1997
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.) is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
July 31, 1997.

10.24 Third Amended and Restated Master Line of Credit Note dated
August 15, 1997 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1997.

10.25 Third Amended and Restated Guidance Line of Credit Note dated
August 15, 1997 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1997.

10.26 Fourth Amendment to Loan Agreement dated August 21, 1998
between the Company and Bank of America, N.A. (formerly
NationsBank of Virginia, N.A.) is incorporated by reference
from the Company's report on Form 10-Q for the quarter ended
July 31, 1998.

10.27 Fourth Amended and Restated Master Line of Credit Note dated
August 21, 1998 between the Company and Bank of America, N.A.
(formerly NationsBank of Virginia, N.A.) is incorporated by
reference from the Company's report on Form 10-Q for the
quarter ended July 31, 1998.

11. Computation of Number of Shares of Common Stock used in the
Computation of Earnings Per Share.

21.1 Subsidiaries of the Company. The following are the significant
subsidiaries of the Company:
Decisions and Designs, Inc. (DDI) incorporated in the Common-
wealth of Virginia.
International Business Services, Inc. (IBS) incorporated in
the District of Columbia.
Comarco Wireless Technologies, Inc. (CWT) incorporated in the
State of Delaware.
LCTI, Inc. incorporated in the State of Maryland.
Comarco Wireless International, Inc. (formerly known as
Comarco Wireless Europe, Inc.) incorporated in the State
of Delaware.
Comarco Staffing, Inc. (formerly known as CoSource Solutions,
Inc.), incorporated in the State of California.
Comarco Systems, Inc., incorporated in the State of California.
Comarco Services, Inc. incorporated in the State of California.

23.1 Consent of Independent Auditors.

99.2 Undertakings of Registrant.

(b) Reports on Form 8-K

On July 22, 1999, the Company filed a Current Report on Form 8-K
reporting the announcement of a strategic plan to enhance shareholder
value by marketing the Company's information technology and staffing
services product lines and enclosing its press release of July 7, 1999
to that effect.

<PAGE>

COMARCO, INC. AND SUBSIDIARIES
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, on April 26, 2000.

COMARCO, INC.

/s/ THOMAS A. FRANZA
-----------------------------
Thomas A. Franza
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf by the
Registrant and in the capacities and on the dates so indicated.

Signature Title Date
--------- ----- ----

President and Chief Executive
Officer (Principal Executive
/s/ THOMAS A. FRANZA Officer) April 26, 2000

- ---------------------------
Thomas A. Franza

Vice President
and
Treasurer (Principal Financial
/s/ THOMAS P. BAIRD and Accounting Officer) April 26, 2000

- ---------------------------
Thomas P. Baird

/s/ DON M. BAILEY Chairman of the Board April 26, 2000

- ----------------------------
Don M. Bailey

/s/ WILBUR L. CREECH Director April 26, 2000
- ----------------------------
Wilbur L. Creech

/s/ GERALD D. GRIFFIN Director April 26, 2000

- ------------------------------
Gerald D. Griffin

/s/ PAUL G. YOVOVICH Director April 26, 2000
- --------------------------------

Paul G. Yovovich

<PAGE>

COMARCO, INC. AND SUBSIDIARIES

SCHEDULE II - RESERVES

Three Years Ended January 31, 2000

(Dollars in thousands)

<TABLE>
Other
Balance at Charged to Changes
Beginning Cost and Add Balance at End
of Year Expense Deductions (Deduct) of Year
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 2000:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 96 $ 24 $ 10(1) $ -- $ 110

Year ended January 31, 1999:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 72 $ 24 $ -- $ -- $ 96

Year ended January 31, 1998:
Allowance for doubtful accounts and
provision for unbilled receivables
(deducted from accounts
receivable)....................... $ 6 $ 66 $ -- $ -- $ 72
</TABLE>

(1) Write off of uncollectible receivables.

EXHIBIT 11

COMARCO, INC. AND SUBSIDIARIES

SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE

<TABLE>
Years Ended January 31,
----------------------------------------------------------------
2000 1999 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Diluted:
Net income.................................... $ 3,153,000 $ 5,683,000 $ 4,875,000
Less-- net income allocated to subsidiary
dilutive stock options outstanding......... (216,000) (267,000) (372,000)
------------------ ----------------- -----------------
Net income used in calculation of diluted income $ 2,937,000 $ 5,416,000 $ 4,503,000
per share..................................
================== ================= =================

Weighted-average number of common shares
outstanding during the year................... 4,381,000 4,608,000 4,744,000
Add--common equivalent shares (determined using the
"treasury stock" method) representing shares
issuable upon exercise of stock options and
warrants...................................... 177,000 204,000 332,000
------------------ ----------------- -----------------
Weighted-average number of shares used in
calculation of diluted income per share...... 4,558,000 4,812,000 5,076,000
================== ================= =================

Diluted income per common share.................. $ .64 $ 1.13 $ .89
================== ================= =================
</TABLE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
COMARCO, Inc.

We consent to the incorporation by reference in the Registration
Statements Nos. 33-37863, 33-44943, 33-45096, 33-50068, and 33-63219 on Forms
S-8 of COMARCO, Inc. of our report dated March 20, 2000, relating to the
consolidated balance sheets of COMARCO, Inc. and Subsidiaries as of January 31,
2000 and 1999, and the related consolidated statements of income, cash flows and
comprehensive income and the related schedule for each of the years in the
three-year period ended January 31, 2000, which report appears in the January
31, 2000 annual report on Form 10-K of COMARCO, Inc. and Subsidiaries.

KPMG LLP

McLean, Virginia
April 28, 2000

EXHIBIT 99.2

Supplement to Registrant's Registration Statements on Form S-8

In accordance with the requirements of Form S-8, the registrant hereby
supplements any discussion of the indemnification provisions of the registrant
in all of the registrant's registration statements previously filed on Form S-8
with the following undertaking:

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 5,064
<SECURITIES> 3,721
<RECEIVABLES> 6,695
<ALLOWANCES> 0
<INVENTORY> 4,852
<CURRENT-ASSETS> 35,252
<PP&E> 2,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,148
<CURRENT-LIABILITIES> 11,795
<BONDS> 0
0
0
<COMMON> 434
<OTHER-SE> 31,320
<TOTAL-LIABILITY-AND-EQUITY> 46,148
<SALES> 33,499
<TOTAL-REVENUES> 39,224
<CGS> 16,983
<TOTAL-COSTS> 33,805
<OTHER-EXPENSES> 13,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (274)
<INCOME-PRETAX> 5,647
<INCOME-TAX> 2,061
<INCOME-CONTINUING> 3,586
<DISCONTINUED> (433)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,153
<EPS-BASIC> .72
<EPS-DILUTED> .64
<FN>
NOTE: RECEIVABLES AND PP&E VALUES REPORTED REPRESENT NET AMOUNTS.
</FN>

</TABLE>