UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 20072008

OR

For the transition period from            to            

Commission File Number 0-5449

COMARCO, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(949) 599-7400

Securities registered pursuant to Section 12(g) of the Act: None

Securities registered pursuant to Section 12(b) of the Act:

Common Stock

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer (do not check if a smaller reporting company)  ¨

Smaller reporting company  x

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

As of July 31, 2006,2007, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $70$44 million.

The number of shares of the registrant’s common stock outstanding as of April 13, 20074, 2008 was 7,371,338.7,326,671.

Documents incorporated by reference:

Part III incorporates information by reference to portions of the registrant’s proxy statement for its fiscal 20072008 annual meeting of shareholders.

COMARCO, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 20072008

TABLE OF CONTENTS

PART I

FORWARD-LOOKING STATEMENTS

This report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding our business, financial condition, results of operations, and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the section below entitled “Risk Factors,” as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

General

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

We have three primary businesses: mobile power products (“ChargeSource”ChargeSource^®”), wireless test solutions (“WTS”), and emergency call box systemsboxes (“call box” or “call box systems”Call Box”). Our mobile power productsChargeSource^® business designs and manufactures external power adapters for notebook computers, mobile phones, and many other rechargeable handheld devices. Our WTS business designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others.service providers. Our call boxCall Box business designs, manufactures, and maintains emergency call box systems.boxes.

Our net revenue by business segment for fiscal 2008, 2007, 2006, and 20052006 was:

More financial information about our business segments is contained in Note 2021 “Business Segment Information” of our consolidated financial statements.

References to “fiscal” years in this report refer to our fiscal years ended January 31; for example, “fiscal 2007”2008” refers to our fiscal year ended January 31, 2007.2008.

We file or furnish annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). Our SEC filings are available free of charge to the public over the Internet at the SEC’s website atonhttp://www.sec.gov. Our SEC filings are also available on our website athttp://www.comarco.com as soon as reasonably practical following the time that they are filed with or furnished to the SEC. Any document we file or furnish with the SEC can be read at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For further information on the Public Reference Room, call the SEC at (800) SEC-0330.

Our Businesses

Mobile Power Products (ChargeSource)ChargeSource^®

Our ChargeSource^® business designs and manufactures external power adapters for notebook computers, mobile phones, and many other rechargeable handheld devices. These mobile power products, which are designed with the needs of the traveling professional in mind, provide a high level of functionality and compatibility in an industry leading compact design.

Products

Our current and planned ChargeSource^® product offering consists of external AC/DC, AC, and DC power adapters designed for the right mix of power output and functionality for most retail, original equipment manufacturer (“OEM”), and enterprise customers. Our ChargeSource^® products are also programmable, allowing those who use multiple rechargeable electronic devices to carry just one power adapter. By simply changing the compact SmartTip^® connected to the end of the charging cable, our external power adapters are capable of charging and powering multiple devices.

We believe our patented electrical designs will continue to be the basis for even higher-power external power adapters that are expected to meet evolving global standards, including the planned standards of the European Union (“EU”), and the increasing power requirements of the notebook computer OEMs, and allow us to offer customers cutting edge technology while significantly decreasing size and weight.

Our ChargeSource^® business generated revenue totaling $5.4 million, $16.7 million, $12.3 million, and $5.8$12.3 million in fiscal 2008, 2007, and 2006, and 2005, respectively.

Wireless Test Solutions

Our WTS business designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others.service providers. Radio frequency engineers, network improvement professionals and technicians and others use these test tools to deploy and optimize wireless networks, and to verify the performance of the wireless networks and resulting quality of service once deployed.

Products

Our WTS product offering consists of integrated hardware and software solutions that are flexible, scalable, and modular, allowing our customers to analyze and test all 2G, 2.5G, and 3G technologies. Test applications include optimization and Quality of Service (“QoS”) testing/benchmarking of wireless networks, in-building or in-vehicle testing, fixed or mobile testing, and voice, data, or video testing.

Services

Our WTS business leases test systems on a limited basis. The demand for our leased equipment is primarily from customers providing engineering services to wireless carriers requiring QoS and benchmarking data on an outsourced basis.

Our WTS business generated revenue totaling $6.7 million, $15.3 million, $24.5 million, and $16.8$24.5 million in fiscal 2008, 2007, 2006, and 2005,2006, respectively.

Emergency Call Box Systems

Products

Our emergency call boxCall Box business designs, manufactures, and maintains emergency call box systemsboxes that incorporate digital wireless and text-telephony (“TTY”) technologies provided by wireless carriers for state and local governmental agencies primarily located in California and New York. Our call box productsboxes provide emergency communication over existing wireless networks and are typically deployed along major highways, and at schools, universities, shopping centers, and parks.

Services

In conjunction with the sale of call box products,boxes, we provide system installation and long-term maintenance services. Currently, there are approximately 10,8009,200 call boxes that we maintain under long-term agreements that expire at various dates through February 2011.January 2012. Under the terms of the maintenance agreements our governmentalwith government customers, each agreement can terminate their respective agreementbe terminated without cause upon 30-daysa 30-day written notice.

Our emergency call box systemsCall Box business generated revenue totaling $11.1 million, $15.7 million, $10.0 million, and $6.6$10.0 million in fiscal 2008, 2007, 2006, and 2005,2006, respectively.

Marketing, Sales, and Distribution

Mobile Power Products (ChargeSource)ChargeSource^®

We believe demand for our mobile power products can be categorized into the following three distinct channels:

Retail. To reach the retail consumer, we have historically entered into exclusive distribution agreements with a single tier-one distributor of consumer electronics. Our distribution partner brands our products and distributes them to retailers, focusing on national “big-box” retail chains and office superstores. Due to the terms of this exclusive distribution agreement, our direct access to certain significant distribution channels was limited. Accordingly, our success was dependeddependent to a large degree upon our exclusive distributor’s ability and willingness to effectively and

widely distribute our ChargeSource^® products. As of January 31,During fiscal years 2008, 2007, and 2006, Kensington Technology Group (“Kensington”), a division of ACCO Brands Corporation (NYSE:ABD), was the exclusive retail channel distributor of our ChargeSource products and has been the source of the majority of our ChargeSource^® revenue. Revenue generated by Kensington for fiscal 2008, 2007, and 2006 and 2005 totaled $4.6 million, $15.4 million, $11.8 million, and $0.9$11.8 million, respectively, or as a percentage of total ChargeSource^® revenue, 86 percent, 92 percent, 96 percent, and 1696 percent, respectively.

To reduce our exposure to the risks related to depending upon a single powerful customer, as well as to expand our retail channel penetration, we have adopted a non-exclusive retail distribution strategy. This strategy is expected to drive volume through multiple non-exclusive distribution relationships, lower our per unit manufacturing cost, and allow us to penetrate the broader retail market and certain geographic regions that may be underserved under a single exclusive distribution arrangement. During the first quarter of fiscal 2008, we entered into a non-exclusive distribution arrangement with Kensington, thereby terminating our exclusive distribution agreement. Under this non-exclusive agreement, we have the right to penetrate all channels with multiple partners and Kensington has the right to purchase our products at competitive prices without volume minimums. Kensington is also able to purchase mobile power products from our competitors.

We expect to experience some disruption over the next several quarters as we transition our ChargeSource retail distribution model to one based on non-exclusive relationships with multiple distributors and brands.

OEM-branded accessories. The notebook computer OEMs offer an expansive selection of notebook computer accessories through their on-line retail portals, catalogs, and other channels. Many of these accessories have been designed to OEM specifications to be compatible and/or to complement their specific notebook computers. Typically, the OEMs will brand these products and market them in conjunction with the sale of their notebook computers.

Late in the fourth quarter of fiscal 2008, we began volume production of a small form factor 90-watt AC/DC external power adapter designed to the stringent specifications of Lenovo, a leading notebook computer OEM. We entered the first quarter of fiscal 2009 with a backlog of 216,000 units on order from Lenovo.

We typically work directly with thedistributors and OEMs on these designs and products in response to their requests. The desired products are both AC only and AC/DC, as well as with and without programmability. Once generally available, we expect to receive purchase orders from the OEM and deliver the ordered products directly from our contract manufacturer into their supply chain organization. We are currently designing several external power adapters to the specifications of a leading OEM.

OEM “in-the-box.” Notebook computers are typically sold with a conventional AC-only power adapter included with the purchase or “in-the-box.” These “in-the-box” adapters are manufactured for low cost and delivered in quantities of tens of millions per year. As notebook computer power and regulatory requirements increase, the size and weight of the power adapter may also increase. We believe our patented electrical design, which is the basis for our small and light power adapters, can address this large and growing market. As with OEM-branded accessories, we typically work directly with the OEMs on these designs and products in response to their requests. Products designed for this channel must be ultra-low cost and reliable, and must be manufactured in high volume. We are currently in the initial stages of responding to a request for “in-the-box” power adapters from a leading OEM.

Wireless Test Solutions

We market and sell our WTS products primarily to wireless carriers through a small direct sales force of technically trained personnel, as well as through select independent sales representatives, and affiliated and unaffiliated resellers. Our North America sales are made through our direct sales and marketing organizationsdepartments located in Lake Forest, California. Sales to our customers in Latin and South America are generally made through our

offices independent sales representatives located in Mexico City, Mexico, and Sao Palo,Paulo, Brazil, assisted by the sales and marketing organizations based in Lake Forest, California. These officesThe Lake Forest office also coordinatecoordinates the marketing, sales, and support efforts of a network of representatives and resellers responsible for sales to customers in other geographic regions.

Through December 31, 2006, Switzerland-based SwissQual AG (“SwissQual”) was responsible for reselling and supporting our co-branded Seven.Five products in Europe, the Middle East, and North Africa (our “European” region). During January 2006, we sold our 18 percent ownership interest in SwissQual, which we acquired during fiscal 2002. During January 2006, Spirent Communications plc (“Spirent”) acquired 100 percent of the outstanding shares of SwissQual, including our 18 percent ownership interest, for consideration totaling up to approximately $71.3 million. See section entitled “Wireless Test Solutions” of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We currently have a revenue sharing agreement in place that determines how much revenue we earn from SwissQual sales and, conversely, how much revenue SwissQual earns from our sales to customers located outside the European region.region through December 31, 2010. The

revenue sharing is based upon sales of upgrades to the current installed base of Seven.Five systems. Both the revenue sharing that we earn from SwissQual and that we pay to SwissQual under the agreement is expected to diminish over time as both companies have introduced new products into the marketplace.

During November 2006, in response to increased competition in the QoS market, we announced a cooperative alliance with Ascom (SWX:ASCN)(Schweiz) AG (“Ascom”), a leading specialist in wireless onsite communications solutions based in Switzerland, to develop, market, and support next-generation wireless network QoS, optimization, and test measurement systems. Together we are currently developing harmonized test and measurement systems and solutions for 3G and 4G wireless standards, accelerating the availability of upgrades to the installed base in Europe and our home markets, while enabling the rapid deployment of new products. These harmonized products and solutions are expected to bebecame available during the second halfthird quarter of fiscal 2008. Additionally, we will share sales and support resources with Ascom on a global basis and we no longer intend to establishmaintain a separate direct sales and support organization for our European region.

Emergency Call Box Systems

We market and sell our call box systemsboxes primarily to state and local governmental agencies located in California and New York through a direct sales force located in Lake Forest, California.

Competition

Mobile Power Products (ChargeSource)ChargeSource^®

Numerous providers, including Delta Electronics, Inc., Mobility Electronics, Inc., Targus, Belkin, Kensington, and APC, sell products that compete directly compete for power product market share. The cellularwith our ChargeSource^® products. Cellular telephone and personal computer OEMs also servedeliver competitors’ products to the market for our ChargeSource^® external power adapters. Many of these distributors and our design and manufacturing competitors are larger and have greater financial resources. We believe that the patents that cover our ChargeSource^® products provide us with a competitive advantage. However,

To compete successfully in this market, we believe we must:

Wireless Test Solutions

The market for our hardware and software test tools is highly competitive and is served by numerous providers. Our primary competitors with respect to our WTS products are Agilent Technologies, Ascom, Ericsson, Andrew Corporation and Spirent plc (“Spirent”)(CommScope), through its acquisition ofand SwissQual. Many of our competitors are larger and have greater financial resources.

The wireless industry is characterized by rapid technological changes, frequent new product and service introductions, and evolving industry standards. To compete successfully in this market, we believe we must:

Emergency Call Box Systems

The market for our emergency call box systemsboxes is also served by numerous competitors, including US Commlink, GAI-Tronics, Talk-A-Phone, and other manufacturers of wireless and wireline emergency and information communication devices. Certain of our competitors are larger and have greater financial resources.

To compete successfully in the call box market, we believe we must:

Key Customers

We derive a substantial portion of our revenue from a limited number of customers.

Mobile Power Products (ChargeSource)ChargeSource^®

In fiscal 2008, 2007, and 2006, Kensington, our primary distributor of ChargeSource^® products, accounted for revenue totaling $4.7 million, $15.4 million, and $11.8 million, or 20 percent, 32 percent, and 25 percent of total consolidated revenue, respectively. In fiscal 2005, Targus, the former distributor of our mobile power products, accounted for revenue totaling $4.1 million, or 14 percent of total revenue.

Wireless Test Solutions

In fiscal 2008, 2007, and 2006, Verizon accounted for revenue totaling $3.7 million, $7.0 million, and $11.9 million, or 16 percent, 15 percent, and 25 percent of total consolidated revenue, respectively. In fiscal 2007 2006, and 2005,2006, SwissQual, our former exclusive distributor of WTS products in our European region, accounted for $2.5 million $8.8 million, and $6.6$8.8 million, or 5 percent 19 percent, and 2219 percent of total consolidated revenue, respectively. InDuring fiscal 2005, TIM Cellular S.A., a wireless carrier based2008, revenue earned from SwissQual was negligible, primarily due to the termination of the sales alliance in Brazil, accounted for revenue totaling $4.3 million or 15 percent of total revenue.December 2006.

Emergency Call Box Systems

Our call boxCall Box business derives a significant portion of its revenue from state and local governmental agencies. In fiscal 2008, 2007, 2006, and 2005,2006, revenue from these governmental agencies totaled $10.7 million, $14.7 million, and $8.7 million, and $6.2 million, or 46 percent, 31 percent, 18 percent, and 2118 percent of total consolidated revenue, respectively.

The spending patterns of Verizon, Kensington, or any of our other key customers can vary significantly from year to year. Any significant reduction in the spending patterns of these customers could adversely affect our revenue, operating results, and cash flows.

International Operations

We sell our ChargeSource^® and WTS products to customers located throughout the world. In fiscal 2008, 2007, 2006, and 2005,2006, we derived 82 percent, 81 percent, 68 percent, and 5368 percent of total revenue, respectively, from customers in the United States and 18 percent, 19 percent, 32 percent, and 4732 percent, respectively, from customers in foreign countries, as determined by the “ship to” address. The decrease in the percentage of sales to foreign countries during fiscal 2008 and 2007 as compared to fiscal 2006 and fiscal 2005 is primarily due to decreasing sales of our WTS products to SwissQual. In fiscal 2008, 2007, and 2006, there were no foreign countries from which we derived more than 10 percent of total revenue. In fiscal 2005, sales to Brazil accounted for $5.6 million, or 19 percent of total revenue.

Research and Development

We sell our products in markets that are characterized by rapid technology changes, frequent new product introductions, and evolving technology standards. Accordingly, we devote significant resources to designdesigning and develop

developing new and enhanced products that can be manufactured cost effectively and sold at competitive prices.

During fiscal 2008, 2007, 2006, and 20052006 we incurred approximately $6.5 million, $5.7 million, and $5.5 million, and $5.2 millionrespectively, in research and development expenses. To focus these efforts, we strive to maintain close relationships with our customers and develop products that meet their needs.

As of April 13, 2007,4, 2008, we had approximately 3229 engineers, 9 of whom are dedicated ChargeSource^® engineers, and other technical personnel dedicated to our research and development efforts. Generally, our research and development and other engineering efforts are managed and focused on a product-by-product basis, and can generally be characterized as follows:

Manufacturing and Suppliers

WeFor our WTS and Call Box products, we maintain one ISO-9001:2000 certified manufacturing facility located in Lake Forest, California, which is ISO-9001:2000 certified. OurCalifornia. For all three businesses, our manufacturing process involves the final assembly and test of individual components by production technicians. The components used by us consist primarily of printed circuit boards and related assemblies, specialized subassemblies, fabricated housings and chassis, and test mobiles. Most of our components and subassemblies are manufactured by third parties to our specifications and are generally delivered to us for final assembly and test. During fiscal 2005, we ceased manufacturing our ChargeSource^® products in-house and transitioned all manufacturing responsibility related to these products to contract manufacturers located in China.

Patents and Intellectual Property

We hold patents that cover key technical aspects of our ChargeSource^® products. However,For our WTS business, we generally rely on a combination of trade secrets, copyrights, and contractual rights to protect our intellectual property embodied in the hardware and software products of our WTS business.products.

Industry Practices Impacting Working Capital

Existing industry practices that affectOur working capital and operating cash flow is affected by our need to balance inventory levels with customer demand. Existing industry practices that affect our working capital and operating cash flow include (i) the level of variability of customer orders relative to the volume of production, (ii) vendor lead times, (iii) materials availability for critical parts, (iv) inventory levels heldnecessary to achieve rapid customer fulfillment, and provisions(v) the granting of extended payment terms to certain foreign customers.

Currently, we sell our products under purchase orders that are placed with short-term delivery requirements. As a result, we periodically maintain significant levels of inventory of long-lead components in order to meet our expected obligations. Delays in planned customer orders could result in higher inventory levels and negatively impact our operating results.

Our standard terms require customers to pay for our products in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward foreign exchange contracts. To date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Employees

As of April 13, 2007,4, 2008, we employed approximately 120119 employees. We believe our employee relations to be good. The majority of our employees are professional or technical personnel who possess training and experience

in engineering, computer science, and management. Our future success depends in large part on our ability to retain key technical, marketing, and management personnel, and to attract and retain qualified employees, particularly the highly skilled radio, design, process, and test engineers involved in the development of new products. Competition for such personnel can be 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 our operating results.

Our success depends to a significant extent upon the contribution of our executive officers and other key employees. Our employee stock option plan expired during May 2005. During December 2005, the Board of Directors approved and adopted a new employee equity incentive planthe 2005 Equity Incentive Plan (the “2005 Plan”) covering 450,000 shares of our common stock. The adoption of the 2005 Plan was ratified by the Company’sour shareholders at the annual shareholders’ meeting held on June 20, 2006.

ITEM 1A.    RISK FACTORSFailure to adjust our operations in response to changing market conditions or failure to accurately estimate demand for our products could adversely affect our operating results.

The spending patterns of many of our WTS customers have been volatile, unpredictable, and driven by market and technological factors that we cannot control or predict. In addition, consumer demand for our ChargeSource^® mobile power products has been subject to fluctuations as a result of our choices of distribution partners, market acceptance of our products, the timing and size of customer orders, and consumer demand for rechargeable mobile electronic devices. Accordingly, it has been difficult for us to forecast the demand for these products. We also are limited in our ability to quickly adapt our manufacturing and related cost structures to changing market conditions because a significant portion of our sales and marketing, design and other engineering, and manufacturing costs are fixed. If customer demand for our WTS and ChargeSource^® products declines or if we otherwise fail to accurately forecast reduced customer demand, we will likely experience excess capacity, which could adversely affect our operating results. Conversely, if market conditions improve, our manufacturing capacity may not be adequate to fill increased customer demand. As a result, we might not be able to fulfill customer orders in a timely manner, which could adversely affect our customer relationships and operating results.

A significant portion of our revenue is derived from the sale of our WTS products to customers in the wireless communications industry. We are currently experiencing a significant impactdecrease in revenue caused by widespread industry consolidation including substantial delays in purchasing decisions by our customers and reduced demand for our products. If these market conditions continue, our operating results and financial condition could suffer.

Revenue from the sale of our WTS products accounted for 3229 percent of total revenue for fiscal 2007.2008. Wireless carriers are the primary customers for our WTS products. These customers operate in an environment driven by new technology, increased competition, and regulatory change. To compete effectively, the wireless carriers must offer their subscribers lower prices, improved quality of service, and innovative new services. Increasing minutes of use, global subscribers, and data-intensive applications are driving higher capacity utilization of existing networks, requiring wireless carriers around the globe to place a greater emphasis on capital expenditures devoted to their wireless networks. Despite this greater emphasis, current demand for our WTS products has decreased compared to the prior fiscal year driven by widespread industry consolidation, delays in purchasing decisions by our customers, increased competition, and increased pricing pressure. If these market conditions continue, our operating results and financial condition may be adversely affected.

A significant portion of our revenue is derived from the sale and maintenance of emergency call box systems and upgrades to governmental customers that have experienced severe budgetary constraints in the past. If current and planned projects to install or upgrade call box systems are delayed, our operating results and financial condition could suffer.

Revenue from the sale of upgrades and maintenance of our emergency call box systems accounted for 33 percent of total revenue for fiscal 2007. Approximately 86 percent of our call box revenue is derived from state and local governmental agencies in California, which in prior years, experienced severe budgetary constraints. As a result, several of our planned projects to install or upgrade call box systems were delayed. If these adverse budgetary conditions recur, or they experience other events that result in funding constraints, we may face significant reductions in spending by our governmental customers, which would likely adversely affect our operating results and financial condition.

A substantial portion of our call box revenue in fiscal 20072008 was derived from non-recurring upgrades of emergency call box systems to governmentalboxes for government customers. If we are unable to replace this revenue stream, our operating results and financial condition could suffer.will be negatively impacted.

Approximately $4.6 million and $10.0 million of our fiscal 2008 and 2007 call box revenue was generated from sales of digital and text-telephony upgrades to our installed base of emergency call box systems.boxes. During fiscal 20082009 we expect to substantially complete the previously awarded digital and TTY upgrade contracts. We expect call box revenue for fiscal 20082009 to decrease compared to fiscal 2007.

Failure2008. If we are unable to adjust our operations due to changing market conditions or failure to accurately estimate demand for our products could adversely affectreplace this revenue stream, our operating results.

The spending patterns of many of our WTS customers have been volatile, unpredictable,results and driven by market and technological factors that we cannot control or predict. In addition, consumer demand for our ChargeSource mobile power products has been subject to fluctuations as a result of our choices of distribution partners, market acceptance of our products, the timing and size of customer orders, and consumer demand for rechargeable mobile electronic devices. Accordingly, it has been difficult for us to forecast the demand for these products. We also are limited in our ability to quickly adapt our manufacturing and related cost structures because a significant portion of our sales and marketing, design and other engineering, and manufacturing costs are fixed. If customer demand for our WTS and ChargeSource products declines or if we otherwise fail to accurately forecast reduced customer demand, wefinancial condition will likely experience excess capacity, which could adversely affect our operating results. Conversely, if market conditions improve, our manufacturing capacity may not be adequate to fill increased customer demand. As a result, we might not be able to fulfill customer orders in a timely manner, which could adversely affect our customer relationships and operating results.negatively impacted.

The ChargeSource^® and WTS products we make are complex and have short life cycles. If we are unable to rapidly and successfully develop and introduce new products, some of our products may become obsolete and our operating results could suffer.

The wireless communications and consumer electronics industries are characterized by rapid technological changes, frequent new product introductions, and evolving industry standards. Additionally, our ChargeSource^® mobile power products have short life cycles, and may become obsolete over relatively short periods of time. Our future success depends on our ability to develop, introduce, and deliver on a timely basis and in sufficient quantity new products, components, and enhancements. The success of any new product offering will depend on several factors, including our ability to:

Development of new products requires high levels of innovation from both our engineers and our component suppliers. Development of a new product often requires a substantial investment before we can determine the commercial viability of the product. If we dedicate a significant amount of resources to the development of products that do not achieve broad market acceptance, our operating results may suffer. Our operating results may also be adversely affected due to the timing of product introductions by competitors, especially if a competitor introduces a new product before our own comparable product is ready to be introduced.

The wireless communications and consumer electronics industries are highly competitive, and our profitability will be adversely affected if we are not able to compete effectively.

The wireless communications and consumer electronics industries in which we sell our products are highly competitive incompetitive. We compete on many areas,levels, including the timing of development and introduction of new products, technology, price, quality, customer service, and support. Our competitors range from some of the respective industries’ largest corporations to many relatively small and highly specialized firms. Many of our competitors possess advantages over us, including greater financial and marketing resources, greater name recognition and larger and more established customer and supplier relationships. Our competitors also may be able to respond more quickly to new or emerging technologies and changes in customer needs. If we do not have the resources or expertise necessary to compete or to match our competitors or otherwise fail to develop successful strategies to address these competitive disadvantages, we could lose customers and revenue.

The average selling prices of our products may decrease over their sales cycles, especially upon the introduction of new products, which may negatively affect our revenue and operating results.

Our products may experience a reduction in the average selling prices over their respective sales cycles. Further, as we introduce new or next-generation products, sales prices of legacy products may decline substantially. In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. There can be no assurances we will be successful in our efforts to reduce these costs. In order to do so, we must carefully manage the price paid for components used in our products, as well as manage our inventory costs to reduce overall product costs. If we are unable to reduce the overall production cost of legacy products as new products are introduced, our average gross margins may decline and adversely affect our operating results.

A significant portion of our revenue is dependent in part upon our relationships with our strategic distribution partners and their performance. If we are unable to successfully manage our relationships with the distributors of our mobile power products, our revenue and operating results could suffer.

Our ChargeSource^® mobile power products are distributed by Kensington, a tier-one distributor of consumer electronics. Our success will depend in part upon Kensington’s ability and willingness to effectively and widely distribute our ChargeSource^® products on a non-exclusive basis. If Kensington and ourany other distributors we may do business with in the future do not purchase the volume of products that we anticipate, our revenue and results of operations will suffer.

During November 2006, in response to increased competition in the QoS market, we announced a cooperative alliance with Ascom, a leading specialist in wireless onsite communications solutions based in Switzerland, to develop, market, and support next-generation wireless network QoS, optimization, and test measurement systems. Together we are currently developinghave developed harmonized test and measurement systems and solutions for 3G and 4G wireless standards, accelerating the availability of upgrades to the installed base in Europe and our home markets, while enabling the rapid deployment of new products. These harmonized products and solutions are expectednow available to be available during the second half of fiscal 2008.market. Additionally, the companies will share sales and support resources on a global basis. We are unsure as to what long term effect, if any, thebelieve our alliance with Ascom will have on futureopen sales of our WTS products,channels, particularly in our European region. Our success will depend in part upon our ability to jointly develop products with Ascom, theirAscom’s ability to capture the current installed base in Europe, as well as to provide sales and support services in that region. If we are unable to sell our jointly develop and selldeveloped harmonized products, our revenue and operating results could suffer.

A significant portion of our revenue is derived from a limited number of customers, and any loss of, cancellation, or delay in purchases by these customers could cause a significant decrease in our revenue.

We have historically derived a significant portion of our revenue from a limited number of customers. Our threetwo key customers for fiscal 20072008 accounted for $25.0$8.4 million, or 5236 percent of total revenue. We expect that a limited number of customers will continue to represent a large percentage of our revenue in the future. If any of our key customers reduces, cancels, or delays orders, and we are not able to develop other customers who purchase products at comparable levels, our revenue could decrease significantly. In addition, any difficulty in collecting amounts due from one or more of our key customers would negatively impact our results of operations and financial condition. We expect that a limited number of customers will continue to represent a large percentage of our revenue.

We may experience quality or safety defects in our products that could cause us to institute product recalls, require us to provide replacement products and harm our reputation.

In the course of conducting our business, we experience and attempt to address various quality and safety issues with our products. Often product defects are identified during our design, development, and manufacturing processes, which we are able to correct in a timely manner. Sometimes, defects are identified after introduction and shipment of products. If we are unable to fix defects in a timely manner or adequately address quality control issues, our relationships with our customers may be impaired, our reputation may suffer and we may lose customers. Any of the foregoing could adversely affect our business and results of operations.

Economic, political, and other risks associated with our international sales and operations could adversely affect our results of operations.

We currently maintain sales and support operations in the United States, China, Europe, and Latin America. Our international operations accounted for approximately 1918 percent of total revenue for fiscal 2007.2008. Accordingly, our business is subject to worldwide economic and market conditions and risks generally associated with doing business abroad, such as fluctuating foreign currency exchange rates, weaknesses in the economic conditions in particular countries or regions, the stability of international monetary conditions, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest and disruptions, and delays in shipments. Specifically, our ChargeSource^® contract manufacturer and a majority of our component suppliers are located in Asia. We do business with our foreign supply base in U.S. dollars. Our costs increase in countries with currencies that are increasing in value against the U.S. dollar. Also, we cannot be sure that our international supply base will

continue to accept orders denominated in U.S. dollars. If they do not, our costs will become more directly subject to foreign exchange fluctuations. These factors could adversely affect our ability to outsource our manufacturing and supply needs to foreign countries as well as our sales of products and services in international markets.

Our failure to address laws and regulations governing our government contracts, could adversely affect our Call Box business and operating results.

We depend on contracts with state and local governmental agencies for a significant portion of our call box revenue, and are subject to various laws and regulations that only apply to companies doing business with the government. For example, we supply call box productsboxes and provide system installation and long-term maintenance services to regional and municipal transit authorities and other governmental agencies. In fiscal 2007,2008, we derived 3146 percent of our revenue from contracts with these governmental customers. From time to time we are also subject to investigation for compliance with regulations governing our government contracts. Our failure to comply with any of these laws or regulations could result in suspension of these contracts, or subject us to administrative claims.

Disruptions in our relationships with our suppliers or in our suppliers’ operations could result in shortages of necessary components and adversely affect our operations.

We currently procure, and expect to continue to procure, certain components from single source manufacturers who provide unique component designs or who meet certain quality and performance requirements. In addition, we sometimes purchase customized components from single sources in order to take advantage of volume pricing discounts. In fiscal 2007,2008, one of the contract manufacturer ofmanufacturers for our ChargeSource^® products provided $10.7$2.2 million, or 5819 percent of all inventory purchases, and the contract manufacturer of our printed circuit boards provided $4.4$1.6 million, or 2414 percent of all inventory purchases.

The performance of these suppliers is largely outside of our control. In the past, we have experienced, and may continue to experience, shortages of important single source components. Our suppliers may fail to timely deliver components or provide components of sufficient quality. If this occurs, we may need to adjust both product designs and production schedules, which could result in delays in the production and delivery of products to our customers. These delays or defects could harm our reputation, impair our customer relationships, and adversely affect our operations.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation, settlement or licensing costs and expenses or be prevented from selling certain products.

Third parties have claimed, and may in the future claim, that we are infringing their intellectual property rights. These intellectual property infringement claims, whether we ultimately are found to be infringing any third party’s intellectual property rights or not, are time-consuming, costly to defend, and divert resources and management attention away from our operations. Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims. Additionally, claims of intellectual property infringement might require us to enter into royalty or license agreements. If we cannot or do not license the

infringed technology on acceptable terms or substitute similar technology from other sources, we could be prevented from or restricted in selling our products containing, or manufactured with, the infringed technology.

Third parties may infringe our intellectual property rights, and we may be required to spend significant resources enforcing these rights or otherwise suffer competitive injury.

Our success depends in large part on our proprietary technology. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners to establish and maintain our intellectual proprietary rights in our proprietary technology. We are required to spend significant resources to monitor and enforce our intellectual property rights; however these rights might not necessarily provide us with a sufficient competitive advantage. Our intellectual proprietary rights could be challenged, invalidated, or circumvented by competitors or others. Our employees, customers or partners could breach our confidentiality agreements, for which we may not have an adequate remedy available. We also may not be able to timely detect the infringement of our intellectual property rights, whichrights. The occurrence of any of the foregoing could harm our competitive position. Finally, the rapid pace of technological change in the wireless communications and consumer electronics industries could make certain of our key proprietary technology obsolete or provide us with less of a competitive advantage.

If we suffer the loss of our manufacturing facility due to catastrophe, our operations would be adversely affected.

We have one manufacturing facility, which is located in Lake Forest, California. Although we carry insurance for property damage, we do not carry insurance or financial reserves for all possible catastrophes, including interruptions or potential losses arising from earthquakes or terrorism. Any significant disruption in our manufacturing operations at the facility, whether due to fire, natural disaster, or otherwise, would have a material adverse effect on our financial condition and operating results.

Additionally, as previously discussed, during fiscal 2005 we transitioned the manufacturing of our ChargeSource^® products to a contract manufacturer located in China. If any significant disruption occurs in the facility in China, it would have a material adverse effect on our financial condition and operating results.

We depend upon the services of key personnel, and may not be able to attract and retain additional key personnel.

Our success depends to a significant extent on the continued services and experience of our key research, engineering, sales, marketing, and executive personnel. If for any reason our key personnel left our employ and we failed to replace a sufficient number of these personnel, we might not be able to maintain or expand our business. Competition for such highly skilled personnel in our wireless communications and consumer electronics industries is intense, and we cannot be certain that we will be able to hire or re-hire sufficiently qualified personnel in adequate numbers to meet the demand for our products and services. If we are unable to identify, hire, and integrate these skilled personnel in a timely or cost-efficient manner, our operating results could suffer.

We may not be able to successfully integrate future acquisitions, which could adversely affect our business, financial condition, and results of operations.

We have acquired, and are likely to acquire in the future, businesses, products, and technologies that complement or expand our current operations. Acquisitions could require significant capital investments and require us to integrate with companies that have different cultures, management teams, and business infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including:

If market conditions or other factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our acquisitions. Our failure to successfully integrate our acquisitions or realize the expected value from past or future acquisitions could harm our business, financial condition, and results of operations.

We may need additional capital in the future to fund the growth of our businesses, which we may not be able to obtain or obtain on acceptable terms.

We currently anticipate that our available capital resources and operating income will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, it is not assured that such resources will be sufficient to fund the long-term growth of our business. In particular, we may experience a negative operating cash flow due to the timing of anticipated sales of our products. We may raise additional funds through public or private debt or equity financings if such financings become available on favorableacceptable terms or we may seek working capital financing under a revolving line of credit. We cannot be certain that any additional financing we may need will be available on terms favorableacceptable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities, develop new products or otherwise respond to competitive pressures, and our operating results and financial condition could be adversely affected.

Our quarterly operating results are subject to significant fluctuations and, if our operating results decline or are worse than expected, our stock price could fall.

We have experienced, and expect to continue to experience, significant quarterly fluctuations in revenue and operating results for our three businesses.business segments. Our quarterly operating results may fluctuate for many reasons, including:

Due to these and other factors, our past results are not reliable indicators of our future performance. In addition, a significant portion of our operating expenses is relatively fixed due to sales, engineering, and manufacturing overhead. If we experience a decline in revenue, we may be unable to reduce our fixed costs quickly enough to compensate for the decline, which would magnify the adverse impact of such revenue shortfall on our results of operations. If our operating results decline or are below expectations of securities analysts or investors, the market price of our stock may decline significantly.

Our stock price has been and will likely remain highly volatile.

The stock market in general, and the stock prices of technology and wireless communications companies in particular, have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry stock price fluctuations may adversely affect the market price of shares of our common stock. The market price of our stock has exhibited significant price fluctuations, which makes our stock unsuitable for many investors. Our stock price may also be affected by the following factors:

Our articlesAll of incorporation and shareholder rights plan could make a potential acquisition that is not approved by our board of directors more difficult.

Provisionsthese factors may contribute to the volatility of our articles of incorporation could make it more difficult for a third party to acquire control of us. Our articles of incorporation prohibit the consummation of a merger, reorganization or recapitalization, sale or lease of a substantial amount of assets with, or issuance of equity securities valued at $2.0 million or more to a stockholder that owns 10 percent or more of our common stock unless certain requirements relating to board or shareholder approval are met. Our articles of incorporation also prohibit shareholder action by written consent, which could make certain changes of control more difficult by requiring the holding of a special meeting of shareholders for purposes of taking shareholder action.

These provisions in our articles of incorporation could discourage takeover attempts which some shareholders might deem to be in their best interests or in which shareholders would receive a premium for their shares over the then existing market price of our common stock.

In February 2006, our Board of Directors terminated our shareholder rights plan effective January 31, 2007 and adopted a policy that, with certain exceptions, requires the Board of Directors to obtain stockholder approval before adopting any shareholder rights plan in the future.price.

The trading volume of our common stock often has been limited and may depress the price for our common stock.

A significant decline in our stock price, even if temporary, could result in substantial losses for individual shareholders. The trading volume of our common stock has been and may continue to be limited. Limited trading volume could depress the price for our common stock because fewer analysts may provide coverage for our stock and because investors might be unwilling to pay a higher market price for a stock that is less liquid. In addition,This limited trading volume, along with market and industry stock price fluctuations and other factors affecting our operations, couldmay depress the price for our common stock or result in greater volatility in the price of our common stock. A significant decline in our stock price, even if temporary, could result in substantial losses for individual shareholders and could subject us to costly and disruptive securities litigation.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Our headquarters and manufacturing facility is located in Lake Forest, California. This leased facility consists of approximately 25,000 square feet of office space and approximately 5,000 square feet of manufacturing and warehouse space. The lease for this facility expires in August 2011. We also lease office space and, in some instances, warehouse space in California, New York, China, and Mexico. The leases on these facilities, which are used by our call box and WTS businesses, expire on various dates through October 2009.June 2010.

ITEM 3.

LEGAL PROCEEDINGS

ITEM 3.    LEGAL PROCEEDINGSMobility Electronics, Inc. (“Mobility”) vs. Comarco Wireless Technologies, Inc., Case No. 5:07cv00084, U.S. District Court for the Eastern District of Texas. On June 8, 2007, Mobility sued us alleging that two Mobility patents are infringed by the mechanical keying arrangement between power adapters and programming tips used by us in our mobile power products sold through our distributors. We have denied liability and countersued alleging that Mobility has breached a Settlement Agreement entered into between the parties in 2003 to settle a previous patent infringement suit, and that Mobility is liable for infringement of at least one Comarco patent by effectively sub-licensing a third party to manufacture and sell power adapter products and accessories covered by the Comarco patent. Mobility has denied liability and amended its claims to further allege that we breached the Settlement Agreement by asserting claims against Mobility because its activities are permissible under the Settlement Agreement. On November 29, 2007, we filed our Answer, Defense, and Counterclaims. On March 5, 2008, both parties attended mediation before a retired U.S. district court judge, which did not lead to a settlement. However, the parties may continue mediation within a month or two. Trial is set for July 2009.

SwissQual AG (“SwissQual”) vs. Comarco Wireless Technologies, Inc., Case No. cv-07-07819, Central District of California.On November 30, 2007, SwissQual filed a lawsuit against us alleging fraud, intentional interference with prospective economic advantage, breach of contract, trademark infringement, unfair competition, trade secret misappropriation, and seeking declaratory relief relating to the December 15, 2005 Distribution and Sales Agreement between the parties.

We answered SwissQual’s complaint and denied any and all liability to SwissQual and denied that SwissQual is entitled to any of the relief sought in its complaint. In addition, we asserted counterclaims against SwissQual alleging breach of contract, breach of the covenant of good faith and fair dealing, trade secret misappropriation, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, unfair competition, conversion, unjust enrichment/restitution, an accounting for money owed due to SwissQual’s misconduct and seeking declaratory relief relating to SwissQual’s failure to comply with its support obligations, indemnity, and trademark ownership. SwissQual has informed the Court that it will be amending its complaint. Discovery has not yet commenced and a trial date has been set for February 10, 2009.

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

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

No matter was submitted during the fourth quarter ended January 31, 20072008 to a vote of our security holders.

PART II

Market Information

Our common stock is traded on the Nasdaq National Market^® under the symbol “CMRO.” The following table sets forth for the periods indicated the quarterly high and low closing prices per share as reported by the Nasdaq National Market. These prices represent actual reported sales transactions.

Holders

As of April 13, 2007,4, 2008, there were 327314 holders of record of our common stock.

Dividends

We have not paid any cash dividends on our common stock in the last three fiscal years. Subsequent to January 31, 2007, we declared a special dividend of $1.00 per share to shareholders of record on April 5, 2007, paid on April 23, 2007. The amount paid was $7.4 million. We do not expect to pay cash dividends in the near future.

ITEM 6.     SELECTED FINANCIAL DATA

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part II, Item 8 of this report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, cyclicality, seasonality, and growth in the markets we sell into, our strategic direction, expenditures in research and development, contracts, our future effective tax rate, new product introductions, changes to our manufacturing processes, our liquidity position, our ability to generate cash from continuing operations, our expected growth, the potential impact of our adopting new accounting pronouncements, our financial results, revenue generated from international sales, the impact of our enterprise resource planning systems implementation, the impact of our variable cost structure, and the existence or length of an economic recovery that involves risks and uncertainties. Our actual results could differ from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Part I, Item 1A and elsewhere in this report.

Overview

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

Our revenue and related cash flows are primarily derived from sales of our ChargeSourceChargeSource® mobile power products, wireless test solutions (“WTS”) products, and emergency call box systemsboxes and related maintenance services. We have three reportable segments: ChargeSource,ChargeSource®, WTS, and Call Box. See “Segment Reporting” in Notes 2 and 2021 of notes to our consolidated financial statements included in Part II, Item 8 of this report.

Industry and Company Trends and Uncertainties

Mobile Power Products (ChargeSource)ChargeSource®

Designed with the needs of the traveling professional in mind, our ChargeSourceChargeSource® external mobile power adapters provide a high level of functionality and compatibility in an industry-leading compact design. Our current and planned ChargeSourceChargeSource® product offering consists of external AC/DC, AC, and DC power adapters designed for the right mix of power output and functionality for most retail, OEM, and enterprise customers. Our ChargeSourceChargeSource® products are also programmable, allowing those who use rechargeable electronic devices to carry just one power adapter. By simply changing the compact SmartTipSmartTip® connected to the end of the charging cable, our external power adapters are capable of charging and powering multiple devices, including most notebook computers, mobile phones, BlackBerry® smartphones, iPods®, and many other handheld devices without requiring a peripheral product.

Personal computer manufacturers continue to design and manufacture notebook computers with enhanced functionality and features. These notebook computers generally have greater power requirements. As power requirements increase, so generally does the size of the OEM power adapter sold with each notebook computer. To address this industry wideindustry-wide trend, we have developed a family of compact high-power ChargeSourceChargeSource® external power adapters that are compatible with most legacy, current, and planned notebook computers. These new ChargeSourceChargeSource® external power adapters are able to deliver up to 120 watts of power in a very small form factor.factor or compact size.

Management currently considers the following additional trends, events, and uncertainties to be important to understanding our ChargeSourceChargeSource® business:

Wireless Test Solutions

Our WTS business designs and manufactures hardware and software tools for use by wireless carriers, equipment vendors, and others.service providers. Radio frequency engineers, network improvement professionals and technicians and others use these test tools to deploy and optimize wireless networks, and to verify the performance, of the wireless networks and resulting quality of service, of the wireless networks once deployed.

Wireless carriers are the primary customers for our WTS products. These customers operate in an environment driven by new technology, increased competition, and regulatory change. To compete effectively, the wireless carriers must offer their subscribers lower prices, improved quality of service, and innovative new services. Increasing minutes of use, global subscribers, and data-intensive applications are driving higher capacity utilization of existing networks, requiring wireless carriers around the globe to place a greater emphasis on capital expenditures devoted to their wireless networks. Despite this greater emphasis, current demand for our WTS products has decreased compared to the prior fiscal year driven by widespread industry consolidation, delays in purchasing decisions by our customers, increased competition, and increased pricing pressure.

Management currently considers the following additional trends, events, and uncertainties to be important to understanding our WTS business:

equipment vendors, as well as uncertainty regarding the timing and amount of anticipated orders from this customer base. Additionally, we have experienced increased competition in our European region from SwissQual and others. We expect our ability to compete on a global basis to be driven by our ability to offer products that cover all current wireless technologies, as well as the timely integration of new technology and functionality into our product platform.

installed base in Europe and our home markets, while enabling the rapid deployment of new products.standards. These harmonized products and solutions are expected to be available during the second half of fiscal 2008. Additionally, we will share sales and support resources with Ascom on a global basis and we no longer intend to establish a direct sales and support organization for our European region.

During fiscal 2007, we recorded revenue attributable to Verizon totaling approximately $7.0 million as we completed delivering on a contrract awarded in fiscal 2006 and delivered upgrades to previously purchased systems. During the first quarter of fiscal 2006, we were awarded a contract from Verizon for our Seven.Five voice and data test systems. Verizon was converting its nationwide wireless network to the CDMA EvDO standard, which is considered to be the U.S. equivalent of 3G, and is utilizing Seven.Five to measure the quality of its network. We began delivering on this contract during the second quarter of fiscal 2006 and completed during the fourth quarter of fiscal 2006, and we recorded revenue attributable to this contract totaling approximately $6.7 million, excluding amortization of first year maintenance obligations.

Additionally, during the third quarter of fiscal 2006, we were awarded an additional contract from Verizon to replace data testing equipment previously sourced from a competitor with our Seven.Five data systems. We delivered on the contract during the fourth quarter of fiscal 2006 and recorded revenue attributable to this contract totaling approximately $3.8 million, excluding amortization of first year maintenance obligations.

The two Verizon contracts discussed above were significant to our WTS business and its operations for fiscal 2007 and 2006. While we currently expect to continue to win new business from Verizon during fiscal 2008, we do not expect this new business to recur at the same level achieved during fiscal 2007 and 2006.

Emergency Call Box Systems

Our emergency call boxCall Box business designs, manufactures, and maintains emergency call box systems.boxes. Our call box productsboxes provide emergency communication over existing wireless networks. In addition to call box products,boxes, we provide system installation and long-term maintenance services. Currently, there are approximately 10,8009,200 call boxes that we maintain under long-term agreements that expire at various dates through February 2011.January 2012.

Wireless carriers have begun reallocating spectrum away from analog, or first generation, wireless technologies to digital, or 2G and 2.5G, wireless technologies. As a result, state and local governmental agencies are continuing to upgrade their existing call box systems to digital to maintain the functional efficiencies of their call box systems. Our upgraded call box products, based onboxes are configured to accommodate 2.5G GSM and CDMA wireless technologies, offer a complete solution of current technology and services at a low cost designed to meet our customers’ needs.technologies. During fiscal 2008, 2007, and 2006, we executed on multiple upgrade contracts primarily driven by the demand for digital wireless technologies. We expect to substantially complete upgrading the installed base in fiscal 2008.contracts.

Management currently considers the following additional trends, events, and uncertainties to be important to understanding our call boxCall Box business:

severe financial challenges experienced by California state government created uncertainty for our governmental customers in California, causing them to delay upgrades and expansions of certain call box systems. While this trend appears to have reversed, as evidenced by the awarded projects discussed above, we continue to be vulnerable to the spending patterns of our customers that are concentrated in California.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to apply accounting policies and make certain estimates and judgments. OurAll of our significant accounting policies are presented in Note 2 to our consolidated financial statements. Of our significant accounting policies, we believe the following are the most significant and involve a higher degree of uncertainty, subjectivity, and judgments. These policies involve estimates and judgments that are inherently uncertain. Changes in these estimates and judgments may significantly impact our annual and quarterly operating results. We have identified the following as our most significant critical accounting policies.

Revenue Recognition

We recognize product revenue upon shipment provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is probable. Generally, our products are shipped FOB named point of shipment, whether it is Lake Forest, our corporate headquarters, or Hong Kong, the shipping point of our ChargeSourceChargeSource® products. Shipments to SwissQual, our former exclusive WTS distributor in Europe, are shipped delivery duties unpaid (“DDU”). Under DDU, title and risk of loss for the goods shipped passes to the buyer at destination.

Our WTS products are integrated with embedded software. Accordingly, we recognize revenue using the residual method pursuant to requirements of Statement of Position No. 97-2, “Software Revenue Recognition,” and other applicable revenue recognition guidance and interpretations. Under the residual method, we allocate revenue to the undelivered element, typically maintenance, based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. We amortize the revenue allocated to the maintenance element evenly over the term of the maintenance commitment made at the time of sale. We expense as incurred the costs associated with honoring the maintenance commitment. The revenue attributable to the delivered product is the residual amount after subtracting the revenue allocated to the undelivered element from the sales price. The revenue attributable to the delivered product is recognized following the policy for product sales described above.

We recognize service revenue as the services are performed. Maintenance revenue from extended warranty sales is deferred and recognized ratably over the term of the maintenance agreement, typically 12 to 48 month periods.

Significant management judgments must be made and used in connection with the revenue recognized in any accounting period. For our WTS business, management must make judgments, for example, regarding uncertainties surrounding customer acceptance because some orders may include acceptance test provisions that require we defer revenue upon shipment until such time as the client has accepted the equipment. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments.

Stock-based Compensation

Effective February 1, 2006, the start of our fiscal year 2007, we adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) using the modified prospective method and, therefore, have not revised prior periods’ results for the adoption of this accounting statement. SFAS No. 123R requires all share-based payments to be measured based on the award’s fair value on the date of grant, and is recognized as expense ratably over the requisite service period. We currently use the Black-Scholes option-pricing model to estimate the fair value of

our share-based payments. The Black-Scholes option-pricing model is based on a number of assumptions, including expected volatility, expected forfeiture rates, expected life, risk-free interest rate and expected dividends. If the assumptions change, stock-based compensation may differ significantly from what we have recorded in the past.

For fiscal yearsyear 2006, and 2005, stock-based compensation was determined under Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock-based compensation plans.

Software Development Costs

We had $0.2$8.4 million of gross capitalized software as of January 31, 2007, net of accumulated amortization of $8.2 million.2008, which has been fully amortized. Capitalized software amortization expense is included in cost of revenue. We capitalize software developed for sale or lease in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86 (“SFAS No. 86”), “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Software costs incurred subsequent to the determination of the technological feasibility of the software product are capitalized. Technological feasibility is generally demonstrated by the completion of a working model. Our policy is to capitalize the costs associated with development of new products and expense the costs associated with new releases, which primarily consist of enhancements or increased functionality of software embedded in existing products. Significant management judgment is required in determining whether technological feasibility has been achieved for a particular software project and in estimating the economic life of the related product. Capitalization ceases and amortization of capitalized costs begins when the software product is available for general release to our customers. Each quarter we compare capitalized software development costs to our estimate of projected revenues quarterly to determine if any impairment in value has occurred that would require an adjustment in the carrying value or change in expected useful lives under the guidelines established under SFAS No. 86. We also continually evaluate the recoverability of software acquired through acquisition or by direct purchase of technology.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits and related terms based upon payment history and the customer’s current credit worthiness. We continually monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results.

Specifically, our management must make estimates of the collectibility of our accounts receivable. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s inability to pay, customer dissatisfaction, or other factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates.

Valuation of Inventory

We value inventory at the lower of the actual cost to purchase and/or manufacture the inventory (calculated on average costs, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on excess quantities

on hand based upon historical and forecasted component usage. As demonstrated during prior periods, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our operating results.

Income Taxes

We are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. We then assess on a periodic basis the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. During the second quarter of fiscal 2005, as a result of incurring cumulative losses for a three-year period, we established a valuation allowance totaling approximately $2.9 million, or the entire deferred tax asset balance existing as of the beginning of fiscal 2005. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses, carry forward temporary differences and future tax deductions resulting from certain types of stock option exercises. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remain fully reserved as of January 31, 2007.2008.

Valuation of Goodwill

We account for goodwill and intangible assets in accordance with SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Accordingly, we no longer amortize goodwill from acquisitions, but continue to amortize other acquisition-related intangibles and costs. As of January 31, 2006,2008, we had $2.4$1.9 million of goodwill recorded in our audited consolidated balance sheet.

Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value generally determined using a discounted cash flow methodology applied to the particular unit. This methodology differs from our previous policy, in accordance with accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine recoverability.

We performed our annual goodwill impairment analysis as of January 31, 2007,2008, and identified no impairment.impairment related to our call box acquisition goodwill in the amount of $0.5 million. The impairment review is based upon a discounted cash flow approach that uses estimates of future market share and revenue and costs for the reporting units, as well as appropriate discount rates. The estimates used are consistent with the plans and estimates that we use to manage the underlying businesses. However, if we fail to deliver new products for these groups, if the products fail to gain expected market acceptance, or if market conditions in the related businesses are unfavorable, revenue and cost forecasts may not be achieved and we may incur additional charges for impairment of goodwill.

For intangible assets with definite useful lives, we amortize the cost over the estimated useful lives and assess any impairment by estimating the future cash flow from the associated asset in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” We also annually review the useful lives of each of our intangible assets. As of January 31, 2007,2008, we had $0.8$0.5 million of non-goodwill acquired intangible assets recorded in intangible assets, which includes $0.1 million for software rights and $0.7 million forrelates to intellectual property rights.

Valuation of Long-Lived Assets

We evaluate long-lived assets used in operations, including purchased intangible assets, when indicators of impairment, such as reductions in demand or significant economic slowdowns that negatively impact our customers or markets, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and the discounted expected future cash flows using a discount rate based upon our cost of capital.

Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.

Results of Operations—Continuing Operations

The following tables set forth certain items as a percentage of revenue from our audited consolidated statements of operations for fiscal 2008, 2007, 2006, and 2005:2006:

Consolidated

Revenue

The fiscal 2008 decrease in revenue of $24.6 million is attributable to decreased sales from all three of our businesses. The fiscal 2008 decrease in revenue for our ChargeSource^®, WTS, and Call Box businesses totaled $11.3 million, $8.7 million, and $4.6 million, respectively, compared to fiscal 2007.

The fiscal 2007 increase in revenue of $0.9 million compared to fiscal 2006, is attributable to a $4.4 million and $5.7 million increase in sales by our ChargeSource^® and call boxCall Box businesses, respectively, offset by a $9.2 million decrease in sales by our WTS business.

The fiscal 2006 increase in revenue of $17.7 million compared to fiscal 2005, is attributable to increased sales from all three of our businesses. The fiscal 2006 increase in revenue for ChargeSource, WTS, and call box businesses totaled $6.5 million, $7.7 million, and $3.4 million, respectively, compared to fiscal 2005. MoreA more detailed analysis of the revenue changes appears in the discussion byof each of our business segments below.

Cost of Revenue and Gross Margin

The fiscal 2008 decrease in cost of revenue of $12.2 million compared to fiscal 2007 is primarily attributable to the 51 percent volume decrease in total revenue. The cost of revenue did not decline by as much as revenue due to fixed manufacturing overhead remaining relatively constant in fiscal 2008 compared to fiscal 2007, as well as approximately $0.4 million in higher scrap charges, specifically as related to ChargeSource^®. A more detailed analysis of the cost of revenue and gross margin changes appears in the discussion of our business segments below.

The fiscal 2007 decrease in cost of revenue of $0.3 million compared to fiscal 2006, was attributable to a $0.8 million decrease in amortization of software development, a $1.1 million decrease in ChargeSource^® inventory charges, partially offset by a $0.6 million increase in subcontractor costs in support of our call box upgrades, and the increase in total revenue.

The fiscal 2006 increase in cost of revenue of $9.0 million compared to fiscal 2005, is primarily attributable to the 75 percent volume increase in product revenue. Cost of product revenue as a percentage of product revenue decreased to 59 percent from 64 percent for fiscal 2005. The fiscal 2006 decrease in cost of product revenue as a percentage of product revenue was primarily due to the 48 percent volume increase in WTS product revenue compared to fiscal 2005, which typically has higher margins compared to our ChargeSource and call box products.

Operating Costs and Expenses

As revenue has declined for the year ended January 31, 2008 compared to the prior fiscal years presented, selling, general, and administrative expenses, allocated corporate overhead expenses, and gross engineering and support expenses all represent a larger percentage of revenue than in the prior year. The fixed cost structure of our business has been maintained in support of our expected future business.

The fiscal 2008 decrease in selling, general, and administrative expenses of $0.2 million compared to fiscal 2007 relates to a reduction in WTS selling expenses in Europe and South America, as well as reduced commission expenses earned by WTS sales staff offset by increased legal fees of $0.8 million incurred relating to the Mobility litigation.

The fiscal 2007 increase in selling, general, and administrative expenses of $1.1 million compared to fiscal 2006 was attributable to several factors including:

The fiscal 2006 decrease in selling, general, and administrative expenses of $1.0 million compared to fiscal 2005, was attributable to the recovery of bad debt expense related to our WTS business, totaling approximately $0.5 million in fiscal 2006, compared to bad debt expense recorded in fiscal 2005 of approximately the same amount.

Allocated corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company. These costs are typically allocated to our three businesses based on each business’s percentage share of total Company costs and expenses. As a percentage of revenue, allocated corporate overhead remained stable atdoubled to 22 percent in fiscal 2008 compared to 11 percent in fiscal 2007.

In fiscal 2008, allocated corporate overhead decreased by $0.2 million or 4 percent. The primary reason for the decrease is due to non-recurring corporate relocation expenses of revenue for both$0.3 million incurred in fiscal 2007 relating to the August 2006 corporate office move to its present location. Offsetting this decrease was a slight increase in expenses related to the current year Sarbanes-Oxley 404 internal control testing and 2006.SFAS No. 123R compensation expense.

While allocated corporate overhead for fiscal 2007 increased by less than $0.1 million compared to fiscal 2006, the specific cost components did fluctuate. In fiscal 2007, the Companywe adopted SFAS No. 123R and

included approximately $0.3 million of non-cash compensation expense in allocated corporate overhead. Additionally, in fiscal 2007 we incurred approximately $0.3 million related to relocating our corporate offices. These fiscal 2007 increases in allocated corporate overhead were offset by a decrease in incentive compensation for our corporate officers totaling $0.5 million compared to fiscal 2006.

The fiscal 2006 increase2008 goodwill impairment charge relates to the impairment of call box goodwill in allocated corporate overheadthe amount of $1.4 million compared$0.5 million. We perform the annual assessment of impairment for goodwill during the fourth quarter each year. During the current year assessment it was determined that the future cash flows anticipated to be generated by the business are insufficient to cover the current carrying value of assets. The entire balance of goodwill related to the fiscal 2005, was attributable to a $0.5 million increase in consulting fees incurred for Sarbanes-Oxley 404 readiness, a $0.3 million increase in audit1997 GTE call box acquisition and tax professional services expense, and a $0.6 million increase in incentive compensation driven by improved financial results forthe fiscal 2006.1998 Cubic acquisition were written-off.

Gross engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our hardware and software design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products.

The fiscal 2008 increase in engineering and support costs includes approximately $0.8 million in increased materials and lab testing for the development of the Lenovo OEM power adapter by our ChargeSource^® business.

The fiscal 2007 increase in engineering and support expenses of $0.3 million compared to fiscal 2006, was primarily attributable to increased WTS engineering costs consisting of wages and related costs, as well as third-party design fees in support of the modificationredesign of the Seven.Five QoS software to exclude SwissQual content.

We capitalize costs incurred for the development of software embedded in our WTS products subsequent to establishing technological feasibility. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. We did not capitalize any software development costs in fiscal 2008, 2007, or 2006.

Other Income, net

Other income, net, consists primarily of interest income earned on invested cash balances. Other income, net, was $0.8 million, $0.9 million, $0.3 million, and $0.2$0.3 million in fiscal 2008, 2007, 2006, and 2005,2006, respectively. The increases in fiscal 20072008 and 20062007 in other income compared to the respective prior fiscal years was2006 were due to increases in our cash balances coupled with higher interest rates.

Gain on Sale of Equipment, net

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

Gain on Sale of Investment in SwissQual and Intangible Asset

As further discussed in the section entitled “Results of Operations—Operations – Wireless Test Solutions” during January 2006, we sold our 18 percent interest in SwissQual. Upon the closing of the transaction, we received approximately $6.8 million of the closing consideration, net of transaction costs, and may receive up to an additional $5.4 million of any escrow distribution and contingent consideration.costs. We recorded a gain on sale of investment totaling $6.1 million, which was based on the cash consideration we received. During fiscal 2007, the Companywe received $1.7 million of contingent consideration, net of $0.1 million of transaction costs, recorded as gain on sale of investment in SwissQual. During fiscal 2008, we received $2.0 million of contingent consideration and escrow distributions, net of $43,000 of transaction costs, recorded as gain on sale of investment in SwissQual.

Prior to the sale transaction, SwissQual declared and paid a cash dividend to its then current shareholders. During January 2006, we recorded the approximately $0.4 million dividend declared as a reduction in the cost basis of our investment in SwissQual. Additionally, during December 2005, we sold rights to software to SwissQual for approximately $0.5 million. At the time of the sale, such software rights had an unamortized book value of approximately $0.2 million. Accordingly, we recorded a gain on sale of intangible assets totaling approximately $0.3 million.

Income Tax Expense (Benefit)

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. During the second quarter of fiscal 2005, we

established a valuation allowance totaling approximately $2.9 million, or the entire deferred tax asset balance existing as of the beginning of fiscal 2005. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating losses, carry forward temporary differences, and future tax deductions resulting from certain types of stock option exercises. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2007.2008.

During fiscal 2008, we recorded a net loss of $10.0 million and recorded $0.6 million in income tax benefit. The net deferred tax asset of $7.7 million at January 31, 2008 is fully reserved, and includes net operating loss carryforwards created in the current fiscal year of $2.7 million.

During fiscal 2007, we recorded net income of $1.8 million and recorded $0.4 million in income tax expense, having fully utilized our net operating loss carryforwards. The net deferred tax asset of $4.3 million at January 31, 2007 was fully reserved.

During fiscal 2006, we recorded net income of $6.3 million and $0.2 million in AMT income tax expense and utilized approximately $2.8 million of our net operating loss carryforwards. The remaining net deferred tax asset of $3.5 million at January 31, 2006 was fully reserved.

During

ChargeSource^®