8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) December 21, 2006

Comarco, Inc.

(Exact name of registrant as specified in its charter)

California	000-05449	95-2088894
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

25541 Commercentre Drive, Lake Forest, California	92630-8870
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (949) 599-7400

2 Cromwell, Irvine, CA 92618

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

INFORMATION TO BE INCLUDED IN THE REPORT

Item 2.02. Results of Operations and Financial Condition.

On December 21, 2006, Comarco, Inc. (the “Company”) issued a press release announcing, among other things, its financial results for the third quarter of fiscal year 2007, which ended on October 31, 2006. In addition, on December 21, 2006, the Company held a conference call and webcast to discuss the Company’s third quarter results for fiscal year 2007, outlook for the fourth quarter of fiscal 2007 and current corporate developments. The press release and transcript of the conference call and webcast are incorporated herein to this Form 8-K by reference and copies of the press release and transcript are attached hereto as Exhibits 99.1 and 99.2.

Note: The information contained in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2) shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Exhibit Number	Description
99.1	Press release of Comarco, Inc. dated December 21, 2006
99.2	Transcript of Earnings Conference Call and Webcast of Comarco, Inc. held on December 21, 2006

SIGNATURES

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

	COMARCO, INC.
	(Registrant)
Date  January 3, 2007	/s/ Daniel R. Lutz
	(Signature)
	Daniel R. Lutz
	Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Exhibit Description
99.1	Press Release of Comarco, Inc. dated December 21, 2006
99.2	Transcript of Earnings Conference Call and Webcast of Comarco, Inc. held on December 21, 2006

EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

COMARCO Reports Financial Results for Fiscal Third Quarter 2007

Provides Update on Strategic WTS and ChargeSource Initiatives

Lake Forest, Calif., December 21, 2006 – Comarco, Inc. (NASDAQ: CMRO), a leading provider of wireless test solutions, wireless emergency call box systems, and ChargeSource mobile power products for notebook computers, cellular telephones, and other handheld devices, today announced financial results for the third quarter of fiscal year 2007 ended October 31, 2006.

Revenue for the third quarter of fiscal 2007 was $11.4 million down 16% compared with $13.6 million in revenue reported for the third quarter of fiscal 2006. The Company reported a net loss for the third quarter of fiscal 2007 of $650,000, or $0.09 per share, which included non-cash stock-based compensation expense totaling $173,000, or $0.02 per share. Net income in the fiscal third quarter of 2006 was $610,000, or $0.08 per share. There was no stock-based compensation expense in the third quarter of the prior fiscal year.

Beginning with the first quarter of fiscal 2007 and in accordance with U.S. Generally Accepted Accounting Principles, Comarco adopted Statement of Financial Accounting Standards No. 123R. The Company’s results now include the cost of stock-based compensation. There were no such costs incurred in the prior fiscal year.

“Our third quarter results reflect transitions in both our WTS and ChargeSource businesses,” said Comarco President and CEO, Tom Franza. “Our WTS business continues to be impacted by the wind-down of our relationship with SwissQual, our European partner acquired by Spirent plc in January 2006. In November, we announced an alliance with ASCOM, a leading Swiss company with the largest installed base of Wireless QoS systems in the world, to develop, promote and sell next-generation 3G and 4G wireless network optimization, test, and QoS systems. We are aggressively working with ASCOM to complete the co-development of several new products planned for introduction in early calendar 2007. This transition, along with a soft market, led to a significant decline in WTS revenue in the third quarter.”

“ChargeSource revenue in the third quarter was comparable with the third quarter of the prior fiscal year, as well as sequentially,” Mr. Franza continued. “The lack of growth in this business is largely a reflection of our reliance on a single distributor for sales into big box retail. In addition, pricing pressures in the retail market are beginning to affect the margins in this business. To address these issues, we are working to modify our distribution strategy. In the future, we expect to provide product on a non-exclusive basis to multiple distributors and other retail customers. We believe this change will enable us to offer a broad product line with improved pricing based on higher volume.”

“The initiatives we have recently launched, our new product development and sales alliance with ASCOM, and the expansion of ChargeSource distribution, will take several quarters to get established and begin to contribute to our financial results,” Mr. Franza said. “We are excited about these new developments and believe that they position Comarco well for revenue growth.”

25541 Commercentre Drive Lake Forest, CA 92630 Office: (949) 599-7400 Fax: (949) 599-1415

WTS revenue for the third quarter of fiscal 2007 was $2.8 million, down $4.8 million or 63% compared with $7.5 million reported for the third quarter of fiscal 2006. ChargeSource revenue for the third quarter of fiscal 2007 was $4.3 million, up $239,000 or 6% compared with $4.1 million reported for the third quarter of fiscal 2006. Third quarter call box revenue was $4.3 million, up $2.4 million or 121% compared with $1.9 million reported for the third quarter of fiscal 2006.

Revenue for the nine months ended October 31, 2006 was $34.9 million, up $2.3 million or 7% compared with $32.7 million for the corresponding period of fiscal 2006. Net loss for the nine months ended October 31, 2006 was $984,000, or $0.13 per share, which included non-cash stock-based compensation totaling $403,000, or $0.05 per share. Net loss for the nine months ended October 31, 2005 was $584,000, or $0.08 per share.

Business Outlook

The Company currently expects WTS revenue for the fourth fiscal quarter, ending January 31, 2007, to continue to be impacted by the trends and events discussed above, including soft demand for WTS products across all regions. Revenue for the fourth quarter and fiscal 2007 for the WTS business is expected to total approximately $2.8 million and $12.9 million, respectively.

The Company’s call box business continues to execute on contracts to upgrade a significant portion of the installed base to digital and TTY technologies. Revenue for the fourth quarter and fiscal 2007 for the emergency call box business is expected to total approximately $4.5 million and $16.0 million, respectively.

With respect to the ChargeSource business, the Company entered the fourth quarter of fiscal 2007 with a backlog of purchase orders from its primary distributor totaling approximately $3.3 million, which are expected to be delivered during the fourth quarter. Accordingly, the Company currently expects ChargeSource revenue for the fourth quarter and fiscal 2007 to total approximately $3.3 to $3.4 million, and $16.3 million, respectively.

Forward-Looking Information

This news release includes “forward-looking statements” that are subject to risks, uncertainties, and other factors that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements. Forward-looking statements in this release are generally identified by words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “would,” and similar expressions that are intended to identify forward-looking statements. A number of important factors could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, the impact of perceived or actual weakening of economic conditions on customers’ and prospective customers’ spending on our products and services; quarterly fluctuations in our revenue or other operating results; failure to meet financial expectations of analysts and investors, including failure from significant reductions in demand from earlier anticipated levels; potential difficulties in the assimilation of operations, strategies, technologies, personnel and products of acquired companies and technologies; risks related to market acceptance of our products and our ability to meet contractual and technical commitments with our customers; activities by us and others regarding protection of intellectual property; competitors’ release of competitive products and other actions and risks relating to the replacement of the exclusive distributor of our WTS products in Europe. Further information on potential factors that could affect our financial results are included in risks detailed from time to time in our Securities and Exchange Commission filings, including without limitation our annual report of Form 10-K for the year ended January 31, 2006.

25541 Commercentre Drive Lake Forest, CA 92630 Office: (949) 599-7400 Fax: (949) 599-1415

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither any other person nor we assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Earnings Conference Call

Comarco will host a conference call to discuss the financial results for the third quarter of fiscal 2007 which ended October 31, 2006, current corporate developments and outlook for the remainder of fiscal 2007 at 11 a.m. Pacific Time on December 21, 2006. Dial (800) 218-8862 domestically or (303) 262-2130 internationally to listen to the call. A live Webcast will also be made available at www.comarco.com. A replay will be available approximately one hour after the call for 7 days following the call’s conclusion. To access the replay, dial (800) 405-2236 for domestic callers or (303) 590-3000 for international callers, both using pass code 11079514#. An archive of the call will be made available at www.comarco.com for 90 days following the call’s conclusion.

About Comarco

Based in Lake Forest, Calif., Comarco is a leading provider of wireless test solutions for field test applications, wireless emergency call box systems, and ChargeSource universal mobile power products for laptop computers, cellular telephones, and other handheld devices. The Company’s Web sites can be found at www.comarco.com and www.chargesource.com.

Company Contacts:		Investor Contact:
Tom Franza	Dan Lutz	Douglas Sherk/Jenifer Kirtland
President and CEO	Vice President and CFO	CEO/Managing Director
Comarco, Inc.	Comarco, Inc.	EVC Group, Inc.
(949) 599-7440	(949) 599-7556	(415) 896-6820
tfranza@comarco.com	dlutz@comarco.com	dsherk@evcgroup.com

25541 Commercentre Drive Lake Forest, CA 92630 Office: (949) 599-7400 Fax: (949) 599-1415

COMARCO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended October 31,						Nine Months Ended October 31,
	2006			2005			2006			2005
Revenue	$	11,403		$	13,574		$	34,930		$	32,670
Cost of revenue		7,497			8,362			22,767			20,956
Gross profit		3,906			5,212			12,163			11,714
Selling, general and administrative costs		2,895			2,639			8,019			6,797
Engineering and support costs		1,914			2,005			5,892			5,621
Operating income (loss)		(903	)		568			(1,748	)		(704	)
Other income		246			76			696			196
Gain on sale of investment in SwissQual		—			—			61			—
Income (loss) before income taxes		(657	)		644			(991	)		(508	)
Income tax (expense) benefit		7			(31	)		7			(31	)
Income (loss) from continuing operations		(650	)		613			(984	)		(539	)
Loss from discontinued operations		—			(3	)		—			(45	)
Net income (loss)	$	(650	)	$	610		$	(984	)	$	(584	)
Basic and diluted loss per share:
Income (loss) from continuing operations	$	(0.09	)	$	0.08		$	(0.13	)	$	(0.07	)
Loss from discontinued operations		—			—			—			(0.01	)
Net income (loss)	$	(0.09	)	$	0.08		$	(0.13	)	$	(0.08	)
Weighted average common shares outstanding:
Basic		7,379			7,422			7,399			7,422
Diluted		7,379			7,434			7,399			7,422
Common shares outstanding		7,379			7,422			7,379			7,422

25541 Commercentre Drive Lake Forest, CA 92630 Office: (949) 599-7400 Fax: (949) 599-1415

COMARCO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	October 31, 2006		January 31, 2006
	(Unaudited)		(A)
ASSETS
Current Assets:
Cash and cash equivalents	$	22,685	$	26,017
Short-term investments		861		1,166
Accounts receivable, net		9,648		9,285
Accounts receivable subject to litigation, net		—		500
Inventory		6,290		8,749
Other current assets		1,110		423
Total current assets		40,594		46,140
Property and equipment, net		3,736		1,595
Software development costs, net		382		1,361
Intangible assets, net		868		1,257
Goodwill, net		2,394		2,394
Restricted cash		500		—
Other assets		17		58
	$	48,491	$	52,805
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	836	$	727
Deferred revenue		5,211		5,480
Deferred compensation		861		1,166
Accrued liabilities		5,601		9,324
Total current liabilities		12,509		16,697
Deferred income taxes		117		—
Deferred rent		818		—
		13,444		16,697
Stockholders’ equity		35,047		36,108
	$	48,491	$	52,805

^(A) Derived from the audited consolidated financial statements as of January 31, 2006.

25541 Commercentre Drive Lake Forest, CA 92630 Office: (949) 599-7400 Fax: (949) 599-1415

EX-99.2

Exhibit 99.2

COMARCO, INC., #11079514

COMARCO THIRD QUARTER 2007

December 21, 2007, 2:00 PM ET

Chairperson: Tom Franza, CEO

Operator:	Good morning and afternoon, ladies and gentlemen; and thank you for standing by. Welcome to the Comarco third quarter 2007 conference call. At this time, all participants’ lines have been placed in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero on your telephone keypad, and a conference operator will assist you. As a reminder, today’s teleconference is being recorded Thursday, December 21, 2006. At this time, I’d like to turn the presentation over to Jenifer Kirtland with the EVC Group. Please go ahead, ma’am.
Jenifer Kirtland:	Thank you, operator. Hello, everyone, and thank you for joining us for the Comarco third quarter conference call. Before the market opened this morning, Comarco announced results for the fiscal third quarter of 2007 that ended on October 31. If you haven’t seen this release and would like a copy, please call our office at 415.896.6820; and we’ll get you one immediately. There will be a taped replay of this call beginning approximately one hour after its conclusion, and it will be available until Thursday, December 28 at midnight Pacific Time. The replay number is 1.800.405.2236 or, for international callers, 1.303.590.3000. You will need the pass code 11079514, followed by the pound sign, to access this replay. A webcast of the call will also be available at Comarco.com.
	Before we get started, as a reminder, during the course of this conference call, the Company may make projections or forward-looking statements regarding its financial outlook and strategic goals. Furthermore, statements made during the course of this conference call which state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It’s important to note that Comarco’s actual results could differ materially from those projected in such forward-looking statements. Additional information concerning facts that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Company’s SEC filings, including, but not limited to, the Company’s report on Form 10-Q for the quarter ended October 31, 2006. Copies of this document will be available and obtainable by contacting Comarco or the SEC.
	And now, I would like to turn the call over to Tom Franza, President and Chief Executive Officer of Comarco. Tom?

Comarco, Inc. Page 1 12/21/2006

Tom Franza:	Thank you, Jenifer. We have initiated some very significant plans that are designed to transition and expand our WTS and ChargeSource businesses. I’ll address these plans in my following remarks. But, first, I’ll give you a brief update on call box.
	Call box had an excellent quarter, with revenue of $4.3 million, up sharply from a year ago. We are executing on a large backorder of orders for upgrades to GSM and CDMA digital, as well as text telephony enhancements for hearing and speech impaired people.
	Fourth quarter revenue should also be strong, and we expect call box to reach approximately $16 million for FY’07. There are additional opportunities, and we expect to win several additional contracts for work to be performed next year.
	Now turning to WTS. As you know, FY’07 is the wind-down year for the design and marketing partnership between Comarco and SwissQual. Spirent plc purchased 100% of SwissQual, including Comarco’s 18% stake, this past January. As in FY’06, SwissQual has been projecting WTS revenue for 7.5 quality of service benchmarking systems of approximately $7 million for the full year. The distraction of the SwissQual transaction, the transition and the soft quality of service benchmarking market has resulted in minimal sales from SwissQual this year. Consequently, WTS revenue is expected to be approximately $12.9 million for the year, way below our earlier expectations.
	We recently announced the formation of an alliance with ASCOM AG, a leading Swiss company with the largest install base of wireless quality service systems in the world. Comarco and ASCOM are partnering on a harmonization of our respective product lines and will cooperatively sell and support products globally. The product development work is proceeding well, and we believe the alliance will provide major benefits in terms of product, time to market and operating costs. The Comarco/ASCOM alliance is extremely complementary in that each partner brings key technological elements to the other. For example, ASCOM brings industry-leading voice, data and video test service methodology and powerful post-processing software. Comarco brings CDMA expertise and scanning receiver technology, including support for future air interfaces such as WiMax, TD, SCMA, etcetera.
	Our new WTS general manager, Mark Chapman, joined Comarco in October; and he is expanding our product strategy to add engineering and optimization products. The change in strategy will provide better balance to the Comarco and ASCOM portfolio. Its engineering and benchmarking products tend to dominate during different phases of the customer purchasing cycle. More predictable financial performance should result. The addition of engineering and optimization products, combined with the ASCOM alliance, effectively doubles our addressable potential market in the wireless space.

Comarco, Inc. Page 2 12/21/2006

The wind down of the SwissQual relationship has been disappointing, particularly their poor performance on sales during FY’07. That is somewhat offset by the receipt of up to $12 million in total from the transaction, with $8 million received to date and the balance expected by mid 2007.

Now turning to ChargeSource. ChargeSource sales for Q3 were on plan and up slightly from a year ago. The Company and many shareholders have been frustrated by the flat performance, roughly $4 million per quarter retail over the past several quarters. The structure of the retail channel is such that some retailers carry competing product for multiple distributors, while some carry only one brand. As a result, our reliance on a single, exclusive distributor for big box retail limits the breadth of placement and therefore lowers unit volumes. Low unit volumes drive up product manufacturing costs further, limiting the full potential of the business.

In order to address these issues, we have decided to modify our distribution strategy starting in FY’07. Our principal distributor supports this approach, and we expect to continue with them on a non-exclusive basis. In the future, we will provide product to multiple distributors, OEMs and retail brands. Executed properly, this change will allow us to offer a broad product line with better pricing based on higher volume. We still will rely on our inherent patented competitive advantage for universal device compatibility and premium small and thin travel chargers. We currently expect this transition will occur over the next several quarters and continue to expand over time.

We are continuing work on products designed for OEM, aftermarket and in the box sales. We have made substantial progress on an OEM-branded option product for one of the leading notebook computer firms. Although the award is contingent on successful completion of product development by mid fiscal 2008, it is another indication of the interest in moving the state of the art power adapters toward our thin and light profile. We are confident in our ability to complete the design project and expect high volume shipments during the second half of fiscal 2008.

Our design project for in the box is proceeding as planned. There is a great deal of commonality in the designs for OEM-branded options and in the box, providing an efficient platform for future enhancements. The in the box opportunity will be addressed in conjunction with one or more power adaptor manufacturers that have the scale and scope to qualify for those high volume, low cost opportunities.

Comarco, Inc. Page 3 12/21/2006

	In summary, we are making big changes in WTS and ChargeSource. I believe these changes are necessary, if we are to realize the full potential of those businesses. These changes are likely to be disruptive in the short run, but I believe that the payoff is large. Comarco and ASCOM working together will become the largest single provider of quality of service benchmarking products and services. Together, we have the ability to sell and support complex systems on a global basis. We expect to expand the relationship to offer engineering and optimization products. Our product lines should be fully harmonized during FY’08.
	During FY’08, we expect to expand ChargeSource distribution and placement, including the addition of at least one OEM-branded option deal. That should cause unit volumes to rise significantly with a corresponding reduction in manufacturing costs. We will continue to press significant competitive advantage of SmartTip technology in small and thin packages.
	We continue to have an excellent balance sheet, no debt and approximately $23 million in cash.
	Now, I’m going to turn the call over to Dan.
Dan Lutz:	Thank you, Tom. Good afternoon, ladies and gentlemen. As you may know, we filed our Form 10-Q yesterday. Prior to filing, we took some additional time to fully analyze the fair value of post-contract support provided with our WTS products. The Company typically defers between 5% and 10% of the contract price for post-contract support. While this detailed analysis resulted in a three-day delay in filing our Form 10-Q, it resulted in no adjustments to previously issued financial statements. Additionally, no other matters contributed to our delay in filing our Form 10-Q.
	As we have filed our Form 10-Q with the SEC, which includes detailed financial information relating to each of our three businesses, I’d like to keep my comments brief and focus on certain highlights from the third quarter. I’ll also be happy to field any questions on those items of interest not covered in my comments.
	Our revenue for the third quarter of fiscal ‘07, which did end October 31, 2006, decreased 16% compared to the third quarter of fiscal ‘06. This quarterly decrease is primarily due to the soft sales performance of our WTS business. This year over year decrease was partially offset by increased sales of our call box and ChargeSource products. Our call box revenue for the third quarter of fiscal ‘07 was $4.3 million, up $2.4 million, or 121%, compared with $1.9 million reported for the third quarter of fiscal ‘06.

Comarco, Inc. Page 4 12/21/2006

And, during the third quarter, we continued upgrading the call box systems owned by the Metropolitan Transportation Commission SAFE, which services the nine counties of the San Francisco Bay area. We also substantially completed the San Diego SAFE contract, to upgrade approximately 1,400 call boxes with digital and TTY technologies.

As Tom mentioned, consistent with prior guidance, we expect call box revenue for fiscal ‘07 to total about approximately $16 million, or approximately $4.5 million for the fourth quarter of fiscal ‘07.

Our ChargeSource revenue for the third quarter of fiscal ‘07 totaled $4.3 million, which was up $300,000, or 6% compared with the third quarter of the prior fiscal year.

As Tom mentioned, we are actively pursuing a retail distribution strategy that will allow Comarco to sell ChargeSource products to multiple distributors, OEMs and other channel brands on a non-exclusive basis. We are likely to experience some disruption over the next several quarters as a result of transitioning to a non-exclusive retail distribution model.

We entered the fourth quarter of fiscal ‘07 with a backlog of purchase orders from our retail distributor totaling approximately $3.3 million, which is expected to be delivered during the fourth quarter. Accordingly, we expect ChargeSource revenue for the fourth quarter of fiscal ‘07 and fiscal ‘07 to total between $3.3 and $3.4 million and $16.3 million, respectively.

ChargeSource gross margin for the third quarter of fiscal ‘07 was 31%, an improvement compared to both the third quarter of fiscal ‘06 and sequentially. This gross margin improvement is attributable to decreased inventory write-offs in the current quarter. Now, as of October 31, 2006, our net inventory balance for ChargeSource totaled less than $50,000.

WTS revenue for the third quarter of fiscal ‘07 totaled $2.8 million, down $4.8 million, or 63%, compared with the third quarter of fiscal ‘06. Our revenue derived from sales to SwissQual, the exclusive reseller in our European region, was down $1.1 million. Also, sales to Verizon during the third quarter of fiscal ‘07 were significantly less than Verizon sales made during the third quarter of the prior fiscal year, which were shipped in support of their nationwide rollout of Comarco’s 7.5 quality of service test platform.

As mentioned in our Form 10-Q, in addition to the impact of winding down our relationship with our European reseller, we experienced soft demand for our WTS products, as wireless carriers delayed deployment of capital for such mobile test tools. We currently expect this market condition to continue, at least through the fourth quarter of fiscal ‘07. Accordingly, we currently expect WTS revenue for the fourth quarter of fiscal ‘07 and for fiscal ‘07 to total approximately $2.8 million and $12.9 million, respectively.

Comarco, Inc. Page 5 12/21/2006

	WTS gross margin, exclusive of software amortization for the third quarter of fiscal ‘07 was approximately 63%, which was a sequential decrease of 3 basis points. The gross margin for the second quarter benefited from certain higher margins, 7.5 upgrade orders, which did not occur during the current quarter. Accordingly, for the fourth quarter of fiscal ‘07, WTS gross margin, exclusive of software amortization, is expected to range between 60% and 63%. Software amortization, which is a component of cost of revenue, is expected to total $100,000 for the fourth quarter of fiscal ‘07, as we are close to fully amortizing previously capitalized software development costs.
	Now, our net loss for the third quarter of fiscal ‘07 was $650,000, or $0.09 per share, which included non-cash, stock-based compensation totaling $173,000, or $0.02 per share.
	Our selling, general and administration expenses for the third quarter of fiscal ‘07 totaled $2.9 million, which is up approximately $300,000 compared to the third quarter of the prior fiscal year and on a sequential basis. Now, looking forward to the fourth quarter of fiscal ‘07, SG&A is expected to be consistent with the fiscal quarter we just completed.
	Engineering and support costs for the third quarter of fiscal ‘07 totaled $2.1 million, which is up, also, approximately $300,000 compared to the third quarter of the prior fiscal year. Sequentially, engineering and product support costs were consistent. The fourth quarter of fiscal ‘07 engineering and support costs are expected to be consistent with the fiscal quarter just completed.
	Finally, moving on to the balance sheet, as of October 31, ‘06, which remains strong, we had cash balances totaling $22.7 million, and our inventory levels continued to decrease as we delivered on call box upgrade contracts. Finally, our receivables continue to be of high quality, and third quarter day sales outstanding came in at approximately 74 days, which was a 1-day increase on a sequential basis.
	That concludes my comments, and now I’ll turn the call back over to Tom. Tom?
Tom Franza:	If there are any questions, we have time. We’d love to address them.
Operator:	Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. If you would like to ask a question on today’s presentation, please press the star, followed by the one, on your pushbutton phone. If you would like to decline from the polling process, press the star, followed by the two. You will hear a three-tone prompt

Comarco, Inc. Page 6 12/21/2006

	acknowledging your selection, and your questions will be polled in the order they are received. We do ask that, if you are using speaker equipment, that you please lift your handset before pressing the numbers. One moment please for our first question.
	Our first question comes from Alex Silverman with Special Situations Fund. Please go ahead.
Alex Silverman:	Hi, guys.
Tom Franza:	Hi, Alex.
Alex Silverman:	How much of the price pressure in the market for ChargeSource do you believe is coming from mobility dumping inventory, given their problems?
Tom Franza:	I have not seen that at all.
Alex Silverman:	Where do you think the pricing pressure is coming from, then?
Tom Franza:	I really think the pricing pressure is always in the channel. The retailer has the ultimate power. The distributor is squeezed between manufacturer and the retailer. And there’s constant pressure; this particular product line probably a little more than normal because it has higher than normal returns due to the complexity of the purchase. Typically, the distributor gets to eat the returns. So, I think, in truth, the way we look at it is it would be quite easy to address the pricing issue in the channel if volumes included all the retailers that are available, and that’s the primary reason, really, for the— one of the reasons— for our change in strategy. Not only does it fix the problem of the flat sales, but it also produces unit volume that is the best way to lower manufacturing costs. We can then resolve any issues in the channel.
Alex Silverman:	Okay. Thank you.
Operator:	Thank you. Ladies and gentlemen, if there are additional questions at this time, please press the star, followed by the one. As a reminder, if you are using speaker equipment, we ask that you, please, lift your handset before pressing the numbers. One moment, please, for our next question. Our next question will come from the line of Richard Deutsch with Ladenburg Thalmann. Please go ahead.
Richard Deutsch:	Yes. Hi, guys.
Speaker:	Hi, Rick.
Richard Deutsch:	You explained that there would be some disruptions as you change over from exclusively using Kensington to other people. Can you explain what you mean by disruptions?

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Tom Franza:	Well, probably, many factors. But, since we have changed distributors in the past, added and left distributors— In this case, we’re not planning on leaving a distributor. We’re planning on adding. But, typically, there are variable startup times to get going with new distributors. There’s packaging to be designed, there’s product coordinations, there’s coordinations with their end customer, typically, the retailers, and inventory issues, all of which are things that really are not known to us today. We don’t really know how this is— how fast this is going to go down and how quickly we’re going to be able to move out. So, we say that we expect disruption. We probably won’t be able to say too much more than that until we go through the next couple of months and get a little bit more reality under our belt and find out what the timing, planning and pricing is going to be in all the different cases.
Richard Deutsch:	Well, you know, you’ve gone through Targus, Belkin and now Kensington, and the results have been— considering your product is so timely and so significant, it’s extremely disappointing how this execution is going along. I don’t understand. Is Kensington going to—? When you say disruptions— I understand putting new people on; you’ve got to do all that stuff. Are you telling me that Kensington’s just going to put less emphasis and less than their minimal results that they’ve come up to now?
Tom Franza:	No; I’m not telling you that. We’re talking to Kensington now. There are a number of options on the table. And, we don’t know exactly how Kensington— what changes they’re going to make, if any. So, I’m not really telling you anything. I’m just signaling that, when you make a big, abrupt change like this, it would be normal to expect some disruptions. So, we’re just trying to send that signal out. We don’t have any specifics for you.
Richard Deutsch:	So, your deal with Kensington doesn’t change at all? You’re just going to be allowed to put on other distributors, and they’re going to just go along like they have been? Is that what you’re saying?
Tom Franza:	The deals are all being negotiated now, so I can’t give you a specific answer because we’re not done yet defining the arrangement.
Operator:	Thank you. Our next question will come from Steve Emerson with Emerson Investment Group. Please go ahead.
Steve Emerson:	Hold on here. Gentlemen, could you explain about what you think are the returns from retail that the distributors have to absorb? Perhaps, can you quantify it? Is it a 25% return rate from retail? What steps are you going to take to minimize this problem for you?
Tom Franza:	Yeah; two things. We don’t have the direct data. If I had to give you a guess, I’d say it’s probably closer to 10%. The returns are not caused by

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	any product defects. They are the same for the various vendors that make these kinds of products. They track. So, it’s almost a certainty that the returns come because of a degree of complexity in making the product purchase at the point of sale. The product has a compatibility chart. The customer has to understand that the package can work with their particular devices, etcetera, etcetera. So, we think most of it really comes from a combination of the normal expected returns for electronic items and then, on top of that, a little bit more from product complexity. There’s been a lot of work done by many distributors over the years, trying to do a better job in describing the compatibility issues. Of course, you can always do better. But, I really think we’re kind of at the point of diminishing returns on that. I think it’s just inherent in the nature of these kinds of products.
Steve Emerson:	Okay. Thank you very much.
Operator:	Thank you, sir. Gentlemen, at this time, we have no additional questions in the queue; and I’ll turn the conference back to you for any closing remarks.
Tom Franza:	Okay. Well, I want to thank everybody for being on the call. I know we’re winding down for the holidays. We’ll be working on these changes very hard over the next few months, and I think, at the next call, we’ll be in a position to give you concrete specifics. We’re very excited about what we’re doing because we think it’s going to benefit both businesses quite dramatically.
	So, thanks again, and have very happy holidays.
Operator:	Thank you, management. Ladies and gentlemen, at this time, we will conclude today’s teleconference program. If you would like to listen to a replay of today’s conference call, please dial 1.800.405.2236 or 303.590.3000, with the access code of 11079514. Once again, if you would like to listen to a replay of today’s conference call, please dial 1.800.405.2236 or 303.590.3000, with the access code of 11079514. At this time, we will conclude with today’s presentation. We thank you for your participation on the program. You may now disconnect, and, please, have a pleasant day.

END

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