Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For thequarterly period ended****June 30, 2008**

** **

**or**

 

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

** **

**For thetransition period from               to              **

 

**CommissionFile Number****1-10346**

 

**EMRISECORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **77-0226211**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**9485 Haven Avenue, Suite 100**

**Rancho Cucamonga, California 91730**

(Addressof principal executive offices) (Zip code)

 

**(909) 987-9220**

(Registrant’stelephone number, including area code)

 

**Not applicable**

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

 

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

 

| Large Accelerated Filer o                                            | Accelerated Filer o          |
|----------------------------------------------------------------------|-----------------------------------|
|                                                                 |                              |
| Non-Accelerated Filer (Do not check if Smaller Reporting  Company) o | Smaller Reporting  Company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

The number of sharesoutstanding of the Registrant’s common stock, $0.0033 par value, as of August 1,2008 was 38,254,250.

 

 

 

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Tableof Contents

 

**EMRISE CORPORATION**

**TABLE OF CONTENTS**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008**

 
| **PART I  FINANCIAL INFORMATION** |
|----------------------------------------|
| ** **                             | ** ** |   |
| **ITEM 1.**                            | **FINANCIAL STATEMENTS** |   |
|                                   |   |   |
|                                   | Condensed  Consolidated Balance Sheets as of June 30, 2008 (unaudited) and  December 31, 2007 | 1 |
|                                   |   |   |
|                                   | Condensed Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2008 and 2007 (unaudited) | 2 |
|                                   |   |   |
|                                   | Condensed Consolidated  Statements of Stockholders’ Equity for the Six Months Ended June 30,  2008 (unaudited) | 3 |
|                                   |   |   |
|                                   | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007  (unaudited) | 4 |
|                                   |   |   |
|                                   | Notes to  Condensed Consolidated Financial Statements (unaudited) | 5 |
|                                   |   |   |
| **ITEM 2.**                            | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | 12 |
|                                   |   |   |
| **ITEM 3.**                            | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** | 26 |
|                                   |   |   |
| **ITEM 4.**                            | **CONTROLS AND  PROCEDURES** | 26 |
|                                   |   |   |
| **ITEM 4T.**                           | **CONTROLS AND  PROCEDURES** | 26 |
|                                   |   |   |
| **PART II  OTHER INFORMATION**    |
|                                   |   |   |
| **ITEM 1.**                            | **LEGAL PROCEEDINGS** | 29 |
|                                   |   |   |
| **ITEM 1A.**                           | **RISK FACTORS** | 29 |
|                                   |   |   |
| **ITEM 2.**                            | **UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS** | 29 |
|                                   |   |   |
| **ITEM 3.**                            | **DEFAULTS UPON SENIOR SECURITIES** | 29 |
|                                   |   |   |
| **ITEM 4.**                            | **SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS** | 29 |
|                                   |   |   |
| **ITEM 5.**                            | **OTHER INFORMATION** | 29 |
|                                   |   |   |
| **ITEM 6.**                            | **EXHIBITS** | 30 |
|                                   |   |   |
| **SIGNATURES**                         | 31 |
|                                        |  |  |  |

 

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Table of Contents

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**EMRISE CORPORATION**

**Condensed Consolidated Balance Sheets**

(inthousands, except share and per share amounts)

 
| ** **                                                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                              |       |              |       |                  |       |
| Current assets:                                                                                                                                                                         |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                 | 1,942      |                  | $          | 4,764 |   |
| Accounts receivable, net of allowances for  doubtful accounts of $292 at June 30, 2008 and $345 at December 31,  2007                                                         |       | 8,976             |       | 9,406                 |       |
| Inventories, net                                                                                                                                                                        |       | 12,059            |       | 11,664                |       |
| Current deferred tax assets                                                                                                                                                             |       | 333               |       | 200                   |       |
| Prepaid and other current assets                                                                                                                                                        |       | 1,578             |       | 1,617                 |       |
| Total current assets                                                                                                                                                                    |       | 24,888            |       | 27,651                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Property, plant and equipment, net                                                                                                                                                      |       | 2,337             |       | 2,227                 |       |
| Goodwill                                                                                                                                                                                |       | 13,078            |       | 13,129                |       |
| Intangible assets other than goodwill, net                                                                                                                                              |       | 3,165             |       | 3,269                 |       |
| Deferred tax assets                                                                                                                                                                     |       | 610               |       | 617                   |       |
| Other assets                                                                                                                                                                            |       | 1,160             |       | 1,287                 |       |
| Total assets                                                                                                                                                                            |       | $                 | 45,238     |                  | $          | 48,180 |   |
|                                                                                                                                                                                    |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                          |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                    |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                        |       | $                 | 4,938      |                  | $          | 4,440 |   |
| Accrued expenses                                                                                                                                                                        |       | 5,039             |       | 5,435                 |       |
| Current portion of long-term debt                                                                                                                                                       |       | 176               |       | 71                    |       |
| Notes payable to stockholders, current  portion                                                                                                                                         |       | 500               |       | 521                   |       |
| Income taxes payable                                                                                                                                                                    |       | 267               |       | 712                   |       |
| Other current liabilities                                                                                                                                                               |       | 357               |       | 357                   |       |
| Total current liabilities                                                                                                                                                               |       | 11,277            |       | 11,536                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Long-term line of credit                                                                                                                                                                |       | 2,007             |       | 3,957                 |       |
| Long-term debt, net of discount of $1,047  and $1,264, respectively                                                                                                                     |       | 5,250             |       | 4,829                 |       |
| Notes payable to stockholders, less current  portion                                                                                                                                    |       | 500               |       | 750                   |       |
| Deferred income taxes                                                                                                                                                                   |       | 904               |       | 904                   |       |
| Other liabilities                                                                                                                                                                       |       | 1,151             |       | 1,158                 |       |
| Total liabilities                                                                                                                                                                       |       | 21,089            |       | 23,134                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Commitments and contingencies (See Note 7)                                                                                                                                              |       |              |       |                  |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                              |       |              |       |                  |       |
| Preferred stock,$0.01 par value. Authorized  10,000,000 shares, zero shares issued and outstanding                                                                                      |       | —            |       | —                |       |
| Common stock,$0.0033 par value. Authorized  150,000,000 shares; 38,254,000 and 38,254,000 shares issued and outstanding  at June 30, 2008 and December 31, 2007, respectively |       | 126               |       | 126                   |       |
| Additional paid-in capital                                                                                                                                                              |       | 44,560            |       | 44,527                |       |
| Accumulated deficit                                                                                                                                                                     |       | (21,814           | )          | (20,661               | )          |
| Accumulated other comprehensive income                                                                                                                                                  |       | 1,277             |       | 1,054                 |       |
| Total stockholders’ equity                                                                                                                                                         |       | 24,149            |       | 25,046                |       |
| Total liabilities and stockholders’ equity                                                                                                                                         |       | $                 | 45,238     |                  | $          | 48,180 |   |

 

*The accompanying Notes are an integral part of theseCondensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Operations**

(Unaudited)****(in thousands, except per share amounts)

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net Sales                           |       | $                                | 14,049     |                           | $          | 12,067 |   | $ | 26,296 |   | $ | 23,989 |   |
| Cost of Sales                       |       | 9,060                            |       | 7,991                          |       | 16,898 |   | 16,065 |   |
| Gross profit                        |       | 4,989                            |       | 4,076                          |       | 9,398 |   | 7,924 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                 |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative |       | 4,006                            |       | 3,849                          |       | 7,981 |   | 7,585 |   |
| Engineering and product development |       | 782                              |       | 665                            |       | 1,446 |   | 1,375 |   |
| Total operating expenses            |       | 4,788                            |       | 4,514                          |       | 9,427 |   | 8,960 |   |
| Income (loss) from operations       |       | 201                              |       | (438                           | )          | (29 | ) | (1,036 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Other income (expense):             |       |                             |       |                           |       |   |   |   |   |
| Interest income                     |       | 23                               |       | 36                             |       | 41 |   | 55 |   |
| Interest expense                    |       | (604                             | )          | (170                           | )          | (1,188 | ) | (320 | ) |
| Other, net                          |       | 120                              |       | 100                            |       | 103 |   | 165 |   |
| Total other income (expense), net   |       | (461                             | )          | (34                            | )          | (1,044 | ) | (100 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Loss before income taxes            |       | (260                             | )          | (472                           | )          | (1,073 | ) | (1,136 | ) |
| Income tax provision (benefit)      |       | (4                               | )          | 151                            |       | 80 |   | 279 |   |
| Net Loss                            |       | $                                | (256       | )                              | $          | (623 | ) | $ | (1,153 | ) | $ | (1,415 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Loss per share:                     |       |                             |       |                           |       |   |   |   |   |
| Basic                               |       | $                                | (0.01      | )                              | $          | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
| Diluted                             |       | $                                | (0.01      | )                              | $          | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding |       |                             |       |                           |       |   |   |   |   |
| Basic                               |       | 38,254                           |       | 38,141                         |       | 38,254 |   | 38,130 |   |
| Diluted                             |       | 38,254                           |       | 38,141                         |       | 38,254 |   | 38,130 |   |

 

*The accompanying Notes are an integral part of theseCondensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Stockholders’Equity**

(Unaudited)****(in thousands)

* *
| ** **                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **      | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**      | ** ** | **Total**  | ** ** |
|                              |       |                  |       |        |       |            |       |              |       |            |       |       |       |
| Balance at December 31, 2007 |       | 38,254                |       | $           | 126        |            | $          | 44,527            |       | $               | (20,661    | )          | $          | 1,054 |   | $ | 25,046 |   |
| Stock-based compensation          |       | —                |       | —      |       | 29              |       | —            |       | —          |       | 29         |       |
| Warrants issued for services      |       | —                |       | —      |       | 4               |       | —            |       | —          |       | 4          |       |
| Net loss and comprehensive income |       | —                |       | —      |       | —          |       | (1,153            | )          | 223             |       | (930       | )          |
| Balance at June 30, 2008     |       | 38,254                |       | $           | 126        |            | $          | 44,560            |       | $               | (21,814    | )          | $          | 1,277 |   | $ | 24,149 |   |

 

*The accompanying Notes are an integral part of theseCondensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)****(in thousands)

* *
| ** **                                                                    | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **June 30,**              | ** ** |
| ** **                                                                    | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                      |       |                           |       |   |   |
| Net loss                                                                      |       | $                              | (1,153     | ) | $ | (1,415 | ) |
| Reconciliation to net cash provided by  (used in) operating activities:       |       |                           |       |   |   |
| Depreciation and amortization                                                 |       | 544                            |       | 541 |   |
| Provision for doubtful accounts                                               |       | (53                            | )          | (93 | ) |
| Provision for inventory obsolescence                                          |       | 429                            |       | 517 |   |
| Provision for warranty reserve                                                |       | 8                              |       | — |   |
| Deferred taxes                                                                |       | (126                           | )          | (3 | ) |
| Amortization of deferred issuance costs                                       |       | 216                            |       | — |   |
| Amortization of debt discount                                                 |       | 216                            |       | — |   |
| Stock-based compensation expense                                              |       | 29                             |       | 42 |   |
| Warrants issued for services                                                  |       | 4                              |       | 3 |   |
| Changes in assets and liabilities:                                            |       |                           |       |   |   |
| Accounts receivable                                                           |       | 483                            |       | 1,089 |   |
| Inventories                                                                   |       | (824                           | )          | (1,415 | ) |
| Prepaid and other assets                                                      |       | (50                            | )          | (295 | ) |
| Accounts payable and accrued expenses                                         |       | (358                           | )          | 1,184 |   |
| Total adjustments                                                             |       | 518                            |       | 1,570 |   |
| Net cash provided by (used in) operating  activities                          |       | (635                           | )          | 155 |   |
|                                                                          |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                     |       |                           |       |   |   |
| Purchases of property, plant and equipment                                    |       | (64                            | )          | (427 | ) |
| Additions to intangible assets                                                |       | (23                            | )          | — |   |
| Net cash used in investing activities                                         |       | (87                            | )          | (427 | ) |
|                                                                          |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                     |       |                           |       |   |   |
| Net proceeds (repayments) of lines of  credit                                 |       | (1,950                         | )          | (293 | ) |
| Repayments of long-term debt                                                  |       | (143                           | )          | (247 | ) |
| Payments of notes to stockholders                                             |       | (271                           | )          | (250 | ) |
| Proceeds from exercise of stock options and  warrants                         |       | —                         |       | 22 |   |
| Net cash used in financing activities                                         |       | (2,364                         | )          | (768 | ) |
|                                                                          |       |                           |       |   |   |
| Effect of exchange rate changes on cash                                       |       | 264                            |       | 62 |   |
| Net decrease in cash and cash equivalents                                     |       | (2,822                         | )          | (978 | ) |
| Cash and cash equivalents at beginning of  period                             |       | 4,764                          |       | 3,802 |   |
| Cash and cash equivalents at end of period                                    |       | $                              | 1,942      |   | $ | 2,824 |   |
|                                                                          |       |                           |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:** |       |                           |       |   |   |
| Acquisition of equipment through capital  lease                               |       | $                              | 453        |   | $ | — |   |

 

*The accompanying Notes are an integral part of theseCondensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Organizationand Business*

 

EMRISE Corporation (the “Company”)designs, manufactures and markets proprietary electronic devices andcommunications equipment for aerospace, defense, industrial, and communicationsapplications. The Company has operations in the United States (“U.S.”),England, France and Japan. The Company conducts its business through twooperating segments: electronic devices and communications equipment. Thesubsidiaries within the electronic devices segment design, develop, manufactureand market electronic devices for defense, aerospace and industrial markets andoperate out of facilities located in the U.S., England and Japan. Thesubsidiaries within the communications equipment segment design, develop,manufacture and market network access equipment and network timing andsynchronization products and operate out of facilities located in the U.S. andFrance.

 

*Basis ofPresentation*

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith the rules and regulations of the Securities and Exchange Commission (“Commission”)and therefore do not include all information and footnotes necessary for acomplete presentation of the financial position, results of operations and cashflows in conformity with accounting principles generally accepted in the U.S. (“GAAP”).The year end balance sheet was derived from the audited financial statements atthat date, but does not include all of the information and footnotes requiredby GAAP for complete financial statements. The unaudited condensed consolidatedfinancial statements do, however, reflect all adjustments, consisting of onlynormal recurring adjustments, which are, in the opinion of management,necessary to state fairly the financial position as of June 30, 2008 andthe results of operations and cash flows for the related interim periods ended June 30,2008 and 2007. However, these results are not necessarily indicative of resultsfor any other interim period or for the year. The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements included in its annualreport on Form 10-K for the year ended December 31, 2007 as filedwith the Commission.

 

*ComprehensiveLoss*

 

Comprehensive loss includesall changes in equity during a period except those that resulted frominvestments by or distributions to the Company’s stockholders. Othercomprehensive income refers to revenues, expenses, gains and losses that, underGAAP, are included in comprehensive income, but excluded from net loss as theseamounts are recorded directly as an adjustment to stockholders’ equity. TheCompany’s other comprehensive income consists of foreign currency translationadjustments. The following table reflects the components of comprehensive loss(in thousands):

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                             |       |                           |       |   |   |   |   |
| Net loss                                |       | $                                | (256       | )                              | $          | (623 | ) | $ | (1,153 | ) | $ | (1,415 | ) |
| Other comprehensive income (loss):      |       |                             |       |                           |       |   |   |   |   |
| Foreign currency translation adjustment |       | (3                               | )          | 197                            |       | 223 |   | 174 |   |
| Comprehensive loss                      |       | $                                | (259       | )                              | $          | (426 | ) | $ | (930 | ) | $ | (1,241 | ) |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

*Loss PerShare*

 

Basic loss per share iscomputed by dividing net loss by the weighted average common shares outstandingduring a period. Diluted loss per share is based on the treasury stock methodand includes the dilutive effect of stock options and warrants outstandingduring the period. Common share equivalents have been excluded where theirinclusion would be anti-dilutive. As a result of the loss incurred by theCompany for all periods presented, the potentially dilutive common shares havebeen excluded because their inclusion would have been anti-dilutive. Thefollowing table illustrates the computation of basic and diluted loss per share(in thousands, except per share amounts):

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       |                             |       |                           |       |   |   |   |   |
| NUMERATOR:                                          |       |                             |       |                           |       |   |   |   |   |
| Net loss                                            |       | $                                | (256       | )                              | $          | (623 | ) | $ | (1,153 | ) | $ | (1,415 | ) |
|                                                |       |                             |       |                           |       |   |   |   |   |
| DENOMINATOR:                                        |       |                             |       |                           |       |   |   |   |   |
| Basic weighted average common shares  outstanding   |       | 38,254                           |       | 38,141                         |       | 38,254 |   | 38,130 |   |
| Effect of dilutive securities:                      |       |                             |       |                           |       |   |   |   |   |
| Dilutive stock options and warrants                 |       | —                           |       | —                         |       | — |   | — |   |
| Diluted weighted average common shares  outstanding |       | 38,254                           |       | 38,141                         |       | 38,254 |   | 38,130 |   |
|                                                |       |                             |       |                           |       |   |   |   |   |
| Basic loss per share                                |       | $                                | (0.01      | )                              | $          | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
|                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted loss per share                              |       | $                                | (0.01      | )                              | $          | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) |

 

The following table showsthe common stock equivalents that were outstanding as of June 30, 2008 and2007, but were not included in the computation of diluted earnings per share asa result of the loss incurred by the Company or because the options’ orwarrants’ exercise price was greater than the average market price of thecommon shares and, therefore, the effect would have been anti-dilutive:

 
| ** **                           | ** ** | ** **         | ** ** | **Range of**       | ** ** |
|--------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                           | ** ** | **Shares**         | ** ** | **Per Share**      | ** ** |
|                                 |       |               |       |                    |       |
| Anti-dilutive common stock options:  |       |               |       |                    |       |
| As of June 30, 2008             |       | 1,056,000          |       | $0.20 – $2.00      |       |
| As of June 30, 2007             |       | 1,943,000          |       | $0.20 – $3.13      |       |
|                                 |       |               |       |                    |       |
| Anti-dilutive common stock warrants: |       |               |       |                    |       |
| As of June 30, 2008             |       | 6,742,000          |       | $1.10 – $1.73      |       |
| As of June 30, 2007             |       | 4,192,000          |       | $0.85 – $2.00      |       |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

*RecentAccounting Pronouncements*

 

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities*.SFAS No. 159 permits an entity to irrevocably elect fair value on acontract-by-contract basis as the initial and subsequent measurement attributefor many financial assets and liabilities and certain other items includinginsurance contracts. Entities electing the fair value option would be requiredto recognize changes in fair value in earnings and to expense upfront cost andfees associated with the item for which the fair value option is elected. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. Theadoption of SFAS No. 159 did not have a material effect on the Company’s financialcondition or results of operations.

 

In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements*. This new statement provides a single definition offair value, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFAS No. 157also emphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy, with thehighest priority being quoted prices in active markets. The required effectivedate of SFAS No. 157 is the first quarter of 2008. The adoption of SFAS No. 157for financial assets and liabilities did not have a material effect on theCompany’s consolidated financial statements, but resulted in additionaldisclosures contained herein. In February 2008, the FASB issued StaffPosition No. 157-2, which delayed by one year the effective date of SFAS No. 157for all non-financial assets and liabilities, except those that are recognizedor disclosed at fair value in the financial statements on a recurring basis.The Company is currently evaluating the impact the adoption of SFAS No. 157for non-financial assets and liabilities will have on its consolidatedfinancial statements.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*. The new standardamends SFAS No. 133 and seeks to enhance disclosure about how and why acompany uses derivative and hedging activities, how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 (and theinterpretations of that standard) and how derivatives and hedging activitiesaffect a company’s financial position, financial performance and cash flows.SFAS No. 161 is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008. The adoption ofSFAS No. 161 is not expected to have a material effect on the Company’sconsolidated financial statements.

 

**NOTE 2 –STOCK-BASED COMPENSATION**

 

The Company has five stockoption plans:

 

·                  EmployeeStock and Stock Option Plan, effective July 1, 1994;

·                  1993Stock Option Plan;

·                  1997Stock Incentive Plan;

·                  Amendedand Restated 2000 Stock Option Plan; and

·                  2007Stock Incentive Plan.

 

The board of directors doesnot intend to issue any additional options under any of the above plans withthe exception of the 2007 Stock Incentive Plan.

 

Total stock-basedcompensation expense included in wages, salaries and related costs was $11,000and $6,000 for the three months ended June 30, 2008 and 2007,respectively, and $29,000 and $42,000 for the six months ended June 30,2008 and 2007, respectively. These compensation expenses were charged toselling, general and administrative expenses. As of June 30, 2008, theCompany had $19,000 of total unrecognized

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

compensation expense relatedto stock option grants, which will be recognized over the remaining weightedaverage period of two years.

 

**NOTE 3 –INVENTORIES**

 

Inventories are stated atthe lower of cost (first-in, first-out method) or market (net realizable value)and consisted of the following (in thousands):

 
| ** **        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|              |       |              |       |                  |       |
| Raw materials     |       | $                 | 10,284     |                  | $          | 9,292 |   |
| Work-in-process   |       | 4,077             |       | 4,540                 |       |
| Finished goods    |       | 4,251             |       | 3,956                 |       |
| Reserves          |       | (6,553            | )          | (6,124                | )          |
| Total inventories |       | $                 | 12,059     |                  | $          | 11,664 |   |

 

**NOTE 4 –OPERATING SEGMENTS**

 

The Company has tworeportable operating segments: electronic devices and communications equipment.The electronic devices segment manufactures and markets digital and rotaryswitches, electronic power supplies, radio frequency (“RF”) and microwavedevices and subsystem assemblies. The electronic devices segment consists ofEMRISE Electronics Corporation and its subsidiaries located in the U.S.,England and Japan, which offer the same or similar products to similarcustomers. The communications equipment segment designs, manufactures anddistributes network access products and timing and synchronization products.The communications equipment segment consists of operating entities CXR LarusCorporation located in the U.S. and CXR Anderson Jacobson located in France,which offer the same or similar products to similar customers. Both segmentsoperate in the U.S., European and Asian markets, but have distinctly differentcustomers, design and manufacturing processes and marketing strategies. Eachsegment has discrete financial information and a separate management structure.

 

The Company evaluatesperformance based upon profit or loss from operations before income taxesexclusive of nonrecurring gains and losses. The Company accounts forintersegment sales at pre-determined prices negotiated between the individualsegments.

 

There were no differences inthe basis of segmentation or in the basis of measurement of segment operatingincome or loss from the amounts disclosed in the Company’s audited consolidatedfinancial statements included in its annual report on Form 10-K for theyear ended December 31, 2007. Included in the Company’s reconciliation ofsegment financial data to the consolidated amounts is unallocated corporateexpenses.

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Selected financial data foreach of the Company’s operating segments reconciled to the consolidated totalsis shown below (in thousands):

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                |       |                             |       |                           |       |   |   |   |   |
| Electronic devices       |       | $                                | 10,187     |                           | $          | 8,440 |   | $ | 19,074 |   | $ | 16,967 |   |
| Communications equipment |       | 3,862                            |       | 3,627                          |       | 7,222 |   | 7,022 |   |
| Total                    |       | $                                | 14,049     |                           | $          | 12,067 |   | $ | 26,296 |   | $ | 23,989 |   |
|                     |       |                             |       |                           |       |   |   |   |   |
| Operating income (loss)  |       |                             |       |                           |       |   |   |   |   |
| Electronic devices       |       | $                                | 1,288      |                           | $          | 536 |   | $ | 2,112 |   | $ | 1,076 |   |
| Communications equipment |       | (90                              | )          | (82                            | )          | (72 | ) | (197 | ) |
| Corporate and other      |       | (997                             | )          | (892                           | )          | (2,069 | ) | (1,915 | ) |
| Total                    |       | $                                | 201        |                           | $          | (438 | ) | $ | (29 | ) | $ | (1,036 | ) |

 
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
|                     |       | **2008**          | ** ** | **2007**              |       |
| Total assets             |       |              |       |                  |       |
| Electronic devices       |       | $                 | 30,963     |                  | $          | 29,835 |   |
| Communications equipment |       | 11,523            |       | 11,851                |       |
| Corporate and other      |       | 2,752             |       | 6,494                 |       |
| Total                    |       | $                 | 45,238     |                  | $          | 48,180 |   |

 

**NOTE 5 –GOODWILL**

 

The following table reflectschanges in our goodwill balances, by segment, for the six months ended June 30,2008 (in thousands):

 
| ** **                        | ** ** | **Electronic** | ** ** | **Communications** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | **Devices**    | ** ** | **Equipment**      | ** ** | **Total**  | ** ** |
|                              |       |           |       |               |       |       |       |
| Balance at December 31, 2007 |       | $              | 7,295      |               | $          | 5,834      |       | $ | 13,129 |   |
| Foreign currency translation      |       | (51            | )          | —             |       | (51        | )          |
| Balance at June 30, 2008     |       | $              | 7,244      |               | $          | 5,834      |       | $ | 13,078 |   |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 6 –INCOME TAXES**

 

The effective tax rate forthe three month period ended June 30, 2008 was different than the 34% U.S.statutory rate primarily because the Company’s foreign entities generate a taxobligation and related tax expense as a result of their net income, whichcannot be offset by U.S. tax loss carryforwards.

 

The Company adopted FIN 48, *Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109*, on January 1,2007. The implementation of FIN 48 did not result in a material adjustment tothe Company’s liability for unrecognized income tax benefits. At the time ofadoption and as of June 30, 2008, the Company had recorded no netunrecognized tax benefits.

 

The Company recognizesinterest and penalties related to uncertain tax positions in interest expenseand selling, general and administrative expense, respectively, in the condensedconsolidated statements of operations and comprehensive income. No interest orpenalties were recognized during the second quarter of 2008. As of June 30,2008, the Company had $0 accrued for interest and penalties.

 

The Company files income taxreturns in the U.S. federal jurisdiction, England, France and Japan, and in thestate jurisdictions of California, Texas, Pennsylvania and New Jersey. TheCompany is no longer subject to United States federal and state taxexaminations for years before 2004 and 2003, respectively, and is no longersubject to tax examinations for England and Japan for years prior to 2006, andfor France for years prior to 2004.

 

**NOTE 7 –LINES OF CREDIT**

 

The Company and its directsubsidiaries, EMRISE Electronics Corporation, CXR Larus Corporation and ROAssociates Incorporated (collectively, the “Borrowers”) are parties to a CreditAgreement (the “Credit Agreement”) with GVEC Resource IV Inc. (the “Lender”)providing for a three year credit facility in the aggregate amount of$23,000,000 (the “Credit Facility”) and is secured by accounts receivable,other rights to payment and general intangibles, inventories and equipment.

 

The Credit Facility consistsof (i) a one year revolving credit facility for up to $7,000,000 that maybe extended, at the Company’s option, for up to three years (the “Revolver”), (ii) athree year term loan in an outstanding principal amount of $6,000,000 which wasfully funded on November 30, 2007 (the “Term Loan A”); and (iii) athree year term loan in the amount of $10,000,000 to be used solely forpossible acquisitions to be made within 18 months of November 30, 2007(the “Term Loan B,” and together with the Term Loan A, the “Term Loans”). Aportion of the proceeds from the Revolver and the Term Loan A were used torepay existing institutional debt at the time of the closing of the financingand a portion was used to fund the Company’s on-going working capital requirements.

 

The Revolver isformula-based and which generally provides that the outstanding borrowingsunder the line of credit may not exceed an aggregate of 85% of eligibleaccounts receivable, plus 10% of the value of eligible raw materials not toexceed $600,000, plus 50% of the value of eligible finished goods inventory notto exceed $1,500,000, minus the aggregate amount of reserves that may beestablished by the Lender.

 

Interest on the Revolver ispayable monthly. The interest rate is variable and is adjusted monthly based onprime rate as published in the “Money Rates” column of The*Wall Street Journal* (the “Base Rate”)plus 1.25%, subject to a minimum rate of 9.5%. The interest rate in effect asof June 30, 2008 was the minimum rate of 9.5%. The Revolver is subject tovarious financial covenants on a consolidated basis including the following:EBITDA, measured on a fiscal quarter-end basis, must not be less than thescheduled amount for each specified period; the debt service coverage ratio,measured quarterly, must be greater than the lesser of the scheduled amount foreach specific period or 1.10:1.00; the leverage ratio, measured quarterly, mustnot be greater than 1.25:1.00; and the Company must not incur capitalexpenditures in any fiscal year in excess of $500,000. As of

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

June 30, 2008, theCompany was in default of the capital expenditure limitation described above;which default has been waived by the Lender.

 

As of June 30, 2008,the Company had outstanding borrowings of $2.0 million under the Revolver withremaining availability under the formula-based calculation of $4.0 million.

 

Upon the sale or dispositionby the Borrowers or any of their subsidiaries of property or assets, theBorrowers may be obligated to prepay the Revolver and the Term Loans with thenet cash proceeds received in connection with such sales or dispositions to theextent that the aggregate amount of net cash proceeds received, and not paid tothe Lender as a prepayment, for all such sales or dispositions exceed $150,000in any fiscal year.

 

In the event of a defaultand continuation of a default, the Lender may accelerate the payment of theprincipal balance requiring the Company to pay the entire indebtednessoutstanding on that date. Upon the occurrence and during the continuation of anevent of default, the Lender may also elect to increase the interest rateapplicable to the outstanding balance by four percentage points above the perannum interest rate that would otherwise be applicable.

 

In connection with enteringinto the Credit Agreement, the Borrowers issued a Revolver Loan Note dated November 30,2007 (the “Revolver Note”) to the Lender in the principal amount of $7,000,000.The Revolver Note is governed by the terms of the Credit Agreement.

 

**NOTE 8 –FAIR VALUE MEASUREMENTS**

 

In September 2006, theFASB issued SFAS No. 157, which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. The effective date ofthe statement is for all entities with fiscal years beginning after November 15,2007. In February 2008, the FASB issued FASB Staff Position No. 157-2,which delays the effective date of SFAS No. 157 for non-financial assetsand liabilities to fiscal years beginning after November 15, 2008. Thedelay pertains to items including, but not limited to, goodwill and otherintangible assets. The Company adopted the provisions of the standard that wereeffective as of January 1, 2008. The Company plans to adopt the remainingprovisions of SFAS No. 157 as of January 1, 2009.

 

SFAS No. 157 definesfair value as the price that would be received to sell an asset or paid totransfer a liability (an exit price) in an orderly transaction between marketparticipants and also establishes a fair value hierarchy which requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value. The fair value hierarchydistinguishes between three levels of inputs that may be utilized whenmeasuring fair value as follows:

 

Level 1 – Inputs areunadjusted quoted prices in active markets for identical assets or liabilitiesavailable at the measurement date.

 

Level 2 – Inputs areunadjusted quoted prices for similar assets and liabilities in active markets, quotedprices for identical or similar assets and liabilities in markets that are notactive, inputs other than quoted prices that are observable, and inputs derivedfrom or corroborated by observable market data.

 

Level 3 – Inputs that areunobservable inputs which reflect the reporting entity’s own assumptions onwhat assumptions the market participants would use in pricing the asset orliability based on the best available information.

 

As of June 30, 2008,the Company did not have financial assets and liabilities measured at fairvalue on a recurring basis that would be subject to the disclosure provisionsof SFAS No. 157.

 

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**ITEM 2.****                     ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**CautionaryStatement**

 

The following discussionshould be read in conjunction with our unaudited condensed consolidatedfinancial statements and the related notes thereto contained in Part I,Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Qis not a complete description of our business or the risks associated with aninvestment in our common stock. We urge you to carefully review and considerthe various disclosures made by us in this Report and in our other reportsfiled with SEC, including our Annual Report on Form 10-K for the yearended December 31, 2007 and subsequent reports on Forms 10-Q and 8-K,which discuss our business in greater detail. This report and the followingdiscussion contain forward-looking statements, which generally include theplans and objectives of management for future operations, including plans andobjectives relating to our future economic performance and our current beliefsregarding revenues we might generate and profits we might earn if we aresuccessful in implementing our business and growth strategies. Theforward-looking statements and associated risks may include, relate to or bequalified by other important factors, including, without limitation:

 

·                  the projected growth or contraction in theelectronic devices and communications equipment markets in which we operate;

·                  our strategies for expanding, maintaining orcontracting our presence in these markets;

·                  anticipated trends in our financial conditionand results of operations;

·                  our ability to distinguish ourselves from ourcurrent and future competitors;

·                  our ability to secure long term purchaseorders;

·                  our ability to deliver against existing orfuture backlog;

·                  technical or quality issues experienced byus, our suppliers and/or our customers;

·                  failure to comply with existing or futuregovernment or industry standards and regulations;

·                  exposure to and impacts of various internationalrisks including legal, business, political and economic risks associated withour international operations;

·                  our ability to adequately fund the workingcapital needs of the company

·                  our ability to successfully locate, acquireand integrate any possible future acquisitions;

·                  our ability to successfully support theworking capital needs of our company; and

·                  our ability to successfully compete againstcompetitors that in many cases are larger than us, have access to significantlymore working capital than us and have significant resources in comparison tous.

 

We do not undertake toupdate, revise or correct any forward-looking statements.

 

Any of the factors describedabove or in the “Risk Factors” section contained in our Annual Report on Form 10-Kfor the year ended December 31, 2007 could cause our financial results,including our net income or loss or growth in net income or loss to differmaterially from prior results, which in turn could, among other things, causethe price of our common stock to fluctuate substantially.

 

**BusinessDescription**

 

EMRISE designs, manufacturesand markets proprietary electronic devices and communications equipment foraerospace, defense, industrial, and communications applications. We haveoperations in the United States (“U.S.”), England, France and Japan. We conductour business through two operating segments: electronic devices andcommunications equipment. Our subsidiaries within our electronic devicessegment design, develop, manufacture and market electronic devices for defense,aerospace and industrial markets. Our subsidiaries within our communicationsequipment segment design, develop, manufacture and market network accessequipment and network timing and synchronization products, for thecommunications industry.

 

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Our electronic devicessegment produces a range of power systems, RF and microwave devices and electromechanicalswitches. The electronic devices segment is “project” driven with the majorityof revenues being derived from custom products with long life cycles and highbarriers to entry. The majority of manufacturing and testing is performedin-house or through sub-contract manufacturers. Our electronic devices are usedin a wide range of military airborne, seaborne and land-based systems,in-flight entertainment systems, including the latest next generation in-flightentertainment and communications (“IFE&C”) systems – such as applicationsfor mobile phone, e-mail and internet communications and real time, on-boardsatellite and broadcast television – which are being retrofitted in existingcommercial aircraft and installed in today’s growing fleet of new commercialaircraft.

 

Our communications equipmentsegment produces a range of network access products and network timing andsynchronization products, for public and private communications customers. Thecommunications equipment segment is “end user product” based with a traditionalcycle of internally funded development and marketing prior to selling viadirect and indirect sales channels. Manufacturing is primarily outsourced. Ourcommunications equipment is used in a broad range of applications for military(defense and homeland security), utility companies and regional and nationalcommunications carriers.

 

**CriticalAccounting Policies**

 

Our discussion and analysisof our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the U.S. The preparation of thosefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamount of net sales and expenses for each period. The following represents asummary of our critical accounting policies, defined as those policies that webelieve are the most important to the portrayal of our financial condition andresults of operations and that require management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffects of matters that are inherently uncertain.

 

***Revenue******Recognition***

 

We derive revenues fromsales of electronic devices and communications equipment products and services.Our sales are based upon written agreements or purchase orders that identifythe type and quantity of the item and/or services being purchased and thepurchase price. We recognize revenues when shipment of products has occurred orservices have been rendered, no significant obligations remain on our part, andcollectability is reasonably assured based on our credit and collectionspractices and policies.

 

We recognize revenues fromU.S. sales of our electronic devices and communications equipment at the pointof shipment of those products. An estimate of warranty costs are recorded atthe time the revenue is recognized. Product returns are infrequent and requireprior authorization because our sales are final and we quality test ourproducts prior to shipment to ensure the products meet the specifications ofthe binding purchase orders under which those products are shipped. Normally,when a customer requests and receives authorization to return a product, therequest is accompanied by a purchase order for a repair or for a replacementproduct.

 

Revenue recognition forproducts and services provided by our subsidiaries in England depends upon thetype of contract involved. Engineering/design services contracts generallyentail design and production of a prototype over a term of up to several years,with revenue deferred until each milestone defined in the contract is reached.Production contracts provide for a specific quantity of products to be producedover a specific period of time. Customers issue binding purchase orders orenter into binding agreements for the products to be produced. We recognizerevenues on these orders as the products are shipped. Returns are infrequentand permitted only with prior authorization because these products are custommade to order based on binding purchase orders and are quality tested prior toshipment. An estimate of warranty costs are recorded at the time revenue isrecognized.

 

We recognize revenues forproducts sold by our French subsidiary at the point of shipment. Customerdiscounts are included in the product price list provided to the customer. Returnsare infrequent and permitted

 

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only with priorauthorization because these products are shipped based on binding purchaseorders and are quality tested prior to shipment. An estimate of warranty costsare recorded at the time revenue is recognized.

 

Revenues from services suchas repairs and modifications are recognized when the service is completed andinvoiced. For repairs that involve shipment of a repaired product, we recognizerepair revenues when the product is shipped back to the customer. Servicerevenues contribute less than 5% of total revenue and, therefore, areconsidered to be immaterial to overall financial results.

 

***Product Warranty Liabilities***

 

Generally, our productscarry a standard one-year, limited parts and labor warranty. In certaincircumstances, we provide a two-year limited parts and labor warranty on ourcommunications test instruments and network access products. We offer extendedwarranties beyond two years for an additional cost to our customers. Productsreturned under warranty typically are tested and repaired or replaced at ouroption. Historically, we have not experienced significant warranty costs orreturns.

 

We record a liability forestimated costs that we expect to incur under our basic limited warranties whenproduct revenue is recognized. Factors affecting our warranty liability includethe number of units sold, historical and anticipated rates of claim and costsper claim. We periodically assess the adequacy of our warranty liabilityaccrual based on changes in these factors.

 

***Inventory******Valuation***

 

Our finished goodselectronic devices inventories generally are built to order. Our communicationsequipment inventories generally are built to forecast, which requires us toproduce a larger amount of finished goods in our communications equipmentbusiness so that our customers can be served promptly. Our products consist ofnumerous electronic and other parts, which necessitates that we exercisedetailed inventory management. We value our inventory at the lower of theactual cost to purchase or manufacture the inventory (first-in, first-out) orthe current estimated market value of the inventory (net realizable value). Weperform cycle counts of inventories using an ABC inventory methodology, whichgroups inventory items into cycle counting categories, or conduct physicalinventories at least once a year. We regularly review inventory quantities onhand and record a provision for excess and obsolete inventory based primarilyon our estimated forecast of product demand and production requirements for thenext 12 to 24 months. Additionally, to determine inventory write-downprovisions, we review product line inventory levels and individual items asnecessary and periodically review assumptions about forecasted demand andmarket conditions. Any inventory that we determine to be obsolete, either inconnection with the physical count or at other times of observation, arereserved for and subsequently written-off. As of June 30, 2008, our totalinventory reserves amounted to $6.6 million of which $4.7 million, representing25% of total inventory, related to our electronic devices segment and $1.9million, representing 10% of total inventory, related to our communicationsequipment segment.

 

The communications equipmentindustry is characterized by rapid technological change, frequent new productdevelopment, and rapid product obsolescence that could result in an increase inthe amount of obsolete inventory quantities on hand. The electronic devicesindustry is characterized by the demand for long-term product stability and arapidly changing market for the components and materials we use in ourproducts, which could result in an increase in the amount of obsolete inventory

quantities on hand. Also,our estimates of future product demand may prove to be inaccurate, in whichcase we may have understated or overstated the provision required for excessand obsolete inventory. Although we make every effort to ensure the accuracy ofour forecasts of future product demand, any significant unanticipated changesin demand or technological developments could have a significant impact on thevalue of our inventory and our reported operating results.

 

***Foreign Currency Translation***

 

We have foreign subsidiariesthat together accounted for approximately 69.7% and 69.9% of our net revenues,42.6% and 58.6% of our assets and 40.1% and 53.9% of our total liabilities asof and for the six months ended June 30, 2008 and 2007, respectively. Inpreparing our consolidated financial statements, we are required

 

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to translate the financialstatements of our foreign subsidiaries from the functional currencies in whichthey keep their accounting records into U.S. dollars. Assets and liabilitiesdenominated in foreign currencies were translated into U.S. dollars (thereporting currency) at the exchange rate prevailing at the balance sheet date,(“translation adjustments”). Equity accounts denominated in foreign currencieswere translated into U.S. dollars at historical exchange rates. Revenues andexpenses denominated in foreign currencies were translated into U.S. dollars atthe monthly average exchange rate for the period. Gains and losses resultingfrom foreign currency transactions are included in the results of operationswithin our statement of operations under the caption “other income (expense).”Translation adjustments are reported as an element of other comprehensiveincome, which is a component of equity on the balance sheet.

 

Under relevant accountingguidance, the treatment of these translation gains or losses depends upon ourmanagement’s determination of the functional currency of each subsidiary. Thisdetermination involves consideration of relevant economic facts andcircumstances affecting the subsidiary. Generally, the currency in which thesubsidiary transacts a majority of its transactions, including billings,financing, payroll and other expenditures, would be considered the functionalcurrency. However, management must also consider any dependency of thesubsidiary upon the parent and the nature of the subsidiary’s operations.

 

If management deems anysubsidiary’s functional currency to be its local currency, then any gain orloss associated with the translation of that subsidiary’s financial statementsis included as a separate component of stockholders’ equity in accumulatedother comprehensive income (loss). However, if management deems the functionalcurrency to be U.S. dollars, then any gain or loss associated with thetranslation of these financial statements would be included in other income(expense) within our statement of operations.

 

If we dispose of any of oursubsidiaries, any cumulative translation gains or losses associated with thatentity would be realized into our statement of operations. If we determine thatthere has been a change in the functional currency of a subsidiary to U.S.dollars, then any translation gains or losses arising after the date of thechange would be included within our statement of operations.

 

Based on our assessment ofthe factors discussed above, we consider the functional currency of each of ourinternational subsidiaries to be each subsidiary’s local currency. Accordingly,we had cumulative translation gains of $1.3 million and $1.1 million that wereincluded as part of accumulated other comprehensive income within our balancesheets at June 30, 2008 and December 31, 2007, respectively. Duringthe three months ended June 30, 2008 and 2007, we included a translationloss of $3,000 and gain of $197,000, respectively, and during the six monthsended June 30, 2008 and 2007 we included translation gains of $223,000 and$174,000, respectively, under accumulated other comprehensive income.

 

If we had determined thatthe functional currency of our subsidiaries was U.S. dollars, these gains orlosses would have decreased or increased our net loss for the three monthsended June 30, 2008 and 2007. The magnitude of these gains or lossesdepends upon movements in the exchange rates of the foreign currencies in whichwe transact business as compared to the value of the U.S. dollar. Thesecurrencies include the euro, the British pound sterling and, to a lesserextent, the Japanese yen. Any future translation gains or losses could besignificantly higher or lower than those we recorded for these periods.

 

A 2.5 million British poundsterling loan payable from one of our subsidiaries in England to EMRISE wasoutstanding as of June 30, 2008 ($5.0 million based on the exchange rateat June 30, 2008). Exchange rate losses and gains on the long-term portionof this loan are recorded in cumulative translation gains or losses in theequity section of the balance sheet.

 

***Intangibles, Including Goodwill***

 

We periodically evaluate ourintangibles, including goodwill, for potential impairment. Our judgments regardingthe existence of impairment are based on legal factors, market conditions andoperational performance of our acquired businesses.

 

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In assessing potentialimpairment of goodwill, we consider these factors as well as forecastedfinancial performance of the acquired businesses. If forecasts are not met, wemay have to record additional impairment charges not previously recognized. Inassessing the recoverability of our goodwill and other intangibles, we mustmake assumptions regarding estimated future cash flows and other factors todetermine the fair value of those respective assets. If these estimates or theirrelated assumptions change in the future, we may be required to recordimpairment charges for these assets that were not previously recorded. If thatwere the case, we would have to record an expense in order to reduce thecarrying value of our goodwill. Under Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, we arerequired to analyze our goodwill for impairment issues at least annually ormore frequently if an event occurs or circumstances change that would morelikely than not reduce the fair value of a reporting unit below its carryingamount. At June 30, 2008, our reported goodwill totaled $13.1 million.During the six months ended June 30, 2008, we did not record anyimpairment losses related to goodwill and other intangible assets.

 

**Overview**

 

The majority of our productsare customized to the unique specifications of our customers and are subject tovariable timing of delivery. Shipments of products can be accelerated ordelayed due to many reasons including, but not limited to, exceeding or notmeeting customer contract requirements, a change in customer timing orspecifications, technology related issues and production related issues.Comparability of our revenues and gross profit is difficult from period toperiod as we typically do not have recurring orders. Exceptions to this include U.S. government stocking orders,foreign military contracts and certain long-term telecommunications contracts.As an example of this variability in revenues, we had orders that we planned toship for approximately $1.1 million of products in the first quarter of 2008that did not ship due to a combination of customer and production relateddelays. The majority of these orders shipped in the second quarter of 2008 resultingin lower sales in the first quarter, but higher sales in the second quarter.

 

Overall sales increased16.4% and 9.6% in the three and six months ended June 30, 2008,respectively, as compared to the same periods in 2007. Sales for our electronicdevices segment increased 21% and 12% for the three and six month periods in2008, respectively, as compared to the same periods in 2007 with increasesgenerated from all of our electronic devices subsidiaries. Sales for ourcommunications equipment segment increased 7% and 3% for the three and sixmonth periods in 2008, respectively, as compared to the same periods in 2007.Units shipped at both of our communications equipment subsidiaries remainedrelatively consistent with prior year periods, however, the effect of exchangerates between the euro and the U.S. dollar on the translation of our Frenchoperations had a favorable impact on the sales within this segment. We expectto continue to experience quarter over quarter increases in sales for the remainderof 2008 with total 2008 sales approaching $60 million. However, the impact ofexchange rates remains an uncertainty and could negatively or positively impactour overall results in future periods.

 

Overall gross marginsincreased to 35.5% and 35.7% in the three and six months ended June 30,2008, respectively, from 33.8% and 33.0% in the three and six months ended June 30,2007, respectively. The improvement in gross margin is primarily due tofavorable changes in product mix, particularly at our U.S. electronic devicessubsidiaries and both of our communications equipment subsidiaries. Overallmargins were also positively impacted as a result of translating foreign unitfinancial results from local (foreign) currencies to U.S. dollars due to thefavorable exchange rate between the U.S. dollar, the British pound sterling andthe euro compared to the prior year. We expect gross margin levels for thesecond half of 2008 to be higher than gross margin levels in the first half of2008, excluding the possible impact, favorable or unfavorable, of exchangerates on the translation of foreign operating unit financial results.

 

While we continue to incurnet losses, we have decreased the amount of these losses as compared to theprior year periods. We have overcome many of the factors that contributed toour 2007 period losses including shipping delays to the Defense LogisticsAgency (“DLA”), the consolidation of our RO Associates Incorporated (“RO”)facility with our CXR Larus Corporation facility and the subsequent transitionof RO manufacturing to a contract manufacturer, which initially resulted inadditional costs and significant shipping and manufacturing delays. We continueto make efficiency improvements in operations and we have resumed increasedshipments of RO products and more regular shipments to the DLA. We incurred anet loss of $0.3 million for the three months

 

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ended June 30, 2008compared to a net loss of $0.6 million for the three months ended June 30,2007. We incurred a net loss of $1.2 million for the six months ended June 30,2008 compared to a net loss of $1.4 million for the six months ended June 30,2007.

 

The following is a moredetailed discussion of our results of operations by segment.

 

**Results ofOperations**

 

***Comparison of the Three Months Ended June 30, 2008 to the ThreeMonths Ended June 30, 2007***

 

**Net Sales**

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**  | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                     |       |                             |       |                             |       |   |   |   |   |
| Electronic devices       |       | $                                | 10,187     |                             | $          | 8,440 |   | $ | 1,747 |   | 20.7 | % |
| *as % of net sales*      | * *   | *72.5*                           | *%*        | *69.9*                           | *%*        | * * | * * | * * | * * |
| Communications equipment |       | 3,862                            |       | 3,627                            |       | 235 |   | 6.5 | % |
| *as % of net sales*      | * *   | *27.5*                           | *%*        | *30.1*                           | *%*        | * * | * * | * * | * * |
| Total net sales          |       | $                                | 14,049     |                             | $          | 12,067 |   | $ | 1,982 |   | 16.4 | % |

 

*ElectronicDevices Segment*

 

The increase in sales of ourelectronic devices in the second quarter of 2008 as compared to the secondquarter of 2007 was primarily the result of a $0.8 million, or 20%, increase insales at our Pascall Electronics Ltd. (“Pascall”) subsidiary in England dueprimarily to shipments of our new IFE&C products. Also contributing to theincrease in sales was a $0.8 million, or 31%, increase in sales at our U.S.electronic device subsidiaries as a result of higher levels of shipments ofU.S. government orders for digital switches to satisfy our existing backlog forthe DLA and improved sales at our RO subsidiary. Second quarter 2007 sales atRO were negatively impacted by the transition to a contract manufacturer andthe consolidation of the RO and CXR Larus facilities. This transition andconsolidation is no longer negatively impacting RO in the second quarter of2008.

 

We expect that sales of electronicdevices during each of the remaining quarterly periods of 2008 will be higherthan the level of sales we reported for second quarter of 2008.

 

*CommunicationsEquipment Segment*

 

The increase in sales of ourcommunications equipment in the second quarter of 2008 as compared to thesecond quarter of 2007 was primarily due to a favorable impact of approximately$0.4 million as the result of the change in exchange rates between the U.S.dollar and the euro over the prior year period. Sales at our U.S. subsidiarywere comparable to sales in the second quarter of 2008 while sales at ourFrench subsidiary declined slightly in the second quarter of 2008 as comparedto the second quarter of 2007 due to slower sales of test equipment and reducedservice revenues.

 

We expect that sales of ourcommunications equipment will improve during the second half of 2008 ascontracts for our TiemPo product are satisfied and sales of our fiber opticmodem products regain momentum. We expect sales at our French subsidiary willincrease slightly as a result of higher international sales. We also expect ourFrench subsidiary sales to increase as a result of an increase in orders at theend of the second quarter that we expect to ship in the second half of 2008.

 

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**GrossProfit**

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**  | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                     |       |                             |       |                             |       |   |   |   |   |
| Electronic devices       |       | $                                | 3,458      |                             | $          | 2,794 |   | $ | 664 |   | 23.8 | % |
| *as a % of net sales*    | * *   | *33.9*                           | *%*        | *33.1*                           | *%*        | * * | * * | * * | * * |
| Communications equipment |       | 1,531                            |       | 1,282                            |       | 249 |   | 19.4 | % |
| *as a % of net sales*    | * *   | *39.6*                           | *%*        | *35.3*                           | *%*        | * * | * * | * * | * * |
| Total gross profit       |       | $                                | 4,989      |                             | $          | 4,076 |   | $ | 913 |   | 22.4 | % |
| *Total gross margin*     | * *   | *35.5*                           | *%*        | *33.8*                           | %          |   |   |   |   |

 

*ElectronicDevices Segment*

 

The increase in grossprofit, as a percentage of net sales, of our electronic devices from 33.1% inthe second quarter of 2007 to 33.9% in the second quarter of 2008 is primarilythe result of increased shipments of higher margin digital switches at our U.S.Digitran division along with increased product pricing and improved productionefficiency at our RO subsidiary, which increases contributed approximately $0.8million of gross profit. These increases were offset by a decrease of $0.2million in gross profit at our subsidiary in England due to increased shipmentsof lower margin IFE&C products, which is consistent with our strategy topenetrate the lower margin, high growth commercial In-flight Entertainmentmarket in an effort to improve overall profitability.

 

We expect that during the secondhalf of 2008, overall gross margins will be higher than the gross marginsreported for the first half of 2008. However, during 2008 we may experiencequarter to quarter variability due to product mix differences and resultingdifferentials associated with lower commercial versus higher militaryelectronic devices gross margins and also due to changes in exchange ratesbetween the euro, British pound sterling and U.S. dollar.

 

*CommunicationsEquipment Segment*

 

The increase in gross marginof our communications equipment from 35.3% in the second quarter of 2007 to39.6% in the second quarter of 2008 is primarily the result of increased salesof higher margin, TiemPoTM and fiber optic modem products, whichincreases totaled approximately $0.1 million of gross profit. Gross profits atour French subsidiary remained relatively consistent with the prior yearperiod. Gross margins were also favorably impacted by changes in foreigncurrency exchange rates between the U.S. dollar and the euro in the second quarterof 2008 compared to the second quarter of 2007.

 

We expect the trend ofquarter over quarter improvement in gross profit (both in dollars and as apercentage of sales) for our communications equipment segment to continuethroughout 2008, although as previously discussed, we do experience volatilityquarter to quarter due to changes in product mix and timing of shipments andalso due to changes in exchange rates between the euro, British pound sterlingand U.S. dollar.

 

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**OperatingExpenses**

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**             | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                |       |                             |       |                             |       |   |   |   |   |
| Selling, general and administrative |       | $                                | 4,006      |                             | $          | 3,849 |   | $ | (157 | ) | (4.1 | )% |
| *as % of net sales*                 | * *   | *28.5*                           | *%*        | *31.9*                           | *%*        | * * | * * | * * | * * |
| Engineering and product development |       | 782                              |       | 665                              |       | (117 | ) | (17.6 | )% |
| *as % of net sales*                 | * *   | *5.6*                            | *%*        | *5.5*                            | *%*        | * * | * * | * * | * * |
| Total operating expenses            |       | $                                | 4,788      |                             | $          | 4,514 |   | $ | (274 | ) | (6.1 | )% |

 

*Selling,general and administrative expenses*

 

The increase in selling,general and administrative expenses is primarily the result of an increase ofapproximately $0.1 million in selling expenses at our French subsidiary relatedto attendance at trade shows that were absent in the second quarter of 2007 andthe addition of headcount to support an increased international sales efforts.

 

During the remainder of theyear, we will likely incur additional costs in connection with the remediationof certain internal control deficiencies and material weaknesses that wereidentified as a result of our 2007 management assessment pursuant to theSarbanes-Oxley Act of 2002. We are currently in the process of developingspecific action plans in that regard. We are uncertain at this time of theadditional costs to remediate all of the control deficiencies and materialweaknesses, however, we anticipate the cost to be in the range of $0.2 millionto $0.4 million, most of which we expect to incur in 2008. We cannot guaranteethat the actual costs to remediate these deficiencies will not exceed thisamount. See “Controls and Procedures.”

 

*Engineeringand product development*

 

The $117,000 increase inengineering and product development costs is primarily due to the additionalinvestment in the evolution of the TiemPoTM family of products, which we havescheduled for this year. We expect engineering and product development costs tobe $0.1 million to $0.2 million higher in each of remaining quarters of 2008 ascompared to the quarter ended June 2008 as we continue to invest in theTiemPoTM family of products and support other ongoing new product initiatives ineach of our product lines.

 

*Interestexpense*

 

Interest expense was $0.6million for the three months ended June 30, 2008 compared to $0.2 millionfor the three months ended June 30, 2007 due to higher outstanding loanand line of credit balances and higher interest rates associated with our newcredit facility entered into in November 2007. Included in interestexpense in the second quarter of 2008 were $0.2 million of unused line fees,non-cash amortization of deferred financing costs and related to non-cashamortization of debt discount. Approximately $0.1 million of this amount wasassociated with our $10 million acquisition term loan, which was incurredwithout the benefit of an acquisition.

 

We expect quarterly interestexpense for the remainder of 2008 to be consistent with that reported in thesecond quarter of 2008. However, if we are successful in closing our pendingacquisition of Advanced Control Compoents, Inc. and, in connection withsuch closing, we are successful in borrowing up to an additional $13 millionfrom our current lender to fund the acquisition, our interest expense willincrease. See “Liquidity and Capital Resources.”

 

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**Otherincome (expense)**

 

We generated other income of$0.1 million for the three months ended June 30, 2008 and 2007. Otherincome (expense) consisted primarily of short-term exchange rate gains,partially offset by losses, associated with the volatility of the U.S. dollarto the British pound sterling and euro on the current portion of certain assetsand liabilities.

 

**Income taxexpense (benefit)**

 

Income tax benefit amountedto $4,000 for the three months ended June 30, 2008 compared to income taxexpense of $151,000 for the same period of 2007. Our income tax expense isprimarily the result of foreign income tax on foreign earned profits. Duringthe second quarter of 2008 we recorded an income tax benefit at two of ourforeign operations related to the reclassification of deferred tax items tocurrent as a result of changes in foreign tax rules, which resulted in a lowereffective tax rate in the second quarter of 2008 compared to the same period of2007.

 

***Comparison of the Six Months Ended June 30, 2008 to the Six MonthsEnded June 30, 2007***

 

**Net Sales**

 
| ** **               | ** ** | **Six Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**  | ** ** | **2008**                       | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                     |       |                           |       |                             |       |   |   |   |   |
| Electronic devices       |       | $                              | 19,073     |                             | $          | 16,967 |   | $ | 2,106 |   | 12.4 | % |
| *as % of net sales*      | * *   | *72.5*                         | *%*        | *70.7*                           | *%*        | * * | * * | * * | * * |
| Communications equipment |       | 7,223                          |       | 7,022                            |       | 201 |   | 2.9 | % |
| *as % of net sales*      | * *   | *27.5*                         | *%*        | *29.3*                           | *%*        | * * | * * | * * | * * |
| Total net sales          |       | $                              | 26,296     |                             | $          | 23,989 |   | $ | 2,307 |   | 9.6 | % |

 

*ElectronicDevices Segment*

 

The increase in sales of ourelectronic devices in the first half of 2008 as compared to the same period in2007 was primarily the result of a $1.2 million, or 17%, increase in sales atour Pascall subsidiary due primarily to shipments of our IFE&C products.Also contributing to the increase in sales was a $0.9 million, or 18%, increasein sales at our U.S. subsidiaries as a result of higher levels of shipments ofU.S. government orders for digital switches to satisfy our existing backlog forthe DLA and the improved sales at our RO subsidiary. First and second quarter2007 sales at RO were negatively impacted by the transition to a contract manufacturerand the consolidation of our RO and CXR Larus Corporation facilities. Thistransition and consolidation is no longer negatively impacting RO.

 

*CommunicationsEquipment Segment*

 

The slight increase in salesof our communications equipment in the first half of 2008 as compared to thefirst half of 2007 is primarily due to the $0.6 million impact of a favorablechange in exchange rates between the U.S. dollar and the euro over the prioryear period. This increase was offset by sales, in local currency, at ourFrench subsidiary which declined $0.2 million in the first half of 2008compared to the first half of 2007 as a result of a decrease in sales of testequipment and a reduction in service revenues. Additionally, sales at our U.S.subsidiary decreased $0.2 million as a result of a reduction in sales of ourfiber optic modem products during the first quarter of 2008 and the requiredreengineering of the product due to obsolete components. This reengineering wascompleted in the first quarter of 2008 and we resumed shipment of the productduring the second quarter of 2008.

 

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**GrossProfit**

 
| ** **               | ** ** | **Six Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**  | ** ** | **2008**                       | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                     |       |                           |       |                             |       |   |   |   |   |
| Electronic devices       |       | $                              | 6,384      |                             | $          | 5,422 |   | $ | 962 |   | 17.7 | % |
| *as a % of net sales*    | * *   | *33.5*                         | *%*        | *32.0*                           | *%*        | * * | * * | * * | * * |
| Communications equipment |       | 3,014                          |       | 2,502                            |       | 512 |   | 20.5 | % |
| *as a % of net sales*    | * *   | *41.7*                         | *%*        | *35.6*                           | *%*        | * * | * * | * * | * * |
| Total gross profit       |       | $                              | 9,398      |                             | $          | 7,924 |   | $ | 1,474 |   | 18.6 | % |
| *Total gross margin*     | * *   | *35.7*                         | *%*        | *33.0*                           | %          |   |   |   |   |

 

*ElectronicDevices Segment*

 

The increase in grossprofit, as a percentage of net sales, for our electronic devices from 32.0% inthe first half of 2007 to 33.5% in the first half of 2008 is primarily theresult of increased shipments of higher margin digital switches at our U.S.Digitran division along with increased product pricing and improved production efficiencyat our RO subsidiary.

 

*CommunicationsEquipment Segment*

 

The increase in gross marginfor our communications equipment from 35.6% in the first half of 2007 to 41.7%in the first half of 2008 is primarily the result of increased sales of highermargin, network access products at our French subsidiary and sales of ourhigher margin TiemPoTM and fiber optic modem products. Gross marginswere also favorably impacted by changes in foreign currency exchange ratesbetween the U.S. dollar and the euro in the first half of 2008 compared to thefirst half of 2007.

 

**OperatingExpenses**

 
| ** **                          | ** ** | **Six Months Ended** | ** ** | **Variance**                     | ** ** |
|-------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **June 30,**              | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**             | ** ** | **2008**                       | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                |       |                           |       |                             |       |   |   |   |   |
| Selling, general and administrative |       | $                              | 7,981      |                             | $          | 7,585 |   | $ | (396 | ) | (5.2 | )% |
| *as % of net sales*                 | * *   | *30.4*                         | *%*        | *31.6*                           | *%*        | * * | * * | * * | * * |
| Engineering and product development |       | 1,446                          |       | 1,375                            |       | (71 | ) | (5.2 | )% |
| *as % of net sales*                 | * *   | *5.5*                          | *%*        | *5.7*                            | *%*        | * * | * * | * * | * * |
| Total operating expenses            |       | $                              | 9,427      |                             | $          | 8,960 |   | $ | (467 | ) | (5.2 | )% |

 

*Selling,general and administrative expenses*

 

The increase in selling,general and administrative expenses is primarily the result of an increase ofapproximately $0.2 million in selling expenses at our French subsidiary relatedto addition of staff and attendance at trade shows that were absent in thesecond quarter of 2007, $0.1 million of one-time redundancy costs associatedwith the restructuring of personnel at two of our facilities and the additionof headcount to support an increased international sales efforts. Additionally,$0.1 million of costs were incurred in connection with our 2007 Sarbanes-OxleyAct of 2002 management assessment, which was conducted during the first quarterof 2008. These costs were offset, in part, by temporary headcount reductions atRO and Pascall.

 

The $71,000 increase inengineering and product development costs is primarily due to additionalinvestment in the evolution of the TiemPoTM family of products.

 

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**Interestexpense**

 

Interest expense was $1.2million for the six months ended June 30, 2008 compared to $0.3 millionfor the six months ended June 30, 2007 due to higher outstanding loan andline of credit balances and higher interest rates associated with our newcredit facility entered into in November 2007. Included in interestexpense in the first half of 2008 were $0.4 million of unused line fees,non-cash amortization of deferred financing costs and non-cash amortization ofdebt discount related to issuance costs for the credit facility. Approximately$0.2 million of this amount was associated with our $10 million acquisitionterm loan, which was incurred without the benefit of an acquisition.

 

**Otherincome (expense)**

 

We generated other income of$0.1 million for the six months ended June 30, 2008 compared to $0.2million for the six months ended June 30, 2007. Other income (expense)consisted primarily of short-term exchange rate gains, partially offset bylosses, associated with the volatility of the U.S. dollar to the British poundsterling and euro on the current portion of certain assets and liabilities.

 

**Income taxexpense (benefit)**

 

Income tax expense amountedto $0.1 million for the six months ended June 30, 2008 compared to $0.3million for the same period of 2007. Income tax expense is primarily the resultof foreign income tax on foreign earned profits. During the second quarter of2008 we recorded an income tax benefit at two of our foreign operations relatedto the reclassification of deferred tax items to current as a result of changesin foreign tax rules, which resulted in a decrease in the overall effective taxrate for the six months ended June 30, 2008 compared to the six months endedJune 30, 2007.

 

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**Liquidityand Capital Resources**

 

In making an assessment ofour liquidity, we believe that the items in our financial statements that aremost relevant are our working capital, cash generated from our operatingactivities and cash available from our financing activities. During the firstquarter of 2008, we funded our daily cash flow requirements through fundsprovided by operations and through borrowings from our credit facility withGVEC Resource IV Inc. (“GVEC”), an affiliate of Private Equity ManagementGroup LLC (“PEM Group”). Working capital was $13.6 million at June 30,2008 as compared to $16.1 million at December 31, 2007. The decrease inworking capital is primarily the result of decreases in cash balances relatedto payments on long-term debt. At June 30, 2008 and December 31,2007, we had accumulated deficits of $21.8 million and $20.7 million,respectively, and cash and cash equivalents of $1.9 million and $4.8 million,respectively.

 

Net cash used in operatingactivities during the six months ended June 30, 2008 totaled $0.6 millionas compared to net cash provided by operating activities of $0.2 million in thesix months ended June 30, 2007. In addition to the net loss of $1.2million, the primary significant use of cash from operations during the firsthalf of 2008 was an increase in inventory of $0.8 million and a $0.4 milliondecrease in accounts payable and accrued liabilities as a result of timing ofpayments to our vendors. The primary source of cash associated with operatingactivities during the first half of 2008 was a decrease in accounts receivablebalances of $0.5 million due to collections on aged customer accounts.

 

During the first half of2008 we paid approximately $2.4 million of principal on debt, including netrepayments on our revolving credit line of $2.0 million and $0.4 million inpayments on other long-term debt.

 

As of June 30, 2008, wehad outstanding borrowings of $2.0 million under the GVEC credit facility,remaining actual availability under a formula-based calculation of $4.0 millionand contractual availability of $5.0 million under the same facility. Actualremaining availability represents the additional amount we were eligible toborrow as of June 30, 2008, based on available eligible collateral andpre-determined advance rates on such collateral. Maximum contractualavailability represents the maximum amount of availability provided under thecredit facility as of that date.

 

In addition to the revolvingline of credit, at June 30, 2008, we had long-term loans, shareholder noteobligations and capitalized lease and equipment loan obligations totaling $7.3million, the current portion of which loans and obligations totaled $0.7million.

 

Our backlog increased to$31.1 million as of June 30, 2008 compared to $25.3 million as of December 31,2007. The amount of backlog orders represents revenue that we anticipaterecognizing in the future, as evidenced by purchase orders and other purchasecommitments received from customers, but on which work has

 

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not yet been initiated orwith respect to which work is currently in progress. Our backlog as of June 30,2008 was approximately 96% related to our electronic devices business, whichbusiness tends to provide us with long lead-times for our manufacturingprocesses due to the custom nature of the products, and approximately 4%related to our communications equipment business, which business tends todeliver standard or modified standard products from stock as orders are received.We believe that the majority of our current backlog will be shipped within thenext 12 months. However, there can be no assurance that we will be successfulin fulfilling such orders and commitments in a timely manner or that we willultimately recognize as revenue the amounts reflected as backlog.

 

*CreditFacility*

 

On November 30, 2007,EMRISE Corporation and its direct subsidiaries, EMRISE Electronics Corporation,CXR Larus Corporation and RO (collectively, the “Borrowers”) entered into aCredit Agreement with GVEC, providing for a three-year credit facility in theaggregate amount of $23,000,000 and is secured by accounts receivable, otherrights to payment and general intangibles, inventories and equipment.

 

The GVEC credit facilityconsists of (i) a one year revolving credit facility for up to $7,000,000that may be extended for up to three years (the “Revolver”), (ii) a threeyear term loan in an outstanding principal amount of $6,000,000 which was fullyfunded on November 30, 2007, and (iii) a three year term loan in theamount of $10,000,000 to be used solely for acquisitions made within 18 monthsof November 30, 2007.

 

The Revolver isformula-based and generally provides that the outstanding borrowings under theline of credit may not exceed an aggregate of 85% of eligible accountsreceivable, plus 10% of the value of eligible raw materials not to exceed$600,000, plus 50% of the value of eligible finished goods inventory not toexceed $1,500,000, minus the aggregate amount of reserves that may beestablished by GVEC.

 

Interest on the Revolver ispayable monthly. The interest rate is variable and is adjusted monthly based onprime rate as published in the “Money Rates” column of *The Wall Street Journal* (the “Base Rate”)plus 1.25%, subject to a minimum rate of 9.5%. The Revolver is subject tovarious financial covenants on a consolidated basis, including the following:EBITDA, measured on a fiscal quarter-end basis, must not be less than thescheduled amount for each specified period; the debt service coverage ratio,measured quarterly, must be greater than the lesser of the scheduled amount foreach specific period or 1.10:1.00; the leverage ratio, measured quarterly, mustnot be greater than 1.25:1.00; and we must not incur capital expenditures inany fiscal year in excess of $500,000. As of June 30, 2008, we were indefault of our capital expenditure limitation described above, which defaulthas been waived by our Lender.

 

The term loans bear interestat the Base Rate plus 4.25%, subject to a minimum rate of 12.5%, and requireinterest only payments in the first year, scheduled principal plus interestpayments in years two and three, and a final balloon payment at the end of yearthree. Interest on the term loans is payable monthly. The Borrowers may makefull or partial prepayment of the term loans provided that any such prepaymentis accompanied by the applicable prepayment premium discussed below.

 

Upon the sale or dispositionby Borrowers or any of their subsidiaries of property or assets, we may beobligated to prepay the Revolver and the term loans with the net cash proceedsreceived in connection with such sales or dispositions to the extent that theaggregate amount of net cash proceeds received and not paid to GVEC as aprepayment, for all such sales or dispositions exceed $150,000 in any fiscalyear.

 

In the event of a defaultand continuation of a default, GVEC may accelerate the payment of the principalbalance requiring us to pay the entire indebtedness outstanding on that date.Upon the occurrence and during the continuation of an event of default, GVECmay also elect to increase the interest rate applicable to the outstandingbalance by four percentage points above the per annum interest rate that wouldotherwise be applicable.

 

To secure payment of theindebtedness of Borrowers under the GVEC credit facility, the Borrowersirrevocably pledged and assigned to, and granted to GVEC a continuing securityinterest in all the personal property of the Borrowers including the Borrowers’interest in any deposit accounts, the stock of each of the Borrowers’subsidiaries, the intellectual property owned by each of the Borrowers, and theproceeds of the

 

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intellectual property ownedby each of the Borrowers. If an event of default, GVEC may, at its option,exercise any or all remedies available to it with respect to the collateral. Inaddition, certain of the Borrowers’ foreign subsidiaries have agreed toguaranty the Borrowers’ performance under the GVEC credit facility.

 

Overall, we believe thatcurrent and future capital resources, revenues generated from operations andother existing sources of liquidity, including our GVEC credit facility, willbe adequate to meet our anticipated short term, working capital and capitalexpenditures needs for at least the next 12 months. However, if we experiencesignificant loss of revenue or increase in costs, our cash flow could benegatively impacted resulting in a cash flow deficit which, in turn, mayrequire us to obtain additional financing. In addition, in order to close onour pending acquisition of Advanced Control Components, Inc. we will needto borrow up to an additional $13 million from GVEC. If we are able to borrowthese funds and close on this acquisition, our interest expense will increaseand because of the expected additional capital needs associated with this newbusiness, we may require additional financing. These potential additionalfinancing needs could be met in the form of a revised debt structure with ourexisting lender, new financing with another lender or lenders, the sale ofadditional equity to raise capital, or the sale of certain assets to generatecash. As part of our overall strategy, we may sell certain businesses and/orproduct lines that are not part of our core business. We believe that the saleof such businesses and/or product lines would streamline operations, wouldstrengthen our focus on core growth and would help to reduce the debt andinterest expense related to the possible acquisition of Advanced ControlComponents. By lowering interest expense, we believe we could reduce ourfinancial risk, provide a stronger balance sheet and achieve improvedliquidity. Our failure to raise capital, if needed, ability to sell assets whenneeded and/or ability to secure additional financing could restrict our growth,limit our development of new products or hinder our ability to compete.

 

**Effects ofInflation**

 

The impact of inflation andchanging prices has not been significant on the financial condition or resultsof operations of either our company or our operating subsidiaries.

 

**Impacts ofNew Accounting Pronouncements**

 

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities*.SFAS No. 159 permits an entity to irrevocably elect fair value on a contract-by-contractbasis as the initial and subsequent measurement attribute for many financialassets and liabilities and certain other items including insurance contracts.Entities electing the fair value option would be required to recognize changesin fair value in earnings and to expense upfront cost and fees associated withthe item for which the fair value option is elected. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. The adoptionof SFAS No. 159 did not have a material effect on our financialcondition or results of operations.

 

In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements*. This new statement provides a single definition offair value, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFAS No. 157also emphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy, with thehighest priority being quoted prices in active markets. The required effectivedate of SFAS No. 157 is the first quarter of 2008. The adoption of SFAS No. 157for financial assets and liabilities did not have a material effect on ourconsolidated financial statements, but resulted in additional disclosures. In February 2008,the FASB issued Staff Position No. 157-2, which delayed by one year theeffective date of SFAS No. 157 for all non-financial assets andliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. We are currently evaluating theimpact the adoption of SFAS No. 157 for non-financial assets andliabilities will have on our consolidated financial statements.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*. The new standardamends SFAS No. 133 and seeks to enhance disclosure about how and why acompany uses derivative and hedging activities, how derivative instruments andrelated hedged items are

 

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accounted for under SFAS No. 133(and the interpretations of that standard) and how derivatives and hedgingactivities affect a company’s financial position, financial performance andcash flows. SFAS No. 161 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008. We areevaluating the effect this statement may have on our consolidated financialstatements.

 

**ITEM 3.****                            ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Not applicable.

 

**ITEM 4.****                            ****CONTROLS AND PROCEDURES.**

 

Not applicable.

 

**ITEM 4T.****                    ****CONTROLS AND PROCEDURES.**

** **

***Evaluation of Disclosure Controls and Procedures***

 

We conducted an evaluationunder the supervision and with the participation of our management, includingour Chief Executive Officer and Vice President Finance and Administration, ourprincipal accounting officer, of the effectiveness of the design and operationof our disclosure controls and procedures. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (“Exchange Act”), means controlsand other procedures of a company that are designed to ensure that informationrequired to be disclosed by the company in the reports it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures also include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate, to allow timely decisions regarding requireddisclosure. Based on this evaluation, our Chief Executive Officer and VicePresident Finance and Administration concluded as of June 30, 2008 thatour disclosure controls and procedures were not effective at the reasonableassurance level due to the material weaknesses discussed immediately below.

 

In light of the threematerial weaknesses described below, we performed additional analysis and otherpost-closing procedures to ensure that our consolidated financial statementswere prepared in accordance with generally accepted accounting principles.Accordingly, we believe that the consolidated financial statements included inthis report fairly present, in all material respects, our financial condition,results of operations and cash flows for the periods presented.

 

***Inherent Limitations on the Effectiveness of Controls***

 

Management does not expectthat our disclosure controls and procedures or our internal control overfinancial reporting will prevent or detect all errors and all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control systems are met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in a cost-effective controlsystem, no evaluation of internal control over financial reporting can provideabsolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, have been or will bedetected.

 

These inherent limitationsinclude the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of a simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the controls. The design of anysystem of controls is based in part on certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Projectionsof any evaluation of controls effectiveness to future periods are subject torisks. Over time, controls

 

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may become inadequatebecause of changes in conditions or deterioration in the degree of compliancewith policies or procedures.

 

***Material Weaknesses and Related Remediation Initiatives***

 

Set forth below is a summaryof the various significant deficiencies which caused management to concludethat we had three material weaknesses. Through the efforts of our VicePresident Finance and Administration and our Audit Committee, we are currentlyin the process of developing specific action plans to remediate the materialweaknesses discussed more fully below. We expect to complete these variousaction plans by September 30, 2008. If we are able to complete theseaction plans by that date, we anticipate that all control deficiencies andmaterial weaknesses will be remediated by December 31, 2008.

 

(1)                                  We did not effectively implementcomprehensive entity-level internal controls, as evidenced by the followingcontrol deficiencies:

 

Entity Level InternalControl Evaluation.We did not formally consider entity-wide controls that are pervasive across ourcompany when considering whether control activities are sufficient to addressidentified risks.

 

Fraud Considerations. We did not conduct regular formalizedassessments to consider risk factors that influence the likelihood of someonecommitting a fraud and the impact of a fraud on our financial reporting.

 

Objective Evaluation ofInternal Controls. Wedid not use an internal audit function or other objective party to provide anobjective perspective on key elements of the internal control system.

 

External Communication. We lacked formal policies and proceduresregarding how and when matters affecting the achievement of financial reportingobjectives are communicated with outside parties.

 

Assessment of InformationTechnology. We didnot formally evaluate the extent of the needed information technology controlsin relation to our assessment of processes and systems supporting financialreporting.

 

Information Technology. We did not have sufficient informationtechnology controls, where applicable, designed and implemented to support theachievement of financial reporting objectives.

 

(2)                                  We did not maintain effective controls overchanges to critical financial reporting applications and over access to theseapplications and related data, as evidenced by the fact that certain of ourpersonnel had unrestricted access to various financial application programs anddata beyond the requirements of their individual job responsibilities. Thiscontrol deficiency could result in a material misstatement of significantaccounts or disclosures, including those described above, that could result ina material misstatement of our interim or annual consolidated financialstatements that would not be prevented or detected.

 

(3)                                  We did not maintain a sufficient level ofinformation technology personnel to execute general computing controls over ourinformation technology structure, which include the implementation andassessment of information technology policies and procedures. This controldeficiency did not result in an audit adjustment to our 2007 interim or annualconsolidated financial statements, but could result in a material misstatementof significant accounts or disclosures, which would not have been prevented ordetected.

 

***Remediation of Internal Control Deficiencies and Expenditures***

 

The above materialweaknesses did not result in adjustments to our consolidated financialstatements as of June 30, 2008, however, it is reasonably possible that,if not remediated, one or more of the material weaknesses described above couldresult in a material misstatement in our reported financial statements thatmight result in a material misstatement in a future annual or interim period.

 

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In addition to thedeveloping specific action plans for each of the above material weaknesses, weare taking steps to unify the financial reporting of all of our divisions.Accordingly, we are in the initial planning phase of implementing a centralizedconsolidation software package which we believe will facilitate this processand will assist in the remediation of many of the above listed deficiencies.

 

In addition, our auditcommittee has authorized the hiring of additional temporary staff and/or theuse of financial and information technology consultants, as necessary, toensure that we have the depth and experience to remediate the above listedmaterial weaknesses, including the implementation and monitoring of theappropriate level of control procedures related to all of our manufacturinglocations and our corporate offices. The audit committee will also workdirectly with management and outside consultants, as necessary to ensure thatboard level deficiencies are addressed. We are uncertain at this time of thecosts to remediate all of the above listed material weaknesses, however, weanticipate the cost to be in the range of $200,000 to $400,000 (including thecost of the consolidation software described above), most of which costs weexpect to incur in 2008. We cannot guarantee that the actual costs to remediatethese deficiencies will not exceed this amount.

 

Through these steps, webelieve that we are addressing the deficiencies that affected our internalcontrol over financial reporting as of June 30, 2008. Because the remedialactions require hiring of additional personnel, upgrading certain of ourinformation technology systems, and relying extensively on manual review andapproval, the successful operation of these controls for at least severalquarters may be required before management may be able to conclude that thematerial weakness has been remediated. We intend to continue to evaluate andstrengthen our internal control over financial reporting systems. These effortsrequire significant time and resources. If we are unable to establish adequateinternal control over financial reporting systems, we may encounterdifficulties in the audit or review of our financial statements by ourindependent registered public accounting firm, which in turn may have amaterial adverse effect on our ability to prepare financial statements inaccordance with GAAP and to comply with our SEC reporting obligations.

 

***Changes in Internal Control over Financial Reporting***

 

There has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the most recently completedfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

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

 

Various legal actions andclaims may arise against us in the ordinary course of business. In the opinionof management, the ultimate resolution of such possible legal actions andclaims will not have a material adverse effect on our consolidated financialposition or our results of operations.

 
| **ITEM 1A.** | ** ** | **RISK  FACTORS.** |
|--------------|------------|--------------------|

 

Item 1A of Part I ofour Form 10-K for the year ended December 31, 2007 summarizes variousmaterial risks that investors should carefully consider before deciding to buyor maintain an investment in our common stock. Any of those risks, if theyactually occur, would likely harm our business, financial condition and resultsof operations and could cause the trading price of our common stock to decline.There are no material changes to the risk factors set forth in theabove-referenced report*.*

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

 

**UnregisteredSales of Equity Securities**

 

None.

 

**Dividends**

 

We have not declared or paidany cash dividends on our capital stock in the past, and we do not anticipatedeclaring or paying cash dividends on our common stock in the foreseeablefuture. We will pay dividends on our common stock only if and when declared byour board of directors. Our board of directors’ ability to declare a dividendis subject to restrictions imposed by Delaware law. In determining whether todeclare dividends, the board of directors will consider these restrictions aswell as our financial condition, results of operations, working capitalrequirements, future prospects and other factors it considers relevant.

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

 

None.

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

 

None

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

 

None.

 

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

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                               |
| 31.1       |       | Certification of Principal  Executive Officer required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                                                                                                                                               |
| 31.2       |       | Certification of Principal  Financial Officer required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                                                                                                                                               |
| 32.1       |       | Certification of Chief  Executive Officer and Vice President Finance and Administration Pursuant to  18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002   |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                       | EMRISE CORPORATION |
|----------------------------|--------------------|
|                       |               |
| Dated: August 7, 2008 | By:                | /S/ CARMINE T. OLIVA |
|                       |               | Carmine T. Oliva, |
|                       |               | Chief Executive Officer |
|                       |               |   |
|                       |               |   |
| Dated: August 7, 2008 | By:                | /S/ D. JOHN DONOVAN |
|                       |               | D. John Donovan, Vice  President Finance and |
|                       |               | Administration (principal  financial and accounting |
|                       |               | officer) |

 

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**INDEX TO EXHIBITS ATTACHED TO THIS REPORT**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                               |
| 31.1       |       | Certification of Principal  Executive Officer required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                                                                                                                                               |
| 31.2       |       | Certification of Principal  Financial Officer required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                                                                                                                                               |
| 32.1       |       | Certification of Chief  Executive Officer and Vice President Finance and Administration Pursuant to  18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002   |

 

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