<PAGE>

================================================================================

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                 For the quarterly period ended JUNE 30, 2005 or

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

         For the transition period from ______________ to ______________


                         Commission File Number 1-10346


                               EMRISE CORPORATION
             (Exact Name 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
               (Address of Principal Executive Offices) (Zip Code)

                                 (909) 987-9220
              (Registrant's Telephone Number, Including Area Code)

                                 NOT APPLICABLE
              (Former Name, Former Address And Former Fiscal Year,
                         if Changed Since Last Report)

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

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

         As of August 12, 2005, there were 37,497,750 shares of the issuer's
common stock, $0.0033 par value, outstanding.

================================================================================



<PAGE>

<TABLE>
<S> <C>
                                                       PART I
                                               FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS.

         Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2005
               and December 31, 2004........................................................................    F-1

         Condensed Consolidated Statements of Operations
               (unaudited) for the Three and Six Months Ended June 30, 2005 and 2004 .......................    F-2

         Condensed Consolidated Statements of Comprehensive Income (Loss)
               (unaudited) for the Three and Six Months Ended June 30, 2005.................................    F-3

         Condensed Consolidated Statements of Stockholders' Equity (unaudited) for the
               Six Months Ended June 30, 2005 ..............................................................    F-4

         Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months
               Ended June 30, 2005 and 2004 ................................................................    F-5

         Notes to Condensed Consolidated Financial Statements (unaudited)...................................    F-6

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

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
              MARKET RISK...................................................................................     24

ITEM 4.       CONTROLS AND PROCEDURES.......................................................................     25

                                                      PART II
                                                 OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS.............................................................................     26

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND
              USE OF PROCEEDS...............................................................................     26

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES...............................................................     26

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................     26

ITEM 5.       OTHER INFORMATION.............................................................................     27

ITEM 6.       EXHIBITS......................................................................................     27

SIGNATURES    ..............................................................................................     28




<PAGE>


                                          PART I - FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                                        EMRISE CORPORATION AND SUBSIDIARIES
                                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                                    (UNAUDITED)
                                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


                                                                                    June 30,         December 31,
ASSETS                                                                                2005               2004
                                                                                  ------------       ------------
Current assets:
   Cash and cash equivalents                                                      $      6,435       $      1,057
   Accounts receivable, net of allowance for doubtful accounts of $156
     and $153, respectively                                                              7,635              5,796
   Inventories                                                                           8,596              6,491

   Deferred tax assets                                                                     345                352
   Prepaid and other current assets                                                        573                417
                                                                                  ------------       ------------
Total current assets                                                                    23,584             14,113
Property, plant and equipment, net                                                       2,079                909
Goodwill, net of accumulated amortization of $1,074 and $1,084,
   respectively                                                                         12,368              5,881

Intangible assets, net of accumulated amortization
   of $135 and $40, respectively                                                         2,062              3,560
Other assets                                                                               573                623
                                                                                  ------------       ------------
                                                                                  $     40,666       $     25,086
                                                                                  ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Borrowings under lines of credit                                               $        811       $        878
   Current portion of long-term debt                                                       892                211
   Notes payable to stockholders, current portion                                          500                500

   Accounts payable                                                                      3,171              3,398

   Income taxes payable                                                                    594                572
   Accrued expenses                                                                      3,707              3,014
                                                                                  ------------       ------------
Total current liabilities                                                                9,675              8,573
Long-term debt, less current portion                                                       322                985

Notes payable to stockholders, less current portion                                      2,000              2,250
Deferred income taxes                                                                    1,420              1,400
Other liabilities                                                                          887                969
                                                                                  ------------       ------------
Total liabilities                                                                       14,304             14,177

Stockholders' equity:
   Common stock, $0.0033 par value. Authorized 50,000,000 shares;
     issued and outstanding 37,385,000 and 24,777,000, respectively                        123                 82
   Additional paid-in capital                                                           43,243             26,746
   Accumulated deficit                                                                 (16,735)           (16,406)
   Accumulated other comprehensive income (loss)                                          (269)               487
                                                                                  ------------       ------------
Total stockholders' equity                                                              26,362             10,909
                                                                                  ------------       ------------
                                                                                  $     40,666       $     25,086
                                                                                  ============       ============

                      See accompanying notes to condensed consolidated financial statements.


                                                       F-1


<PAGE>
                                        EMRISE CORPORATION AND SUBSIDIARIES
                                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                                    (UNAUDITED)
                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                           Three Months Ended               Six Months Ended
                                                                June 30,                         June 30,
                                                       -------------------------         -------------------------
                                                         2005             2004             2005             2004
                                                       --------         --------         --------         --------
Net sales                                              $  9,962         $  6,432         $ 17,261         $ 12,624
Cost of sales                                             5,999            3,533           10,186            6,978
Gross profit                                              3,963            2,899            7,075            5,646
Operating expenses:
   Selling, general and administrative                    3,447            2,067            6,278            4,284
   Engineering and product development                      604              312            1,136              595
                                                       --------         --------         --------         --------
Income (loss) from operations                               (88)             520             (339)             767
Other income (expense):
   Interest expense                                         (94)             (94)            (196)            (190)
   Interest income                                           37               --              109               --
   Other income (expense)                                   115              (30)             112              (36)
                                                       --------         --------         --------         --------
Income (loss) before income taxes                           (30)             396             (314)             541
Income tax expense (benefit)                                (51)              27               15              102
                                                       --------         --------         --------         --------
Net income (loss)                                      $     21         $    369         $   (329)        $    439
Basic earnings per share                               $   0.00         $   0.02         $  (0.01)        $   0.02
                                                       ========         ========         ========         ========
Diluted earnings per share                             $   0.00         $   0.02         $  (0.01)        $   0.02
                                                       ========         ========         ========         ========


                       See accompanying notes to condensed consolidated financial statements.


                                                        F-2


<PAGE>

                                        EMRISE CORPORATION AND SUBSIDIARIES
                         CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND LOSS
                                 THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                                    (UNAUDITED)
                                                   (IN THOUSANDS)


                                                             Three Months Ended              Six Months Ended
                                                                  June 30,                        June 30,
                                                           -----------------------         -----------------------
                                                             2005            2004            2005            2004
                                                           -------         -------         -------         -------
Net income (loss)                                          $    21         $   369         $  (329)        $   439
Other comprehensive loss:
   Foreign currency translation adjustment                    (315)            (62)           (756)            (64)
                                                           -------         -------         -------         -------
Comprehensive income (loss)                                $  (294)        $   307         $(1,085)        $   375
                                                           =======         =======         =======         =======


                       See accompanying notes to condensed consolidated financial statements.


                                                        F-3



<PAGE>


                                                 EMRISE CORPORATION AND SUBSIDIARIES
                                      CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                   SIX MONTHS ENDED JUNE 30, 2005
                                                             (UNAUDITED)
                                                           (IN THOUSANDS)


                                                                                                       Accumulated
                                                  Common Stock            Additional                      Other
                                          --------------------------       Paid-In     Accumulated     Comprehensive
                                             Shares         Amount         Capital       Deficit       Income(Loss)       Total
                                          ------------   ------------   ------------   ------------    ------------    ------------
Balance at December 31, 2004                    24,777   $         82   $     26,746   $    (16,406)   $        487    $     10,909
Stock option exercises                             104             --             36             --              --              36
Issuance of common stock and warrants           12,504             41         16,438             --              --          16,479
Foreign currency translation adjustment             --             --             --             --            (756)           (756)
Warrants issued for services                        --             --             23             --              --              23
Net loss                                            --             --             --           (329)             --            (329)
                                          ------------   ------------   ------------   ------------    ------------    ------------
Balance at June 30, 2005                        37,385   $        123   $     43,243   $    (16,735)   $       (269)   $     26,362
                                          ============   ============   ============   ============    ============    ============


                               See accompanying notes to condensed consolidated financial statements.


                                                                F-4


<PAGE>

                                        EMRISE CORPORATION AND SUBSIDIARIES
                                      SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (UNAUDITED)
                                                   (IN THOUSANDS)


                                                                                               Six Months
                                                                                               Ended June 30,
                                                                                          ------------------------
                                                                                            2005            2004
                                                                                          --------        --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                         $   (329)       $    439
   Adjustments to reconcile net income (loss) to cash provided by (used in)
     operating activities:
       Depreciation and amortization                                                           391             128
       Provision for inventory obsolescence                                                    827             339
       Deferred taxes                                                                           27              --
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                                                     1,607             522
     Inventories                                                                              (462)            240
     Prepaid and other assets                                                                 (106)            (77)
     Accounts payable and accrued expenses                                                  (2,285)           (611)
                                                                                          --------        --------
Cash provided by (used in) operating activities                                               (330)            980
                                                                                          --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                                             (149)           (186)

   Cash paid for acquisition of Pascall, net of cash acquired                               (9,341)             --
   Acquisition related costs                                                                  (286)             --
                                                                                          --------        --------
Cash used in investing activities                                                           (9,776)           (186)
                                                                                          --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net repayments of current notes payable                                                     (67)           (422)
   Repayments of long-term debt                                                               (324)            (21)
   Proceeds from long-term debt                                                                 92              --
   Net proceeds from issuance of common stock in offering                                   16,479              --
   Proceeds from exercise of stock options                                                      36              --
                                                                                          --------        --------
Cash provided by (used in) financing activities                                             16,216            (443)
                                                                                          --------        --------

Effect of exchange rate changes on cash                                                       (732)            (89)
Net increase in cash and cash equivalents                                                    5,378             262
Cash and cash equivalents at beginning of period                                             1,057           1,174
                                                                                          --------        --------
Cash and cash equivalents at end of period                                                $  6,435        $  1,436
                                                                                          ========        ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for:
     Interest                                                                             $    178        $    164
                                                                                          ========        ========
     Income taxes                                                                         $     30        $    170
                                                                                          ========        ========


                       See accompanying notes to condensed consolidated financial statements.


                                                        F-5
</TABLE>


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

         Emrise Corporation (the "Company"), operates through three wholly-owned
subsidiaries: Emrise Electronics Corporation (formerly XET Corporation ("Emrise
Electronics")), CXR Larus Corporation ("CXR Larus"), and CXR-Anderson Jacobson
("CXR-AJ"). Emrise Electronics and its subsidiaries design, develop, manufacture
and market digital and rotary switches, power supplies, radio frequency ("RF")
and microwave components and subsystems, and subsystem assemblies. CXR Larus
designs, develops, manufactures and markets network access and transmission
products, communications test equipment, and network timing and synchronization
products. CXR-AJ designs, develops, manufactures and markets network access and
transmission products. The Company conducts its operations out of various
facilities in the United States, England, France and Japan and organizes itself
in two product line segments: electronic components and communications
equipment.

BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America.

         The unaudited condensed consolidated financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of June 30, 2005 and December 31, 2004 and the results of operations
and cash flows for the related interim periods ended June 30, 2005 and 2004.
However, these results are not necessarily indicative of results for any other
interim period or for the year. It is suggested that the accompanying condensed
consolidated financial statements be read in conjunction with the Company's
audited consolidated financial statements included in its 2004 annual report on
Form 10-K.

STOCK-BASED COMPENSATION

         The Company applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for its employee stock option plans unless the
exercise price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure."

         The following table sets forth the net income, net income available for
common stockholders and earnings per share amounts for the periods presented as
if the Company had elected the fair value method of accounting for stock options
for all periods presented:


                                      F-6


<PAGE>

<TABLE>
<S> <C>
                                   EMRISE CORPORATION AND SUBSIDIARIES
                          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                         JUNE 30, 2005 AND 2004
                                               (UNAUDITED)


                                                      Three Months Ended           Six Months Ended
                                                           June 30,                     June 30,
                                                   ------------------------     ------------------------
                                                      2005          2004          2005            2004
                                                   ---------      ---------     ---------      ---------
Net income (loss):
   As reported                                     $  21,000      $ 369,000     $(329,000)     $ 439,000
   Add: Stock-based compensation expense
     included in reported net income, net
     of related tax effect                                --             --            --             --
   Deduct: Stock-based compensation
     expense determined under the fair
     value-based method                              (47,000)       (34,000)      (94,000)       (48,000)
                                                   ---------      ---------     ---------      ---------
   Pro forma                                       $  26,000      $ 335,000     $(423,000)     $ 391,000
                                                   =========      =========     =========      =========

Basic earnings per share:
   As reported                                     $    0.00      $    0.02     $    0.01      $    0.02
   Add: Stock-based compensation expense
     included in reported net income, net
     of related tax effect                                --             --            --             --
   Deduct: Stock-based compensation
     expense determined under the fair
     value-based method                                   --          (0.01)           --             --
                                                   ---------      ---------     ---------      ---------
   Pro forma                                       $    0.00      $    0.01     $    0.01      $    0.02
                                                   =========      =========     =========      =========

Diluted earnings per share:
   As reported                                     $    0.00      $    0.02     $    0.01      $    0.02

   Add: Stock based compensation expense
     included in reported net income,
     net of related tax effect                            --             --            --             --
   Deduct: Stock-based compensation
     expensed determined under the fair
     value-based method                                   --          (0.01)           --             --
                                                   ---------      ---------     ---------      ---------
   Pro forma                                       $    0.00      $    0.01     $    0.01      $    0.02
                                                   =========      =========     =========      =========

</TABLE>

         The above calculations include the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income or loss in future periods. The calculations were based on
a Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 87% to 92%; risk-free interest rate of 3%; expected lives
of 7 years.

DERIVATIVE FINANCIAL INSTRUMENTS

         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in


                                      F-7


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


earnings unless specific hedge accounting criteria are met, and that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Company currently uses derivatives to manage
foreign currency rate risk.

         One of the Company's United Kingdom subsidiaries conducts business in
British pounds sterling and has a program that utilizes forward currency
contracts denominated in United States dollars to offset the risk associated
with the effects of currency exposure for sales in United States dollars. Under
this program, increases or decreases in the subsidiary's foreign currency
exposure are offset by gains or losses on the forward contracts, to mitigate the
possibility of foreign currency transaction gains or losses. These forward
contracts generally have terms of 90 days or less. The Company does not use
these forward contracts for trading purposes. All outstanding foreign currency
forward contracts used in this program are marked to market at the end of the
period with unrealized gains and losses included in other income and expense.

         Emrise Electronics also has a program that utilizes a forward currency
contract denominated in British pounds sterling to offset the risk of
intercompany loans to a United Kingdom subsidiary. Under this program, increases
or decreases in the current portion of intercompany debt due to Emrise
Electronics are offset by gains or losses on the forward contract, to mitigate
the possibility of foreign currency transaction gains or losses. The forward
contract currently expires in August 2005. The Company does not use this forward
contract for trading purposes. The forward contract used in this program is
marked to market at the end of the period with unrealized gains and losses
included in other income and expense.

         The Company's ultimate realized gain or loss with respect to currency
fluctuations will depend on the currency exchange rates and other factors in
effect as the contracts mature. Net foreign exchange transaction losses included
in other income and expense in the accompanying consolidated statements of
operations totaled $36,000 for the six months ended June 30, 2005. There was no
hedging in the year ended December 31, 2004.


                                      F-8


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


(2)      EARNINGS PER SHARE

         The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):

<TABLE>
<S> <C>
                                                Three Months Ended         Six Months Ended
                                                     June 30,                  June 30,
                                              ---------------------     ----------------------
                                                2005         2004         2005          2004
                                              --------     --------     --------      --------
NUMERATOR:
Net income (loss)                             $     21     $    369     $   (329)     $    439
                                              --------     --------     --------      --------

 Income (loss) attributable to common
    stockholders                              $     21     $    369     $   (329)     $    439
                                              ========     ========     ========      ========

DENOMINATOR:
 Weighted average number of common shares
    outstanding during the period               37,385       23,482       37,017        23,481

Incremental shares from assumed exercises
    of warrants and options                      1,254          826           --           871
                                              --------     --------     --------      --------

 Adjusted weighted average number of
    outstanding shares                          38,639       24,308       37,017        24,352
                                              ========     ========     ========      ========
Basic earnings per share                      $   0.00     $   0.02     $  (0.01)     $   0.02
                                              ========     ========     ========      ========
Diluted earnings per share                    $   0.00     $   0.02     $  (0.01)     $   0.02
                                              ========     ========     ========      ========


                                            F-9
</TABLE>


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         The following options and warrants were excluded from the computation
of diluted earnings per share as a result of the exercise prices exceeding the
average market prices of the underlying shares of common stock (in thousands,
except per share amounts):

<TABLE>
<S> <C>
                                                                   Three Months Ended June 30,
                                                                 ------------------------------
                                                                      2005           2004
                                                                 -------------    -------------

 Options and warrants to purchase shares of common stock             3,952            911
                                                                 -------------    -------------

 Exercise prices                                                 $1.55 - $3.44    $1.00 - $3.44
                                                                 -------------    -------------

                                                                        Six Months Ended
                                                                            June 30,
                                                                 ------------------------------
                                                                      2005           2004
                                                                 -------------    -------------

 Options and warrants to purchase shares of common stock             6,147           1,129
                                                                 -------------    -------------

 Exercise prices                                                 $0.20 - $3.44    $1.00 - $3.44
                                                                 -------------    -------------

</TABLE>

(3)      INVENTORIES

         Inventories consist of the following (in thousands):

                                         June 30, 2005         December 31, 2004
                                         --------------        -----------------
Raw materials                            $        3,831        $           3,222

Work-in-process                                   2,099                    1,280

Finished goods                                    2,666                    1,989
                                         --------------        -----------------
                                         $        8,596        $           6,491
                                         ==============        =================

(4)      REPORTABLE SEGMENTS

         The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
United States, European and Asian markets and designs, manufactures and markets
digital and rotary switches, electronic power supplies, RF and microwave
components and subsystems and subsystem assemblies. The communications equipment
segment also operates in the United States, European and Asian markets and
designs, manufactures and distributes network access and transmission products,
communications test instruments and network timing and synchronization products.

         The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes
exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.


                                      F-10


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers and different
design and manufacturing and marketing strategies.

         Each segment has business units or components as described in paragraph
30 of SFAS No. 142. Each component has discrete financial information and a
management structure. Following is a description of the Company's segment and
component structure as of June 30, 2005:

         Reporting Units Within Electronic Components Segment:
         -----------------------------------------------------

         o        Emrise Electronics - Rancho Cucamonga, California: Digitran
                  Division- digital and rotary switches, and electronic
                  subsystem assemblies for defense, aerospace and industrial
                  applications

         o        Emrise Electronics - Monrovia, California: XCEL Circuits
                  Division - printed circuit boards mostly for intercompany use
                  but with a small base of outside customers

         o        XCEL Japan Ltd. - Tokyo, Japan: Reseller of Digitran switches
                  and other third party electronic components

         o        XCEL Corporation Ltd. - Ashford, Kent, England/Isle of Wight,
                  England: Power supplies and radio frequency products for
                  defense and aerospace applications and for a broad range of
                  other commercial applications, including in-flight
                  entertainment systems; this reporting unit also includes XCEL
                  Power Systems, Ltd. ("XPS"), and Pascall Electronics Limited

         Reporting Units Within Communications Equipment Segment:
         -------------------------------------------------------

         o        CXR Larus - San Jose, California: Network timing and
                  synchronization devices and network access equipment

         o        CXR-AJ - Abondant, France: network access equipment and
                  Transmission equipment.

         There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's audited consolidated financial statements included in its 2004 annual
report on Form 10-K except for the inclusion of Pascall sales in the electronic
components segment for the last 13 days of the three months ended March 31, 2005
and for the three months ended June 30, 2005. Selected financial data for each
of the Company's operating segments is shown below (in thousands):


                                      F-11


<PAGE>
<TABLE>
<S> <C>
                                        EMRISE CORPORATION AND SUBSIDIARIES
                                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                               JUNE 30, 2005 AND 2004
                                                    (UNAUDITED)


                                      Three Months         Three Months         Six Months           Six Months
                                         Ended                 Ended              Ended                 Ended
                                      June 30, 2005        June 30, 2004       June 30, 2005        June 30, 2004
                                     ---------------      ---------------     ---------------      ---------------
Sales to external customers:
----------------------------
      Electronic Components          $         6,421      $         3,955     $        10,227      $         7,860
      Communications Equipment                 3,541                2,477               7,034                4,764
                                     ---------------      ---------------     ---------------      ---------------
                                     $         9,962      $         6,432     $        17,261      $        12,624
                                     ===============      ===============     ===============      ===============

Segment pretax profits (losses):
--------------------------------
      Electronic Components          $           660      $           813     $         1,177      $         1,596
      Communications Equipment                   (99)                 141                (290)                 130
                                     ---------------      ---------------     ---------------      ---------------
                                     $           561      $           954     $           887      $         1,726
                                     ===============      ===============     ===============      ===============


                                                                              June 30, 2005      December 31, 2004
                                                                             ---------------     -----------------
Segment assets:
---------------
      Electronic Components                                                  $        19,565     $           8,435
      Communications Equipment                                                        15,674                16,313
                                                                             ---------------     -----------------
                                                                             $        35,239     $          24,748
                                                                             ===============     =================

         The following is a reconciliation of the reportable segment sales,
income or loss and assets to the Company's consolidated totals (in thousands):


                                             Three Months      Three Months         Six Months         Six Months
                                                Ended              Ended              Ended              Ended
                                            June 30, 2005      June 30, 2004      June 30, 2005       June 30, 2004
                                            -------------      -------------      -------------      -------------
Income before income taxes
--------------------------
   Total income for reportable segments     $         561      $         954      $         887      $       1,726
Unallocated amounts:
   General corporate expenses                        (591)              (558)            (1,216)            (1,185)
                                            -------------      -------------      -------------      -------------
Consolidated income before
      income taxes                          $         (30)     $         396      $        (329)     $         541
                                            =============      =============      =============      =============


                                                                              June 30, 2005      December 31, 2004
                                                                             ---------------     -----------------
Assets
------
    Total assets for reportable segments                                     $        35,763     $          24,748
    Other assets                                                                       4,903                   338
                                                                             ---------------     -----------------
 Total consolidated assets                                                   $        40,666     $          25,086
                                                                             ===============     =================

</TABLE>

         (5)      NEW ACCOUNTING PRONOUNCEMENTS

         New accounting pronouncements are discussed under the heading "Impacts
of New Accounting Pronouncements" in Part I, Item 2 of this report.


                                      F-12


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


(6)      INCOME TAXES

         The effective tax rate for the six-month period ended June 30, 2005 is
different than the 34% United States statutory rate primarily because of foreign
taxes on foreign source income that cannot be offset by domestic tax loss
carryforwards.

(7)      CREDIT FACILITIES

         On June 1, 2004, two of the Company's subsidiaries, Emrise Electronics
and CXR Larus, together with the Company acting as guarantor, obtained a credit
facility from Wells Fargo Bank, N.A. for the Company's domestic operations. This
facility was to be effective through July 1, 2005 and replaced the previous
credit facility the Company had with Wells Fargo Business Credit, Inc. No
prepayment penalty was due because the prior loan contract excluded from
prepayment penalties loans replaced with new credit facilities from Wells Fargo
Bank, N.A. The new credit facility is subject to an unused commitment fee equal
to 0.25% per annum, payable quarterly based on the average daily unused amount
of the line of credit described in the following paragraph.

         The credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at June 30, 2005 was 6.25%.

         The credit facility also provides for a term loan of $150,000 secured
by equipment, amortizable over 36 months at a variable rate equal to the prime
rate plus 1.5%. The term loan portion of the facility had a balance of $100,000
at June 30, 2005.

         Wells Fargo Bank, N.A. has also provided the Company with $300,000 of
credit available for the purchase of new capital equipment when needed through
July 1, 2005, of which a balance of $135,000 was outstanding at June 30, 2005.
The interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR")
rate (3.52% at June 30, 2005) plus 3.75% per annum. Amounts borrowed under this
arrangement are amortized over 60 months from the respective dates of borrowing.

         As of June 30, 2005, the Company had no outstanding balance owing under
the revolving credit line, and the Company had $2,000,000 of availability on the
non-formula based portion of the credit line. The credit facility is subject to
various financial covenants. As of June 30, 2005, the Company was in compliance
with each of those covenants. The minimum debt service coverage ratio of each of
Emrise Electronics and CXR Larus must be not less than 1.50:1.00 on a trailing
four-quarter basis. "Debt service coverage ratio" is defined as net income plus
depreciation plus amortization, minus non-financed capital expenditures, divided


                                      F-13


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


by current portion of long-term debt measured quarterly. The current ratio of
each of Emrise Electronics and CXR Larus must be not less than 1.50:1.00,
determined as of each fiscal quarter end. "Current ratio" is defined as total
current assets divided by total current liabilities. Net income after taxes of
each of Emrise Electronics and CXR Larus must be not less than $1.00 on an
annual basis, determined as of the end of each quarter. Net profit after taxes
of each of Emrise Electronics and CXR Larus must be not less than $1.00 in each
fiscal quarter immediately following a fiscal quarter in which that entity
incurred a net loss after taxes. Total liabilities divided by tangible net worth
of our domestic operations on a consolidated basis must not at any time be
greater than 2.00:1.00, determined as of each fiscal quarter end. Tangible net
worth of us and all of our subsidiaries on a consolidated basis must not at any
time be less than $5,200,000, measured at the end of each quarter. "Total
liabilities" is defined as current liabilities plus non-current liabilities,
minus subordinated debt. "Tangible net worth" is defined as stockholders' equity
plus subordinated debt, minus intangible assets.

         The credit facility was to expire July 1, 2005. However, the bank has
extended the credit facility to September 1, 2005. The Company is in the process
of renewing the credit facility. However, if the Company is unable to obtain a
renewal of the credit facility, the Company believes that it will have
sufficient funds available to timely repay any additional amounts it may borrow
under the credit facility prior to the expiration of the extension.

         As of June 30, 2005, the Company's foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Venture Finance PLC,
a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution,
in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National
de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in
Japan. At June 30, 2005, the balances outstanding under the Company's United
Kingdom, France and Japan credit facilities were $879,000, $628,000 and $44,000,
respectively.

         On July 8, 2005, XPS and Pascall obtained a credit facility with Lloyds
TSB Commercial Finance Limited ("Lloyds"). At the same time, the credit facility
of Venture Finance PLC was terminated, and all debt to Venture Finance PLC was
paid off. The Lloyds facility provides a revolving loan secured by receivables,
with a maximum availability of 2,100,000 British pounds sterling (approximately
U.S. $3,822,000 based on the exchange rate in effect on June 30, 2005). The
annual interest rate on the revolving loan is 1.5% above the Lloyds TSB rate.
The Lloyds TSB rate was 4.75% at July 8, 2005. This credit facility covers a
period of 24 months. The financial covenants include a 50% cap on combined
export gross sales of XPS and Pascall and debt turns of less than 65 days, and
the funding balance is capped at 125% of XPS and Pascall combined gross sales.
In addition to the revolving loan, Lloyds has also indicated it is willing to
provide an unsecured cashflow loan of $546,000 and a $273,000 term loan that
will be secured by equipment and amortized over 36 months. The cashflow and term
loan portions of the facility are being processed and are expected to close in
the near future.

(8)      RELATED PARTY TRANSACTIONS

         On July 13, 2004, the Company issued two promissory notes to the former
stockholders of Larus totaling $3,000,000 in addition to paying cash and issuing
shares of common stock (see Note 8), in exchange for 100% of the outstanding
capital stock of Larus. These notes are subordinated to the Company's bank debt
and are payable in 72 monthly equal payments of principal totaling $41,667 per


                                      F-14


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


month plus interest at the 30-day LIBOR rate plus 5% with a maximum interest
rate of 7% during the first two years of the term of the notes, 8% during the
third and fourth years and 9% thereafter. As of June 30, 2005, the 30-day LIBOR
rate was 3.34%. The total balance of these promissory notes as of June 30, 2005
was $2,500,000.

         Future maturities of notes payable to stockholders are as follows:

                 Year Ending               Dollars in
                 December 31,              Thousands
               ---------------             ----------
               2005 (6 months)             $      250
                    2006                          500
                    2007                          500
                    2008                          500
                    2009                          500
                 Thereafter                       250
                                           ----------
                                           $    2,500
                                           ==========


         Total interest paid on these notes for the six months ended June 30,
2005 was $93,000.

         The Company entered into an above-market real property lease with the
former stockholders of Larus Corporation. This lease represents an obligation
that exceeds the fair market value by approximately $756,000. The lease term is
for 7 years and expires on June 30, 2011. It is renewable for a 5-year term
priced under market conditions. The base rent is based on a minimum rent of
$0.90 per square foot per month, which is $27,000 monthly or $324,000 per year,
subject to monthly adjustments of the interest rate based on the Federal Reserve
Discount Rate that match the lessor's variable interest rate mortgage payments
on the building. The maximum increase in any year is 1.5%, with a cumulative
maximum increase of 8% over the life of the lease. The increases apply to that
portion of the rent that corresponds to the interest portion of the lessor's
mortgage. Lease payments paid to the related parties during the six months ended
June 30, 2005 totaled $184,000.

(9)      JANUARY 2005 PRIVATE PLACEMENT

         On January 5, 2005, the Company issued to 17 accredited record holders
in a private offering an aggregate of 12,503,500 shares of common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share, for total proceeds of approximately $18,005,000. The Company
paid cash placement agent fees and expenses of approximately $961,000, and
issued five-year placement warrants to purchase up to an aggregate of 650,310
shares of common stock at an exercise price of $1.73 per share in connection
with the offering. The total warrants issued, representing 3,776,185 shares of
the Company's common stock, have an estimated value of $4,400,000. Additional
costs related to the financing include legal, accounting and consulting fees
that totaled approximately $385,000 through June 30, 2005. The Company used a
portion of the proceeds from this financing to fund the acquisition of Pascall
in Note 10. The Company intends to use the remaining proceeds from this
financing for additional acquisitions and for investments in new products and
enhancements to existing products.


                                      F-15


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         The Company agreed to register for resale the shares of common stock
issued to investors and the shares of common stock issuable upon exercise of the
investor warrants and placement warrants. The registration obligations require,
among other things, that a registration statement be declared effective no later
than June 4, 2005. The Company was unable to meet this obligation and therefore
paid to each investor liquidated damages equal to 1% of the amount paid by the
investor to the Company in the offering, which damage payments totaled an
aggregate of approximately $180,000. The Company also paid to the investors
liquidated damages totaling $300,000 for the period from June 5, 2005 through
June 30, 2005, the date the registration was declared effective. These damages
were charged directly to equity as a return of capital against the gross
proceeds of the financing. The Company also will be required to pay to each
investor liquidated damages for any future periods in which the Company is
unable to maintain the effectiveness of the registration in accordance with the
requirements contained in the registration rights agreement the Company entered
into with the investors. These liquidated damages will be, and the liquidated
damages paid for the period from June 5, 2005 through June 30, 2005 were, equal
to 2% of the amount paid by each investor for the common shares still owned by
the investor on each monthly anniversary of the date of the default that occurs
prior to the cure of the default, pro rated on a daily basis for periods of
default shorter than one month. The maximum aggregate liquidated damages payable
to any investor will be equal to 10% of the aggregate amount paid by the
investor for the shares of the Company's common stock.

         Accordingly, the maximum aggregate penalty that the Company would be
required to pay under this provision is 10% of the $18,005,000 initial purchase
price of the common stock, which would be approximately $1,801,000. Although the
Company anticipates that it will be able to meet its future registration
obligations, it also anticipates that it will have sufficient cash available to
pay the maximum penalties if required.

(10)     LARUS CORPORATION AND PASCALL ACQUISITIONS

LARUS CORPORATION ACQUISITION

         Pursuant to the terms of a Stock Purchase Agreement executed on July
13, 2004, the Company acquired all of the issued and outstanding common stock of
Larus Corporation. Larus Corporation was based in San Jose, California and
engaged in the manufacturing and sale of telecommunications products. Larus
Corporation had one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"),
which provided engineering services to Larus Corporation. Assets held by Larus
Corporation included intellectual property, cash, accounts receivable and
inventories owned by each of Larus Corporation and Vista.

         The purchase price for the acquisition totaled $6,539,500 and consisted
of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common
stock with a fair value of $1,000,000, $887,500 in the form of two short-term,
zero interest promissory notes that were repaid in 2004, $3,000,000 in the form
of two subordinated secured promissory notes, warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share,
and approximately $580,000 of acquisition costs. The number of shares of the
Company's common stock issued as part of the purchase price was calculated based
on the $0.824 per share average closing price of the Company's common stock for
the five trading days preceding the transaction. The warrants to purchase
150,000 shares of common stock were valued at $72,000 using a Black-Scholes
formula that included a volatility of 107.19%, an interest rate of 3.25%, a life
of three years and no assumed dividend.


                                      F-16


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         In addition, the Company assumed $245,000 in accounts payable and
accrued expenses and entered into an above-market real property lease with the
sellers. This lease represents an obligation that exceeds the fair market value
by approximately $756,000 and is part of the acquisition accounting. The cash
portion of the acquisition purchase price was funded with proceeds from the
Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand.

         In determining the purchase price for Larus Corporation, the Company
took into account the historical and expected earnings and cash flow of Larus
Corporation, as well as the value of companies of a size and in an industry
similar to Larus Corporation, comparable transactions and the market for such
companies generally. The purchase price represented a significant premium over
the $1,800,000 recorded net worth of Larus Corporation's assets. In determining
this premium, the Company considered the Company's potential ability to refine
various Larus Corporation products and to use the Company's marketing resources
and status as a qualified supplier to qualify and market those products for sale
to large telecommunications companies. The Company believes that large
telecommunications companies desired to have an additional choice of suppliers
for those products and would be willing to purchase Larus Corporation's products
following some refinements. The Company also believes that if Larus Corporation
had remained independent, it was unlikely that it would have been able to
qualify to sell its products to the large telecommunications companies due to
its small size and lack of history selling to such companies. Therefore, Larus
Corporation had a range of value separate from the net worth it had recorded on
its books.

         In conjunction with the acquisition of Larus Corporation, the Company
commissioned a valuation firm to determine what portion of the purchase price
should be allocated to identifiable intangible assets. The valuation analysis is
complete. Accordingly, the Company has recorded the Larus Corporation trade name
and trademark at $750,000, the technology at $1,150,000, and customer
relationships at $200,000. Goodwill associated with the Larus Corporation
acquisition totals $4,944,000. The Larus Corporation trade name and trademark
were determined to have indefinite lives and therefore are not being amortized
but rather are being periodically tested for impairment. The technology and
customer relationships were both estimated to have ten-year lives and, as a
result, $40,000 and $95,000 of amortization expenses were recorded and charged
to administrative expense during the year ended December 31, 2004 and the six
months ended June 30, 2005, respectively. Previously, management had estimated
the intangibles of Larus Corporation to be $2,800,000 for trademark and trade
name, $500,000 for technology, and $300,000 for customer relationships. As a
result, the balances were adjusted and $50,000 of amortization expense was
recorded to adjust the accumulated amortization to the revised intangible
balances.


                                      F-17


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition:

                                                                      Dollars
                                                                    in Thousands
                                                                    ------------
        Current assets                                              $     2,460
        Property, plant and equipment                                        90
        Intangible assets other than goodwill                             2,100
        Goodwill                                                          4,944
                                                                    ------------
        Total assets acquired                                             9,594
        Current liabilities                                                (766)
        Deferred income taxes                                            (1,400)
        Unfavorable lease obligation and other liabilities                 (888)
                                                                    ------------
        Total liabilities assumed                                        (3,054)
                                                                    ------------
        Net assets acquired                                         $     6,540
                                                                    ============


         The intangible assets other than goodwill consist of non-amortizable
trade names with a carrying value of $750,000, and technology and customer
relationships with carrying values of $1,150,000 and $200,000, respectively,
that are amortizable over ten years. Amortization for the intangibles subject to
amortization as of June 30, 2005 is anticipated to be approximately $135,000 per
year for each of the next five years.

PASCALL ACQUISITION

         On March 1, 2005, the Company and XCEL Corporation Limited, a
second-tier wholly-owned subsidiary of the Company ("XCEL"), entered into an
agreement ("Purchase Agreement") for XCEL to acquire all of the issued and
outstanding capital stock of Pascall Electronic (Holdings) Limited ("PEHL"). The
closing of the purchase occurred on March 18, 2005. The Company loaned to XCEL
the funds that XCEL used to purchase PEHL. PEHL has one wholly-owned subsidiary,
Pascall Electronics Limited ("Pascall"), which produces, designs, develops,
manufactures and sells power supplies and RF products for a broad range of
applications, including in-flight entertainment systems and military programs.

         Under the Purchase Agreement, XCEL purchased all of the outstanding
capital stock of PEHL, using funds loaned to XCEL by the Company. The purchase
price for the acquisition initially totaled $9,669,000, subject to adjustments
as described below, and included a $5,972,000 cash payment to PEHL's former
parent, a $3,082,000 loan to PEHL and Pascall and approximately $615,000 in
acquisition costs, as described below.

         The initial portion of the purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The initial portion of the purchase price was paid in cash at
the closing and was subject to upward or downward adjustment on a pound for
pound basis to the extent that the value of the net assets of Pascall as of the
closing date was greater or less than 2,520,000 British pounds sterling.


                                      F-18


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         On May 6, 2005, the Company submitted to Intelek Properties Limited
(which is a subsidiary of Intelek PLC, a London Stock Exchange public limited
company, and is the former parent of PEHL), the Company's calculation of the
value of the net assets of Pascall as of the closing date, which the Company
believed slightly exceeded 2,520,000 British pounds sterling. Ultimately, the
parties determined that the value of the net assets of Pascall at the closing
date was 2,650,000 British pounds sterling. As a result, the Company paid to
Intelek Properties Limited 130,000 British pounds sterling (approximately U.S.
$236,000 based on the exchange rate in effect at June 30, 2005) on August 1,
2005 to satisfy this obligation. The purchase price is also subject to downward
adjustments for any payments that may be made to XCEL under indemnity, tax or
warranty provisions of the Purchase Agreement.

         XCEL loaned to PEHL and Pascall at the closing 1,600,000 British pounds
sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on
March 18, 2005) in accordance with the terms of a Loan Agreement entered into by
those entities at the closing. The loaned funds were used to immediately repay
outstanding intercompany debt owed by PEHL and Pascall to the seller.

         The Company and Intelek PLC have agreed to guarantee payment when due
of all amounts payable by XCEL and Intelek Properties Limited, respectively,
under the Purchase Agreement. The Company and XCEL agreed to seek to replace the
guaranty that Intelek Properties Limited has given to Pascall's landlord with a
guaranty by the Company, and XCEL has agreed to indemnify Intelek Properties
Limited and its affiliates for damages they suffer as a result of any failure to
obtain the release of the guarantee of the 17-year lease that commenced in May
1999. The leased property is a 30,000 square foot administration, engineering
and manufacturing facility located off the south coast of England.

         Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, Intelek PLC, XCEL, and
the Company entered into a Supplemental Agreement dated March 18, 2005. The
Supplemental Agreement provides, among other things, that an interest-free
bridge loan of 200,000 British pounds sterling (approximately U.S. $385,000
based on the exchange rate in effect on March 17, 2005) that was made by the
seller to Pascall on March 17, 2005 would be repaid by Pascall by March 31,
2005. XCEL agreed to ensure that Pascall had sufficient funds to repay the
bridge loan. The bridge loan was repaid in full by Pascall on the March 31, 2005
due date.


                                      F-19


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


         The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, including $615,000 in
acquisition costs:

                                                            Dollars
                                                          in Thousands
                                                          ------------
        Current assets...............................     $      6,196
        Property, plant and equipment................            1,367
        Intangibles, including goodwill..............            5,008
                                                          ------------
        Total assets acquired........................           12,571
        Current liabilities..........................           (2,535)
        Other liabilities............................              (80)
                                                          ------------
        Total liabilities assumed....................           (2,615)
                                                          ------------
        Net assets acquired..........................     $      9,956
                                                          ============

         The purchase price represented a significant premium over the recorded
net worth of Pascall's assets. In determining to pay this premium, we considered
various factors, including the opportunities that Pascall presented for us to
add RF components and RF subsystem assemblies to our product offerings, the
marketing resources of Pascall in the United States power supplies market, and
expected synergies between Pascall's business and our existing power supplies
business.

         In conjunction with the acquisition of Pascall, the Company has
selected a valuation firm to determine what portion of the purchase price should
be allocated to identifiable intangible assets. The Company has considered
whether the acquisition included various types of identifiable intangible
assets, including trade names, trademarks, patents, covenants not to compete,
customers, workforce, technology and software. The Company has estimated that
the Pascall trade name and trademark are valued at $50,000. The Company has
estimated that the covenants not to compete that were obtained from Pascall's
former affiliates are valued at $100,000 in light of public statements made by
those affiliates indicating that they were, for strategic reasons, exiting the
power supply business, which the Company believes result in a low probability
that they would return to the power supply business absent the covenants not to
compete. The Company believes that no other identifiable intangible assets of
value were acquired. No patents were acquired. The Company has not ascribed any
value to Pascall's customer base because the Company's United Kingdom
subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key customers.
Pascall's workforce does not hold any special skills that are not readily
available from other sources. The Company did not identify any valuable
completed technology that was acquired, because Pascall utilizes non-proprietary
technology to produce custom power supplies pursuant to customer specifications.
Pascall does not develop or design software and does not own software of any
material value.

         Accordingly, the Company has estimated that the goodwill associated
with the Pascall acquisition totaled $4,958,000 as compared to the initial
goodwill of $4,571,000. The Pascall trade name and trademark were determined to
have indefinite lives and therefore are not being amortized but rather are being
periodically tested for impairment. The covenants not to compete will be
amortized over their three-year duration. The valuation of the identified
intangible assets is expected to be completed during the quarter ending


                                      F-20


<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004
                                   (UNAUDITED)


September 30, 2005 and could result in changes to the value of these identified
intangible assets and corresponding changes to the value of goodwill. However,
the Company does not believe these changes will be material to its financial
position or results of operations.

PRO FORMA RESULTS OF OPERATIONS

         The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company, Larus Corporation and Pascall, as
though the Larus Corporation and Pascall acquisitions occurred as of January 1,
2004. The pro forma amounts give effect to appropriate adjustments for interest
expense and income taxes. The pro forma amounts presented are not necessarily
indicative of future operating results (in thousands, except per share amounts).

<TABLE>
<S> <C>
                                                      Three Months               Six Months
                                                     Ended June 30,             Ended June 30,
                                                   2005          2004         2005          2004
                                                ---------     ---------    ---------     ---------
Revenues                                        $   9,962     $  11,239    $  20,502     $  21,873
Net income                                      $     ,21     $     251    $    (165)    $     518
Earnings per share of common stock
   Basic                                        $    0.00     $    0.01    $    0.00     $    0.02
                                                =========     =========    =========     =========
   Diluted                                      $    0.00     $    0.01    $    0.00     $    0.02
                                                =========     =========    =========     =========

</TABLE>

(11)     ACCRUED EXPENSES

         Accrued expenses were as follows (in thousands):

                                         June 30, 2005        December 31, 2004
                                         -------------        -----------------
Accrued salaries                         $         805        $             805
Accrued payroll taxes and benefits                 654                      491
Advance payments from customers                     42                       77
Other accrued expenses                           2,206                    1,641
                                         -------------        -----------------
Total accrued expenses                   $       3,707        $           3,014
                                         =============        =================


                                      F-21


<PAGE>

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

         The following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes to financial
statements included elsewhere in this document. This report and our condensed
consolidated financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:

         o        the projected growth or contraction in the electronic
                  components and communications equipment markets in which we
                  operate;

         o        our business strategy for expanding, maintaining or
                  contracting our presence in these markets;

         o        our ability to efficiently and effectively integrate and
                  operate the businesses of our newly-acquired subsidiary,
                  Pascall Electronics Limited ("Pascall");

         o        our ability to identify, fund and integrate additional
                  businesses;

         o        anticipated trends in our financial condition and results of
                  operations; and

         o        our ability to distinguish ourselves from our current and
                  future competitors.

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

         The information contained in this document is not a complete
description of our business or the risks associated with an investment in our
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures we made in this
report, and in our other materials filed with the Securities and Exchange
Commission that discuss our business in greater detail and that disclose various
risks, uncertainties and other factors that may affect our business, results of
operations or financial condition. In particular, you should review our annual
report on Form 10-K for the year ended December 31, 2004, and the "Risk Factors"
we included in that report.

         Any of the factors described above could cause our financial results,
including our net income or loss or growth in net income or loss to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.


                                       2


<PAGE>

OVERVIEW

         Through our three wholly-owned operating subsidiaries, Emrise
Electronics Corporation ("Emrise Electronics", formerly XET Corporation), CXR
Larus Corporation ("CXR Larus") and CXR-Anderson Jacobson ("CXR-AJ"), and
through the divisions and subsidiaries of those subsidiaries, we design,
develop, manufacture, assemble, and market products and services in the
following two material business segments:

         o        Electronic Components

                  --       digital and rotary switches

                  --       electronic power supplies

                  --       subsystem assemblies

                  --       radio frequency ("RF") components and subsystem
                           assemblies

         o        Communications Equipment

                  --       network access and transmission products

                  --       network timing and synchronization products

                  --       communications test instruments

         Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 59.2%
and 62.3% of our total net sales during the six months ended June 30, 2005 and
2004, respectively. Sales of communications equipment and related services,
primarily to private customer premises and public carrier customers, were 40.8%
and 37.7% of our total net sales during the six months ended June 30, 2005 and
2004, respectively.

         Sales of our electronic components segment increased $2,367,000 (30.1%)
for the six months ended June 30, 2005 as compared to the six months ended June
30, 2004. Excluding sales of $3,730,000 from our new subsidiary, Pascall, which
we acquired March 18, 2005, our electronic components segment sales declined
$1,363,000 (18.0%) for the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004, primarily due to a $1,504,000 (38.8%) decrease in
net sales of power supplies manufactured by our XCEL Power Systems, Ltd.
subsidiary that was primarily due to the delay of delivery requirements for the
Eurofighter Typhoon aircraft.

         We achieved a $2,270,000 (47.6%) sales increase in our communications
equipment segment for the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004. Excluding $2,947,000 of sales by CXR Larus that are
attributable to the business previously conducted by Larus Corporation that we
acquired in July 2004, our communications equipment segment sales declined
$677,000 (14.2%) for the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004. This was primarily due to a continued low demand for
our test equipment by the major United States telecommunications companies, a
delay in continued shipments on a long-term United States government
infrastructure program and delays in French military communications
infrastructure programs. Of our subsidiaries, CXR Larus was the most affected by
the telecommunications downturn, because CXR Larus had the greatest dependence
on sales to United States public carriers and other public carriers.


                                       3


<PAGE>

         We continue to reduce costs at CXR Larus by reducing its work force and
increasing our sourcing of test equipment from offshore manufacturers that
produce for lower prices than the previous cost incurred to manufacture
in-house. Outsourcing of manufacturing to Asia was a primary reason we were able
to increase our gross margin from 34% in 2002 to 67% in 2004 in our CXR Larus
test equipment business, which resulted in an annual cost reduction of
approximately $1,372,000 during 2004. During the six months ended June 30, 2005,
we began working toward establishing a similar arrangement for the manufacture
of our network timing and synchronization products, which we anticipate will
result in further improvements in our gross margin. We also reduced costs
elsewhere in our communications equipment segment and lowered the breakeven
point both in our United States and France operations through various
cost-cutting methods, such as using offshore contract manufacturers, reducing
facility rent expense by approximately $150,000 on an annual basis as compared
to the six months ended June 30, 2004, and downsizing our administrative office
in Paris, France. At the end of 2004, we merged Larus Corporation with and into
CXR Telcom Corporation to form CXR Larus Corporation, and we integrated their
operations.

         As described in our annual report on Form 10-K for the year ended
December 31, 2004, we paid $6,539,500 to acquire the outstanding common stock of
Larus Corporation on July 13, 2004 and have consolidated the results of
operations of Larus Corporation beginning from the date of acquisition, July 13,
2004. We are beginning to now benefit from increased sales of our French
subsidiary's products in the United States market as a result of sales and
marketing support for the French products by CXR Larus' United States-based
sales and marketing staff, which has resulted in the securing of relationships
with two new major United States-based distributors during the six months ended
June 30, 2005. We consolidated our CXR Larus subsidiary's operations into Larus
Corporation's facility, which resulted in annual savings in rent and facilities
expense of approximately $250,000 beginning in the third quarter of 2004. During
the three months ended June 30, 2005, we implemented further administrative,
engineering and sales cost savings through staffing reductions of approximately
$750,000 on an annual basis. These staffing reductions related to eliminating
redundancies in personnel, including ten sales, marketing and administrative
positions and one engineering director and the former President of CXR Telcom
Corporation.

         On March 18, 2005, XCEL Corporation Ltd. ("XCEL") purchased all of the
outstanding capital stock of Pascall Electronic (Holdings) Limited ("PEHL"), the
parent holding company of Pascall, using funds loaned to XCEL by Emrise. The
purchase price for the acquisition initially totaled $9,669,000, subject to
adjustments as described below, and included a $5,972,000 cash payment to PEHL's
former parent, a $3,082,000 loan from XCEL to PEHL and Pascall, and
approximately $615,000 in acquisition costs.

         The initial portion of the purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The initial portion of the purchase price was paid in cash at
the closing and was subject to upward or downward adjustment on a pound for
pound basis to the extent that the value of the net assets of Pascall as of the
closing date was greater or less than 2,520,000 British pounds sterling.

         On May 6, 2005, we submitted to Intelek Properties Limited (which is a
subsidiary of Intelek PLC, a London Stock Exchange public limited company, and
is the former parent of PEHL), our calculation of the value of the net assets of
Pascall as of the closing date, which we believed slightly exceeded 2,520,000
British pounds sterling. Ultimately, the parties determined that the value of
the net assets of Pascall at the closing date was 2,650,000 British pounds
sterling. As a result, we paid to Intelek Properties Limited 130,000 British
pounds sterling (approximately U.S. $236,000 based on the exchange rate in
effect at June 30, 2005) on August 1, 2005 to satisfy this obligation. The
purchase price is also subject to downward adjustments for any payments that may
be made to XCEL under indemnity, tax or warranty provisions of the purchase
agreement.


                                       4


<PAGE>

         XCEL loaned to Pascall and PEHL at the closing 1,600,000 British pounds
sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on
March 18, 2005) in accordance with the terms of a loan agreement entered into by
those entities at the closing. The loaned funds were used to immediately repay
outstanding intercompany debt owed by Pascall and PEHL to Intelek Properties
Limited.

         We and Intelek PLC have agreed to guarantee payment when due of all
amounts payable by XCEL and Intelek Properties Limited, respectively, under the
PEHL purchase agreement. Emrise and XCEL have agreed to seek to replace the
guaranty that Intelek Properties Limited has given to Pascall's landlord with a
guaranty from us, and XCEL has agreed to indemnify Intelek Properties Limited
and its affiliates for damages they suffer as a result of any failure to obtain
the release of the guarantee of the 17-year lease that commenced in May 1999.
The leased property is a 30,000 square-foot administration, engineering and
manufacturing facility located off the south coast of England.

         Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, XCEL, Intelek PLC and
we entered into a Supplemental Agreement dated March 18, 2005. The Supplemental
Agreement provides, among other things, that an interest-free bridge loan of
200,000 British pounds sterling (approximately U.S. $385,400 based on the
exchange rate in effect on March 17, 2005) that was made by Intelek Properties
Limited to Pascall on March 17, 2005 would be repaid by Pascall by March 31,
2005. XCEL agreed to ensure that Pascall has sufficient funds to repay the
bridge loan. The bridge loan was repaid in full by Pascall to the seller on the
March 31, 2005 due date.

         We have consolidated the results of operations of Pascall beginning
from the date of acquisition, March 18, 2005. Based on current sales
projections, we anticipate that the Pascall acquisition will be accretive to our
earnings per share despite the associated expenses relating both to the payment
of the purchase price and the operation and integration of the Pascall business.
We expect to increase Pascall's sales to its existing customers in the United
States and to sell Pascall's products to Emrise's existing customers as a result
of our local presence and enhanced support from our United States-based sales
and marketing staff. We plan to consolidate a number of administrative functions
of our two United Kingdom-based subsidiary's operations into the Pascall
facility, which we anticipate will result in significant administrative and
facilities cost savings.


                                       5


<PAGE>

         The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, including $615,000 in
acquisition costs:

                                                             Dollars
                                                          in Thousands
                                                          ------------

        Current assets...............................     $     6,196
        Property, plant and equipment................           1,367
        Intangibles, including goodwill                         5,008
                                                          -----------
        Total assets acquired........................          12,571
        Current liabilities..........................          (2,535)
        Other liabilities............................             (80)
                                                          -----------
        Total liabilities assumed....................          (2,615)
                                                          -----------
        Net assets acquired..........................     $     9,956
                                                          ===========
         The purchase price represented a significant premium over the recorded
net worth of Pascall's assets. In determining to pay this premium, we considered
various factors, including the opportunities that Pascall presented for us to
add RF components and RF subsystem assemblies to our product offerings, the
marketing resources of Pascall in the United States power supplies market, and
expected synergies between Pascall's business and our existing power supplies
business.

         The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of Emrise, Larus Corporation and Pascall, as
though the Laurus Corporation and Pascall acquisitions occurred as of January 1,
2004. The pro forma amounts give effect to appropriate adjustments for interest
expense and income taxes. The pro forma amounts presented are not necessarily
indicative of future operating results (in thousands, except per share amounts).

<TABLE>
<S> <C>
                                              Three Months                Six Months
                                             Ended June 30,             Ended June 30,
                                        -----------------------    -----------------------
                                           2005          2004         2005          2004
                                        ---------     ---------    ---------     ---------
Revenues                                $   9,962     $  11,239    $  20,502     $  21,873
Net income                              $      21     $     251    $    (165)    $     518
Earnings per share of common stock
   Basic                                $    0.00     $    0.01    $    0.00     $    0.02
                                        =========     =========    =========     =========
   Diluted                              $    0.00     $    0.01    $    0.00     $    0.02
                                        =========     =========    =========     =========

</TABLE>

CRITICAL ACCOUNTING POLICIES

         Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of net sales and expenses for
each period. The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to
the portrayal of our financial condition and results of operations and that
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.


                                       6


<PAGE>

     REVENUE RECOGNITION

         We derive revenues from sales of electronic components and
communications equipment products and services. Our sales are based upon written
agreements or purchase orders that identify the type and quantity of the item
being purchased and the purchase price. We recognize revenues when delivery of
products has occurred or services have been rendered, no significant obligations
remain on our part, and collectibility is reasonably assured based on our credit
and collections practices and policies.

         We recognize revenues from domestic sales of our electronic components
and communications equipment at the point of shipment of those products. Product
returns are infrequent and require prior authorization because our sales are
final and we quality test our products prior to shipment to ensure they meet the
specifications of the binding purchase orders under which they are shipped.
Normally, when a customer requests and receives authorization to return a
product, the request is accompanied by a purchase order for a replacement
product.

         Revenue recognition for products and services provided by our United
Kingdom subsidiaries depends upon the type of contract involved.
Engineering/design services contracts generally entail design and production of
a prototype over a term of up to several years, with all revenue deferred until
all services under the contracts have been completed. Production contracts
provide for a specific quantity of products to be produced over a specific
period of time. Customers issue binding purchase orders for each suborder to be
produced. At the time each suborder is shipped to the customer, we recognize
revenue relating to the products included in that suborder. Returns are
infrequent and permitted only with prior authorization because these products
are custom made to order based on binding purchase orders and are quality tested
prior to shipment. Generally, these products carry a one-year limited parts and
labor warranty. We do not offer customer discounts, rebates or price protection
on these products.

         We recognize revenues for products sold by our French subsidiary at the
point of shipment. Customer discounts are included in the product price list
provided to the customer. Returns are infrequent and permitted only with prior
authorization because these products are shipped based on binding purchase
orders and are quality tested prior to shipment. Generally, these products carry
a two-year limited parts and labor warranty.

         Generally, our electronic components, network access and transmission
products and network timing and synchronization products carry a one-year
limited parts and labor warranty and our communications test instruments and
European network access and transmission products carry a two-year limited parts
and labor warranty. Products returned under warranty are tested and repaired or
replaced at our option. Historically, warranty repairs have not been material.
Product returns during 2004 were less than $1,000. We do not offer customer
discounts, rebates or price protection on these products.

         Revenues from services such as repairs and modifications are recognized
when the service has been completed and invoiced. For repairs that involve
shipment of a repaired product, we recognize repair revenues when the product is
shipped back to the customer. Service revenues represented 3.2% and 5.7% of net
sales during the six months ended June 30, 2005 and the year ended December 31,
2004, respectively.

     INVENTORY VALUATION

         Our finished goods electronic components inventories generally are
built to order. Our communications equipment inventories generally are built to
forecast, which requires us to produce a larger amount of finished goods in our
communications equipment business so that our customers can promptly be served.
Our products consist of numerous electronic and other parts, which necessitates


                                       7


<PAGE>

that we exercise detailed inventory management. We value our inventory at the
lower of the actual cost to purchase or manufacture the inventory (first-in,
first-out) or the current estimated market value of the inventory (net
realizable value). We perform physical inventories at least once a year. We
regularly review inventory quantities on hand and record a provision for excess
and obsolete inventory based primarily on our estimated forecast of product
demand and production requirements for the next twelve months. Additionally, to
determine inventory write-down provisions, we review product line inventory
levels and individual items as necessary and periodically review assumptions
about forecasted demand and market conditions. Any parts or finished goods that
we determine are obsolete, either in connection with the physical count or at
other times of observation, are reserved for and subsequently discarded and
written-off. Demand for our products can fluctuate significantly. A significant
increase in the demand for our products could result in a short-term increase in
the cost of inventory purchases, while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand.

         In addition, the communications equipment industry is characterized by
rapid technological change, frequent new product development, and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Also, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize
additional operating income at the time of sale. Therefore, although we make
every effort to ensure the accuracy of our forecasts of future product demand,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and our reported
operating results.

     FOREIGN CURRENCY TRANSLATION

         We have foreign subsidiaries that together accounted for 57.3% of our
net revenues, 46.0% of our assets and 39.0% of our total liabilities as of and
for the year ended December 31, 2004, and 61.2% of our net revenues, 54.2% of
our assets and 48.7% of our total liabilities as of and for the six months ended
June 30, 2005. In preparing our consolidated financial statements, we are
required to translate the financial statements of our foreign subsidiaries from
the currencies in which they keep their accounting records into United States
dollars. This process results in exchange gains and losses which, under relevant
accounting guidance, are either included within our statement of operations or
as a separate part of our net equity under the caption "accumulated other
comprehensive income (loss)."

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


                                       8


<PAGE>

         If management deems any subsidiary's functional currency to be its
local currency, then any gain or loss associated with the translation of that
subsidiary's financial statements is included as a separate component of
stockholders' equity in accumulated other comprehensive income (loss). However,
if management deems the functional currency to be United States dollars, then
any gain or loss associated with the translation of these financial statements
would be included within our statement of operations.

         If we dispose of any of our subsidiaries, any cumulative translation
gains or losses would be realized into our statement of operations. If we
determine that there has been a change in the functional currency of a
subsidiary to United States dollars, then any translation gains or losses
arising after the date of the change would be included within our statement of
operations.

         Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries as each
subsidiary's local currency. Accordingly, we had a cumulative translation loss
of $269,000 and gain of $487,000 that were included as part of accumulated other
comprehensive income (loss) within our balance sheet at June 30, 2005 and
December 31, 2004, respectively. During the six months ended June 30, 2005 and
the year ended December 31, 2004, we included translation adjustments of losses
of approximately $756,000 and $379,000, respectively, under accumulated other
comprehensive income (loss).

         If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our loss for these periods. The magnitude of these gains or losses
depends upon movements in the exchange rates of the foreign currencies in which
we transact business as compared to the value of the United States dollar. These
currencies include the euro, the British pound sterling and the Japanese yen.
Any future translation gains or losses could be significantly higher or lower
than those we recorded for these periods.

     INTANGIBLES, INCLUDING GOODWILL

         We periodically evaluate our intangibles, including goodwill, for
potential impairment. Our judgments regarding the existence of impairment are
based on legal factors, market conditions and operational performance of our
acquired businesses.

         In assessing potential impairment of goodwill, we consider these
factors as well as forecasted financial performance of the acquired businesses.
If forecasts are not met, we may have to record additional impairment charges
not previously recognized. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of those respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets that were not previously
recorded. If that were the case, we would have to record an expense in order to
reduce the carrying value of our goodwill. On January 1, 2002, we adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," and were required to analyze our goodwill for
impairment issues by June 30, 2002, and then at least annually after that date
or more frequently if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. At June 30, 2005 and December 31, 2004, the reported goodwill totaled
$12,368,000 and $5,881,000, respectively (net of accumulated amortization of
$1,074,000 and $1,084,000, respectively). During the six months ended June 30,
2005 and the year ended December 31, 2004, we did not record any impairment
losses related to goodwill and other intangible assets.


                                       9


<PAGE>

         In conjunction with our July 2004 acquisition of Larus Corporation, we
commissioned a valuation firm to determine what portion of the purchase price
should be allocated to identifiable intangible assets. As a result of the
valuation, we have determined that the Larus trade name and trademark are valued
at $750,000, the technology is valued at $1,150,000 and customer relationships
are valued at $200,000. Goodwill associated with the Larus Corporation
acquisition totaled $4,944,000. The Larus trade name and trademark were
determined to have indefinite lives and therefore are not being amortized but
rather are being periodically tested for impairment. The technology and customer
relationships were both estimated to have ten-year lives and, as a result,
$40,000 and $95,000 of amortization expenses were recorded and charged to
administrative expense during the year ended December 31, 2004 and the six
months ended June 30, 2005, respectively. Previously, management had estimated
the intangibles of Larus Corporation to be $2,800,000 for trademark and trade
name, $500,000 for technology, and $300,000 for customer relationships. As a
result, the balances were adjusted and $50,000 of amortization expense was
recorded to adjust the accumulated amortization to the revised intangible
balances.

         In conjunction with our March 2005 acquisition of Pascall, we have
selected a valuation firm to determine what portion of the purchase price should
be allocated to identifiable intangible assets. We have considered whether the
acquisition included various types of identifiable intangible assets, including
trade names, trademarks, covenants not to compete, patents, customers,
workforce, technology and software. We have estimated that the Pascall trade
name and trademark are valued at $50,000. We have estimated that the covenants
not to compete that were obtained from Pascall's former affiliates are valued at
$100,000 in light of public statements made by those affiliates indicating that
they were, for strategic reasons, exiting the power supply business, which we
believe results in a low probability that they would return to the power supply
business absent the covenants not to compete. We believe that no other
identifiable intangible assets of value were acquired. No patents were acquired.
We have not ascribed any value to Pascall's customer base because our United
Kingdom subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key
customers. Pascall's workforce does not hold any special skills that are not
readily available from other sources. We did not identify any valuable completed
technology that was acquired, because Pascall utilizes non-proprietary
technology to produce custom power supplies pursuant to customer specifications.
Pascall does not develop or design software and does not own software of any
material value.

         Accordingly, we have estimated that the goodwill associated with the
Pascall acquisition totaled $4,958,000 as compared to the initial goodwill of
$4,571,000. The Pascall trade name and trademark were determined to have
indefinite lives and therefore are not being amortized but rather are being
periodically tested for impairment. The covenants not to compete will be
amortized over their three-year duration. The valuation of the identified
intangible assets is expected to be completed during the quarter ending
September 30, 2005 and could result in changes to the value of these identified
intangible assets and corresponding changes to the value of goodwill. However,
we do not believe these changes will be material to our financial position or
results of operations.

RESULTS OF OPERATIONS

         The tables presented below, which compare our results of operations for
the three and six months ended June 30, 2005 to our results of operations for
the three and six months ended June 30, 2004, present the results for each
period, the change in those results from one period to another in both dollars
and percentage change, and the results for each period as a percentage of net
sales. The columns present the following:


                                       10


<PAGE>

         o        The first two data columns show the absolute results for each
                  period presented.

         o        The columns entitled "Dollar Variance" and "Percentage
                  Variance" show the change in results, both in dollars and
                  percentages. These two columns show favorable changes as a
                  positive and unfavorable changes as negative. For example,
                  when our net sales increase from one period to the next, that
                  change is shown as a positive number in both columns.
                  Conversely, when expenses increase from one period to the
                  next, that change is shown as a negative in both columns.

         o        The last two columns show the results for each period as a
                  percentage of net sales.

<TABLE>
<S> <C>
                            THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004


                                                                                                           ESULTS AS A PERCENTAGE
                                                                               DOLLAR      PERCENTAGE       OF NET SALES FOR THE
                                                   THREE MONTHS ENDED         VARIANCE      VARIANCE         THREE MONTHS ENDED
                                                        JUNE 30,            -----------    -----------           JUNE 30,
                                              --------------------------     FAVORABLE      FAVORABLE    -------------------------
                                                  2005           2004      (UNFAVORABLE)  (UNFAVORABLE)     2005          2004
                                              -----------    -----------    -----------    -----------   -----------   -----------
                                                        (DOLLARS IN THOUSANDS)
Net sales
    Electronic components ...............     $     6,421    $     3,955    $     2,466         62.4%         64.5%         61.5%
    Communications equipment ............           3,541          2,477          1,064         43.0%         35.5%         38.5%
                                              -----------    -----------    -----------    -----------   -----------   -----------
    Total net sales .....................           9,962          6,432          3,530         54.9%        100.0%        100.0%
Cost of sales
    Electronic components ...............           4,084          2,260         (1,824)       (80.7)%        41.0%         35.1%
    Communications equipment ............           1,915          1,273           (642)       (50.4)%        19.2%         19.8%
                                              -----------    -----------    -----------    -----------   -----------   -----------
    Total cost of sales .................           5,999          3,533         (2,466)       (69.8)%        60.2%         54.9%
Gross profit
    Electronic components ...............           2,337          1,695            642         37.9%         23.5%         26.4%
    Communications equipment ............           1,626          1,204            422         35.0%         16.3%         18.7%
                                              -----------    -----------    -----------    -----------   -----------   -----------
    Total gross profit ..................           3,963          2,899          1,064         36.7%         39.8%         45.1%
Selling, general and administrative
   expenses .............................           3,447          2,067         (1,380)       (66.8)%        34.6%         32.1%
Engineering and product development......             604            312           (292)       (93.6)%         6.1%          4.9%
Operating income ........................             (88)           520           (608)      (116.9)%         3.3%          8.1%
Interest expense ........................             (94)           (94)            --          0.0%         (0.9)%        (1.5)%
Interest income .........................              37             --             37           --          (0.9)%         0.0%
Other (income) expense ..................             115            (30)           145       (483.3)%         0.4%         (0.5)%
Income before income tax expense ........             (30)           396           (426)      (107.6)%        (0.3)%         6.2%
Income tax expense ......................             (51)            27             78       (288.9)%        (0.5)%         0.4%
                                              -----------    -----------    -----------    -----------   -----------   -----------
Net income ..............................     $        21    $       369           (348)       (94.3)%         0.2%          5.7%


</TABLE>

         NET SALES. The $3,530,000 (54.9%) increase in total net sales for the
three months ended June 30, 2005 as compared to the three months ended June 30,
2004 resulted from the combination of a $2,466,000 (62.4%) increase in net sales
of our electronic components and a $1,064,000 (43.0%) increase in net sales of
our communications equipment products and services.

         ELECTRONIC COMPONENTS. The increase in net sales of our electronic
components segment resulted from a $1,366,000 (71.3%) increase in net sales of
power supplies primarily due to the inclusion of $2,042,000 of power supplies
sold by Pascall, which we acquired on March 18, 2005. Without Pascall, sales of
power supplies by XCEL Power Systems, Ltd. would have declined by $676,000
primarily due to the delay of delivery requirements for the Eurofighter Typhoon
aircraft. We first reported sales of RF components and RF subsystem assemblies


                                       11


<PAGE>

during the three months ended March 31, 2005. We had $1,106,000 of sales of RF
components and RF subsystems assemblies for the three months ended June 30, 2005
as compared to none in the prior year period due to the acquisition of Pascall.
Sales of switches increased $128,000 (8.5%) to $1,639,000 for the three months
ended June 30, 2005 from $1,511,000 for the prior year period due to an $81,000
increase in switch sales by XCEL Power Systems, Ltd. and a $36,000 increase in
switch sales by XCEL Japan, Ltd.

         COMMUNICATIONS EQUIPMENT. The $1,064,000 (43.0%) increase in net sales
of our communications equipment segment resulted primarily from the inclusion in
our results for the three months ended June 30, 2005 of $1,437,000 of net sales
of network timing and synchronization products attributable to our acquisition
of Larus Corporation that occurred on July 13, 2004. This increase was partially
offset by a $199,000 (13.4%) decline in net sales of network access equipment
and transmission products manufactured by CXR-AJ, which primarily was due to
delays in the French military infrastructure programs. Communications test
equipment net sales decreased $154,000 (21.0%) to $581,000 for the three months
ended June 30, 2005 as compared to $735,000 for the prior year period primarily
due to a continued low demand by the major United States telecommunications
companies and a delay in continued shipments on a long-term government
infrastructure program due to customer technical issues. We anticipate that
sales of our communications test equipment will remain flat throughout the
remainder of 2005. However, we anticipate that sales of our network access
products both in France and, more importantly, in the United States will grow as
new sales channels and our stronger marketing presence becomes effective and we
work to utilize our two new United States-based distributors with whom we
established relationships during the six months ended June 30, 2005. We also
anticipate that sales of our network timing and synchronization products will
show further growth as we build our business with telecommunications carrier
companies in 2005 and beyond.

         GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 39.8% for the three months ended June 30, 2005 from 45.1% for the prior year
period. In dollar terms, gross profit increased by $1,064,000 (36.7%) to
$4,411,000 for the three months ended June 30, 2005 as compared to $2,899,000
for the prior year period.

         ELECTRONIC COMPONENTS. The $642,000 (37.9%) increase in gross profit
for our electronic components segment was primarily due to the inclusion of
Pascall's results, which contributed $813,000 in gross profit for the three
months ended June 30, 2005. The 2.9% percentage point decrease in gross profit
as a percentage of total net sales of electronic components primarily resulted
from the increased proportion of power supply sales resulting from the Pascall
acquisition, which sales generally produce a lower gross margin than the switch
products. Gross profit for our switch sales declined by $74,000 (8.0%) to
$838,000 for the three months ended June 30, 2005 as compared to $912,000 for
the prior year period due to changes in product mix.

         COMMUNICATIONS EQUIPMENT. The $422,000 (35.0%) increase in gross profit
for our communications equipment segment was primarily due to the inclusion of
$650,000 in gross profit during the three months ended June 30, 2005
attributable to net sales of network access and network timing and
synchronization products that we did not offer prior to our acquisition of Larus
Corporation in July 2004. Excluding the addition of these sales, gross profit
for communications equipment decreased approximately $228,000 (18.9%) primarily
due to a $235,000 (44.7%) decrease in gross profit of test equipment due to
lower sales volume.

         The 2.4 percentage point decrease in this segment's gross profit as a
percentage of total net sales was primarily the result of the lower gross margin
on sales of test equipment due primarily to lower sales volume.


                                       12


<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $1,380,000 (66.8%)
increase in selling, general and administrative expenses for the three months
ended June 30, 2005 as compared to the three months ended June 30, 2004
primarily was due to:

         o        a $142,000 (206%) increase in sales commissions primarily due
                  to the inclusion of sales commissions due to the Larus and
                  Pascall acquisitions;

         o        a $635,000 (97.5%) increase in other selling and marketing
                  expenses primarily due to the inclusion of selling expenses as
                  a result of the Larus and Pascall acquisitions, attendance at
                  tradeshows, and increased advertising and marketing of our
                  electronic components, including $88,000 spent on trade shows;

         o        a $603,000 (44.8%) increase in administrative expenses
                  primarily due to the inclusion of $218,000 and $217,000 of
                  administrative costs for our Larus division and for Pascall,
                  respectively;

         o        an increase of $70,000 in corporate legal expenses and a
                  $91,000 increase in accounting and auditing expenses at our
                  United States operations to $105,000 and $142,000,
                  respectively;

         o        a $74,000 severance expense we recorded to administrative
                  expense to reflect a consolidation of CXR Larus' operations;
                  and

         o        a $55,000 expense we recorded for a repair provision for the
                  building in Wales that we vacated to combine our coil winding
                  business with XCEL Power Systems, Ltd. in Ashford, England.

Despite the increase in selling, general and administrative expenses in dollar
terms, our selling general and administrative expenses declined to 31.9% of our
net sales for the three months ended June 30, 2005 as compared to 32.1% of our
net sales for the prior year period due to our overall increase in net sales.

         We anticipate that selling, general and administrative expenses for the
remainder of 2005 will remain at levels higher than those we experienced last
year due to the Larus Corporation and Pascall acquisitions, increased
investments in new products, sales and marketing expenses for our new low
profile rotary and digital switches, activity in searching for and analyzing
potential acquisitions, expansion of our investor relations program and
increased corporate governance activities in response to the Sarbanes-Oxley Act
of 2002 and recently adopted rules and regulations of the Securities and
Exchange Commission. However we continue to seek efficiency and cost savings at
all operations and anticipate we will further reduce our selling, general and
administrative expenses by an estimated $625,000 on an annual basis over the
current levels as a result of sales, marketing and administrative staffing
reductions implemented in our communications equipment segment during the three
months ended June 30, 2005.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. The $292,000 (93.6%) increase in these expenses resulted primarily
from the inclusion of $148,000 expenses attributable to our Larus division, a
$53,000 increase in research and engineering expenses related to our Pascall
acquisition and a $39,000 increase for development of our new low profile rotary
switches. We expect this higher level of expense to continue throughout 2005 as
we continue to develop our new family of rotary switches and pursue long-term
opportunities in the timing and synchronization market. During the three months
ended June 30, 2005, we eliminated one of our two engineering directors at CXR
Larus, which we anticipate will offset approximately $75,000 of our increased
engineering expenses on an annual basis.


                                       13


<PAGE>

         INTEREST EXPENSE AND OTHER INCOME. Interest expense of $94,000 remained
the same for the three months ended June 30, 2005 as for the three months ended
June 30, 2004 due to the issuance of $3,000,000 of notes for the acquisition of
Larus Corporation in July 2004 which offset our lower bank interest charges. We
recorded reduced interest expenses related to our Wells Fargo Bank loan and
reduced loan balances of our United Kingdom operations. In addition, we recorded
$37,000 of interest income in the three months ended June 30, 2005, which was
earned on the proceeds of the January 2005 private placement. We did not have
interest income during the three months ended June 30, 2004. Other income of
$115,000 for the three months ended June 30, 2005 primarily was affected by a
$100,000 gain due to the sale of our T-Com product line for $100,000. The T-Com
Technology and tangible assets has no carrying value.

         INCOME TAX EXPENSE. Income tax benefit for the three months ended June
30, 2005 was $51,000, compared to an expense of $27,000 for the three months
ended June 30, 2004. We have net tax loss carryforwards for United States income
tax purposes and our foreign subsidiaries achieved combined income before income
taxes and corporate charges of $196,000, which at the rates effective in the
respective countries affect which tax loss carryforwards resulted in the
reported current tax benefit of $51,000.

         NET INCOME. The net income for the three months ended June 30, 2005
decreased by $348,000 (94.3%) to $21,000 as compared to net income of $369,000
for the three months ended June 30, 2004. The decrease was primarily due to the
impact of planned increased sales and marketing expenses to launch new products
and improve the marketing and sales efforts in promoting our existing products
and the addition of similar expenses of Larus Corporation designed to increase
future revenue and net income, together with the substantial increase in
research and development associated primarily with our network timing products.
We incurred severance expenses of $119,000 for our CXR Larus integration,
$88,000 for trade shows, $55,000 to provide for repairs due to the relocation of
our Wales winding business to Ashford in the second quarter of 2005. We continue
to closely monitor costs throughout our operations and have reduced costs
through staffing reductions in our communications equipment operations in the
United States as detailed above.


                                       14


<PAGE>
<TABLE>
<S> <C>
                              SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004


                                                                                                        ESULTS AS A PERCENTAGE
                                                                            DOLLAR      PERCENTAGE       OF NET SALES FOR THE
                                                Six Months Ended           VARIANCE      VARIANCE          Six Months Ended
                                                     JUNE 30,            -----------    -----------           JUNE 30,
                                             ------------------------     FAVORABLE      FAVORABLE     ----------------------
                                               2005           2004      (UNFAVORABLE)  (UNFAVORABLE)     2005          2004
                                             --------       ---------    -----------    -----------    ---------   ----------
                                                             (DOLLARS IN THOUSANDS)
Net sales
    Electronic components ..............     $ 10,227       $  7,860      $  2,367         30.1%         59.2%          62.3%
    Communications equipment ...........     $  7,034       $  4,764      $  2,270         47.6%         40.8%          37.7%
                                             --------------------------------------------------------------------------------
    Total net sales ....................     $ 17,261       $ 12,624      $  4,637         36.7%        100.0%         100.0%
                                             --------------------------------------------------------------------------------
Cost of sales
    Electronic components ..............     $  6,451       $  4,525      $ (1,926)       (42.6)%        37.4%          35.8%
    Communications equipment ...........     $  3,735       $  2,453      $ (1,282)       (52.3)%        21.6%          19.4%
                                             --------------------------------------------------------------------------------
    Total cost of sales ................     $ 10,186       $  6,978      $ (3,208)       (46.0)%        59.0%          55.3%
                                             --------------------------------------------------------------------------------
Gross profit
    Electronic components ..............     $  3,776       $  3,335      $    441         13.2%         21.9%          26.4%
    Communications equipment ...........     $  3,299       $  2,311      $    988         42.8%         19.1%          18.3%
                                             --------------------------------------------------------------------------------
    Total gross profit .................     $  7,075       $  5,646      $  1,429         25.3%         41.0%          44.7%
                                             --------------------------------------------------------------------------------
Selling, general and administrative
   expenses ............................     $  6,278       $  4,284      $ (1,994)       (46.5)%        36.4%          33.9%
Engineering and product development
   expenses ............................     $  1,136       $    595      $   (541)       (90.9)%         6.6%           4.7%
Operating income (loss) ................     $   (339)      $    767      $ (1,106)      (144.2)%        (2.0)%          6.1%
Interest expense .......................     $   (196)      $   (190)     $     (6)         3.2%         (1.1)%         (1.5)%
Interest income ........................     $    109             --      $    109           --          (0.6)%          0.0%
Other (income) expense .................     $    112       $    (36)     $    148       (411.1)%        (0.6)%         (0.3)%
Income (loss) before income tax
   expense .............................     $   (314)      $    541      $   (855)      (158.0)%        (1.8)%          4.3%
Income tax expense .....................     $     15       $    102      $     87        (85.3)%         0.1%           0.8%
                                             --------------------------------------------------------------------------------
Net income (loss) ......................     $   (329)      $    439      $   (768)      (174.9)%        (1.9)%          3.5%
                                             ================================================================================

</TABLE>

         NET SALES. The $4,637,000 (36.7%) increase in total net sales for the
six months ended June 30, 2005 as compared to the six months ended June 30, 2004
resulted from the combination of a $2,367,000 (30.1%) increase in net sales of
our electronic components and a $2,270,000 (47.6%) increase in net sales of our
communications equipment products and services.

         ELECTRONIC COMPONENTS. The increase in net sales of our electronic
components segment resulted primarily from the inclusion in our results for the
six months ended June 30, 2005 of Pascall's $3,736,000 sales of power supplies
and RF components and RF subsystem assemblies. This increase was offset by a
$1,504,000 (38.8%) decrease in sales at XCEL Power Systems, Ltd., which decrease
was primarily related to reduced sales of power supplies primarily due to the
delay of delivery requirements for the Eurofighter Typhoon aircraft. Sales of
switches increased $113,000 (3.8%) to $3,113,000 for the six months ended June
30, 2005 from $3,000,000 for the prior year period due to a $173,000 increase of
sales of our new low profile rotary switches partially offset by a $60,000
decrease in digital switch sales.

         We first reported sales of RF components and RF subsystem assemblies
during the three months ended March 31, 2005 due to the Pascall acquisition.
Excluding sales by Pascall from March 18, 2005 through June 30, 2005, our
electronic components segment sales declined by $1,363,000 or 17.3% for the six
months ended June 30, 2005 as compared to the six months ended June 30, 2004. We
currently anticipate that our sales of electronic components will increase in
subsequent quarters of 2005, with the greatest anticipated period of growth
occurring in late 2005 and throughout 2006 based upon informal indications we
have received from various customers.


                                       15


<PAGE>

         COMMUNICATIONS EQUIPMENT. The $2,270,000 (47.6%) increase in net sales
of our communications equipment segment resulted primarily from the inclusion in
our results for the six months ended June 30, 2005 of $2,947,000 of net sales of
network timing and synchronization products attributable to our acquisition of
Larus Corporation that occurred on July 13, 2004. This increase was partially
offset by a $538,000 (17.8%) decline in net sales of network access equipment
and transmission products manufactured by CXR-AJ, which was primarily due to
delays in the French military communications infrastructure programs.
Communications test equipment net sales declined $137,000 (11.3%) to $1,080,000
for the six months ended June 30, 2005 as compared to $1,217,000 for the prior
year period, primarily due to a continued low demand by the major United States
telecommunications companies. We anticipate that sales of our communications
test equipment will remain flat throughout the remainder of 2005. However, we
anticipate that sales of our network access products both in France and more
importantly in the United States will grow as new sales channels and our
stronger marketing presence becomes effective and we work to utilize our two new
United States-based distributors we established relationships with during the
three months ended March 31, 2005. We also anticipate that sales of our network
timing and synchronization products will show further growth as we build our
business with telecommunications companies in 2005 and beyond.

         GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 41.0% from 44.7% for the prior year period. In dollar terms, gross profit
increased by $1,429,000 (25.3%) to $7,075,000 for the six months ended June 30,
2005 as compared to $5,646,000 for the prior year period.

         ELECTRONIC COMPONENTS. The $441,000 (13.2%) increase in gross profit
for our electronic components segment was primarily due to the inclusion in our
results for the six months ended June 30, 2005 of $991,000 of gross profit from
Pascall. Partially offsetting this increase was a $325,000 reduction in gross
profit from switches primarily due to product mix and a $234,000 decrease in
gross profit on power supplies produced by XCEL Power Systems, Ltd. as a direct
result of reduced sales volume due to contract delivery deferrals. We expect
overall sales of power supplies in 2005 to exceed overall sales of power
supplies in 2004 and to grow further in 2006 based upon informal indications we
have received from various customers.

         COMMUNICATIONS EQUIPMENT. The $988,000 (42.8%) increase in gross profit
for our communications equipment segment was primarily due to the inclusion of
$1,325,000 in gross profit during the six months ended June 30, 2005
attributable to net sales of network access and network timing and
synchronization products that we did not offer prior to our acquisition of Larus
Corporation in July 2004. Excluding the addition of these sales, gross profit
for communications equipment decreased approximately $337,000 (14.6%) primarily
due to a $213,000 (24.0%) decrease in gross profit on test equipment due to
lower sales volume and a $123,000 (8.6%) reduction in gross profit at CXR-AJ for
network access equipment sales due to lower volume.

         The 0.8 percentage point decrease in this segment's gross profit as a
percentage of total net sales was primarily the result of the larger
contribution of the lower margin CXR Larus network timing and synchronization
products and CXR-AJ network access products as compared to the higher margin
test equipment.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $1,994,000 (46.5%)
increase in selling, general and administrative expenses for the six months
ended June 30, 2005 as compared to the six months ended June 30, 2004 and the
2.5 percentage point increase in selling, general and administrative expenses as
a percentage of total net sales were primarily due to:


                                       16


<PAGE>

         o        a $170,000 (84.2%) increase in sales commissions primarily due
                  to the inclusion of $109,000 and $92,000 of sales commission
                  expenses of our Larus division and Pascall, respectively;

         o        a $996,000 (74.6%) increase in other selling and marketing
                  expenses primarily due to the inclusion of $671,000 and
                  $353,000 of selling expenses of our Larus division and
                  Pascall, respectively, attendance at tradeshows and increased
                  advertising and marketing of our electronic components;

         o        an $829,000 (30.2%) increase in administrative expenses
                  primarily due to the inclusion of $385,000 and $246,000 of
                  administrative costs for our Larus division and Pascall,
                  respectively;

         o        $53,000 in administrative expenses relating to our review of
                  internal controls pursuant to Section 404 of the Sarbanes
                  Oxley Act of 2002;

         o        $74,000 in severance costs we recorded to administrative
                  expense to reflect a consolidation of CXR Larus' operations;

         o        a $55,000 expense we recorded for a repair provision for the
                  building in Wales that we vacated to combine our coil winding
                  business with XCEL Power Systems, Ltd. in Ashford, England;
                  and

         o        an increase of $94,000 in United States corporate legal
                  expenses and a $92,000 increase in our domestic accounting and
                  auditing expenses.

         We anticipate that selling, general and administrative expenses for the
remainder of 2005 will remain at levels higher than those we experienced last
year due to the Larus Corporation and Pascall acquisitions, increased
investments in new products, sales and marketing expenses for our new low
profile rotary and digital switches, increased activity in searching for and
analyzing potential acquisitions, expansion of our investor relations program
and increased corporate governance activities in response to the Sarbanes-Oxley
Act of 2002 and recently adopted rules and regulations of the Securities and
Exchange Commission. However we continue to seek efficiency and cost savings at
all operations and anticipate we will further reduce our selling, general and
administrative expenses by an estimated $625,000 on an annual basis over the
current levels as a result of sales, marketing and administrative staffing
reductions implemented in our communications equipment segment.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of product development engineering
activities. The $541,000 (90.9%) increase in these expenses resulted primarily
from the inclusion of $337,000 expenses attributable to our Larus division and a
$96,000 increase in engineering attributable to Pascall. Also, expenses related
to development of our new low profile rotary switches increased $68,000 (31.9%)
to $281,000 for the six months ended June 30, 2005 as compared to $213,000 for
the prior year period. We expect this higher level of expense to continue
throughout 2005 as we continue to develop our new family of rotary switches and
pursue long -term opportunities in the timing and synchronization market. During
the six months ended June 30, 2005, we eliminated one of our two engineering
directors at CXR Larus, which we anticipate will offset approximately $75,000 of
our increased engineering expenses on an annual basis.


                                       17


<PAGE>

         INTEREST EXPENSE AND OTHER INCOME. Interest expense increased by $6,000
(3.2%) to $196,000 for the six months ended June 30, 2005 as compared to
$190,000 for the six months ended June 30, 2004 primarily due to the issuance of
$3,000,000 of notes for the acquisition of Larus Corporation in July 2004. This
increase was mostly offset by reduced interest expenses related to our Wells
Fargo Bank loan and reduced loan balances of our United Kingdom operations. In
addition, we recorded $109,000 of interest income in the six months ended June
30, 2005, which was earned on the proceeds of the January 2005 private
placement. We did not have interest income during the six months ended June 30,
2004. Other income of $112,000 for the six months ended June 30, 2005 primarily
was affected by a $100,000 gain due to the sale of our T-Com product line for
$100,000. The T-Com technology and tangible assets had no carrying value.

         INCOME TAX EXPENSE. Income tax expense for the six months ended June
30, 2005 was $15,000, compared to $102,000 for the six months ended June 30,
2004 due to lower pretax income. Although we applied net tax loss carryforwards
for United States income tax purposes, our foreign subsidiaries achieved
combined income before income taxes and corporate charges of $395,000, which at
the rates effective in the respective countries resulted in the reported current
tax expense of $15,000.

         NET INCOME (LOSS). Net income for the six months ended June 30, 2005
decreased by $768,000 to a loss of $329,000 as compared to net income of
$439,000 for the six months ended June 30, 2004. The decrease was primarily due
to the impact of planned increased sales and marketing expenses to launch new
products and improve the marketing and sales efforts in promoting our existing
products and the addition of similar expenses of Larus Corporation designed to
increase future revenue and net income together with the substantial increase in
product development engineering associated primarily with our network timing and
synchronization products. We continue to closely monitor costs throughout our
operations and have reduced costs through staffing reductions in our
communications equipment operations in the United States and France as detailed
above.

LIQUIDITY AND CAPITAL RESOURCES

         During the year ended December 31, 2004, we funded our operations
primarily through revenue generated from our operations and through our existing
and previous lines of credit with Wells Fargo Bank, N.A., and various foreign
banks. During the six months ended June 30, 2005, we continued to rely on these
sources and also raised approximately $16,437,000 in net proceeds through a
private placement of equity securities in January 2005 as described below. As of
June 30, 2005, we had working capital of $13,909,000, which represented a
$8,369,000 (151.1%) increase from working capital of $5,540,000 at December 31,
2004, primarily due to the proceeds from the private placement and the addition
of the working capital of Pascall. At June 30, 2005 and December 31, 2004, we
had accumulated deficits of $16,735,000 and $16,406,000, respectively, and cash
and cash equivalents of $6,435,000 and $1,057,000, respectively.

         Accounts receivable increased $1,839,000 (31.7%) during the six months
ended June 30, 2005 from $5,796,000 as of December 31, 2004 to $7,635,000 as of
June 30, 2005. Sales attributable to the Pascall acquisition contributed
$2,236,000 to accounts receivable at June 30, 2005. Without the acquisition of
Pascall, our receivables would have decreased $397,000 (6.8%) during the six
months ended June 30, 2005, primarily due to increased collections. Days sales
outstanding, which is a measure of our average accounts receivable collection
period, decreased from 69 days for the year ended December 31, 2004 to 55 days
for the six months ended June 30, 2005. This calculation is skewed because
$2,236,000 of Pascall receivables were included in our accounts receivable
balance at June 30, 2005 while only 105 days of Pascall's sales, totaling
$3,730,000, were included in our results for the six months ended June 30, 2005.


                                       18


<PAGE>

Excluding Pascall's sales, days sales outstanding was 61, which represents an
improvement for the six month period as compared to 69 days sales outstanding
for the year ended December 31, 2004. Our customers include many Fortune 100
companies in the United States and similarly large companies in Europe and Asia.
Because of the financial strength of our customer base, we have virtually
eliminated our bad debt reserves.

         Inventory balances increased $2,105,000 (32.4%) during the six months
ended June 30, 2005, from $6,491,000 at December 31, 2004 to $8,596,000 at June
30, 2005. Inventory represented 21.1% and 25.9% of our total assets as of June
30, 2005 and December 31, 2004, respectively. Included in the June 30, 2005
amount is $2,117,000 of inventory attributable to Pascall. Excluding the effect
of this inclusion, inventory would have decreased by $12,000 and would have
represented 18.8% of total assets (excluding the $11,333,000 of total assets
related to Pascall) at June 30, 2005. Inventory turnover, which is a ratio that
indicates how many times our inventory is sold and replaced over a specified
period, increased to 2.37 times (excluding Pascall, turnover would have decline
to 2.3 times) for the six months ended June 30, 2005 as compared to 2.48 times
for the year ended December 31, 2004 due to the decline in sales revenues.

         We took various actions to reduce costs in 2004. These actions were
intended to reduce the cash outlays of our communications equipment segment to
match its revenue rate. We also have contracted with offshore manufacturers for
production of test equipment at lower prices than we previously cost for
in-house manufacturing. We merged Larus Corporation with and into CXR Telcom
Corporation at the end of 2004 and integrated their operations.

         Cash used in our operating activities totaled $330,000 for the six
months ended June 30, 2005 as compared to cash provided by operating activities
of $980,000 for the six months ended June 30, 2004. This $1,310,000 decrease in
operating cash flows primarily resulted from a small net loss in the six months
ended June 30, 2005 as compared to net income in the comparable period in the
prior year, as well as increased payment of accounts payable and accrued
expenses.

         Cash used in our investing activities totaled $9,776,000 for the six
months ended June 30, 2005 as compared to $186,000 for the six months ended June
30, 2004. Included in the results for the six months ended June 30, 2005 are net
cash of $9,341,000 used to acquire Pascall and $149,000 of property, plant and
equipment purchases for production equipment and computer equipment. The
investments for the six months ended June 30, 2004 were mostly property, plant
and equipment purchases.

         Cash provided by our financing activities totaled $16,216,000 for the
six months ended June 30, 2005 as compared to $443,000 of cash used in our
financing activities for the six months ended March 31, 2004. The change is
primarily due to the net proceeds of $16,216,000 from the issuance of common
stock in the January 2005 private placement.

         On June 1, 2004, Emrise Electronics and CXR Larus, together with Emrise
acting as guarantor, obtained a credit facility from Wells Fargo Bank, N.A. for
our domestic operations. This facility was to be effective through July 1, 2005
and replaced the previous credit facility we had with Wells Fargo Business
Credit, Inc. No prepayment penalty was due because the prior loan contract
excluded from prepayment penalties loans replaced with new credit facilities
from Wells Fargo Bank, N.A. The new credit facility is subject to an unused
commitment fee equal to 0.25% per annum, payable quarterly based on the average
daily unused amount of the line of credit described in the following paragraph.

         The credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000


                                       19


<PAGE>

for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at June 30, 2005 was 6.25%.

         The credit facility also provides for a term loan of $150,000 secured
by equipment, amortizable over 36 months at a variable rate equal to the prime
rate plus 1.5%. The term loan portion of the facility had a balance of $112,000
at June 30, 2005.

         Wells Fargo Bank, N.A. has also provided us with $300,000 of credit
available for the purchase of new capital equipment when needed through July 1,
2005, of which a balance of $135,000 was outstanding at June 30, 2005 and July
1, 2005. The interest rate is equal to the 90-day London InterBank Offered Rate
("LIBOR") rate (3.52% at June 30, 2005) plus 3.75% per annum. Amounts borrowed
under this arrangement are amortized over 60 months from the respective dates of
borrowing.

         The previous credit facility bore interest at the prime rate plus 1.0%
and was subject to a $13,500 minimum monthly interest fee plus an unused
commitment fee equal to 0.25% per annum. The average amounts outstanding on the
revolving portions of the previous and new credit facilities during the year
ended December 31, 2004 and the six months ended June 30, 2005 were $1,035,000
and zero dollars, respectively. The prime rate averaged approximately 4.25% in
2004 and approximately 5.625% during the six months ended June 30, 2005. During
the six months ended June 30, 2005, interest on the new revolving line of credit
totaled approximately $12,000. During the six months ended June 30, 2004,
interest on our previous domestic credit facility was $76,000 and was subject to
a minimum monthly interest charge of $13,500.

         At June 30, 2005, we had no outstanding balance owing under the
revolving credit line and we had $2,000,000 of availability on the non-formula
based portion of the credit line. The credit facility is subject to various
financial covenants. At June 30, 2005, we were in compliance with those
financial covenants. The minimum debt service coverage ratio of each of Emrise
Electronics and CXR Larus must be not less than 1.50:1.00 on a trailing
four-quarter basis. "Debt service coverage ratio" is defined as net income plus
depreciation plus amortization, minus non-financed capital expenditures, divided
by current portion of long-term debt measured quarterly. The current ratio of
each of Emrise Electronics and CXR Larus must be not less than 1.50:1.00,
determined as of each fiscal quarter end. "Current ratio" is defined as total
current assets divided by total current liabilities. Net income after taxes of
each of Emrise Electronics and CXR Larus must be not less than $1.00 on an
annual basis, determined as of the end of each quarter. Net profit after taxes
of each of Emrise Electronics and CXR Larus must be not less than $1.00 in each
fiscal quarter immediately following a fiscal quarter in which that entity
incurred a net loss after taxes. Total liabilities divided by tangible net worth
of our domestic operations on a consolidated basis must not at any time be
greater than 2.00:1.00, determined as of each fiscal quarter end. Tangible net
worth of us and all of our subsidiaries on a consolidated basis must not at any
time be less than $5,200,000, measured at the end of each quarter. "Total
liabilities" is defined as current liabilities plus non-current liabilities,
minus subordinated debt. "Tangible net worth" is defined as stockholders' equity
plus subordinated debt, minus intangible assets.


                                       20


<PAGE>

         At June 30, 2005, there was no balance outstanding under the revolving
line of credit. The credit facility was to expire July 1, 2005. However, the
bank extended the term of the revolving line to September 1, 2005 and has
indicated that it intends to renew and expand the credit facility. However, if
we are unable to obtain a renewal of the credit facility, we believe we will
have sufficient funds available to timely repay any additional amounts we may
borrow under the credit facility prior to the expiration of the extension.

         On July 13, 2004, we issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that we repaid in 2004, in exchange for 100% of the capital
stock of Larus Corporation. These notes are subordinated to our bank debt and
are payable in 72 equal monthly payments of principal totaling $41,667 per month
plus interest at the 30-day LIBOR rate plus 5% with a maximum interest rate of
7% during the first two years of the term of the notes, 8% during the third and
fourth years and 9% thereafter. As of June 30, 2005, the 30-day LIBOR rate was
3.33%. The total balance on these promissory notes as of June 30, 2005 was
$2,500,000.

         As of June 30, 2005, our foreign subsidiaries had credit facilities,
including lines of credit and term loans, with Venture Finance PLC, a subsidiary
of the global Dutch ABN AMRO Holdings, N.V. financial institution, in England,
IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris,
Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. As of
June 30, 2005, the balances outstanding under our United Kingdom, France and
Japan credit facilities were $879,000, $628,000 and $44,000, respectively.

         XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years, carries an annual
fixed interest rate of 3.25% and is secured by the assets of XJL. The balance of
the loan as of June 30, 2005 was $44,000 using the exchange rate in effect at
that date for conversion of Japanese yen into United States dollars. There are
no financial performance covenants applicable to this loan.

         XCEL Power Systems, Ltd., one of our United Kingdom subsidiaries,
obtained a credit facility with Venture Finance PLC in November 2002. This
credit facility expires on November 15, 2005. Using the exchange rate in effect
at June 30, 2005 for the conversion of British pounds sterling into United
States dollars, the facility is for a maximum of $2,730,000 and includes a
$637,000 unsecured cash flow loan, a $146,000 term loan secured by fixed assets,
and the remainder is a loan secured by accounts receivable and inventory. The
interest rate is the base rate of Venture Finance PLC (4.5% at June 30, 2005)
plus 2%, and is subject to a minimum rate of 4% per annum. There are no
financial performance covenants applicable to this credit facility.

         On July 8, 2005, XPS and Pascall obtained a credit facility with Lloyds
TSB Commercial Finance Limited ("Lloyds"). At the same time, the credit facility
of Venture Finance PLC was terminated and all debt to Venture Finance PLC was
paid off. The Lloyds facility provides a revolving loan secured by receivables,
with a maximum of 2,100,000 British pounds sterling (approximately $3,822,000
based on the exchange rate in effect on June 30, 2005). The annual interest rate
on the revolving loan is 1.5% above the Lloyds TSB rate. The Lloyds TSB rate was
4.75% at July 8, 2005. This credit facility covers a period of 24 months. The
financial covenants include a 50% cap on combined export gross sales of XPS and
Pascall and debt turns of less than 65 days, and the funding balance is capped
at 125% of XPS and Pascall combined gross sales. In addition to the revolving
loan, Lloyds has also indicated it is willing to provide an unsecured cashflow
loan of $546,000 and a $273,000 term loan that will be secured by equipment and
amortized over 36 months. The cashflow and term loan portions of the facility
are being processed and are expected to close in the near future.


                                       21


<PAGE>

         In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,547,000,
based on the exchange rate in effect at June 30, 2005 for the conversion of
euros into United States dollars. CXR-AJ also had $39,000 of term loans with
several French banks outstanding as of June 30, 2005. The IFN Finance facility
is secured by accounts receivable and carries an annual interest rate of 1.6%
above the French "T4M" rate. At June 30, 2005, the French T4M rate was 2.067%
and this facility had a balance of $588,000. This facility has no financial
performance covenants.

         Our backlog was $16,673,000 as of June 30, 2005 as compared to
$8,403,000 as of June 30, 2004. The increase in backlog was primarily due to the
addition of $8,405,000 of backlog for Pascall. Our backlog as of June 30, 2005
was 93.4% related to our electronic components business, which business tends to
provide us with long lead-times for our manufacturing processes due to the
custom nature of the products, and 6.6% related to our communications equipment
business, which business tends to deliver standard products from stock as orders
are received. The amount of backlog orders represents revenue that we anticipate
recognizing in the future, as evidenced by purchase orders and other purchase
commitments received from customers, but on which work has not yet been
initiated or with respect to which work is currently in progress. However, there
can be no assurance that we will be successful in fulfilling such orders and
commitments in a timely manner or that we will ultimately recognize as revenue
the amounts reflected as backlog.

         As described above under the heading "Overview," we acquired Larus
Corporation and Vista in July 2004. As a result of the acquisition, we acquired
all of the assets and liabilities of Larus Corporation, including the
intellectual property, cash, accounts receivable and inventories owned by each
of Larus Corporation and Vista. The $6,539,500 purchase price consisted of
$1,000,000 in cash, the issuance of 1,213,592 shares of our common stock with a
fair value of $1,000,000, $887,500 in the form of two short-term, zero interest
promissory notes that were repaid in 2004, $3,000,000 in the form of two
subordinated secured promissory notes, warrants to purchase up to an aggregate
of 150,000 shares of our common stock at $1.30 per share, and approximately
$580,000 of acquisition costs. In addition, we assumed $245,000 worth of
accounts payable and accrued expenses and entered into an above-market
seven-year real property lease with the sellers. This lease represents an
obligation that exceeds the fair market value by approximately $756,000 and is
part of the acquisition accounting. We funded the cash portion of the purchase
price using proceeds from our credit facility with Wells Fargo Bank, N.A. and
our cash on-hand.

         On January 5, 2005, we issued to 17 accredited record holders in a
private offering an aggregate of 12,503,500 shares of common stock at a purchase
price of $1.44 per share and five-year investor warrants to purchase up to an
additional 3,125,875 shares of our common stock at an exercise price of $1.73
per share, for a total purchase price of $18,005,000. We paid cash placement
agent fees and expenses of approximately $961,000, and issued five-year
placement warrants to purchase up to an aggregate of 650,310 shares of common
stock at an exercise price of $1.73 per share in connection with the offering.
Additional costs related to the financing include registration rights-related
liquidated damages and legal, accounting and consulting fees that totaled
$607,000 through June 30, 2005 and continue to be incurred in connection with
the resale registration described below.

         We agreed to register for resale the shares of common stock issued to
investors and the shares of common stock issuable upon exercise of the investor
warrants and placement warrants. The registration obligations require, among
other things, that a registration statement be declared effective no later than
June 4, 2005. We were unable to meet this obligation and therefore paid to each
investor liquidated damages equal to 1% of the amount paid by the investor to us
in the offering, which damage payments totaled an aggregate of approximately
$180,000. We also paid to the investors liquidated damages totaling $300,000 for
the period from June 5, 2005 through June 30, 2005, the date the registration
statement was declared effective. We also will be required to pay to each


                                       22


<PAGE>

investor liquidated damages for any future periods in which we are unable to
maintain the effectiveness of the registration in accordance with the
requirements contained in the registration rights agreement we entered into with
the investors. These liquidated damages will be, and the liquidated damages paid
for the period from June 5, 2005 through June 30, 2005 were, equal to 2% of the
amount paid by each investor for the common shares still owned by the investor
on each monthly anniversary of the date of the default that occurs prior to the
cure of the default, pro rated on a daily basis for periods of default shorter
than one month. The maximum aggregate liquidated damages payable to any investor
will be equal to 10% of the aggregate amount paid by the investor for the shares
of our common stock. Accordingly, the maximum aggregate penalty that we would be
required to pay under this provision is 10% of the $18,005,000 initial purchase
price of the common stock, which would be $1,801,000. Although we anticipate
that we will be able to meet our future registration obligations, we also
anticipate that we will have sufficient cash available to pay the maximum
penalties if required.

         We used a portion of the proceeds from the January 2005 private
placement to fund the acquisition of Pascall described above under the heading
"Overview." In connection with the Pascall acquisition, we loaned to XCEL
Corporation Ltd. approximately $10,100,000 in cash that was used to acquire
Pascall and to repay Pascall's existing intercompany debt. As described above,
the Pascall purchase price is subject to upward or downward adjustment, and we
have guaranteed obligations of XCEL Corporation Ltd. in connection with the
Pascall acquisition and have agreed to indemnify Pascall's former parent in
connection with obligations under Pascall's facilities lease. This has been
settled with our $237,000 payment to Intelek on August 1 to compensate for an
upward adjustment of Pascall's net worth.

         We included in our annual report on Form 10-K for the year ended
December 31, 2004 a contractual obligations table that outlines payments due
from us or our subsidiaries under our lines of credit and other significant
contractual obligations through 2009, exclusive of interest. During the six
months ended June 30, 2005, no material changes in this information occurred
outside the ordinary course of business.

         We intend to grow our business through both internal growth and through
further acquisitions that we identify as being potentially both synergistic and
accretive of our earnings. Any additional acquisitions would likely be funded
through the use of cash and/or a combination of cash, notes and our limited use
stock.

         We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including the credit facilities we have and the remaining proceeds we have from
the January 2005 private placement, will be adequate to meet our anticipated
working capital and capital expenditure requirements for at least the next
twelve months. If, however, our capital requirements or cash flow vary
materially from our current projections, if unforeseen circumstances occur, or
if we require a significant amount of cash to fund future acquisitions, we may
require additional financing. Our failure to raise capital, if needed, could
restrict our growth, limit our development of new products or hinder our ability
to compete.

EFFECTS OF INFLATION

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


                                       23


<PAGE>

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

         In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4,"
SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted materials (spoilage)
are required to be recognized as current period costs. The provisions of SFAS
No. 151 are effective for our fiscal 2006. We are currently evaluating the
provisions of SFAS No. 151 and do not expect that adoption will have a material
effect on our financial position, results of operations or cash flows.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," which addresses the accounting for employee stock
options. SFAS No. 123(R) eliminates the ability to account for shared-based
compensation transactions using APB Opinion No. 25 and generally would require
instead that such transactions be accounted for using a fair value-based method.
SFAS No. 123(R) also requires that tax benefits associated with these
share-based payments be classified as financing activities in the statement of
cash flow rather than operating activities as currently permitted. SFAS No.
123(R) becomes effective for interim or annual periods beginning after December
15, 2005. Accordingly, we are required to apply SFAS No. 123(R) beginning
January 1, 2006. SFAS No. 123(R) offers alternative methods of adopting this
final rule. At the present time, we have not yet determined which alternative
method we will use.

         On March 3, 2005, the FASB issued Financial Interpretation No. ("FIN")
46(R), "Implicit Variable Interests under FASB Interpretation No. 46 (revised
December 2003) Variable Interest Entities an Interpretation of ARB No. 51." FIN
46(R) requires us to consolidate variable interest entities if we are designated
as the primary beneficiary of that entity, even if we do not own a majority of
voting interests. A variable interest entity is generally defined as an entity
that has insufficient equity to finance its activities or the owners of the
entity lack the risks and rewards of ownership. The provisions of FIN 46(R) had
no impact on our results of operations or financial position.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.

         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met, and that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. We currently use derivatives to manage foreign
currency rate risk.

         One of our United Kingdom subsidiaries conducts business in British
pounds sterling and has a program that utilizes forward currency contracts
denominated in United States dollars to offset the risk associated with the
effects of currency exposure for sales in United States dollars. Under this
program, increases or decreases in the subsidiary's foreign currency exposure
are offset by gains or losses on the forward contracts, to mitigate the


                                       24


<PAGE>

possibility of foreign currency transaction gains or losses. These forward
contracts generally have terms of 90 days or less. We do not use these forward
contracts for trading purposes. All outstanding foreign currency forward
contracts used in this program are marked to market at the end of the period
with unrealized gains and losses included in other income and expense.

         Emrise Electronics also has a program that utilizes a forward currency
contract denominated in British pounds sterling to offset the risk of
intercompany loans to a United Kingdom subsidiary. Under this program, increases
or decreases in the current portion of intercompany debt due to Emrise
Electronics are offset by gains or losses on the forward contract, to mitigate
the possibility of foreign currency transaction gains or losses. The forward
contract currently expires in August 2005. We do not use this forward contract
for trading purposes. The forward contract used in this program is marked to
market at the end of the period with unrealized gains and losses included in
other income and expense.

         Our ultimate realized gain or loss with respect to currency
fluctuations will depend on the currency exchange rates and other factors in
effect as the contracts mature. Net foreign exchange transaction losses included
in other income and expense in the accompanying consolidated statements of
operations totaled $36,000 for the six months ended June 30, 2005. There was no
hedging in the year ended December 31, 2004.

         A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates. Our annual report on Form 10-K for the year ended December 31,
2004 contains information about our debt obligations that are sensitive to
changes in interest rates under "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk." There were no material changes in those market
risks during the six months ended June 30, 2005.

ITEM 4.  CONTROLS AND PROCEDURES.

         On August 15, 2005, in connection with its review of our condensed
consolidated financial statements for the quarter ended June 30, 2005, Grant
Thornton LLP, our independent registered public accounting firm, advised our
management of a matter that Grant Thornton LLP considers to be a "material
weakness" as that term is defined under standards established by the Public
Company Accounting Oversight Board (United States).

         Grant Thornton LLP noted that we recorded revenue in our Pascall
division for certain items previously recorded as "bill and hold" inventory. We
had shipped the items to the customer on June 30, 2005, the customer took title
to the items and paid for the items. However, the customer requested that
Pascall store the items and returned the items to Pascall on July 7, 2005 for
storage under a separate contract. The return of the items by the customer
subsequent to June 30, 2005 resulted in the transaction not meeting the revenue
recognition criteria under Staff Accounting Bulletin ("SAB") No. 104. The
recording of these items as sales in the quarter ended June 30, 2005 resulted in
an adjusting journal entry to reduce revenue by $841,000 and to reduce net
income by $314,000 ($0.01 per share). On August 18, 2005, Grant Thornton LLP met
with our audit committee and recommended that we review the control procedures
over bill and hold arrangements to determine adherence to SAB 104. Our audit
committee and management have undertaken an extensive review of SAB 104. We are
seeking guidance from our financial consultants, who are certified public
accountants with the requisite background and experience, to assist us in our
future compliance with SAB 104 as it relates to control procedures over bill and
hold matters.


                                       25


<PAGE>

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded
that the design and operation of our "disclosure controls and procedures" (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act")) were not effective as of June 30, 2005 with respect to the
material weakness identified in the area of control procedures over bill and
hold arrangements.

         During the quarter ended June 30, 2005, there were no changes in our
"internal controls over financial reporting" (as defined in Rule 13a-15(f) under
the Exchange Act) that materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         We are not a party to any material pending legal proceedings.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

     DIVIDENDS

         We have not declared or paid any cash dividends on our capital stock in
the past, and we do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future. In addition, our credit facility with
Wells Fargo Bank, N.A., described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," restricts the payment of dividends without the bank's consent.

         We will pay dividends on our common stock only if and when declared by
our board of directors. Our board of directors' ability to declare a dividend is
subject to restrictions imposed by Delaware law. In determining whether to
declare dividends, the board of directors will consider these restrictions as
well as our financial condition, results of operations, working capital
requirements, 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.

         On May 6, 2005, we held a special stockholders' meeting. The total
number of outstanding votable shares was 37,334,705. Our stockholders were asked
to consider and vote upon the following three proposals:

         (1) Amendment of our certificate of incorporation in order to increase
our authorized common stock from 50,000,000 shares to 150,000,000 shares and
make clarifying changes.

         (2) Amendment of our certificate of incorporation in order to clarify
the mechanics of our classified board.

         (3) Amendment and restatement of our certificate of incorporation in
order to modernize and conform the certificate of incorporation to current
Delaware corporate law and practices.


                                       26


<PAGE>

         Proposal        For           Against        Withheld      Total Voted
         --------        ---           -------        --------      -----------

            (1)       29,541,554      1,397,690        30,513        30,969,757
            (2)       21,478,130        810,286        46,010        22,334,426
            (3)       21,947,419        354,004        33,003        22,334,426

         As a result, proposals 1 and 3 were approved by our stockholders. Due
to the supermajority voting requirement that applied to proposal 2, proposal 2
did not receive sufficient affirmative votes for approval.

         We filed an amended and restated certificate of incorporation with the
Secretary of State of Delaware on May 9, 2005 to reflect the stockholders'
approval of proposals 1 and 3.

ITEM 5.  OTHER INFORMATION.

         None.

ITEM 6.  EXHIBITS.

       Number           Description
       ------           -----------

         3        Amended and Restated Certificate of Incorporation of Emrise
                  Corporation filed with the Secretary of State of Delaware on
                  May 9, 2005 (1)

         31       Certifications 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       Certification of Chief Executive Officer and Acting Chief
                  Financial Officer Pursuant to 18 U.S.C. Section 350, as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002

------------------

         (1)      Filed on May 19, 2005 as an exhibit to our Form 8-K for May 6,
                  2005 and incorporated herein by reference.


                                       27


<PAGE>

                                   SIGNATURES

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

                               EMRISE CORPORATION

Dated: August 22, 2005         By: /S/ CARMINE T. OLIVA
                                  ---------------------------------------------
                                   Carmine T. Oliva, Chairman of the Board,
                                   Chief Executive Officer (principal executive
                                   officer) and President

                               By: /S/ RANDOLPH D. FOOTE
                                  ---------------------------------------------
                                   Randolph D. Foote, Chief Financial Officer
                                   (principal financial and accounting officer)


                                       28


<PAGE>

                        EXHIBITS ATTACHED TO THIS REPORT

      EXHIBIT
       NUMBER                  DESCRIPTION
       ------                  -----------

         31       Certifications 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       Certification of Chief Executive Officer and Acting Chief
                  Financial Officer Pursuant to 18 U.S.C. Section 350, as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002


                                       29