<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 MARCH 31, 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 May 5, 2005, there were 37,384,708 shares of the issuer's common
stock, $0.0033 par value, outstanding.

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


<PAGE>

<TABLE>
                                                       PART I
                                               FINANCIAL INFORMATION

<S>                                                                                                             <C>
ITEM 1.       FINANCIAL STATEMENTS.

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

         Condensed Consolidated Statements of Operations for the Three Months
               Ended March 31, 2005 and 2004 (unaudited)....................................................    F-2

         Condensed Consolidated Statements of Comprehensive Income for the
               Three Months Ended March 31, 2005 and 2004 (unaudited).......................................    F-3

         Condensed Consolidated Statements of Stockholders' Equity for the
               Three Months Ended March 31, 2005 (unaudited)................................................    F-4

         Condensed Consolidated Statements of Cash Flows for the Three Months Ended
               March 31, 2005 and 2004 (unaudited)..........................................................    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...................................................................................     20

ITEM 4.       CONTROLS AND PROCEDURES.......................................................................     20

                                                      PART II
                                                 OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS.............................................................................     21

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND
              USE OF PROCEEDS...............................................................................     21

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES...............................................................     22

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................     22

ITEM 5.       OTHER INFORMATION.............................................................................     22

ITEM 6.       EXHIBITS......................................................................................     23

SIGNATURES    ..............................................................................................     24


                                                         1
</TABLE>

<PAGE>

<TABLE>
                                          PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                       EMRISE CORPORATION AND SUBSIDIARIES
                                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                    AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
                                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


                                                                                    March 31,        December 31,
                                                                                      2005               2004
                                                                                  ------------       ------------
                                                                                  (unaudited)
<S>                                                                               <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                      $      6,861       $      1,057
   Accounts receivable, net of allowance for doubtful accounts of $150
     and $153, respectively                                                              7,645              5,796
   Inventories                                                                           8,885              6,491

   Deferred tax assets                                                                     352                352
   Prepaid and other current assets                                                        840                417
                                                                                  ------------       ------------
Total current assets                                                                    24,583             14,113
Property, plant and equipment, net                                                       2,236                909
Goodwill, net of accumulated amortization of $1,084                                     10,552              5,881

Intangible assets, net of accumulated amortization
   of $60 and $40, respectively                                                          3,590              3,560
Other assets                                                                               580                623
                                                                                  ------------       ------------
                                                                                  $     41,541       $     25,086
                                                                                  ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Borrowings under lines of credit                                               $        946       $        878
   Current portion of long-term debt                                                       940                211
   Notes payable to stockholders, current portion                                          500                500
   Accounts payable                                                                      3,393              3,398
   Income taxes payable                                                                    568                572
   Accrued expenses                                                                      3,304              3,014
                                                                                  ------------       ------------
Total current liabilities                                                                9,651              8,573
Long-term debt, less current portion                                                       377                985
Notes payable to stockholders, less current portion                                      2,125              2,250
Deferred income taxes                                                                    1,400              1,400
Other liabilities                                                                          941                969
                                                                                  ------------       ------------
Total liabilities                                                                       14,494             14,177

Stockholders' equity:
   Preferred stock, authorized 10,000,000 shares;
     issued and outstanding zero shares                                                     --                 --
   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                                                           43,634             26,746
   Accumulated deficit                                                                 (16,756)           (16,406)
   Accumulated other comprehensive income                                                   46                487
                                                                                  ------------       ------------
Total stockholders' equity                                                              27,047             10,909
                                                                                  ------------       ------------
                                                                                  $     41,541       $     25,086
                                                                                  ============       ============


                      See accompanying notes to condensed consolidated financial statements.

                                                       F-1
</TABLE>

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                                   (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                 Three Months Ended March 31,
                                                ------------------------------
                                                    2005              2004
                                                ------------      ------------

Net sales                                       $      7,299      $      6,192
Cost of sales                                          4,187             3,445
                                                ------------      ------------
Gross profit                                           3,112             2,747
Operating expenses:
   Selling, general and administrative                 2,831             2,217
   Engineering and product development                   532               283
                                                ------------      ------------
Income (loss) from operations                           (251)              247
Other expense:
   Interest income                                        72                --
   Interest expense                                     (102)              (96)
   Other expense, net                                     (3)               (6)
                                                ------------      ------------
Income (loss) before income taxes                       (284)              145
Income tax expense                                        66                75
                                                ------------      ------------
Net income (loss)                               $       (350)     $         70
                                                ============      ============
Basic earnings (loss) per share                 $      (0.01)     $       0.00
                                                ============      ============
Diluted earnings (loss) per share               $      (0.01)     $       0.00
                                                ============      ============


     See accompanying notes to condensed consolidated financial statements.

                                      F-2

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                                   (UNAUDITED)
                                 (IN THOUSANDS)


                                                            Three Months
                                                          Ended March 31,
                                                   ----------------------------
                                                       2005             2004
                                                   -----------      -----------

Net income (loss)                                  $      (350)     $        70
Other comprehensive income (loss):
   Foreign currency translation adjustment                (441)              (2)
                                                   -----------      -----------
Comprehensive income (loss)                        $      (791)     $        68
                                                   ===========      ===========


     See accompanying notes to condensed consolidated financial statements.

                                      F-3

<PAGE>

<TABLE>
                                                 EMRISE CORPORATION AND SUBSIDIARIES
                                                  THREE MONTHS ENDED MARCH 31, 2005
                                      CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                             (UNAUDITED)
                                                           (IN THOUSANDS)


                                                                                                        Accumulated
                                                 Common Stock            Additional                        Other
                                          --------------------------      Paid-In      Accumulated     Comprehensive
                                             Shares         Amount        Capital        Deficit       Income (Loss)      Total
                                          ------------   ------------   ------------   ------------    -------------   ------------
<S>                                             <C>      <C>            <C>            <C>             <C>             <C>
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         16,852             --              --          16,893
Foreign currency translation adjustment             --             --             --             --            (441)           (441)
Net loss                                            --             --             --           (350)             --            (350)
                                          ------------   ------------   ------------   ------------    ------------    ------------
Balance at March 31, 2005                       37,385   $        123   $     43,634   $    (16,756)   $         46    $     27,047
                                          ============   ============   ============   ============    ============    ============


                               See accompanying notes to condensed consolidated financial statements.

                                                                F-4
</TABLE>

<PAGE>

<TABLE>
                                      EMRISE CORPORATION AND SUBSIDIARIES
                                  THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (UNAUDITED)
                                                (IN THOUSANDS)


                                                                                          Three Months
                                                                                        Ended March 31,
                                                                                ------------------------------
                                                                                   2005               2004
                                                                                ------------      ------------
<S>                                                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                               $       (350)     $         70
   Adjustments to reconcile net income (loss) to cash provided by (used in)
     operating activities:
       Depreciation and amortization                                                      97                59
       Provision for inventory obsolescence                                              640               173
   Changes in operating assets and liabilities net of businesses acquired:
       Accounts receivable                                                             1,597               681
       Inventories                                                                      (612)              (62)
       Prepaid and other assets                                                         (380)               39
       Accounts payable and accrued expenses                                          (2,362)             (328)
                                                                                ------------      ------------
Cash provided by (used in) operating activities                                       (1,370)              632
                                                                                ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                                        (37)              (96)
   Cash paid for acquisition of Pascall, net of cash acquired                         (9,341)               --
                                                                                ------------      ------------
Cash used in investing activities                                                     (9,378)              (96)
                                                                                ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net repayments of current notes payable                                                68              (562)
   Repayments of long-term debt                                                         (202)               (8)
   Proceeds from long-term debt                                                          198                --
   Proceeds from issuance of common stock in offering                                 16,893                --
   Proceeds from exercise of stock options                                                36                 1
                                                                                ------------      ------------
Cash provided by (used in) financing activities                                       16,993              (569)
                                                                                ------------      ------------

Effect of exchange rate changes on cash                                                 (441)              (65)
Net increase (decrease) in cash and cash equivalents                                   5,804               (98)
Cash and cash equivalents at beginning of period                                       1,057             1,174
                                                                                ------------      ------------
Cash and cash equivalents at end of period                                      $      6,861      $      1,076
                                                                                ============      ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for:
     Interest                                                                   $         96      $         70
     Income taxes                                                               $         71      $          5
                                                                                ============      ============


                    See accompanying notes to condensed consolidated financial statements.

                                                     F-5
</TABLE>

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 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 communication 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 March 31, 2005 and December 31, 2004 and the results of
operations and cash flows for the related interim periods ended March 31, 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 (in thousands, except per share amounts):


                                      F-6

<PAGE>

<TABLE>
                                    EMRISE CORPORATION AND SUBSIDIARIES
                           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                          MARCH 31, 2005 AND 2004
                                                (UNAUDITED)


                                                                                   Three Months
                                                                                 Ended March 31,
                                                                       -----------------------------------
                                                                            2005                   2004
                                                                       ---------------      --------------
<S>                                                                    <C>                  <C>
Net income (loss):
   As reported                                                        $           (350)     $           70
   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)                (15)
                                                                       ---------------      --------------

   Pro forma                                                           $          (397)     $           55
                                                                       ===============      ==============

Basic earnings (loss) per share:
   As reported                                                         $         (0.01)     $         0.00
   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                                                        --                  --
                                                                       ---------------      --------------

   Pro forma                                                           $         (0.01)     $         0.00
                                                                       ===============      ==============

Diluted earnings (loss) per share:
   As reported                                                         $         (0.01)     $         0.00
   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                                                        --                  --
                                                                       ---------------      --------------

   Pro forma                                                           $         (0.01)     $         0.00
                                                                       ===============      ==============
</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.

                                                   F-7

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 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>
                                                                                           Three Months
                                                                                          Ended March 31,
                                                                                  ------------------------------
                                                                                      2005               2004
                                                                                  -------------      -----------
<S>                                                                               <C>                <C>
NUMERATOR:
Net income                                                                        $        (350)     $        70

Less: accretion of the excess of the redemption value over the carrying value
  of redeemable preferred stock                                                              --               --
                                                                                  -------------      -----------

Income attributable to common stockholders                                        $        (350)     $        70
                                                                                  =============      ===========

DENOMINATOR:
Weighted average number of common shares outstanding during the period-basic             36,788           23,480

Incremental shares from assumed conversions of warrants and options                          --              915
                                                                                  -------------      -----------

Adjusted weighted average number of outstanding shares-diluted                           36,788           24,395
                                                                                  -------------      -----------

Basic earnings per share                                                          $       (0.01)     $      0.00
                                                                                  =============      ===========

Diluted earnings per share                                                        $       (0.01)     $      0.00
                                                                                  =============      ===========
</TABLE>

         The computation of diluted loss per share for the three months ended
March 31, 2005 excludes the effect of incremental common shares attributable to
the exercise of outstanding common stock options and warrants because their
effect was antidilutive due to losses incurred by the Company. The computation
of diluted loss per share for the three months ended March 31, 2004 excludes the
effect of incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive as a
result of the exercise prices exceeding the average market prices of the
underlying shares of common stock.

         The following options and warrants were excluded from the computation
of diluted earnings per share (in thousands, except per share amounts):

<TABLE>
                                                                            Three Months
                                                                          Ended March 31,
                                                                ----------------- -- ----------------
                                                                      2005                2004
                                                                -----------------    ----------------
<S>                                                                <C>                 <C>
   Options and warrants to purchase shares of common stock             6,065               693
                                                                -----------------    ----------------
   Exercise prices                                                $0.20 - $3.44        $1.89 - $3.44
                                                                -----------------    ----------------
</TABLE>

                                       F-8

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


(3)      INVENTORIES

         Inventories consist of the following (in thousands):

                                    March 31, 2005     December 31, 2004
                                    --------------     -----------------

         Raw materials              $        3,912       $        3,222

         Work-in-process                     2,548                1,280

         Finished goods                      2,425                1,989
                                    --------------       --------------
                                    $        8,885       $        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.

         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 March 31, 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


                                       F-9

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


         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
                  applications, including in-flight entertainment systems; this
                  reporting unit also includes XCEL Power Systems, Ltd., Belix
                  Wound Components Ltd., Pascall Electronic (Holdings) Limited
                  and Pascall Electronics Limited

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

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

         o        CXR Telcom division of CXR Larus - San Jose, California:
                  Communications test equipment for the field and central office
                  applications

         o        CXR-AJ - Abondant, France: network access 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. Selected financial data for each of the Company's operating segments is
shown below (in thousands):

                                      Three Months Ended     Three Months Ended
                                        March 31, 2005         March 31, 2004
                                       ----------------       ----------------

Sales to external customers:
----------------------------

      Electronic Components            $          3,807       $          3,905
      Communications Equipment                    3,492                  2,287
                                       $          7,299       $          6,192

Segment pretax profit (losses):
-------------------------------
      Electronic Components            $            505       $            783
      Communications Equipment                     (187)                   (11)
                                       ----------------       ----------------
                                       $            318       $            772
                                       ================       ================


                                        March 31, 2005         March 31, 2004
                                       ----------------       ----------------

Segment assets:
---------------
      Electronic Components            $         20,137       $          8,435
      Communications Equipment                   15,603                 16,313
                                       ----------------       ----------------
                                       $         35,740       $         24,748
                                       ================       ================


                                      F-10

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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

<TABLE>
                                                    Three Months Ended    Three Months Ended
                                                      March 31, 2005        March 31, 2004
                                                     ----------------      ----------------
<S>                                                  <C>                   <C>
Income (loss) before income taxes
---------------------------------
     Total income (loss) for reportable segments     $            318      $            772
     Unallocated amounts:
       General corporate expenses                                (602)                 (627)
                                                     ----------------      ----------------
Consolidated income (loss) before income taxes       $           (284)     $            145
                                                     ================      ================


                                                      March 31, 2005       December 31, 2004
                                                     ----------------      -----------------
Assets
------
   Total assets for reportable segments              $         35,740      $         24,748
   Other assets                                                 5,801                   338
                                                     ----------------      ----------------
Total consolidated assets                            $         41,541      $         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.

(6)      INCOME TAXES

         The effective tax rate for the three-month period ended March 31, 2005
is different than the 34% U.S. 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 is 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


                                      F-11

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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 March 31, 2005 was 5.50%.

         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 March 31, 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 $142,000 was outstanding at March 31, 2005.
The interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR")
rate (3.10% at March 31, 2005) plus 3.75% per annum. Amounts borrowed under this
arrangement are amortized over 60 months from the respective dates of borrowing.

         As of March 31, 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 March 31, 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 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 expires in July 2005. The Company currently intends
to seek renewal of the credit facility and believes that the bank will be
amenable to renewing it. 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 its expiration.


                                      F-12

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


         As of March 31, 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 March 31, 2005, the balances outstanding under the Company's United
Kingdom, France and Japan credit facilities were $1,230,000, $692,000 and
$52,000, respectively.

         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
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 March 31, 2005, the 30-day LIBOR
rate was 2.86%. The total balance of these promissory notes as of March 31, 2005
was $2,625,000.

         Future maturities of notes payable to stockholders are as follows:

             Year Ending                Dollars in
             December 31,               Thousands
             ------------              ------------
                 2005                  $       375
                 2006                          500
                 2007                          500
                 2008                          500
                 2009                          500
              Thereafter                       250
                                       ------------
                                       $     2,625
                                       ============

         Total interest paid on these notes for the quarter ended March 31, 2005
was $53,000.


                                      F-13

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


(8)      RELATED PARTY TRANSACTIONS

         On July 13, 2004, the Company 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 were repaid in 2004, in exchange for 100% of the common
stock of Larus Corporation (see Note 7).

         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 three months
ended March 31, 2005 totaled $92,000.

(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 $192,000 through March 31, 2005 and continue to be
incurred in connection with the resale registration described below. The Company
used a portion of the proceeds from this financing to fund the acquisition of
Pascall described below. 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.

         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 the 150th day following the closing date. If the Company is unable to meet
this obligation or 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, then the Company will be required
to pay to each investor liquidated damages equal to 1% of the amount paid by the
investor for the common shares still owned by the investor on the date of the
default and 2% of the amount paid by the 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. The maximum aggregate liquidated
damages payable to any investor will be equal to 10% of the aggregate amount


                                      F-14

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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 registration obligations, it also anticipates
that it will have sufficient cash available to pay these 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.

         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


                                      F-15

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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. Although the valuation
analysis is still in progress, the Company has estimated that the Larus
Corporation trade name and trademark are valued at $2,800,000 and that the
technology and customer relationships are valued at $800,000. Goodwill
associated with the Larus Corporation acquisition totaled $3,363,000. 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 of amortization expense was
recorded and charged to administrative expense in 2004. The valuation of the
identified intangible assets is expected to be completed during the quarter
ending June 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.

         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                         3,600
         Goodwill                                                      3,363
                                                                ------------
         Total assets acquired                                         9,513
         Current liabilities                                            (685)
         Deferred income taxes                                        (1,400)
         Unfavorable lease obligation and other liabilities             (888)
                                                                ------------
         Total liabilities assumed                                    (2,973)
                                                                ------------
         Net assets acquired                                    $      6,540
                                                                ============

         The intangible assets other than goodwill consist of non-amortizable
trade names with a carrying value of $2,800,000, and technology and customer
relationships with carrying values of $500,000 and $300,000, respectively, that
are amortizable over ten years. Amortization for the intangibles subject to
amortization as of March 31, 2005 is anticipated to be approximately $80,000 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") to acquire all of the issued and outstanding
capital stock of Pascall Electronic (Holdings) Limited ("PEHL") by XCEL. The


                                      F-16

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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 radio frequency 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 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 is 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, 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
believes slightly exceeded 2,520,000 British pounds sterling. Intelek Properties
Limited has 25 business days after receipt of the calculation to accept or
dispute the calculation. Any payment relating to the increase or reduction of
the purchase price based on the value of the net assets of Pascall will be due
from XCEL or Intelek Properties Limited, as the case may be, within 14 days of
the acceptance of the calculation. A default rate of interest equal to 3% above
the base lending rate of Barclays Bank plc London will apply if the adjustment
payment is not timely made. However, the Company anticipates that any adjustment
payment based on this calculation will not be material to the Company's
financial results and that it will be timely made. 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.


                                      F-17

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


         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.

         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                         4,721
                                                           -----------
         Total assets acquired                                  12,284
         Current liabilities                                     2,535
         Other liabilities                                          80
                                                           -----------
         Total liabilities assumed                               2,615
                                                           -----------
         Net assets acquired                               $     9,669
                                                           ===========

         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 is
preparing to commission 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 without limitation patents, covenants
not to compete, customers, trade names and trademarks. The Company has estimated
that the Pascall trade name and trademark are valued at $50,000 and believes
that no other identifiable intangible assets of value were acquired.
Accordingly, the Company has estimated that the goodwill associated with the
Pascall acquisition totaled $4,671,000. 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 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, the Company does not believe these changes will be material to its
financial position or results of operations.


                                      F-18

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                                   (UNAUDITED)


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).

                                                      Three Months
                                                     Ended March 31,
                                           -----------------------------------
                                                2005                 2004
                                           --------------       --------------

Revenues                                   $       10,540       $       12,215
Net income                                 $         (189)      $          644
Earnings per share of common stock
   Basic                                   $        (0.01)      $         0.02
                                           ==============       ==============
   Diluted                                 $        (0.01)      $         0.02
                                           ==============       ==============

(11)     ACCRUED EXPENSES

         Accrued expenses were as follows (in thousands):

                                           March 31, 2005      December 31, 2004
                                           --------------      -----------------

Accrued salaries                           $          879       $          805
Accrued payroll taxes and benefits                    642                  491
Advance payments from customers                       398                   77
Other accrued expenses                              1,385                1,641
                                           --------------       --------------
Total accrued expenses                     $        3,304       $        3,014
                                           ==============       ==============


                                      F-19

<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

                  --  communication 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 52.2%
and 63.1% of our total net sales during the three months ended March 31, 2005
and 2004, respectively. Sales of communications equipment and related services,
primarily to private customer premises and public carrier customers, were 47.8%
and 36.9% of our total net sales during the three months ended March 31, 2005
and 2004, respectively.

         Sales of our electronic components segment decreased $98,000 (2.5%) for
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004. Excluding sales of $722,000 from our new subsidiary, Pascall,
which we acquired March 18, 2005, our electronic components segment sales
declined $820,000 (21.0%) for the three months ended March 31, 2005 as compared
to the three months ended March 31, 2004, primarily due to the higher levels of
shipments of our digital switches to meet the military's demand for the Iraq war
not repeating in the three months ended March 31, 2005, and a $693,000 (29.0%)
decrease in net sales of power supplies manufactured by our XCEL Power Systems
Ltd. subsidiary that we believe was primarily because the second traunche of
power supply shipments on the Eurofighter Typhoon program had not yet begun
during the three months ended March 31, 2005.

         We achieved a $1,205,000 (52.7%) sales increase in our communications
equipment segment for the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004. Excluding $1,509,000 of sales by the Larus
division of 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 $304,000 (13.3%) for the three months ended March 31,
2005 as compared to the three months ended March 31, 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 due to customer technical
issues, and delays in French military program orders that had been expected in
early 2005. Of our subsidiaries, CXR Larus was the most affected by the
telecommunications downturn, because CXR Larus had the greatest dependence on
sales to Regional Bell Operating Companies 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 components from offshore manufacturers
that produce components for lower prices than we previously paid to our former
suppliers. 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 reductions of
approximately $1,372,000 during 2004. During the three months ended March 31,
2005, we began working toward establishing a similar arrangement for the
manufacture of our communication 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 $327,350 on an annual basis as compared
to the three months ended March 31, 2004, and downsizing our administrative
office in Paris, France.

         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 three months
ended March 31, 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. Subsequent to March 31, 2005, we implemented further administrative,
engineering and sales cost savings through staffing reductions of approximately
$700,000 on an annual basis as compared to our costs in the three months ended
March 31, 2005. These staffing reductions related to eliminating redundancies in
our electronic components segment personnel (including nine sales, marketing and
administrative positions and one engineering director) that occurred as a result
of our acquisition of Larus 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 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, as described below.

         The initial 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 purchase price was paid in cash and is 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 believe slightly
exceeded 2,520,000 British pounds sterling. Intelek Properties Limited has 25
business days after receipt of the calculation to accept or dispute the
calculation. Any payment relating to the increase or reduction of the purchase
price based on the value of the net assets of Pascall will be due from XCEL or
Intelek Properties Limited, as the case may be, within 14 days of the acceptance
of the calculation. A default rate of interest equal to 3% above the base


                                       4

<PAGE>

lending rate of Barclays Bank plc London will apply if the adjustment payment is
not timely made. However, we anticipate that any adjustment payment based on
this calculation will not be material to our financial results and that it will
be timely made. The purchase price is 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 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                         4,721
                                                           -----------
         Total assets acquired                                  12,284
         Current liabilities                                     2,535
         Other liabilities                                          80
                                                           -----------
         Total liabilities assumed                               2,615
                                                           -----------
         Net assets acquired                               $     9,669
                                                           ===========

         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 acquisition 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).

                                                     Three Months Ended
                                                          March 31,
                                             -----------------------------------
                                                  2005                 2004
                                             --------------       --------------
Revenues                                     $       10,540       $       12,215
Net income                                   $         (189)      $          644
Earnings per share of common stock
   Basic                                     $        (0.01)      $         0.02
                                             ==============       ==============
   Diluted                                   $        (0.01)      $         0.02
                                             ==============       ==============

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.

     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


                                       6

<PAGE>

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 communication 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 4.8% and 5.7% of net
sales during the three months ended March 31, 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
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


                                       7

<PAGE>

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 55.0% of our net revenues, 54.3% of
our assets and 48.2% of our total liabilities as of and for the three months
ended March 31, 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.

         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.


                                       8

<PAGE>

         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 cumulative translation gains of
$46,000 and $487,000 that were included as part of accumulated other
comprehensive income within our balance sheet at March 31, 2005 and December 31,
2004, respectively. During the three months ended March 31, 2005 and the year
ended December 31, 2004, we included translation adjustments of losses of
approximately $441,000 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 March 31, 2005 and December 31, 2004, the reported goodwill totaled
$10,552,000 and $5,881,000, respectively (net of accumulated amortization of
$1,084,000). During the quarter ended March 31, 2005 and the year ended December
31, 2004, we did not record any impairment losses related to goodwill and other
intangible assets.

         In conjunction with our July 2004 acquisition of Larus Corporation, we
have commissioned a valuation firm to determine what portion of the purchase
price should be allocated to identifiable intangible assets. Although the
valuation analysis is still in progress, we have estimated that the Larus trade
name and trademark are valued at $2,800,000 and that the technology and customer
relationships are valued at $800,000. Goodwill associated with the Larus
Corporation acquisition totaled $3,363,000. 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


                                       9

<PAGE>

customer relationships were both estimated to have ten-year lives and, as a
result, $40,000 of amortization expense was recorded and charged to
administrative expense in 2004. The valuation of the identified intangible
assets is expected to be completed during the quarter ending June 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.

         In conjunction with our March 2005 acquisition of Pascall, we are
preparing to commission 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 without limitation patents, covenants not to
compete, customers, trade names and trademarks. We have estimated that the
Pascall trade name and trademark are valued at $50,000 and believe that no other
identifiable intangible assets of value were acquired. Accordingly, we have
estimated that the goodwill associated with the Pascall acquisition totaled
$4,671,000. 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 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 table presented below, which compares our results of operations for
the three months ended March 31, 2005 to our results of operations for the three
months ended March 31, 2004, presents 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:

         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.


                                       10

<PAGE>

<TABLE>
                                                                                                             RESULTS AS A PERCENTAGE
                                                                               DOLLAR         PERCENTAGE      OF NET SALES FOR THE
                                                 THREE MONTHS ENDED            VARIANCE        VARIANCE        THREE MONTHS ENDED
                                                       MARCH 31,              -----------     -----------           MARCH 31,
                                            ------------------------------     FAVORABLE       FAVORABLE     -----------------------
                                                 2005             2004       (UNFAVORABLE)   (UNFAVORABLE)     2005          2004
                                            ---------------------------------------------------------------------------------------
                                                          (DOLLARS IN THOUSANDS)
<S>                                          <C>              <C>             <C>              <C>             <C>           <C>
Net sales
    Electronic components ..............     $     3,807      $     3,905     $       (98)       (2.5)%        52.2%         63.1%
    Communications equipment ...........     $     3,492      $     2,287     $     1,205        52.7%         47.8%         36.9%
                                            ---------------------------------------------------------------------------------------
    Total net sales ....................     $     7,299      $     6,192     $     1,107        17.9%        100.0%        100.0%
                                            ---------------------------------------------------------------------------------------
Cost of sales
    Electronic components ..............     $     2,368      $     2,264     $      (104)       (4.6)%        62.2%         58.0%
    Communications equipment ...........     $     1,819      $     1,181     $      (638)       54.0%         52.1%         51.6%
                                            ---------------------------------------------------------------------------------------
    Total cost of sales ................     $     4,187      $     3,445     $      (742)       21.5%         57.4%         55.6%
                                            ---------------------------------------------------------------------------------------
Gross profit
    Electronic components ..............     $     1,439      $     1,641     $      (202)      (12.3)%        37.8%         42.0%
    Communications equipment ...........     $     1,673      $     1,106     $       567        51.3%         47.9%         48.4%
                                            ---------------------------------------------------------------------------------------
    Total gross profit .................     $     3,112      $     2,747     $       365        13.3%         42.6%         44.4%
                                            ---------------------------------------------------------------------------------------
Selling, general and administrative
   expenses ............................     $     2,831      $     2,217     $       614        27.7%         38.8%         35.8%
Engineering and product development
   expenses ............................     $       532      $       283     $       249        88.0%          7.3%          4.6%
Operating income (loss) ................     $      (251)     $       247     $      (498)     (201.6)%        (3.4)%         4.0%
Interest expense, net ..................     $        30      $        96     $       (66)      (68.8)%        (0.4)%        (1.6)%
Other (income) expense .................     $         3      $         6     $        (3)      (50.0)%        (0.4)%        (0.1)%
Income (loss) before income tax
   expense .............................     $      (284)     $       145     $      (429)     (295.9)%        (3.9)%         2.3
Income tax expense .....................     $        66      $        75     $        (9)      (12.0)%         0.9%          1.2
                                            ---------------------------------------------------------------------------------------
Net income (loss) ......................     $      (350)     $        70     $      (420)     (600.0)%        (4.8)%         1.1%
                                            =======================================================================================
</TABLE>

         NET SALES. The $1,107,000 (17.9%) increase in total net sales for the
three months ended March 31, 2005 as compared to the three months ended March
31, 2004 resulted from the combination of a $98,000 (2.5%) decrease in net sales
of our electronic components and a $1,205,000 (52.7%) increase in net sales of
our communications equipment products and services.

         ELECTRONIC COMPONENTS. The decrease in net sales of our electronic
components segment resulted from a $177,000 (13.4%) decrease in net sales of
switches by Emrise Electronics' Digitran division that we believe was primarily
due to the higher levels of shipments of our digital switches to meet the
military's demand for the Iraq war not repeating in the three months ended March
31, 2005, and a $693,000 (29.0%) decrease in net sales of power supplies
manufactured by our XCEL Power Systems Ltd. subsidiary that we believe was
primarily because the second traunche of power supply shipments on the
Eurofighter Typhoon program had not yet begun during the three months ended
March 31, 2005.

         These decreases were partially offset by the contribution of $722,000
in net sales of power supplies and RF components and subsystem assemblies by
Pascall, which subsidiary we acquired on March 18, 2005. The three months ended
March 31, 2005 is the first period in which we reported sales of RF components
and RF subsystem assemblies. Excluding these sales by Pascall, our electronic
components segment sales declined 21.0% in the three months ended March 31, 2005
as compared to the three months ended March 31, 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.


                                       11

<PAGE>

         COMMUNICATIONS EQUIPMENT. The $1,205,000 (52.7%) increase in net sales
of our communications equipment segment resulted primarily from the inclusion of
$1,509,000 of net sales of communication timing and synchronization products
attributable to our acquisition of Larus Corporation that occurred on July 13,
2004. This increase was partially offset by a $314,000 (18.4%) decline in net
sales of network access equipment and transmission products manufactured by
CXR-AJ, which we believe primarily was due to the delay in placement of key
military communication contracts in Europe. Communications test equipment net
sales remained flat at $583,000 for the three months ended March 31, 2005 as
compared to $573,000 for the three months ended March 31, 2004, 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 we established relationships with during
the three months ended March 31, 2005. We also anticipate that sales of our
communication timing and synchronization products will show further growth as we
build our business with telecommunications companies in 2005 and beyond.

         GROSS PROFIT. The 1.8 percentage point decrease in gross profit as a
percentage of total net sales and the $365,000 (13.3%) increase in total gross
profit for the three months ended March 31, 2005 as compared to the three months
ended March 31, 2004 resulted from a gross profit decrease in our electronic
components segment that was offset by a gross profit increase in our
communications equipment segment.

         ELECTRONIC COMPONENTS. The $202,000 (12.3%) decrease in gross profit
for our electronic components segment was primarily due to lower sales volumes
in both our digital switch and power supply businesses. The 4.2 percentage point
decrease in gross profit as a percentage of total net sales of electronic
components primarily resulted from the increased cost of sales in the
manufacture of our switch products due to higher material costs, which decreased
Digitran's gross profit for digital switches by $250,000 (28.0%). This decrease
was partially offset by a $73,000 (11.0%) increase in gross profit on power
supplies and RF components and subsystems primarily due to the contribution from
Pascall of $181,000 in the last 13 days of the three months ended March 31,
2005, which masked a $112,000 (18.0%) decrease in gross profit contributed by
XCEL Corporation Ltd. primarily due to lower sales volumes of power supplies as
discussed above. 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 $567,000 (51.3%) increase in gross profit
for our communications equipment segment was primarily due to the inclusion of
$675,000 in gross profit during the quarter ended March 31, 2005 attributable to
net sales of network access and communication 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 $108,000 (9.8%) primarily due
to a $130,000 (17.4%) decrease in gross profit at CXR-AJ due to lower sales
volume of its network access products as compared to the prior year period.

         The 0.5 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 communication timing and
synchronization products and CXR-AJ network access products as compared to the
higher margin test equipment.


                                       12

<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $614,000 (27.7%)
increase in selling, general and administrative expenses for the three months
ended March 31, 2005 as compared to the three months ended March 31, 2004 and
the 3.0 percentage point increase in selling, general and administrative
expenses as a percentage of total net sales were primarily due to:

         o        a $27,000 (20.0%) increase in sales commissions primarily due
                  to the inclusion of our Larus division's sales commission
                  expenses;

         o        a $361,000 (53.0%) increase in other selling and marketing
                  expenses primarily due to the inclusion of our Larus
                  division's selling expenses, attendance at tradeshows and
                  increased advertising and marketing of our electronic
                  components;

         o        a $225,000 (16.0%) increase in administrative expenses
                  primarily due to the inclusion of $166,000 and $30,000 of
                  administrative costs for our Larus division and for Pascall,
                  respectively; and

         o        $72,000 in administrative expenses relating to our review of
                  internal controls pursuant to Section 404 of the Sarbanes
                  Oxley Act of 2002.

         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 subsequent to
March 31, 2005.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. The $249,000 (88.0%) increase in these expenses resulted primarily
from the inclusion of $190,000 expenses attributable to our Larus division and a
$37,000 increase in research and engineering expenses related to 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.
Subsequent to March 31, 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.

         INTEREST EXPENSE, NET. Interest expense increased marginally by $6,000
(6.3%) to $102,000 for the three months ended March 31, 2005 as compared to
$96,000 for the three months ended March 31, 2004 due to the issuance of
$3,000,000 of notes for the acquisition of Larus Corporation. This increase was
partially offset by reduced interest expenses related to our new Wells Fargo
Bank loan and reduced loan balances of our United Kingdom operations. In
addition, we recorded $72,000 of interest income in the three months ended March
31, 2005, which was earned on the proceeds of the January 2005 private
placement. We did not have interest income during the three months ended March
31, 2004.


                                       13

<PAGE>

         INCOME TAX EXPENSE. Income tax expense for the three months ended March
31, 2005 was $66,000, compared to $75,000 for the three months ended March 31,
2004. Although we are reporting a consolidated loss before income taxes of
$284,000 for the quarter, our foreign subsidiaries achieved combined income
before income taxes of $190,000, which at the rates effective in the respective
countries resulted in the reported current tax expense of $66,000.

         NET INCOME. The net income for the three months ended March 31, 2005
decreased by $420,000 to a loss of $350,000 as compared to net income of $70,000
for the three months ended March 31, 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 communication timing products.
Also contributing to the loss were delays in significant telecommunications
orders in France for network access products and in the United States for test
equipment, that had been expected during the three months ended March 31, 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.

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., Wells Fargo Business
Credit, Inc. and various foreign banks. During the three months ended March 31,
2005, we continued to rely on these sources and also raised approximately
$16,893,000 in net proceeds through a private placement of equity securities in
January 2005 as described below. As of March 31, 2005, we had working capital of
$14,932,000, which represented a $9,392,000 (169.5%) 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
March 31, 2005 and December 31, 2004, we had accumulated deficits of $16,756,000
and $16,406,000, respectively, and cash and cash equivalents of $6,861,000 and
$1,057,000, respectively.

         Accounts receivable increased $1,849,000 (31.9%) during the three
months ended March 31, 2005 from $5,796,000 as of December 31, 2004 to
$7,645,000 as of March 31, 2005. Sales attributable to the Pascall acquisition
contributed $2,700,000 to accounts receivable at March 31, 2005. Without the
acquisition of Pascall, our receivables would have decreased $851,000 (14.7)%
during the three months ended March 31, 2005, primarily due to increased
collections. Days sales outstanding, which is a measure of our average accounts
receivable collection period, increased from 69 days for the year ended December
31, 2004 to 83 days for the three months ended March 31, 2005. This calculation
is skewed because $2,700,000 of Pascall receivables were included in our
accounts receivable balance at March 31, 2005 while only 13 days of Pascall's
sales, totaling $722,000, were included in our results for the quarter ended
March 31, 2005. Excluding Pascall's sales, days sales outstanding was 68, which
represents a slight improvement for the quarter as compared to fiscal 2004. Our
customers include many Fortune 500 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 $2,394,000 (36.9%) during the three months
ended March 31, 2005, from $6,491,000 at December 31, 2004 to $8,885,000 at
March 31, 2005. Inventory represented 21.4% and 25.9% of our total assets as of
March 31, 2005 and December 31, 2004, respectively. Included in the March 31,
2005 amount is $2,165,000 of inventory attributable to Pascall. Excluding the
effect of this inclusion, inventory would have increased by $229,000 (3.4%) and
would have represented 18.8% of total assets (excluding the $5,841,000 of total


                                       14

<PAGE>

assets related to Pascall) at March 31, 2005. Inventory turnover, which is a
ratio that indicates how many times our inventory is sold and replaced over a
specified period, declined to 2.2 times (excluding Pascall, turnover would have
decline to 1.8 times) for the three months ended March 31, 2005 as compared to
2.6 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 components at lower prices than we previously paid
to our former suppliers and have received shipments of quality components from
these offshore suppliers. We continued with this method of operation throughout
the three months ended March 31, 2005 and anticipate implementing this method in
our communication timing and synchronization business.

         Cash used in our operating activities totaled $1,370,000 for the three
months ended March 31, 2005 as compared to cash provided by operating activities
of $632,000 for the three months ended March 31, 2004. This $2,002,000 decrease
in operating cash flows primarily resulted from net losses in the three months
ended March 31, 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 $9,378,000 for the three
months ended March 31, 2005 as compared to $96,000 for the three months ended
March 31, 2004. Included in the results for the three months ended March 31,
2005 are net cash of $9,341,000 used to acquire Pascall and $37,000 of property,
plant and equipment purchases for production facility upgrade,
telecommunications, management information systems and computer controlled
production machinery for our new low profile rotary and digital switches. The
investments for the three months ended March 31, 2004 were mostly property,
plant and equipment purchases.

         Cash provided by our financing activities totaled $16,993,000 for the
three months ended March 31, 2005 as compared to $569,000 of cash used in our
financing activities for the three months ended March 31, 2004. The change is
primarily due to the net proceeds of $16,893,000 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 is 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 new 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 March 31, 2005 was 5.50%.


                                       15

<PAGE>

         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 March 31, 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 $142,000 was outstanding at March 31, 2005. The
interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR")
rate (3.10% at March 31, 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 three months ended March 31, 2005 were
$1,035,000 and $400,000, respectively. The prime rate averaged approximately
4.25% in 2004 and approximately 5.5% during the three months ended March 31,
2005. Therefore, during 2004 the average annual interest cost on the new
revolving line of credit was approximately $49,162 while the average annual
interest cost on the prior revolving line of credit was approximately $162,000
due to the minimum interest rate charge of $13,500 per month. During the three
months ended March 31, 2005, interest on the new revolving line of credit
totaled approximately $7,000 and was not subject to the $13,500 per month
minimum interest charge that applied during the three months ended March 31,
2004.

         At March 31, 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 March 31, 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.

         The credit facility expires in July 2005. At March 31, 2005, there was
no balance outstanding under the revolving line of credit. We currently intend
to seek renewal of the credit facility and believe that the bank will be
amenable to renewing it. 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
its expiration.


                                       16

<PAGE>

         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 March 31, 2005, the 30-day LIBOR rate was
2.86%. The total balance on these promissory notes as of March 31, 2005 was
$2,625,000.

         As of March 31, 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
March 31, 2005, the balances outstanding under our United Kingdom, France and
Japan credit facilities were $1,230,000, $692,000 and $52,000, 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 March 31, 2005 was $52,000 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.

         XPS, 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 March 31, 2005 for the
conversion of British pounds sterling into United States dollars, the facility
is for a maximum of $2,685,000 and includes a $627,000 unsecured cash flow loan,
a $143,000 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 (4.75% at March 31, 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.

         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 $1,488,000,
based on the exchange rate in effect at March 31, 2005 for the conversion of
euros into United States dollars. CXR-AJ also had $74,000 of term loans with
several French banks outstanding as of March 31, 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 March 31, 2005, the French T4M rate was 2.05%
and this facility had a balance of $692,000. This facility has no financial
performance covenants.

         Our backlog was $15,021,000 as of March 31, 2005 as compared to
$9,830,000 as of March 31, 2004. The increase in backlog was primarily due to
the addition of $4,925,000 of backlog for Pascall. Our backlog as of March 31,
2005 was 91.7% 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 8.3% 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.


                                       17

<PAGE>

         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 legal, accounting and
consulting fees that 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
the 150th day following the closing date. If we are unable to meet this
obligation or 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, then we will be required to pay to each
investor liquidated damages equal to 1% of the amount paid by the investor for
the common shares still owned by the investor on the date of the default and 2%
of the amount paid by the 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. 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 registration
obligations, we also anticipate that we will have sufficient cash available to
pay these 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.


                                       18

<PAGE>

         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 three
months ended March 31, 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 and our 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.

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 June 15,
2005. Accordingly, we are required to apply SFAS No. 123(R) beginning in the
quarter ending September 30, 2005. 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.


                                       19

<PAGE>

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.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.

         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 three months ended March 31, 2005.

ITEM 4.  CONTROLS AND PROCEDURES.

         On April 5, 2005, in connection with its audit of our consolidated
financial statements for the year ended December 31, 2004, Grant Thornton LLP,
our independent registered public accounting firm, advised our audit committee
and management of two matters that Grant Thornton LLP considers to be "material
weaknesses" as that term is defined under standards established by the Public
Company Accounting Oversight Board (United States).

         The first matter related to our need for additional staff with
expertise in preparing required disclosures in the notes to the financial
statements, and our need to develop greater internal resources for researching
and evaluating the appropriateness of complex accounting principles and for
evaluating the effects of new accounting pronouncements on us. Our growth during
and since 2004 as a result of our acquisitions of Larus Corporation and Pascall
and the increased complexity surrounding our financing arrangements are major
contributors to the need for additional resources in financial reporting.

         The second matter related to segregation of duties relating to cash
disbursements. Both our assistant controller and accounts payable clerk have
access to initiate the payment of invoices and print electronically signed
checks. Both individuals have the ability to record transactions in the
accounting system. The lack of segregation of these two functions -
check-writing ability and the recording of disbursement transactions in our
accounting system - represents a material weakness in the cash disbursements
cycle.

         We considered these matters in connection with the preparation of the
December 31, 2004 consolidated financial statements included in our most recent
Form 10-K and also determined that no prior period financial statements were
materially affected by such matters. In response to the observations made by
Grant Thornton LLP, on April 7, 2005, we engaged financial consultants who are
certified public accountants with the requisite background and experience to
prepare required disclosures in the notes to our financial statements and to
provide greater internal resources for researching and evaluating the
appropriateness of complex accounting principles and for evaluating the effects


                                       20

<PAGE>

that new accounting pronouncements may have on us. In addition, we recognize
that the risk of an unauthorized disbursement exists without proper segregation
of duties between check-writing and record keeping. However, every month we
review the listing of checks produced and research any check number that is
missing or questionable. We believe this type of detective control would
identify unauthorized disbursements. Additionally, on May 6, 2005, we limited
the system access for those individuals performing this review such that there
are appropriate mitigating controls over the incompatible duties with regard to
our disbursements. We believe these steps will address the matters raised by
Grant Thornton LLP.

         Our Chief Executive Officer and Acting 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 March 31, 2005 with
respect to the material weaknesses identified in the areas of financial
statement disclosures and segregation of duties in the cash disbursements cycle
as discussed above.

         During the quarter ended March 31, 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.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
         SECURITIES.

     RECENT SALES OF UNREGISTERED SECURITIES

         In January 2005, we issued to one entity a three-year warrant to
purchase 25,000 shares of common stock at an exercise price of $2.00 per share
as partial consideration for investor relations services.

         In January 2005, we issued 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 common stock at an exercise price of $1.73
per share in a private offering to 17 record holders pursuant to a securities
purchase agreement. We paid cash placement agent fees and expenses of
approximately $961,000 and issued a five-year placement agent warrant to
purchase up to 650,310 shares of common stock at an exercise price of $1.73 per
share. We also entered into a registration rights agreement in which 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.

         In March 2005, we issued to one entity a three-year warrant to purchase
up to 85,000 shares of common stock at an exercise price of $1.86 per share as
partial consideration for financial advisory services.


                                       21

<PAGE>

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated or
accredited with access to the kind of information registration would provide.

     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.

         None.

ITEM 5.  OTHER INFORMATION.

         None.


                                       22

<PAGE>

ITEM 6.  EXHIBITS.

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

   2.1         Agreement dated March 1, 2005 among Intelek Properties Limited,
               XCEL Corporation Limited, Intelek PLC and Emrise Corporation
               relating to the sale and purchase of the outstanding capital
               shares of Pascall Electronic (Holdings) Limited (1)

   2.2         Supplemental Agreement dated March 18, 2005 among Intelek
               Properties Limited, XCEL Corporation
               Limited, Intelek PLC and Emrise Corporation (1)

    10         Loan Agreement dated March 18, 2005 among XCEL Corporation
               Limited, Pascall Electronics Limited and Pascall Electronic
               (Holdings) Limited (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 as an exhibit to the Registrant's current report on Form 8-K for
         March 18, 2005 and incorporated herein by reference.


                                       23

<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: May 16, 2005         By: /S/ CARMINE T. OLIVA
                                ------------------------------------------------
                                Carmine T. Oliva, Chairman of the Board,
                                Chief Executive Officer and President
                                (principal executive officer)

                            By: /S/ CARMINE T. OLIVA
                                ------------------------------------------------
                                Carmine T. Oliva, Acting Chief Financial Officer
                                (principal financial and accounting officer)


                                       24

<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


                                       25