Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND 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 thequarterly period ended****September 30, 2008**

 

**or**

 

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

 

**For the transition period from               to              **

 

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

 

**EMRISECORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**9485 HavenAvenue, Suite 100**

**RanchoCucamonga, California 91730**

(Address of principalexecutive 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 sincelast report)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

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

 

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

 

The number of sharesoutstanding of the Registrant’s common stock, $0.0033 par value, as of November 5,2008 was 38,254,250.

 

 

 

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Table ofContents

 

**EMRISE CORPORATION**

**TABLE OF CONTENTS**

**FORM 10-Q**

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

 
| **PART I**           |
|---------------------------|
| **FINANCIAL INFORMATION** |
| ** **                |   |   |
| **ITEM 1.**               | **FINANCIAL  STATEMENTS** |   |
|                      |   |   |
|                      | Condensed  Consolidated Balance Sheets as of September 30, 2008 (unaudited) and  December 31, 2007 | 1 |
|                      |   |   |
|                      | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2008 and 2007 (unaudited) | 2 |
|                      |   |   |
|                      | Condensed Consolidated Statements of Stockholders’  Equity for the Nine Months Ended September 30, 2008 (unaudited) | 3 |
|                      |   |   |
|                      | Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2008 and 2007 (unaudited) | 4 |
|                      |   |   |
|                      | Notes to Condensed Consolidated Financial Statements  (unaudited) | 5 |
|                      |   |   |
| **ITEM 2.**               | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | 15 |
|                      |   |   |
| **ITEM 3.**               | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** | 32 |
|                      |   |   |
| **ITEM 4.**               | **CONTROLS AND  PROCEDURES** | 32 |
|                      |   |   |
| **ITEM 4T.**              | **CONTROLS AND  PROCEDURES** | 32 |
|                      |   |   |
| **PART II**          |
| **OTHER INFORMATION**     |
|                      |   |   |
| **ITEM 1.**               | **LEGAL PROCEEDINGS** | 35 |
|                      |   |   |
| **ITEM 1A.**              | **RISK FACTORS** | 35 |
|                      |   |   |
| **ITEM 2.**               | **UNREGISTERED  SALES OF EQUITY SECURITIES ANDUSE OF  PROCEEDS** | 36 |
| ** **                |   |   |
| **ITEM 3.**               | **DEFAULTS UPON SENIOR  SECURITIES** | 36 |
|                      |   |   |
| **ITEM 4.**               | **SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS** | 36 |
|                      |   |   |
| **ITEM 5.**               | **OTHER INFORMATION** | 36 |
|                      |   |   |
| **ITEM  6.**              | **EXHIBITS** | 37 |
|                      |   |   |
| **SIGNATURES**            | 38 |
|                           |  |  |  |

 

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Table of Contents

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

**EMRISE CORPORATION**

**Condensed Consolidated Balance Sheets**

(in thousands,except share and per share amounts)

 
| ** **                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                             | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                             |       |                   |       |                  |       |
| Current assets:                                                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                              |       | $                      | 5,267      |                  | $          | 4,764 |   |
| Accounts  receivable, net of allowances for doubtful accounts of $493 at  September 30, 2008 and $345 at December 31, 2007                                   |       | 11,386                 |       | 9,406                 |       |
| Inventories, net                                                                                                                                                       |       | 13,159                 |       | 11,664                |       |
| Current deferred  tax assets                                                                                                                                           |       | 649                    |       | 200                   |       |
| Prepaid and  other current assets                                                                                                                                      |       | 1,609                  |       | 1,617                 |       |
| Total current  assets                                                                                                                                                  |       | 32,070                 |       | 27,651                |       |
|                                                                                                                                                                   |       |                   |       |                  |       |
| Property, plant  and equipment, net                                                                                                                                    |       | 3,560                  |       | 2,227                 |       |
| Goodwill                                                                                                                                                               |       | 16,275                 |       | 13,129                |       |
| Intangible  assets other than goodwill, net                                                                                                                            |       | 7,876                  |       | 3,269                 |       |
| Deferred tax  assets                                                                                                                                                   |       | 610                    |       | 617                   |       |
| Other assets                                                                                                                                                           |       | 1,193                  |       | 1,287                 |       |
| Total assets                                                                                                                                                           |       | $                      | 61,584     |                  | $          | 48,180 |   |
|                                                                                                                                                                   |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                  |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                       |       | $                      | 4,465      |                  | $          | 4,440 |   |
| Accrued expenses                                                                                                                                                       |       | 5,681                  |       | 5,435                 |       |
| Current portion  of long-term debt                                                                                                                                     |       | 4,498                  |       | 71                    |       |
| Notes payable to  stockholders, current portion                                                                                                                        |       | 500                    |       | 521                   |       |
| Income taxes  payable                                                                                                                                                  |       | 571                    |       | 712                   |       |
| Other current  liabilities                                                                                                                                             |       | 357                    |       | 357                   |       |
| Total current  liabilities                                                                                                                                             |       | 16,072                 |       | 11,536                |       |
|                                                                                                                                                                   |       |                   |       |                  |       |
| Long-term line  of credit                                                                                                                                              |       | 5,772                  |       | 3,957                 |       |
| Long-term debt,  net of discount of $1,108 and $1,264, respectively                                                                                                    |       | 14,162                 |       | 4,829                 |       |
| Notes payable to  stockholders, less current portion                                                                                                                   |       | 375                    |       | 750                   |       |
| Deferred income  taxes                                                                                                                                                 |       | 1,023                  |       | 904                   |       |
| Other  liabilities                                                                                                                                                     |       | 1,125                  |       | 1,158                 |       |
| Total liabilities                                                                                                                                                      |       | 38,529                 |       | 23,134                |       |
|                                                                                                                                                                   |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                         |       |                   |       |                  |       |
|                                                                                                                                                                   |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                                            |       |                   |       |                  |       |
| Preferred  stock,$0.01 par value. Authorized 10,000,000 shares, zero shares issued and  outstanding                                                                    |       | —                 |       | —                |       |
| Common  stock,$0.0033 par value. Authorized 150,000,000 shares; 38,254,000 shares  issued and outstanding at  September 30,  2008 and December 31, 2007 |       | 126                    |       | 126                   |       |
| Additional  paid-in capital                                                                                                                                            |       | 44,771                 |       | 44,527                |       |
| Accumulated  deficit                                                                                                                                                   |       | (21,481                | )          | (20,661               | )          |
| Accumulated  other comprehensive income                                                                                                                                |       | (361                   | )          | 1,054                 |       |
| Total  stockholders’ equity                                                                                                                                       |       | 23,055                 |       | 25,046                |       |
| Total  liabilities and stockholders’ equity                                                                                                                       |       | $                      | 61,584     |                  | $          | 48,180 |   |

 

*Theaccompanying Notes are an integral part of these Condensed ConsolidatedFinancial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Operations**

(Unaudited)****(inthousands, except per share amounts)

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Net sales                            |       | $                                | 15,687     |                            | $          | 12,809 |   | $ | 41,983 |   | $ | 36,798 |   |
| Cost of sales                        |       | 9,379                            |       | 8,798                           |       | 26,277 |   | 24,863 |   |
| Gross profit                         |       | 6,308                            |       | 4,011                           |       | 15,706 |   | 11,935 |   |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                 |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative |       | 4,058                            |       | 3,796                           |       | 12,039 |   | 11,381 |   |
| Engineering and  product development |       | 659                              |       | 692                             |       | 2,105 |   | 2,067 |   |
| Total operating  expenses            |       | 4,717                            |       | 4,488                           |       | 14,144 |   | 13,448 |   |
| Income (loss)  from operations       |       | 1,591                            |       | (477                            | )          | 1,562 |   | (1,513 | ) |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Other income  (expense):             |       |                             |       |                            |       |   |   |   |   |
| Interest income                      |       | 38                               |       | 40                              |       | 79 |   | 95 |   |
| Interest expense                     |       | (816                             | )          | (190                            | )          | (2,004 | ) | (510 | ) |
| Other, net                           |       | (167                             | )          | 314                             |       | (64 | ) | 479 |   |
| Total other  income (expense), net   |       | (945                             | )          | 164                             |       | (1,989 | ) | 64 |   |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  before income taxes   |       | 646                              |       | (313                            | )          | (427 | ) | (1,449 | ) |
| Income tax  provision                |       | 313                              |       | 173                             |       | 393 |   | 452 |   |
| Net income  (loss)                   |       | $                                | 333        |                            | $          | (486 | ) | $ | (820 | ) | $ | (1,901 | ) |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  per share:            |       |                             |       |                            |       |   |   |   |   |
| Basic                                |       | $                                | 0.01       |                            | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
| Diluted                              |       | $                                | 0.01       |                            | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding |       |                             |       |                            |       |   |   |   |   |
| Basic                                |       | 38,254                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |
| Diluted                              |       | 38,451                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |

 

*Theaccompanying Notes are an integral part of these Condensed ConsolidatedFinancial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Stockholders’Equity**

(Unaudited)****(inthousands)

* *
| ** **                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **             | ** ** |
| ** **                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                |       |                  |       |        |       |            |       |              |       |                   |       |       |       |
| Balance at  December 31, 2007  |       | 38,254                |       | $           | 126        |            | $          | 44,527            |       | $                      | (20,661    | )          | $          | 1,054 |   | $ | 25,046 |   |
| Stock-based  compensation           |       | —                |       | —      |       | 55              |       | —            |       | —                 |       | 55         |       |
| Warrants issued  for services       |       | —                |       | —      |       | 189             |       | —            |       | —                 |       | 189        |       |
| Net loss and  comprehensive loss    |       | —                |       | —      |       | —          |       | (820              | )          | (1,415                 | )          | (2,235     | )          |
| Balance at  September 30, 2008 |       | 38,254                |       | $           | 126        |            | $          | 44,771            |       | $                      | (21,481    | )          | $          | (361 | ) | $ | 23,055 |   |

 

*The accompanyingNotes are an integral part of these Condensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)****(inthousands)

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                          |       |                            |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                     |       |                            |       |   |   |
| Net loss                                                                      |       | $                               | (820       | ) | $ | (1,901 | ) |
| Reconciliation  to net cash used in operating activities:                     |       |                            |       |   |   |
| Depreciation and  amortization                                                |       | 818                             |       | 818 |   |
| Provision for  doubtful accounts                                              |       | 148                             |       | (100 | ) |
| Provision for  inventory obsolescence                                         |       | 584                             |       | 664 |   |
| Provision for  warranty reserve                                               |       | (86                             | )          | (60 | ) |
| Gain on  disposition of assets                                                |       | (17                             | )          | — |   |
| Gain on sale of  facility                                                     |       | (77                             | )          | — |   |
| Deferred taxes                                                                |       | (101                            | )          | 3 |   |
| Amortization of  deferred issuance costs                                      |       | 339                             |       | — |   |
| Amortization of  debt discount                                                |       | 338                             |       | — |   |
| Stock-based  compensation expense                                             |       | 55                              |       | 60 |   |
| Warrants issued  for services                                                 |       | 6                               |       |   |   |
| Changes in  assets and liabilities, net of effects from purchase of:          |       |                            |       |   |   |
| Advanced Control  Components, Inc. (“ACC”)                     |       |                            |       |   |   |
| Accounts  receivable                                                          |       | 177                             |       | 162 |   |
| Inventories                                                                   |       | (231                            | )          | (1,596 | ) |
| Prepaid and  other assets                                                     |       | 6                               |       | (240 | ) |
| Accounts payable  and accrued expenses                                        |       | (1,757                          | )          | 592 |   |
| Total  adjustments                                                            |       | 202                             |       | 303 |   |
| Net cash used in  operating activities                                        |       | (618                            | )          | (1,598 | ) |
|                                                                          |       |                            |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                    |       |                            |       |   |   |
| Purchases of  property, plant and equipment                                   |       | (72                             | )          | (613 | ) |
| Additions to  intangible assets                                               |       | (40                             | )          | — |   |
| Payments  received on note receivable                                         |       | 40                              |       | — |   |
| Payment for  purchase of ACC net of cash acquired                             |       | (12,356                         | )          | — |   |
| Net cash used in  investing activities                                        |       | (12,428                         | )          | (613 | ) |
|                                                                          |       |                            |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                    |       |                            |       |   |   |
| Proceeds from  issuance of debt                                               |       | 13,000                          |       | — |   |
| Net proceeds from  lines of credit                                            |       | 1,815                           |       | 838 |   |
| Principal  payments of long-term debt                                         |       | (141                            | )          | (421 | ) |
| Payments of  notes to stockholders                                            |       | (396                            | )          | (250 | ) |
| Proceeds from  exercise of stock options and warrants                         |       | —                          |       | 69 |   |
| Net cash  provided by financing activities                                    |       | 14,278                          |       | 236 |   |
|                                                                          |       |                            |       |   |   |
| Effect of  exchange rate changes on cash                                      |       | (729                            | )          | 191 |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | 503                             |       | (1,784 | ) |
| Cash and cash  equivalents at beginning of period                             |       | 4,764                           |       | 3,802 |   |
| Cash and cash  equivalents at end of period                                   |       | $                               | 5,267      |   | $ | 2,018 |   |
|                                                                          |       |                            |       |   |   |
| **SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:** |       |                            |       |   |   |
| Acquisition of  equipment through capital lease                               |       | $                               | 453        |   | $ | — |   |

 

*The accompanying Notes are anintegral part of these Condensed Consolidated Financial Statements*

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1 – SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Organizationand Business*

 

EMRISECorporation (the “Company”) designs, manufactures and markets proprietaryelectronic devices and communications equipment for aerospace, defense,industrial, and communications applications. The Company has operations in theUnited States (“U.S.”), England, France and Japan.  The Company conducts its businessthrough two operating segments: electronic devices and communicationsequipment. The subsidiaries within the electronic devices segment design, develop, manufacture and marketelectronic devices for defense, aerospace and industrial markets and operateout of facilities located in the U.S., England and Japan.  The subsidiaries within thecommunications equipment segment design, develop, manufacture and marketnetwork access equipment and network timing and synchronization products and operateout of facilities located in the U.S. and France.

 

*Basis of Presentation*

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission (“Commission”) andtherefore do not include all information and footnotes necessary for a completepresentation of the financial position, results of operations and cash flows inconformity with accounting principles generally accepted in the U.S. (“GAAP”).  The year end balance sheet was derived fromthe audited financial statements at that date, but does not include all of theinformation and footnotes required by GAAP for complete financial statements.  The unaudited condensed consolidatedfinancial statements do, however, reflect all adjustments, consisting of onlynormal recurring adjustments, which are, in the opinion of management,necessary to state fairly the financial position as of September 30, 2008and the results of operations and cash flows for the related interim periodsended September 30, 2008 and 2007. However, these results are notnecessarily indicative of results for any other interim period or for the year.The accompanying unaudited condensed consolidated financial statements should beread in conjunction with the Company’s audited consolidated financialstatements included in its annual report on Form 10-K for the year ended December 31,2007 as filed with the Commission.

 

*Comprehensive Loss*

 

Comprehensive loss includes all changes in equityduring a period except those that resulted from investments by or distributionsto the Company’s stockholders.  Othercomprehensive income (loss) refers to revenues, expenses, gains and lossesthat, under GAAP, are included in comprehensive income (loss), but excludedfrom net income (loss) as these amounts are recorded directly as an adjustmentto stockholders’ equity.  The Company’sother comprehensive income (loss) consists of foreign currency translationadjustments.  The following table reflectsthe components of comprehensive loss (in thousands):

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                        |       | $                                | 333        |                            | $          | (486 | ) | $ | (820 | ) | $ | (1,901 | ) |
| Other  comprehensive income (loss):      |       |                             |       |                            |       |   |   |   |   |
| Foreign currency  translation adjustment |       | (1,639                           | )          | 162                             |       | (1,415 | ) | 336 |   |
| Comprehensive  loss                      |       | $                                | (1,306     | )                               | $          | (324 | ) | $ | (2,235 | ) | $ | (1,565 | ) |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

*Earnings (Loss) Per Share*

 

Basic earnings (loss) per share is computed bydividing net income (loss) by the weighted average common shares outstandingduring a period.  Diluted earnings (loss)per share is based on the treasury stock method and includes the dilutiveeffect of stock options and warrants outstanding during the period.  Common share equivalents have been excludedwhere their inclusion would be anti-dilutive. As a result of the loss incurred by the Company for certain periodspresented, the potentially dilutive common shares have been excluded becausetheir inclusion would have been anti-dilutive. The following table illustrates the computation of basic and dilutedearnings (loss) per share (in thousands, except per share amounts):

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                          | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       |                             |       |                            |       |   |   |   |   |
| NUMERATOR:                                          |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                  |       | $                                | 333        |                            | $          | (486 | ) | $ | (820 | ) | $ | (1,901 | ) |
|                                                |       |                             |       |                            |       |   |   |   |   |
| DENOMINATOR:                                        |       |                             |       |                            |       |   |   |   |   |
| Basic weighted  average common shares outstanding   |       | 38,254                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |
| Effect of  dilutive securities:                     |       |                             |       |                            |       |   |   |   |   |
| Dilutive stock  options and warrants                |       | 197                              |       | —                          |       | — |   | — |   |
| Diluted weighted  average common shares outstanding |       | 38,451                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Basic earnings  (loss) per share                    |       | $                                | 0.01       |                            | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Diluted earnings  (loss) per share                  |       | $                                | 0.01       |                            | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |

 

The following table shows the common stock equivalentsthat were outstanding as of September 30, 2008 and 2007, but were notincluded in the computation of diluted earnings per share as a result of theloss incurred by the Company or because the options’ or warrants’ exerciseprice was greater than the average market price of the common shares and,therefore, the effect would have been anti-dilutive:

 
| ** **                            | ** ** | ** **         | ** ** | **Range of**       | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Per Share**      | ** ** |
|                                  |       |               |       |                    |       |
| Anti-dilutive  common stock options:  |       |               |       |                    |       |
| As of  September 30, 2008        |       | 2,051,000          |       | $0.20 - $2.00           |       |
| As of  September 30, 2007        |       | 1,808,000          |       | $0.20 - $2.00           |       |
|                                  |       |               |       |                    |       |
| Anti-dilutive  common stock warrants: |       |               |       |                    |       |
| As of September 30,  2008        |       | 6,742,000          |       | $1.10 - $1.73           |       |
| As of  September 30, 2007        |       | 4,042,000          |       | $0.85 - $2.00           |       |

 

6

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Table of Contents

 

**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

*Recent Accounting Pronouncements*

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities*. SFAS No. 159 permits an entity toirrevocably elect fair value on a contract-by-contract basis as the initial andsubsequent measurement attribute for many financial assets and liabilities andcertain other items including insurance contracts. Entities electing the fairvalue option would be required to recognize changes in fair value in earningsand to expense upfront cost and fees associated with the item for which thefair value option is elected. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. The adoption of SFAS No. 159 didnot have a material effect on the Company’s financial condition or results ofoperations.

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. This newstatement provides a single definition of fair value, together with a frameworkfor measuring it, and requires additional disclosure about the use of fairvalue to measure assets and liabilities. SFAS No. 157 also emphasizes thatfair value is a market-based measurement, not an entity-specific measurement,and sets out a fair value hierarchy, with the highest priority being quotedprices in active markets. The required effective date of SFAS No. 157 isthe first quarter of 2008. The adoption of SFAS No. 157 for financialassets and liabilities did not have a material effect on the Company’sconsolidated financial statements, but resulted in additional disclosurescontained herein.  In February 2008,the FASB issued Staff Position No. 157-2, which delayed by one year theeffective date of SFAS No. 157 for all non-financial assets andliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. The Company is currently evaluating the impact the adoption of SFAS No. 157for non-financial assets and liabilities will have on its consolidatedfinancial statements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities*. The new standard amends SFAS No. 133 andseeks to enhance disclosure about how and why a company uses derivative andhedging activities, how derivative instruments and related hedged items areaccounted for under SFAS No. 133 (and the interpretations of thatstandard) and how derivatives and hedging activities affect a company’sfinancial position, financial performance and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  The adoption of SFAS No. 161is not expected to have a material effect on the Company’s consolidatedfinancial statements.

 

In April 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets* and also requiresexpanded disclosure related to the determination of intangible asset usefullives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. Early adoption is prohibited. The Company is currently evaluating theimpact the adoption of FSP 142-3 will have on its consolidated financialstatements.

 

7

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 2 – INVENTORIES**

 

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

 
| ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|               |       |                   |       |                  |       |
| Raw materials      |       | $                      | 11,446     |                  | $          | 9,292 |   |
| Work-in-process    |       | 4,169                  |       | 4,540                 |       |
| Finished goods     |       | 4,252                  |       | 3,956                 |       |
| Reserves           |       | (6,708                 | )          | (6,124                | )          |
| Total  inventories |       | $                      | 13,159     |                  | $          | 11,664 |   |

 

**NOTE 3 – LINES OF CREDIT**

 

The Company and its direct subsidiaries, EMRISE ElectronicsCorporation, CXR Larus Corporation and RO Associates Incorporated(collectively, the “Borrowers”) are parties to a Credit Agreement (the “CreditAgreement”), as amended, with GVEC Resource IV Inc. (the “Lender”) providingfor a three year credit facility in the aggregate amount of $26,000,000 (the “CreditFacility”) and is secured by accounts receivable, other rights to payment andgeneral intangibles, inventories and equipment. The Credit Facility includes a one yearrevolving credit facility for up to $7,000,000 that may be extended, at theCompany’s option, for up to three years (the “Revolver”).

 

TheRevolver is formula-based and which generally provides that the outstandingborrowings under the line of credit may not exceed an aggregate of 85% ofeligible accounts receivable, plus 10% of the value of eligible raw materialsnot to exceed $600,000, plus 50% of the value of eligible finished goodsinventory not to exceed $1,500,000, minus the aggregate amount of reserves thatmay be established by the Lender.

 

Interest on the Revolveris payable monthly.  The interest rate isvariable and is adjusted monthly based on prime rate as published in the “MoneyRates” column of *The Wall Street Journal* (the “BaseRate”) plus 1.25%, subject to a minimum rate of 9.5%.  The interest rate in effect as of September 30,2008 was the minimum rate of 9.5%.  TheRevolver is subject to various financial covenants on a consolidated basisincluding the following: EBITDA, measured on a fiscal quarter-end basis, mustnot be less than the scheduled amount for each specified period; the debtservice coverage ratio, measured quarterly, must be greater than the lesser ofthe scheduled amount for each specific period or 1.10:1.00; the leverage ratio,measured quarterly, must not be greater than 1.25:1.00; and the Company mustnot incur capital expenditures in any fiscal year in excess of $500,000.  As of September 30, 2008, the Companywas in default of the capital expenditure limitation described above; whichdefault has been waived by the Lender.

 

Asof September 30, 2008, the Company had outstanding borrowings of $5.8million under the Revolver with remaining availability under the formula-basedcalculation of $1.2 million.

 

8

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Inthe event of a default and continuation of a default, the Lender may acceleratethe payment of the principal balance requiring the Company to pay the entireindebtedness outstanding on that date. Upon the occurrence and during the continuation of an event of default,the Lender may also elect to increase the interest rate applicable to theoutstanding balance by four percentage points above the per annum interest ratethat would otherwise be applicable.

 

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

 

**NOTE 4 – LONG TERM DEBT**

 

On August 20, 2008, in connection with theacquisition of Advanced Control Components, Inc. (“ACC”) and CustomComponents, Inc. (“CCI”) as discussed in Note 6, the Borrowers and theLender entered into a Amendment Number 1 to Loan Documents (“Amendment to LoanDocuments”), pursuant to which certain terms of the Credit Facility were amendedto, among other things, include a term loan in an outstanding principal amountof $3,000,000 (the “Term Loan C).  TheCredit Facility, as amended, now provides for a three year credit facility inthe aggregate amount of $26,000,000 (the “Amended Credit Facility”).

 

The Amended CreditFacility consists of (i) a one year revolving credit facility for up to$7,000,000 that may be extended for up to three years (the “Revolver”), (ii) athree year term loan in an outstanding principal amount of $6,000,000 which wasfully funded on November 30, 2007 (“Term Loan A”), (iii) a term loanin the amount of $10,000,000 (“Term Loan B”), and (iv) a term loan in theamount $3,000,000 (“Term Loan C”).  TermLoans B and C were fully funded on August 20, 2008 in connection with theacquisition of ACC.  Term Loan B requiresschedule payments commencing June 2009 and regular payments thereafteruntil the loan is paid in full in November 2010.  Term Loan C must be paid in full by February 15,2009.

 

The Company’s Term Loan C,in the principal amount of $3 million, must be repaid by no later than February15, 2009.  In order to facilitate therepayment of the Term Loan C, the Company has also agreed with the Lender toraise at least $5 million in net proceeds through either the sale of assets ofEMRISE Corporation or any of its subsidiaries or through the sale of equity ofEMRISE Corporation by no later than February 15, 2009.  The Company does not believe that its cash onhand and/or cash generated from operations will be sufficient to repay the TermLoan C at its stated maturity date. Therefore, the Company expects to use all or a portion of the netproceeds from the sale of assets and/or equity to repay the Term Loan C.  If the Company elects to sell assets, theremaining proceeds from such sale(s), after repayment of the Term Loan C, ifany, must be used to repay a portion of the principal of Term Loan B pursuantto the terms of the credit facility, which requires that cash proceeds from anyvoluntary or involuntary sale or disposition by the Company or any of itssubsidiaries of property or assets (other than sales or dispositions ofinventory or equipment in the ordinary course of business) in excess of$150,000 in any fiscal year must be used to repay the Term Loans.  

 

Although the Company iscurrently evaluating a number of options to meet these various obligationsunder the credit facility, the Company’s preference is to sell non-coreassets.  If the Company is unable torepay the Term Loan C by February 15, 2009 and/or is unsuccessful in raising $5million through the sale of assets or equity by that same date, then theCompany would be in default under the terms of the credit facility.  In the event of a default and continuation ofa default, the Lender may limit future availability under the revolving line ofcredit and/or accelerate the payment of all principal balances and accruedinterest requiring the Company to pay the entire indebtedness under the creditfacility outstanding on that date.  Uponthe occurrence and during the continuation of an event of default, the Lendermay also elect to increase the interest rate applicable to the outstandingbalance of the Term Loans A and B by four percentage points above the per annuminterest rate that would otherwise be applicable and increase the rateapplicable to the Term Loan C to a per annum interest rate of 24%.  Any of these conditions could have a materialadverse effect on the Company’s operations and/or ability to conduct businessafter that date.

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 5 – STOCK-BASED COMPENSATION**

 

The Company has fivestock option plans:

 

·                  Employee Stockand Stock Option Plan, effective July 1, 1994;

·                  1993 StockOption Plan;

·                  1997 StockIncentive Plan;

·                  Amended andRestated 2000 Stock Option Plan; and

·                  2007 StockIncentive Plan.

 

The board of directors does not intend to issue anyadditional options under any of the above plans with the exception of the 2007Stock Incentive Plan.

 

Total stock-based compensation expense included inwages, salaries and related costs was $28,000 and $15,000 for the three monthsended September 30, 2008 and 2007, respectively, and $55,000 and $60,000for the nine months ended September 30, 2008 and 2007, respectively. Thesecompensation expenses were charged to selling, general and administrativeexpenses. As of September 30, 2008, the Company had $317,000 of totalunrecognized compensation expense related to stock option grants, which will berecognized over the remaining weighted average period of three years.

 

**NOTE 6 – ACQUISTION OF ADVANCEDCONTROL COMPONENTS**

 

OnMay 23, 2008, the Company and its wholly-owned subsidiary, EEC, enteredinto a Stock Purchase Agreement (the “Stock Purchase Agreement”) pursuant towhich EEC agreed to acquire CCI and its operating subsidiary, ACC.  On August 20,2008, the Stock Purchase Agreement was amended pursuant to Amendment No. 1to Stock Purchase Agreement (the “Amendment to Purchase Agreement,” andcollectively with the Stock Purchase Agreement, the “Purchase Agreement”) to,among other things, reduce the initial purchase price for all of the capitalstock of both CCI and ACC to $12,400,000, subject to adjustments for workingcapital and net cash.  Additionally, pursuant to the terms of theAmendment to Purchase Agreement, the Company is obligated to pay interest on aprincipal amount of $600,000 at a rate equal to the prime rate as reportedin *The Wall Street Journal *onAugust 20, 2008 plus 1% for the period commencing on August 20, 2008and ending on the later of November 18, 2008 or the actual date suchinterest payment is made.

 

Theclosing of the Purchase Agreement occurred on August 20, 2008.  Underthe terms of the Purchase Agreement, EEC acquired all of the issued andoutstanding shares of common stock of CCI and all of the issued and outstandingshares of common stock of ACC not owned by CCI (the “Acquisition”).  Inaddition to the purchase price, the Company is obligated to pay up to anadditional $3,000,000 in cash if ACC meets certain operating income targets forone or both of the two twelve month periods following the closing.  Additionally,EEC issued Subordinated Secured Contingent Promissory Notes (the “Notes”) toeach of the Sellers in the aggregate principal amount of $2,000,000.  TheNotes become payable if ACC meets certain operating income thresholds duringthe first and second 12 month periods after August 20, 2008.  TheNotes bear interest at a rate per annum equal to the prime rate asreported in *The Wall StreetJournal *plus 1%.

 

Indetermining the purchase price for the Acquisition, the Company took intoaccount the historical and expected earnings and cash flow of ACC, as well asthe value of companies of a size and in an industry similar to ACC, comparabletransactions and the market for such companies generally.  The purchase price represented a premium ofapproximately $3.8 million over the recorded net worth of ACC’s assets.

 

Inconjunction with the Acquisition, the Company commissioned a valuation firm todetermine the fair value of ACC’s tangible assets and the portion of thepurchase price that should be allocated to identifiable 

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

intangible assets.  The Company considered whether theAcquisition included various types of identifiable intangible assets, includingtrade names, trademarks, patents, covenants not to compete, customers, backlog,workforce, technology and software.  Thevaluation firm has issued a preliminary report that is currently under reviewand was not finalized at September 30, 2008.  The Company has recorded the value of thetangible and intangible assets in its Condensed Consolidated Balance Sheets inaccordance with the preliminary purchase price allocation.  Any material adjustments to this purchaseprice allocation in future periods will be disclosed.  The Company has estimated and recorded theidentified intangible assets as follows: trade name of $1,570,000; covenant not to compete of $60,000; backlog of$570,000; and customer relationships of $2,550,000.

 

The following table summarizes the unaudited assetsand liabilities assumed in connection with the Acquisition (in thousands):

 

| Accounts  receivable                      |   | $      | 2,185  |   |
|-------------------------------------------|--------|--------|--------|--------|
| Inventories                               |   | 1,848  |   |
| Property and  equipment                   |   | 1,545  |   |
| Intangible  assets, net                   |   | 4,750  |   |
| Goodwill                                  |   | 3,782  |   |
| Other assets                              |   | 584    |   |
| Total assets  acquired                    |   | 14,694 |   |
| Accounts payable  and accrued liabilities |   | (1,608 | )      |
| Other  liabilities                        |   | (730   | )      |
| Total  liabilities assumed                |   | (2,338 | )      |
| Net assets  acquired                      |   | $      | 12,356 |   |

 

The following table summarizes, on an unaudited proforma basis, the combined results of operations of the Company and ACC asthough the Acquisition occurred as of January 1, 2007.  The pro forma adjustments are based upon available information andassumptions that management believes reasonably reflect the transaction.  The Company presents the pro forma results ofoperations for informational purposes only. The pro forma results of operations are not necessarily indicative ofwhat the Company’s results of operations would have been had the Companycompleted the Acquisition as of the dates indicated.  In addition, the pro forma financialstatements do not purport to project the future financial position or operatingresults of the combined company.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                             |       | $                                | 18,263     |                            | $          | 15,306 |   | $ | 50,316 |   | $ | 48,234 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                    |       | $                                | 322        |                            | $          | (1,126 | ) | $ | (2,580 | ) | $ | (1,078 | ) |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per share:           |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | $                                | 0.01       |                            | $          | (0.03 | ) | $ | (0.07 | ) | $ | (0.03 | ) |
| Diluted                               |       | $                                | 0.01       |                            | $          | (0.03 | ) | $ | (0.07 | ) | $ | (0.03 | ) |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding: |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | 38,254                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |
| Diluted                               |       | 38,451                           |       | 38,193                          |       | 38,254 |   | 38,163 |   |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 7 – OPERATING SEGMENTS**

 

The Company has two reportable operating segments:electronic devices and communications equipment. The electronic devices segmentmanufactures and markets digital and rotary switches, electronic powersupplies, radio frequency (“RF”) and microwave devices and subsystemassemblies. The electronic devices segment consists of EEC and its subsidiarieslocated in the U.S., England and Japan, which offer the same or similar productsto similar customers.  The communicationsequipment segment designs, manufactures and distributes network access productsand timing and synchronization products. The communications equipment segment consists of operating entities CXRLarus Corporation (“CXR Larus”) located in the U.S. and CXR Anderson Jacobsonlocated in France, which offer the same or similar products to similarcustomers.  Both segments operate in theU.S., European and Asian markets, but have distinctly different customers,design and manufacturing processes and marketing strategies.  Each segment has discrete financialinformation and a separate management structure.

 

The Company evaluates performance based upon profit orloss from operations before income taxes exclusive of nonrecurring gains andlosses. The Company accounts for intersegment sales at pre-determined pricesnegotiated between the individual segments.

 

There were no differencesin the basis of segmentation or in the basis of measurement of segmentoperating income or loss from the amounts disclosed in the Company’s auditedconsolidated financial statements included in its annual report on Form 10-Kfor the year ended December 31, 2007. Included in the Company’s reconciliation of segment financial data tothe consolidated amounts is unallocated corporate expenses.

 

Selected financial datafor each of the Company’s operating segments reconciled to the consolidatedtotals is shown below (in thousands):

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                 |       |                             |       |                            |       |   |   |   |   |
| Electronic  devices       |       | $                                | 12,524     |                            | $          | 8,872 |   | $ | 31,598 |   | $ | 25,839 |   |
| Communications  equipment |       | 3,163                            |       | 3,937                           |       | 10,385 |   | 10,959 |   |
| Total                     |       | $                                | 15,687     |                            | $          | 12,809 |   | $ | 41,983 |   | $ | 36,798 |   |
|                      |       |                             |       |                            |       |   |   |   |   |
| Operating income  (loss)  |       |                             |       |                            |       |   |   |   |   |
| Electronic  devices       |       | $                                | 2,580      |                            | $          | 287 |   | $ | 4,692 |   | $ | 1,363 |   |
| Communications  equipment |       | (9                               | )          | 189                             |       | (81 | ) | (9 | ) |
| Corporate and  other      |       | (980                             | )          | (953                            | )          | (3,049 | ) | (2,867 | ) |
| Total                     |       | $                                | 1,591      |                            | $          | (477 | ) | $ | 1,562 |   | $ | (1,513 | ) |

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | **2008**               | ** ** | **2007**              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets              |       |                   |       |                  |       |       |       |       |       |
| Electronic  devices       |       | $                      | 30,556     |                  | $          | 29,835     |       |       |       |   |   |
| Communications  equipment |       | 10,660                 |       | 11,851                |       |       |       |       |       |
| Corporate and  other      |       | 20,368                 |       | 6,494                 |       |       |       |       |       |
| Total                     |       | $                      | 61,584     |                  | $          | 48,180     |       |       |       |   |   |

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 8 – GOODWILL**

 

The following table reflects changes in our goodwillbalances, by segment, for the nine months ended September 30, 2008 (inthousands):

 
| ** **                          | ** ** | **Electronic** | ** ** | **Communications** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                          | ** ** | **Devices**    | ** ** | **Equipment**      | ** ** | **Total**  | ** ** |
|                                |       |           |       |               |       |       |       |
| Balance at  December 31, 2007  |       | $              | 7,295      |               | $          | 5,834      |       | $ | 13,129 |   |
| Additions                           |       | 3,782          |       | —             |       | 3,782      |       |
| Foreign currency  translation       |       | (636           | )          | —             |       | (636       | )          |
| Balance at  September 30, 2008 |       | $              | 10,441     |               | $          | 5,834      |       | $ | 16,275 |   |

 

Goodwill in the amount of $3.8 million was recognizedin the acquisition of ACC and is not deductible for Federal income taxpurposes.

 

**NOTE 9 – INCOME TAXES**

 

The effective taxrate for the three month period ended September 30, 2008 was differentthan the 34% U.S. statutory rate primarily because the Company’s foreignentities generate a tax obligation and related tax expense as a result of theirnet income, which cannot be offset by U.S. tax loss carryforwards.

 

The Company adopted FIN 48, *Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109*, on January 1, 2007. The implementationof FIN 48 did not result in a material adjustment to the Company’s liabilityfor unrecognized income tax benefits. At the time of adoption and as of September 30,2008, the Company had recorded no net unrecognized tax benefits.

 

The Company recognizes interest and penalties relatedto uncertain tax positions in interest expense and selling, general andadministrative expense, respectively, in the condensed consolidated statementsof operations and comprehensive income. No interest or penalties were recognizedduring the second quarter of 2008. As of September 30, 2008, the Companyhad $0 accrued for interest and penalties.

 

The Company files income tax returns in the U.S.federal jurisdiction, England, France and Japan, and in the state jurisdictionsof California, Texas, Pennsylvania and New Jersey. The Company is no longersubject to United States federal and state tax examinations for years before2004 and 2003, respectively, and is no longer subject to tax examinations forEngland and Japan for years prior to 2006, and for France for years prior to2004.

 

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**EMRISE CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 10 – FAIR VALUE MEASUREMENTS**

 

InSeptember 2006, the FASB issued SFAS No. 157, which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair valuemeasurements.  The effective date of thestatement is for all entities with fiscal years beginning after November 15,2007.  In February 2008, the FASBissued FSP No. 157-2, which delays the effective date of SFAS No. 157for non-financial assets and liabilities to fiscal years beginning after November 15,2008.  The delay pertains to itemsincluding, but not limited to, goodwill and other intangible assets.  The Company adopted the provisions of thestandard that were effective as of January 1, 2008.  The Company plans to adopt the remainingprovisions of SFAS No. 157 as of January 1, 2009.

 

SFASNo. 157 defines fair value as the price that would be received to sell anasset or paid to transfer a liability (an exit price) in an orderly transactionbetween market participants and also establishes a fair value hierarchy whichrequires an entity to maximize the use of observable inputs and minimize theuse of unobservable inputs when measuring fair value.  The fair value hierarchy distinguishes betweenthree levels of inputs that may be utilized when measuring fair value asfollows:

 

Level1 – Inputs are unadjusted quoted prices in active markets for identical assetsor liabilities available at the measurement date.

 

Level2 – Inputs are unadjusted quoted prices for similar assets and liabilities inactive markets, quoted prices for identical or similar assets and liabilitiesin markets that are not active, inputs other than quoted prices that areobservable, and inputs derived from or corroborated by observable market data.

 

Level3 – Inputs that are unobservable inputs which reflect the reporting entity’sown assumptions on what assumptions the market participants would use inpricing the asset or liability based on the best available information.

 

Asof September 30, 2008, the Company did not have financial assets andliabilities measured at fair value on a recurring basis that would be subjectto the disclosure provisions of SFAS No. 157.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

**CautionaryStatement**

 

The following discussion should be read in conjunctionwith our unaudited condensed consolidated financial statements and the relatednotes thereto contained in Part I, Item 1 of this Report. The informationcontained in this Quarterly Report on Form 10-Q is not a completedescription of our business or the risks associated with an investment in ourcommon stock. We urge you to carefully review and consider the variousdisclosures made by us in this Report and in our other reports filed with SEC,including our Annual Report on Form 10-K for the year ended December 31,2007 and subsequent reports on Forms 10-Q and 8-K, which discuss our businessin greater detail.  This report and thefollowing discussion contain forward-looking statements, which generallyinclude the plans and objectives of management for future operations, includingplans and objectives relating to our future economic performance and ourcurrent beliefs regarding revenues we might generate and profits we might earnif we are successful in implementing our business and growth strategies. Theforward-looking statements and associated risks may include, relate to or bequalified by other important factors, including, without limitation:

 

**·**                  the projected growth orcontraction in the electronic devices and communications equipment markets inwhich we operate;

**·**                  our strategies forexpanding, maintaining or contracting our presence in these markets;

**·**                  anticipated trends in ourfinancial condition and results of operations;

**·**                  our ability to distinguishourselves from our current and future competitors;

**·**                  our ability to secure longterm purchase orders;

**·**                  our ability to deliveragainst existing or future backlog;

**·**                  technical or qualityissues experienced by us, our suppliers and/or our customers;

**·**                  failure to comply withexisting or future government or industry standards and regulations;

**·**                  exposure to and impacts ofvarious international risks including legal, business, political and economicrisks associated with our international operations;

**·**                  our ability to adequatelyfund the working capital needs of the company

**·**                  our ability tosuccessfully locate, acquire and integrate any possible future acquisitions;

**·**                  our ability tosuccessfully dispose of our non-core assets and businesses;

**·**                  our ability tosuccessfully support the working capital needs of our company; and

**·**                  our ability tosuccessfully compete against competitors that in many cases are larger than us,have access to significantly more working capital than us and have significantresources in comparison to us.

** **

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

 

Any of the factors described above or in the “RiskFactors” section contained in our Annual Report on Form 10-K for the yearended December 31, 2007 or in the Risk Factors section contained withinthis Report could cause our financial results, including our net income or lossor growth in net income or loss to differ materially from prior results, which inturn could, among other things, cause the price of our common stock tofluctuate substantially.

 

**Business Description**

 

EMRISE designs, manufacturesand markets proprietary electronic devices and communications equipment foraerospace, defense, industrial, and communications applications. We haveoperations in the United States (“U.S.”), England, France and Japan.  We conduct our business through twooperating segments: electronic devices and communications equipment. Oursubsidiaries within our electronic devices segment design, develop, manufacture and market electronic devices for defense,aerospace and industrial markets.  Oursubsidiaries within our communications equipment segment design, develop,manufacture and market network access equipment including network timing andsynchronization products, for the communications industry.

 

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Our electronic devices segmentproduces a range of power systems, RF and microwave devices andelectromechanical switches.  Theelectronic devices segment is “project” driven with the majority of revenuesbeing derived from custom products with long life cycles and high barriers toentry.  The majority of manufacturing andtesting is performed in-house or through sub-contract manufacturers.  Our electronic devices are used in a widerange of military airborne, seaborne and land-based systems, in-flightentertainment systems, including the latest next generation in-flightentertainment and communications (“IFE&C”) systems – such as applicationsfor mobile phone, e-mail and internet communications and real time, on-boardsatellite and broadcast television – which are being retrofitted in existingcommercial aircraft and installed in today’s growing fleet of new commercialaircraft.

 

Our communications equipment segment produces a rangeof network access products including network timing and synchronizationproducts, for public and private communications customers.  The communications equipment segment is “enduser product” based with a traditional cycle of internally funded developmentand marketing prior to selling via direct and indirect sales channels.  Manufacturing is primarily outsourced.  Our communications equipment is used in abroad range of applications for military (including defense and homelandsecurity), utility companies and regional and national communications carriersas well as private communications networks.

 

**Acquisition of Advanced ControlComponents**

 

OnAugust 20, 2008, EMRISE Corporation and its wholly-owned subsidiary, EEC,acquired Custom Components, Inc. (“CCI”) and its operating subsidiary,Advanced Control Components, Inc. (“ACC”) for $12,400,000, subject toadjustments for working capital and net cash, pursuant to the terms of a StockPurchase Agreement dated May 23, 2008, as amended on August 20, 2008.

 

Advanced ControlComponents, Inc. ispart of our electronic devices segment. The company is a supplier ofhigh performance solid-state RF and microwave components and sub-systemsserving military, aerospace and instrumentation markets.

 

**Critical Accounting Policies**

** **

Our discussion and analysis of our financial conditionand results of operations is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the U.S. The preparation of these financial statements requires usto make estimates and judgments that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amount of net sales and expenses foreach period. The following represents a summary of our critical accounting policies,defined as those policies that we believe are the most important to theportrayal of our financial condition and results of operations and that requiremanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effects of matters that are inherentlyuncertain.

 

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

 

We derive revenues fromsales of electronic devices and communications equipment products andservices.  Our sales are based uponwritten agreements or purchase orders that identify the type and quantity ofthe item and/or services being purchased and the purchase price.  We recognize revenues when shipment ofproducts has occurred or services have been rendered, no significantobligations remain on our part, and collectability is reasonably assured basedon our credit and collections practices and policies.

 

We recognize revenuesfrom U.S. sales of our electronic devices and communications equipment at thepoint of shipment of those products.  Anestimate of warranty costs are recorded at the time the revenue isrecognized.  Product returns areinfrequent and require prior authorization because our sales are final and wequality test our products prior to shipment to ensure the products meet thespecifications of the binding purchase orders under which those products areshipped. Normally, when a customer requests and receives authorization toreturn a product, the request is accompanied by a purchase order for a repairor for a replacement product.

 

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

 

We recognize revenues forproducts sold by our French subsidiary at the point of shipment.  Customer discounts are included in theproduct price list provided to the customer. Returns are infrequent and permitted only with prior authorizationbecause these products are shipped based on binding purchase orders and arequality tested prior to shipment.  Anestimate of warranty costs are recorded at the time revenue is recognized.

 

Revenues from servicessuch as repairs and modifications are recognized when the service is completedand invoiced.  For repairs that involveshipment of a repaired product, we recognize repair revenues when the productis shipped back to the customer. Service revenues contribute less than 5% oftotal revenue and, therefore, are considered to be immaterial to overallfinancial results.

 

***Product Warranty Liabilities***

 

Generally, ourproducts carry a standard one-year, limited parts and labor warranty.  In certain circumstances, we provide atwo-year limited parts and labor warranty on our communications testinstruments and network access products. We offer extended warranties beyond two years for an additional cost toour customers.  Products returned underwarranty typically are tested and repaired or replaced at our option.  Historically, we have not experiencedsignificant warranty costs or returns.

 

We record aliability for estimated costs that we expect to incur under our basic limitedwarranties when product revenue is recognized. Factors affecting our warranty liability include the number of unitssold, historical and anticipated rates of claim and costs per claim.  We periodically assess the adequacy of ourwarranty liability accrual based on changes in these factors.

 

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

 

Our finished goods electronic devices inventoriesgenerally are built to order.  Ourcommunications equipment inventories generally are built to forecast, whichrequires us to produce a larger amount of finished goods in our communicationsequipment business so that our customers can be served promptly.  Our products consist of numerous electronicand other parts, which necessitates that we exercise detailed inventorymanagement.  We value our inventory atthe 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 cycle counts of inventories using an ABCinventory methodology, which groups inventory items into cycle countingcategories, or conduct physical inventories at least once a year.  We regularly review inventory quantities onhand and record a provision for excess and obsolete inventory based primarilyon our estimated forecast of product demand and production requirements for thenext 12 to 24 months. Additionally, to determine inventory write-downprovisions, we review product line inventory levels and individual items asnecessary and periodically review assumptions about forecasted demand andmarket conditions.  Any inventory that wedetermine to be obsolete, either in connection with the physical count or atother times of observation, are reserved for and subsequently written-off.  As of September 30, 2008, our totalinventory reserves amounted to $6.7 million of which $5.0 million, representing25% of total inventory, related to our electronic devices segment and $1.7million, representing 8% of total inventory, related to our communicationsequipment segment.

 

The communications equipment industry is characterizedby rapid technological change, frequent new product development, and rapidproduct obsolescence that could result in an increase in the amount of obsoleteinventory quantities on hand. The electronic devices industry is characterizedby the demand for long-term product stability and a rapidly changing market forthe components and materials we use in our products, which 

 

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could result in anincrease in the amount of obsolete inventory quantities on hand.  Also, our estimates of future product demandmay prove to be inaccurate, in which case we may have understated or overstatedthe provision required for excess and obsolete inventory. Although we makeevery effort to ensure the accuracy of our forecasts of future product demand,any significant unanticipated changes in demand or technological developmentscould have a significant impact on the value of our inventory and our reportedoperating results.

 

***Foreign Currency Translation***

 

We have foreign subsidiaries thattogether accounted for approximately 67.1% and 71.4% of our net revenues, 29.5%and 59.4% of our assets and 20.7% and 57.4% of our total liabilities as of andfor the nine months ended September 30, 2008 and 2007, respectively.  In preparing our consolidatedfinancial statements, we are required to translate the financial statements ofour foreign subsidiaries from the functional currencies in which they keeptheir accounting records into U.S. dollars. Assets and liabilities denominated in foreign currencies weretranslated into U.S. dollars (the reporting currency) at the exchange rateprevailing at the balance sheet date (“translation adjustments”). Equityaccounts denominated in foreign currencies were translated into U.S. dollars athistorical exchange rates. Revenues and expenses denominated in foreigncurrencies were translated into U.S. dollars at the monthly average exchangerate for the period.  Gains and lossesresulting from foreign currency transactions are included in the results ofoperations within our statement of operations under the caption “otherincome (expense).” Translationadjustments are reported as an element of other comprehensive income, which isa component of equity on the balance sheet.

 

Under relevant accounting guidance, the treatment ofthese translation gains or losses depends upon management’s determination ofthe functional currency of each subsidiary. This determination involvesconsideration of relevant economic facts and circumstances affecting thesubsidiary. Generally, the currency in which the subsidiary transacts amajority of its transactions, including billings, financing, payroll and otherexpenditures, would be considered the functional currency. However, managementmust also consider any dependency of the subsidiary upon the parent and thenature of the subsidiary’s operations.

 

If management deems any subsidiary’s functionalcurrency to be its local currency, then any gain or loss associated with thetranslation of that subsidiary’s financial statements is included as a separatecomponent of stockholders’ equity in accumulated other comprehensive income(loss).  However, if management deems thefunctional currency to be U.S. dollars, then any gain or loss associated withthe translation of these financial statements would be included in other income(expense) within our statement of operations.

 

If we dispose of any of our subsidiaries, anycumulative translation gains or losses associated with that entity would berealized into our statement of operations. If we determine that there has beena change in the functional currency of a subsidiary to U.S. dollars, then anytranslation gains or losses arising after the date of the change would beincluded within our statement of operations.

 

Based on our assessment of the factors discussedabove, we consider the functional currency of each of our internationalsubsidiaries to be each subsidiary’s local currency. Accordingly, we hadcumulative translation losses of $0.4 million and cumulative translation gainsof $1.1 million that were included as part of accumulated other comprehensiveincome within our balance sheets at September 30, 2008 and December 31,2007, respectively. During the three months ended September 30, 2008 and2007, we included a translation loss of $1.6 million and gain of $0.2 million,respectively, and during the nine months ended September 30, 2008 and 2007we included a translation loss of $1.4 million and gain of $0.3 million,respectively, under accumulated other comprehensive income.

 

If we had determined that the functional currency ofour subsidiaries was U.S. dollars, these gains or losses would have decreased or increased our net loss for thethree months ended September 30, 2008 and 2007. The magnitude of thesegains or losses depends upon movements in the exchange rates of the foreigncurrencies in which we transact business as compared to the value of the U.S.dollar. These currencies include the euro, the British pound sterling and, to alesser extent, the Japanese yen. Any future translation gains or losses couldbe significantly higher or lower than those we recorded for these periods.

 

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A 2.5 million British pound sterling loan payable by one of our subsidiaries in England toEMRISE Corporation was outstanding as of September 30, 2008 ($4.5 millionbased on the exchange rate at September 30, 2008).  Exchange rate losses and gains on thelong-term portion of this loan are recorded in cumulative translation gains orlosses in the equity section of the balance sheet.

 

***Intangibles, Including Goodwill***

 

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

 

In assessing potential impairment ofgoodwill, we consider these factors as well as forecasted financial performanceof the acquired businesses.  If forecastsare not met, we may have to record additional impairment charges not previouslyrecognized. In assessing the recoverability of our goodwill and otherintangibles, we must make assumptions regarding estimated future cash flows andother factors to determine the fair value of those respective assets. If theseestimates or their related assumptions change in the future, we may be requiredto record impairment charges for these assets that were not previouslyrecorded.  If that were the case, wewould have to record an expense in order to reduce the carrying value of ourgoodwill.  Under Statement ofFinancial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets*, weare required to analyze our goodwill for impairment issues at least annually ormore frequently if an event occurs or circumstances change that would morelikely than not reduce the fair value of a reporting unit below its carryingamount.  At September 30, 2008, ourreported goodwill totaled $16.3 million. During the nine months ended September 30, 2008, we did not record any impairment losses relatedto goodwill and other intangible assets.

 

**Overview**

 

The majority of our products are customized to theunique specifications of our customers and are subject to variable timing ofdelivery.  Shipments of products can beaccelerated or delayed due to many reasons including, but not limited to,exceeding or not meeting customer contract requirements, a change in customertiming or specifications, technology related issues and production relatedissues.  Comparability of our revenuesand gross profit is difficult from period to period as we typically do not haverecurring orders.  Exceptions to thisinclude U.S. government stocking orders, foreign military contracts and certainlong-term telecommunications contracts.

 

Overall sales increased 22% and 14% in the three andnine months ended September 30, 2008, respectively, as compared to thesame periods in 2007.  Included in thethree and nine months net sales results is approximately $1.7 million in netsales contributed as a result of our recent acquisition of ACC which wascompleted on August 20, 2008 and which accounted for a 13% and 5% increasein total net sales in the three and nine months ended September 30, 2008,respectively.  Sales for our electronicdevices segment were up strongly with increases in net sales generated by allof our electronic devices subsidiaries excluding RO Associates, whichexperienced a slight decline on a quarterly basis, but is up 11% on a year todate basis.  ACC’s $1.7 million in netsales in the period ended September 30, 2008, resulted in approximately a19% and 7% increase in sales for the electronic devices segment on a quarter todate and year to date basis, respectively. Sales for our communications equipment segment decreased 20% and 5% forthe three and nine month periods in 2008, respectively, as compared to the sameperiods in 2007.  The effect of exchangerates between the euro, British pound sterling and the U.S. dollar on thetranslation of our European operations had an unfavorable impact on the salesof both segments.  We expect to continueto experience quarter over quarter increases in sales for the remainder of 2008with total 2008 sales expectations exceeding $60 million, including theadditional contribution of net sales from our recent acquisition of ACC.  However, the impact of exchange rates remainsan uncertainty and could negatively or positively impact our overall revenueresults in future periods.

 

Overall gross margins increased to 40.1% and 37.4% inthe three and nine months ended September 30, 2008, respectively, from31.1% and 32.4% in the three and nine months ended September 30, 2007,respectively.  Gross margins were notsignificantly impacted on a quarter to date or year to date basis by theinclusion of ACC’s in our 2008 results. Rather, the significant improvement in gross margin is primarily due toimproved sales prices 

 

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of our products,improved efficiency in manufacturing and/or favorable changes in product mix,particularly at our U.S. electronic devices subsidiaries, where overall grossmargins increased to 40.3% and 36.2% on a quarter-to-date and year-to-datebasis, respectively compared to 28.6% and 30.8% a year ago.  Our communication equipment segment alsoexperienced improved gross margins increasing to 39.2% and 41% on aquarter-to-date and a year-to-date basis, respectively, compared to 37.4% and36.3% a year ago.  Overall margins wereimpacted unfavorably in the most recent quarter by the translation of foreignunit financial results from local (foreign) currencies to U.S. dollars due tothe large variability in exchange rate between the U.S. dollar, the Britishpound sterling and the euro compared to the prior year and prior quarters of2008.  We expect gross margin levels inthe fourth quarter of 2008 to be consistent with the third quarter of 2008,excluding the possible impact, favorable or unfavorable, of exchange rates onthe translation of foreign operating unit financial results.

 

We generated a profit inthe third quarter.  We attribute this tohigher sales levels, improved gross margins and reduced selling, general andadministrative, or SG&A, expenses in the quarter compared to a yearago.  Included within the quartersresults are certain one-time restructuring costs, partially offset by a gain onthe sale of certain non-core assets, which together had a negative impact ofapproximately $0.1 million on the quarter’s results.  Furthermore, we are encouraged by the factthat despite our recent acquisition of ACC having contributed only 40 days toour third quarter results, we were able to offset the additional interest cost associatedwith the acquisition of ACC with even higher pretax net income that ACCcontributed in the same short period.  Net income for the quarter improved to $0.3million, or $0.01 per share, from a net loss of $0.5 million, or $0.01 loss pershare, for the third quarter of 2007.

 

The following is a more detailed discussion of ourresults of operations by segment.

 

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**Results of Operations**

 

***Comparisonof the Three Months Ended September 30, 2008 to the Three Months Ended September 30,2007***

 

**Net Sales**

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|---------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**   | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                      |       |                             |       |                             |       |   |   |   |   |
| Electronic  devices       |       | $                                | 12,524     |                             | $          | 8,872 |   | $ | 3,652 |   | 41.2 | % |
| *as % of  net sales*      | * *   | *79.8*                           | *%*        | *69.3*                           | *%*        | * * | * * | * * | * * |
| Communications  equipment |       | 3,163                            |       | 3,937                            |       | (774 | ) | (19.7 | )% |
| *as % of  net sales*      | * *   | *20.2*                           | *%*        | *30.7*                           | *%*        | * * | * * | * * | * * |
| Total net sales           |       | $                                | 15,687     |                             | $          | 12,809 |   | $ | 2,878 |   | 22.5 | % |

 

*Electronic Devices Segment*

 

Net sales of ourelectronic devices were up 41% in the third quarter of 2008 as compared to sameperiod in 2007.  Included within the 2008quarterly results is approximately $1.7 million of net sales contributed byACC, which we acquired on August 20, 2008. Excluding this amount, the remaining $2.4 million or 24% increase wasthe result of higher sales at all of our electronic device subsidiaries,excluding RO Associates, which experienced a slight decline on a quarterlybasis, but is up 11% on a year to date basis. All of our other electronic device units experienced significantincreases in net sales ranging from 20% to 80% higher as compared to the samequarter a year ago.  In particular, ourDigitran division shipped over $1.0 million of additional product during thethird quarter of 2008 compared to the third quarter of 2007, which representsan 80% increase in quarterly net sales for that division.  The higher shipments were primarily theresult of higher levels of shipments of U.S. government orders for digitalswitches to satisfy our existing backlog for the Defense Logistics Agency, orDLA.  In addition, Pascall, shippednearly $0.9 million in additional product, which represents approximately a 22%increase as compared to the same quarter a year ago and is primarily due tohigher shipments of new IFE&C products.

 

The effect of exchange rates between the euro and theU.S. dollar and the British pound sterling and the U.S. dollar on thetranslation of our European operations into U.S. dollars had an unfavorableimpact on the third quarter net sales of all our European subsidiaries ascompared to the prior year and earlier periods in 2008. The translation impactof exchange rates remains an uncertainty and could negatively or positivelyimpact our overall results in future periods.

 

Going forward, we expect that sales of electronicdevices during the fourth quarter of 2008 will be higher than the level ofsales we reported for the third quarter of 2008, driven primarily by thecontribution of a full quarter of sales from ACC as compared to only 40 days ofnet sales in the third quarter of 2008. Excluding ACC, we expect fourth quarter 2008 net sales to be higher thanthe fourth quarter of 2007.  Changes inthe current economic and/or political climate could negatively impact ourfuture net sales expectations.

 

*Communications Equipment Segment*

 

The decrease in sales of our communications equipmentin the third quarter of 2008 as compared to 2007 was due primarily to a declinein sales at our French subsidiary as the result of temporary spendingreductions by the French Defense ministry which have resulted in a short-termreduction of orders and shipments for communication and networkingproducts.  The decline in French sales isworsened in the third quarter of 2008 by the unfavorable translation impact ofrecent fluctuations in 

 

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exchange ratesbetween the euro and the U.S. dollar as compared to the third quarter of2007.  Sales at our U.S. communicationssubsidiary were also down compared to the same quarter a year ago, primarilydue to a reduction in orders as we transition from our lower volume lowermargin legacy products to our higher growth, higher margin products, namelyTiempoTM.

 

We expect that sales ofour communications equipment at both our French and U.S. subsidiaries willimprove during the fourth quarter of 2008 as this is traditionally a strongquarter for communications equipment. Furthermore, in the U.S., we expect higher shipments of our TiemPoTM productsand test equipment in the fourth quarter and throughout early 2009 to satisfyexisting backlog and expected higher order entry in the fourth quarter.  We expect that sales at our French subsidiarywill increase slightly also as a result of satisfying existing backlog andexpected increased order entry, especially due to higher international sales.  However, the softening of demand in Franceassociated with temporary budget reductions by the French Defense ministrycombined with the current economic and political climate could negativelyimpact our future net sales expectations for communication equipment in bothFrance and the U.S.  In addition, the translationimpact of exchange rates remains an uncertainty and could negatively orpositively impact our overall revenues in future periods.

 

**Gross Profit**

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|---------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**   | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                      |       |                             |       |                             |       |   |   |   |   |
| Electronic  devices       |       | $                                | 5,069      |                             | $          | 2,538 |   | $ | 2,531 |   | 99.7 | % |
| *as a % of  net sales*    | * *   | *40.5*                           | *%*        | *28.6*                           | *%*        | * * | * * | * * | * * |
| Communications  equipment |       | 1,239                            |       | 1,473                            |       | (234 | ) | (15.9 | )% |
| *as a %  of net sales*    | * *   | *39.2*                           | *%*        | *37.4*                           | *%*        | * * | * * | * * | * * |
| Total gross  profit       |       | $                                | 6,308      |                             | $          | 4,011 |   | $ | 2,297 |   | 57.3 | % |
| *Total  gross margin*     | * *   | *40.2*                           | *%*        | *31.3*                           | %          |   |   |   |   |

 

*Electronic Devices Segment*

 

Gross profit within ourelectronic devices segment increased by $2.5 million, or 100%, during the thirdquarter as compared to the same quarter a year ago.  Included within the 2008 quarterly results isapproximately $629,000 of gross profit contributed by ACC.  Excluding this amount, the remaining $1.9million or 75% increase in gross profit was the result of substantial grossmargin improvements from all of our electronic device subsidiaries, due to acombination of improved selling prices on products, improved efficiency inmanufacturing and/or favorable changes in product mix.   In particular, our Digitran divisioncontributed nearly $1.2 million in additional gross profit as compared to thethird quarter of 2007 and higher than normal gross margin for the quarter dueto the large number of shipments to the DLA of higher margin digitalswitches.  Of significance is the factthat the quarterly gross margin for this segment improved from 29% a year agoto 40%, excluding the impact of ACC, reflecting an overall gross marginimprovement at all of our electronic devices business units.

 

Going forward, we expectthat overall gross margins in the electronic devices segment will be similar tothose reported during the third quarter of 2008.  The impact of Digitran will be slightly less,but we believe that any decrease at Digitran will be offset by the full quarterimpact of ACC’s gross profit contribution as compared to only 40 days of grossprofit contribution during the third quarter 2008.  However, we may experience quarter to quartervariability due to product mix differences and also due to changes in exchangerates between the euro, British pound sterling and U.S. dollar.  In addition, changes in the current economicand/or political climate could negatively impact our future gross profitexpectations.

 

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*Communications Equipment Segment*

 

Although the gross profitfor our communications equipment decreased slightly in absolute dollars duringthe quarter (due, in part, to the impact of unfavorable exchange rates on thetranslation of foreign sales into U.S. dollars as previously discussed), grossprofit as a percentage of sales of our communications equipment segmentincreased from 37.4% in the third quarter of 2007 to 39.2% in the third quarterof 2008.  Despite lower overall netsales, gross margin at our U.S. subsidiary remained relatively consistent withthe prior year period due to increased sales of our higher margin TiemPoTM products, whilegross margin at our French subsidiary increased by nearly four percentagepoints driven by increased sales of higher margin fiber optic modems and afavorable euro/U.S. dollar ratio due to the fact that certain productcomponents are purchased in U.S. dollars by our French subsidiary.

 

We expect the trend ofquarter over quarter improvement in gross profit (both in dollars and as apercentage of sales) for our communications equipment segment to continuethroughout 2008, although as previously discussed, we do experience volatilityin gross profit from quarter to quarter due to changes in product mix, timingof shipments and also due to changes in exchange rates between the euro and theU.S. dollar.  The softening of demand inFrance for communication equipment associated with temporary budget reductionby the French Defense ministry as well as the current economic and/or politicalclimate could negatively impact our future gross profit expectations.  In addition, the translation impact ofexchange rates remains an uncertainty and could negatively or positively impactour overall gross profit results in future periods.

 

**Operating Expenses**

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**              | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                 |       |                             |       |                             |       |   |   |   |   |
| Selling, general  and administrative |       | $                                | 4,058      |                             | $          | 3,796 |   | $ | (262 | ) | (6.9 | )% |
| *as % of  net sales*                 | * *   | *25.9*                           | *%*        | *29.6*                           | *%*        | * * | * * | * * | * * |
| Engineering and  product development |       | 659                              |       | 692                              |       | 33 |   | 4.8 | % |
| *as % of  net sales*                 | * *   | *4.2*                            | *%*        | *5.4*                            | *%*        | * * | * * | * * | * * |
| Total operating  expenses            |       | $                                | 4,717      |                             | $          | 4,488 |   | $ | (229 | ) | (5.1 | )% |

 

*Selling, general andadministrative expenses*

 

The increase in SG&Aexpenses is primarily the result of the addition of ACC’s SG&A expenses,which totaled $0.4 million for the 40 days during the quarter that we ownedACC.  Excluding this amount, SG&Aexpenses during the third quarter decreased slightly compared to the prioryear, despite a 22% increase in sales reflecting higher selling expenses duringthe same period.  Our French subsidiaryhas incurred and will continue to incur slightly higher selling expenses in2008 as compared to 2007 associated with a plan to increase U.S. sales, whichbegan in the third quarter of 2008.

 

During the fourth quarterof 2008, we expect SG&A expenses to increase as a result of incurring afull quarter of expenses from ACC compared to only 40 days in the third quarter2008.  In addition, during the remainderof the year and during early 2009, we will likely incur additional costs inconnection with the remediation of certain internal control deficiencies andmaterial weaknesses that were identified as a result of our 2007 managementassessment pursuant to the Sarbanes-Oxley Act of 2002.  We are currently in the process implementingspecific action plans in that regard.  Inaddition, we will likely be incurring additional costs associated with our 2008management assessment pursuant to the Sarbanes-Oxley Act of 2002.  We estimate the 

 

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cost to implement such remediation plans and the costs to conduct our2008 management assessment to be between $0.2 million and $0.4 million, most ofwhich will be spread between the fourth quarter of 2008 and the first half of2009, with the majority of this expense being incurred in 2009.  We cannot provide assurance that the actualcosts to remediate these deficiencies and/or to conduct our 2008 managementassessment will not exceed this amount.

 

*Engineering and productdevelopment*

 

Quarterly engineering andproduct development costs remained relatively flat compared to the prioryear.  We continue to invest in theevolution of the TiemPoTM family of products and support other ongoing newproduct initiatives in our various product lines which we anticipate couldincrease our quarterly engineering and development costs by $0.1 million to$0.2 million in future quarters as compared to 2008 quarterly spending levels.

 

**Interest expense**

 

Interest expense was $0.8 million for the three monthsended September 30, 2008 compared to $0.2 million for the three monthsended September 30, 2007 due to higher outstanding loan and line of creditbalances, higher interest rates associated with our new credit facility enteredinto in November 2007 and the additional debt incurred in connection withthe acquisition of ACC.

 

We expect quarterlyinterest to peak in the fourth quarter of 2008 as a result of incurring a fullquarter’s interest expense on our new acquisition debt as compared to only 40days worth of interest in the third quarter of 2008.  We expect that our fourth quarter interestexpense levels will gradually decrease throughout 2009 due to scheduled term notepayments to our lender, which are scheduled to begin in the fourth quarter of2008 and will continue throughout 2009 and 2010.  See “Liquidity and Capital Resources” discussionand footnotes to financial statements.

 

**Other income (expense)**

 

We reported other expenseof $0.2 million for the three months ended September 30, 2008 compared toother income of $0.3 million in the third quarter of 2007.  Other income (expense) typically consistsprimarily of short-term exchange rate gains or losses associated with thevolatility of the U.S. dollar to the British pound sterling and euro on thecurrent portion of certain assets and liabilities.  Other income for the third quarter of 2007also included a one-time accrual reversal related to the satisfactoryresolution of a legal dispute at our French subsidiary.  Other expense for the third quarter of 2008also included certain one-time restructuring costs, partially offset by a gainon the sale of certain in non-core assets, which together had a negative impactof approximately $0.1 million on the quarterly results.

 

**Income tax expense (benefit)**

 

Income tax benefitamounted to $4,000 for the three months ended September 30, 2008 comparedto income tax expense of $151,000 for the same period of 2007.  Our income tax expense is primarily theresult of foreign income tax on foreign earned profits.  During the second quarter of 2008, we recordedan income tax benefit at two of our foreign operations related to the reclassificationof deferred tax items to current as a result of changes in foreign tax rules,which resulted in a lower effective tax rate in the second quarter of 2008compared to the same period of 2007.

 

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***Comparisonof the Nine months Ended September 30, 2008 to the Nine months Ended September 30,2007***

 

**Net Sales**

 
| ** **                | ** ** | **Nine Months Ended** | ** ** | **Variance**                     | ** ** |
|---------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**   | ** ** | **2008**                        | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                      |       |                            |       |                             |       |   |   |   |   |
| Electronic  devices       |       | $                               | 31,598     |                             | $          | 25,839 |   | $ | 5,759 |   | 22.3 | % |
| *as % of  net sales*      | * *   | *75.3*                          | *%*        | *70.2*                           | *%*        | * * | * * | * * | * * |
| Communications  equipment |       | 10,385                          |       | 10,959                           |       | (574 | ) | (5.2 | )% |
| *as % of  net sales*      | * *   | *24.7*                          | *%*        | *29.8*                           | *%*        | * * | * * | * * | * * |
| Total net sales           |       | $                               | 41,983     |                             | $          | 36,798 |   | $ | 5,185 |   | 14.1 | % |

 

*Electronic Devices Segment*

 

Net sales of ourelectronic devices were up 22% for the first nine months of 2008 as compared tothe same period in 2007.  Included withinthe 2008 results is approximately $1.7 million of net sales contributed by ACC,which represents approximately 7% of the 22% increase.  Excluding this amount, the remaining $4.0million, or 15%, increase was the result of higher sales at all of ourelectronic device subsidiaries, excluding Xcel Power Systems in the U.K., whoseyear to date sales remained approximately equal to the prior year sales.  In particular, our Digitran division shippedover $1.5 million of additional product during the first nine months of 2008 ascompared to 2007, which represents over a 34% increase in year-to-date netsales for that division.  The higherDigitran shipments were primarily the result of higher levels of shipments ofU.S. government orders for digital switches to satisfy our existing backlog forthe DLA.  In addition, Pascall shippednearly $2.1 million in additional product during the nine months ended September 30,2008 compared to 2007, which represents a 19% increase and is primarily due tohigher shipments of new IFE&C products.

 

The effect of exchange rates between the euro and theU.S. dollar and the British pound sterling and the U.S. dollar on thetranslation of our European operations local currency results into U.S. dollarshad an unfavorable impact on the third quarter net sales of all our Europeansubsidiaries as compared to the prior year and earlier periods in 2008. Theimpact of exchange rates remains an uncertainty and could negatively orpositively impact our overall results in future periods.

 

*Communications Equipment Segment*

 

The decrease in net salesof our communications equipment for the nine months ended September 30, 2008,as compared to the same period for 2007 is primarily due to a delay in our U.S.subsidiary fiber optic modem sales during the first quarter of 2008 as a resultof required reengineering, which product shipments did resume in the secondquarter of 2008, and temporary spending reductions by the French DefenseMinistry for communication and networking products at our French subsidiary.  These declines were partially offset by thefavorable impact in the first half of 2008 of the fluctuations in exchangerates between the euro and the U.S. dollar over the prior year period.

 

The translation effect of exchange rates in Francebetween the euro and the U.S. dollar has had both favorable and unfavorableimpacts on the quarterly results of our French subsidiary at various timesthroughout 2008. The translation impact of exchange rates remains anuncertainty and could negatively or positively impact our overall results infuture periods.

 

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**Gross Profit**

 
| ** **                | ** ** | **Nine Months Ended** | ** ** | **Variance**                     | ** ** |
|---------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**   | ** ** | **2008**                        | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                      |       |                            |       |                             |       |   |   |   |   |
| Electronic  devices       |       | $                               | 11,452     |                             | $          | 7,961 |   | $ | 3,491 |   | 43.9 | % |
| *as a %  of net sales*    | * *   | *36.2*                          | *%*        | *30.8*                           | *%*        | * * | * * | * * | * * |
| Communications  equipment |       | 4,254                           |       | 3,974                            |       | 280 |   | 7.0 | % |
| *as a %  of net sales*    | * *   | *41.0*                          | *%*        | *36.3*                           | *%*        | * * | * * | * * | * * |
| Total gross  profit       |       | $                               | 15,706     |                             | $          | 11,935 |   | $ | 3,771 |   | 31.6 | % |
| *Total  gross margin*     | * *   | *37.4*                          | *%*        | *32.4*                           | %          |   |   |   |   |

 

*Electronic Devices Segment*

 

Gross profit within ourelectronic devices segment increased by $3.5 million, or 44%, during the ninemonths ended September 30, 2008 as compared to the same period a yearago.  Included within the nine monthsresults is approximately $0.6 million of gross profit contributed by ACC.  Excluding this amount, the remaining $2.9million, or 36%, increase in year-to-date gross profit was the result of grossmargin improvements from all of our electronic device subsidiaries exceptPascall.  Although Pascall’s thirdquarter gross margins were up as compared to the third quarter a year ago, itsyear-to-date gross margin is relatively flat compared to the prior year due toincreased shipments earlier in the year of lower margin, higher volume newIFE&C products, which is consistent with our strategy to penetrate thelower margin, high growth commercial in-flight entertainment market in aneffort to improve overall sales growth and higher profitability. The improvedgross margins at our other subsidiaries were due to a combination of improvedselling prices on products, improved efficiency in manufacturing and/or favorablechanges in product mix.  In particular,our Digitran division contributed nearly $1.6 million in additional grossprofit during the first nine months of 2008 as compared to the same period in2007 and achieved a higher than normal gross margin during the third quarterdue to the high number of shipments to the DLA of higher margin digitalswitches.  Of some significance is thefact that the year-to-date gross margin for the segment improved from 31% to36%, even excluding the impact of ACC, reflecting the overall gross marginimprovement at all of our electronic devices business units.

 

*Communications Equipment Segment*

 

The increase in grossmargin for our communications equipment from 36% during the first nine monthsof 2007 to 41% during the first nine months of 2008 is the result ofyear-to-date gross margin improvements at both our U.S. subsidiary and ourFrench subsidiary, both of which increased by approximately four percentagepoints, driven by increased sales of TiempoTM and higher margin fiber optic modem products,respectively.  In addition, France hasbenefited from a favorable euro/U.S. dollar ratio in the first nine months of2008, as a result of certain raw materials purchases denominated in U.S.dollars.

 

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**Operating Expenses**

 
| ** **                           | ** ** | **Nine Months Ended** | ** ** | **Variance**                     | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30,**          | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in thousands)**              | ** ** | **2008**                        | ** ** | **2007**                         | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                 |       |                            |       |                             |       |   |   |   |   |
| Selling, general  and administrative |       | $                               | 12,039     |                             | $          | 11,381 |   | $ | (658 | ) | (5.8 | )% |
| *as % of  net sales*                 | * *   | *28.7*                          | *%*        | *30.9*                           | *%*        | * * | * * | * * | * * |
| Engineering and  product development |       | 2,105                           |       | 2,067                            |       | (38 | ) | (1.8 | )% |
| *as % of  net sales*                 | * *   | *5.0*                           | *%*        | *5.6*                            | *%*        | * * | * * | * * | * * |
| Total operating  expenses            |       | $                               | 14,144     |                             | $          | 13,448 |   | $ | (696 | ) | (5.2 | )% |

 

*Selling, general andadministrative expenses*

 

The increase in SG&Aexpenses is largely the result of the addition of ACC’s SG&A expenses,which totaled $0.4 million for the 40 days during the quarter that we ownedthem.  Excluding this amount, year todate SG&A expenses increased $0.3 million, or 3%, as compared to the prioryear.  Because we have certain variableselling expenses that trend up or down with sales, to have an increase such asthis during the period when sales increased by 14% is not unusual.  In addition, our French communicationsequipment subsidiary has incurred and will continue to incur slightly higherselling expenses in 2008 as compared to 2007 associated with their plan toincrease sales of their products in the U.S., which began in the third quarterof 2008, and higher selling expenses associated with higher internationalsales.  

 

*Engineering and productdevelopment*

 

Engineering and productdevelopment costs remained relatively flat in the first nine months of 2008compared to the prior year.  We continueto invest in the evolution of the TiemPoTM family of products and support otherongoing new product initiatives in our various product lines which weanticipate could increase our quarterly engineering and development costs by$0.1 million to $0.2 million in future quarters as compared to 2008 quarterlyspending levels.

 

**Interest expense**

 

Interest expense was $2.0 million for the nine monthsended September 30, 2008 compared to $0.5 million for the nine monthsended September 30, 2007 due to higher outstanding loan and line of creditbalances, higher interest rates associated with our new credit facility enteredinto in November 2007 and the additional debt incurred in connection withacquisition of ACC.  Included in interestexpense in the first nine months of 2008 were approximately $0.7 million ofunused line fees, non-cash amortization of deferred financing costs andnon-cash amortization of debt discount related to issuance costs for the creditfacility.  Approximately $0.3 million ofthis amount was associated with our $10 million acquisition term loan, whichwas incurred without the benefit of an acquisition until the last 40 days ofthe third quarter.

 

**Other income (expense)**

 

Our other income andexpense for the nine months ended September 30, 2008 amounted to otherexpense of $0.1 million compared to other income of $0.5 million during thesame period in 2007.  Other income(expense) in both years included short-term exchange rate gains and/or losses,associated with the volatility of the U.S. dollar to the British pound sterlingand euro on the current portion of certain assets and liabilities.  Other income for the first nine months of 2007also included a one-time accrual reversal related to the satisfactoryresolution of a legal dispute at our French subsidiary.  Other expense for the first nine months of2008 also included certain one-time restructuring costs incurred in the thirdquarter of 2008, partially offset by a gain on the sale of certain non-coreassets.

 

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**Income tax expense (benefit)**

 

Income tax expenseamounted to $0.4 million for the nine months ended September 30, 2008compared to $0.5 million for the same period of 2007.  Income tax expense is primarily the result offoreign income tax on foreign earned profits. During the second quarter of 2008 we recorded an income tax benefit attwo of our foreign operations related to the reclassification of deferred taxitems to current as a result of changes in foreign tax rules, which resulted ina decrease in the overall effective tax rate for the nine months ended September 30,2008 compared to the nine months ended September 30, 2007.

 

**Liquidityand Capital Resources**

 

In making an assessment of our liquidity, we believethat the items in our financial statements that are most relevant are ourworking capital, cash generated from our operating activities and cashavailable from our financing activities. During the nine months of 2008, we funded our daily cash flowrequirements through funds provided by operations and through borrowings fromour credit facility with GVEC Resource IV Inc., or Lender, an affiliate ofPrivate Equity Management Group LLC. Working capital was $16 million at September 30, 2008 as comparedto $16.1 million at December 31, 2007. September 30, 2008 working capital balances include the followingchanges associated with the acquisition of ACC: approximately $5 million inadditional current assets offset by $1.8 million in additional currentliabilities and $3.7 million in incremental short term debt.  At September 30, 2008 and December 31,2007, we had accumulated deficits of$21.5 million and $20.7 million, respectively, andcash and cash equivalents of $5.3million and $4.8 million, respectively.

 

Net of the effects from the acquisition of ACC, netcash used in operating activities during the nine months ended September 30,2008 totaled $0.6 million as compared to $1.6 million in the nine months ended September 30,2007.  Excluding non cash expenses, wegenerated approximately $1.2 million of cash through our operations during thefirst nine months of 2008 and used approximately $1.8 million to reduceaccounts payable and accrued expenses during the same period, reflecting anintentional effort to reduce accrued expenses and payables during the firstnine months of 2008.

 

During the first nine months of 2008we paid cash of $12.4 million in connection with the acquisition of ACC.  During the same period, we increasedborrowings by $14.8 million, including $13 million of new debt issued inconnection with the acquisition of ACC and net borrowings of $1.8 million onour revolving line of credit, offset by $0.5 million in payments on otherlong-term debt.

 

As of September 30,2008, we had outstanding borrowings of $5.8 million under our revolving line ofcredit with remaining actual and contractual availability under a formula-basedcalculation of $1.2 million.  Actualremaining availability represents the additional amount we were eligible toborrow as of September 30, 2008, based on available eligible collateraland pre-determined advance rates on such collateral. Maximum contractualavailability represents the maximum amount of availability provided under thecredit facility as of that date.

 

In addition to the revolving line of credit, at September 30,2008, we had long-term loans, acquisition debt and capitalized lease andequipment loan obligations totaling $19.5 million, the current portion of whichloans and obligations totaled $5.0 million.

 

Our backlog increased to $40.9million as of September 30, 2008 comparedto $25.3 million as of December 31, 2007. The amount of backlog ordersrepresents revenue that we anticipate recognizing in the future, as evidencedby purchase orders and other purchase commitments received from customers, buton which work has not yet been initiated or with respect to which work iscurrently in progress. Our backlog as of September 30, 2008 wasapproximately 96% related to our electronic devices business, which businesstends to provide us with long lead-times for our manufacturing processes due tothe custom nature of the products, and approximately 4% related to ourcommunications equipment business, which business tends to deliver standard ormodified standard products from stock as orders are received. We believe thatthe majority of our current backlog will be shipped 

 

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within the next 12 months.  However,there can be no assurance that we will be successful in fulfilling such ordersand commitments in a timely manner or that we will ultimately recognize asrevenue the amounts reflected as backlog.

* *

On November 30, 2007, we and our directsubsidiaries, EEC, CXR Larus and RO Associates entered into a Credit Agreementwith the Lender, providing for a three-year credit facility in the aggregateamount of $23,000,000 whichis secured by accounts receivable, other rights to payment and generalintangibles, inventories and equipment. On August 20, 2008, in connection with the acquisition of ACC andCCI, we amended the credit facility to include ACC and CCI as borrowers and to,among other things, include a term loan in an outstanding principal amount of$3,000,000 (the “Term Loan C”).  Thecredit facility now provides for a three year credit facility in the aggregateamount of $26,000,000..

 

The credit facility consists of (i) a one yearrevolving loan for up to $7,000,000 that may be extended for up to three years(the “Revolver”), (ii) a three year term loan in an outstanding principalamount of $6,000,000 which was fully funded on November 30, 2007 (“TermLoan A”), (iii) a term loan in the amount of $10,000,000 (“Term Loan B”),and (iv) a term loan in the amount $3,000,000 (“Term Loan C”).  Term Loans B and C were fully funded on August 20,2008 in connection with the acquisition of ACC. Term Loan B requires scheduled payments commencing June 2009 andregular payments thereafter until the loan is paid in full in November 2010.  Term Loan C must be paid in full by February 15,2009.

 

The Revolver is formula-based and generally providesthat the outstanding borrowings under the line of credit may not exceed anaggregate of 85% of eligible accounts receivable, plus 10% of the value ofeligible raw materials not to exceed $600,000, plus 50% of the value ofeligible finished goods inventory not to exceed $1,500,000, minus the aggregateamount of reserves that may be established by the Lender.

 

Interest on the Revolver is payable monthly.  The interest rate is variable and is adjustedmonthly based on prime rate as published in the “Money Rates” column of *The Wall Street Journal* (the “Base Rate”) plus 1.25%,subject to a minimum rate of 9.5%.  TheRevolver is subject to various financial covenants on a consolidated basis,including the following:  EBITDA,measured on a fiscal quarter-end basis, must not be less than the scheduledamount for each specified period; the debt service coverage ratio, measuredquarterly, must be greater than the lesser of the scheduled amount for eachspecific period or 1.10:1.00; and the leverage ratio, measured quarterly, mustnot be greater than the scheduled amount for each specified period. Additionally, the Revolver is subject to the borrowers not incurring capitalexpenditures (a) in excess of $1,000,000 for the fiscal year ending December 31,2008, and (b) in excess of $1,500,000 in each fiscal yearthereafter.  Funding of the Revolver is also contingent upon the borrowersnot incurring capital expenditures in excess of $1,500,000 during the periodcommencing January 1, 2008 until all obligations owed with respect to theTerm Loan C have been satisfied in full.

 

The Term Loans A and B bear interest at the Base Rateplus 4.25%, subject to a minimum rate of 12.5%, and require interest onlypayments in the first year, scheduled principal plus interest payments in yearstwo and three, and a final balloon payment at the end of year three.  Term Loan C bears interest at the rate of 14%per annum.  Interest on the term loans ispayable monthly.  The borrowers may makefull or partial prepayment of the Term Loans provided that any such prepaymentis accompanied by the applicable prepayment premium discussed below.

 

If the Lender terminates the credit facility during adefault period or if we prepay the Revolver or the Term Loans prior to thescheduled maturity dates, then we are subject to penalties as follows: if thetermination or prepayment occurs during the one year period after November 30,2007, the penalty is equal to 3% of the outstanding principal balance of theRevolver and the Term Loans; if the termination or prepayment occurs duringsecond year after November 30, 2007, the penalty is equal to 2% of theoutstanding principal balance of the Revolver and the Term Loans.  TheRevolver and the Term Loan B are subject to an unused line fee of 0.5% perannum, payable monthly, on any unused portion of the revolving credit facilityand the loan, respectively.

 

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To secure payment of the indebtedness of borrowersunder the credit facility, the borrowers irrevocably pledged and assigned to,and granted to the Lender a continuing security interest in all the personalproperty of the borrowers including the borrowers’ interest in any depositaccounts, the stock of each of the borrowers’ subsidiaries, the intellectualproperty owned by each of the borrowers, and the proceeds of the intellectualproperty owned by each of the borrowers. In an event of default, the Lender may, at its option, exercise any orall remedies available to it with respect to the collateral.  In addition, certain of the borrowers’foreign subsidiaries have agreed to guaranty the borrowers’ performanceunder the credit facility.

 

Our Term Loan C, in the principal amount of $3million, must be repaid by no later than February 15, 2009.  In order to facilitate the repayment of ourTerm Loan C, we have also agreed with our Lender to raise at least $5 millionin net proceeds through either the sale of assets of EMRISE Corporation or anyof our subsidiaries or through the sale of equity of EMRISE Corporation by nolater than February 15, 2009.  We do notbelieve that our cash on hand and/or cash generated from operations will besufficient to repay the Term Loan C at its stated maturity date.  Therefore, we expect to use all or a portionof the net proceeds from the sale of assets and/or equity to repay our TermLoan C.  If we elect to sell assets, theremaining proceeds from such sale after repayment of the Term Loan C, if any,must be used to repay a portion of the principal of Term Loan B pursuant to theterms of our credit facility, which requires that the cash proceeds from anyvoluntary or involuntary sale or disposition by us or any of our subsidiariesof property or assets (other than sales or dispositions of inventory or equipmentin the ordinary course of business) in excess of $150,000 in any fiscal yearmust be used to repay the Term Loans.  

 

Although we are currently evaluating a number ofoptions to meet these various obligations under our credit facility, ourpreference is to sell non-core assets. We believe that the sale of non-core assets will streamline operations,strengthen our focus on core growth and will help to reduce the debt andinterest expense related to our recent acquisition of ACC.  By lowering our interest expense throughreduced borrowings, we believe we can reduce our financial risk, provide astronger balance sheet and achieve improved liquidity.  Given current market conditions and thetrading price of our common stock, an equity raise could prove difficult tostructure.  Even if we were successful instructuring an equity raise acceptable to us and our Lender, it would mostlikely result in substantial dilution to our stockholders.

 

If we are unable to repay our Term Loan C by February15, 2009 and/or we are unsuccessful in raising $5 million through the sale ofassets or equity by that same date, then we would be in default under the termsof our credit facility.  In the event ofa default and continuation of a default, the Lender may limit future availabilityunder our revolving line of credit and/or accelerate the payment of allprincipal balances and accrued interest requiring us to pay the entireindebtedness under our credit facility outstanding on that date.  Upon the occurrence and during the continuationof an event of default, the Lender may also elect to increase the interest rateapplicable to the outstanding balance of the Term Loans A and B by fourpercentage points above the per annum interest rate that would otherwise beapplicable and increase the rate applicable to the Term Loan C to a per annuminterest rate of 24%.  Any of theseconditions could have a material adverse effect on our operations and/orability to conduct business after that date. 

 

If we are successful in raising the $5 million in netproceeds through the sale of assets or equity prior to February 15, 2009,thereby satisfying our capital raise requirements under the credit facility andproviding us with sufficient net proceeds to repay the Term Loan C, then webelieve that current and future capital resources, revenues generated fromoperations and other existing sources of liquidity, including amounts availableunder the credit facility, will be adequate to meet our anticipated short term,working capital and capital expenditures needs for at least the next 12months.  However, if we experience asignificant loss of revenue or increase in costs, our cash flow could benegatively impacted resulting in a cash flow deficit which, in turn, mayrequire us to obtain additional or alternate financing.  These potential financing needs could be metin the form of a revised debt structure with our Lender, new financing withanother lender or lenders, the sale of certain assets to generate cash or thesale of additional equity to raise capital.  Our failure to secure additional or alternatefinancing, if needed, could have an adverse affect on our operations and/orability to do business after that date or could restrict our growth, limit ourdevelopment of new products, or hinder our ability to fulfill existing orfuture orders.

 

**Effectsof Inflation**

 

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

 

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**Impactsof New Accounting Pronouncements**

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities*. SFAS No. 159 permits an entity toirrevocably elect fair value on a contract-by-contract basis as the initial andsubsequent measurement attribute for many financial assets and liabilities andcertain other items including insurance contracts. Entities electing the fairvalue option would be required to recognize changes in fair value in earningsand to expense upfront cost and fees associated with the item for which thefair value option is elected. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. The adoption of SFAS No. 159did not have a material effect on our financial condition or results of operations.

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. This newstatement provides a single definition of fair value, together with a frameworkfor measuring it, and requires additional disclosure about the use of fairvalue to measure assets and liabilities. SFAS No. 157 also emphasizes thatfair value is a market-based measurement, not an entity-specific measurement,and sets out a fair value hierarchy, with the highest priority being quotedprices in active markets. The required effective date of SFAS No. 157 isthe first quarter of 2008. The adoption of SFAS No. 157 for financialassets and liabilities did not have a material effect on our consolidatedfinancial statements, but resulted in additional disclosures.  In February 2008, the FASB issued StaffPosition No. 157-2, which delayed by one year the effective date of SFAS No. 157for all non-financial assets and liabilities, except those that are recognizedor disclosed at fair value in the financial statements on a recurring basis.  We are currently evaluating the impact theadoption of SFAS No. 157 for non-financial assets and liabilities willhave on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities*. The new standard amends SFAS No. 133 andseeks to enhance disclosure about how and why a company uses derivative andhedging activities, how derivative instruments and related hedged items areaccounted for under SFAS No. 133 (and the interpretations of thatstandard) and how derivatives and hedging activities affect a company’sfinancial position, financial performance and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  We are evaluating the effect thisstatement may have on our consolidated financial statements.

 

In April 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets* and also requiresexpanded disclosure related to the determination of intangible asset usefullives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. Early adoption is prohibited. We are currently evaluating the impact theadoption of FSP 142-3 will have on our consolidated financial statements.

 

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**ITEM 3.**                                                     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

** **

Not applicable.

 

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

 

Notapplicable.

 

**ITEM 4T.****                                             CONTROLS AND PROCEDURES.  [open for revisions]**

 

***Evaluationof Disclosure Controls and Procedures***

 

We conducted an evaluation under the supervision andwith the participation of our management, including our Chief Executive Officerand Vice President Finance and Administration, our principal accountingofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures.  The term“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended (“Exchange Act”), meanscontrols and other procedures of a company that are designed to ensure thatinformation required to be disclosed by the company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures alsoinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by a company in the reports that it filesor submits under the Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate, to allowtimely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Vice PresidentFinance and Administration concluded as of September 30, 2008 that ourdisclosure controls and procedures were not effective at the reasonableassurance level due to the material weaknesses discussed immediately below.

 

In light of the three material weaknesses describedbelow, we performed additional analysis and other post-closing procedures toensure that our consolidated financial statements were prepared in accordancewith generally accepted accounting principles. Accordingly, we believe that the consolidated financial statementsincluded in this report fairly present, in all material respects, our financialcondition, results of operations and cash flows for the periods presented.  

 

***InherentLimitations on the Effectiveness of Controls***

 

Management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent or detect all errors and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control systems are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in a cost-effective control system,no evaluation of internal control over financial reporting can provide absoluteassurance that misstatements due to error or fraud will not occur or that allcontrol issues and instances of fraud, if any, have been or will bedetected.  

 

These inherent limitations include the realities thatjudgments in decision-making can be faulty and that breakdowns can occurbecause of a simple error or mistake. Controls can also be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the controls. The design of any system of controls isbased in part on certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Projections of any evaluation ofcontrols effectiveness to future periods are subject to risks. Over time,controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. 

 

***MaterialWeaknesses and Related Remediation Initiatives***

 

Set forth below is a summary of the varioussignificant deficiencies which caused management to conclude that we had threematerial weaknesses.  Through the effortsof our Vice President Finance and Administration and our Audit Committee, weare currently in the process of remediating certain deficiencies as identifiedbelow and we are in process of developing specific action plans to remediatethe remaining deficiencies which contribute to our material weaknessesdiscussed more fully below.  Based on currentremediation efforts and ongoing formulation of action plans, we expect toremediate all of the following material weaknesses by June

 

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30, 2009.  (1)   Wedid not effectively implement comprehensive entity-levelinternal controls,as evidenced by the following control deficiencies:  

 

Entity Level Internal Control Evaluation.  We did not formally consider entity-widecontrols that are pervasive across our company when considering whether controlactivities are sufficient to address identified risks.

 

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

 

Objective Evaluation of Internal Controls.  We did not use an internal audit function orother objective party to provide an objective perspective on key elements ofthe internal control system.

 

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

 

Assessment of Information Technology.  We did not formally evaluate the extent ofthe needed information technology controls in relation to our assessment ofprocesses and systems supporting financial reporting. 

 

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

 

(2)                                  We did not maintaineffective controls over changes to critical financial reporting applicationsand over access to these applications and related data, as evidenced by thefact that certain of our personnel had unrestricted access to various financialapplication programs and data beyond the requirements of their individual jobresponsibilities. This control deficiency could result in a materialmisstatement of significant accounts or disclosures, including those describedabove, that could result in a material misstatement of our interim or annualconsolidated financial statements that would not be prevented or detected. 

 

(3)                                  We did not maintaina sufficient level of information technology personnel to execute generalcomputing controls over our information technology structure, which include theimplementation and assessment of information technology policies and procedures.This control deficiency did not result in an audit adjustment to our 2007interim or annual consolidated financial statements, but could result in amaterial misstatement of significant accounts or disclosures, which would nothave been prevented or detected.  

 

***Remediationof Internal Control Deficiencies and Expenditures***

 

The above material weaknesses did not result in adjustments to ourconsolidated financial statements as of September 30, 2008, however, it isreasonably possible that, if not remediated, one or more of the materialweaknesses described above could result in a material misstatement in ourreported financial statements that might result in a material misstatement in afuture annual or interim period. 

 

In addition to remediating and/or developing specific action plans toremediate each of the above material weaknesses, we are taking steps to unifythe financial reporting of all of our divisions.  Accordingly, we are in the initial planningphase of implementing a centralized consolidation software package which webelieve will facilitate this process and will assist in the remediation of manyof the above listed deficiencies.  

 

In addition, our audit committee has authorized the hiring of additionaltemporary staff and/or the use of financial and information technologyconsultants, as necessary, to ensure that we have the depth and experience toremediate the above listed material weaknesses, including the implementationand monitoring of the appropriate level of control procedures related to all ofour manufacturing locations and our corporate offices.  The audit committee will also work directlywith management and outside consultants, as necessary to ensure that boardlevel deficiencies are addressed.  We areuncertain at this time of the costs to remediate all of the above listedmaterial weaknesses, however, we anticipate the cost to be in the range of$200,000 to $400,000 (including the

 

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cost of theconsolidation software described above), some of which we intend to incur in2008, but most of which costs we expect to incur in 2009.  We cannot guarantee that the actual costs toremediate these deficiencies will not exceed this amount.  

 

Through these steps, we believe that we are addressing the deficienciesthat affected our internal control over financial reporting as of September 30,2008. Because the remedial actions require hiring of additional personnel,upgrading certain of our information technology systems, and relyingextensively on manual review and approval, the successful operation of thesecontrols for at least several quarters may be required before management may beable to conclude that the material weakness has been remediated.  We intend to continue to evaluate andstrengthen our internal control over financial reporting systems. These effortsrequire significant time and resources. If we are unable to establish adequate internal control over financialreporting systems, we may encounter difficulties in the audit or review of ourfinancial statements by our independent registered public accounting firm,which in turn may have a material adverse effect on our ability to preparefinancial statements in accordance with GAAP and to comply with our SECreporting obligations.   

 

***Changesin Internal Control over Financial Reporting***

 

We completed our acquisition of ACC on August 20,2008.  Management considers thistransaction material to our results of operations, cash flows and financialposition from the date of the acquisition through September 30, 2008, andbelieves that the internal controls and procedures of ACC have a materialeffect on our internal controls over financial reporting.   We arecurrently in the process of incorporating the internal controls and proceduresof ACC into our internal controls over financial reporting.

 

There has been no other change in our internal controlover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the most recently completed fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1.****                                                     LEGAL PROCEEDINGS.**

 

Various legal actions and claims may arise against usin the ordinary course of business. In the opinion of management, the ultimateresolution of such possible legal actions and claims will not have a materialadverse effect on our consolidated financial position or our results ofoperations.

 

**ITEM 1A.****                                         RISK FACTORS.**

 

In addition to the risks described in this report,including the additional risk factors set forth below, Item 1A of Part Iof our Form 10-K for the year ended December 31, 2007 summarizesvarious material risks that investors should carefully consider before decidingto buy or maintain an investment in our common stock.  Any of these risks, if they actually occur,would likely harm our business, financial condition and results of operationsand could cause the trading price of our common stock to decline.  Except as set forth below, there are nomaterial changes to the risk factors set forth in the above-referenced report*.*

 

**The crisis in thefinancial markets and sustained weakening of the economy could significantlyimpact our business and financial condition in ways that we currently cannotpredict, and may further limit our ability to raise additional funds.**

 

As widely reported, financialmarkets in the United States and the rest of the world have been experiencingextreme disruption recently, including, among other things, extreme volatilityin security prices, as well as severely diminished liquidity and creditavailability. As a result, our ability to access the capital or debt marketsand to restructure debt, obtain additional debt, raise funds required for ouroperations or to meet our obligations under our credit facility may be severelyrestricted at a time when we would like, or need, to do so, which could have anadverse effect on our ability to meet our current and future fundingrequirements and on our flexibility to react to changing economic and businessconditions. The current economic and market conditions, could also result in adecrease in the demand for our products. We are not able to predict the likelyduration and severity of the current disruption in financial markets andadverse global economic conditions. However, if economic conditions continue toworsen, it is likely that these factors could result in a decline in our futureprofitability and prospects.

 

**Under the terms ofour credit facility, we are required to pay-off our Term Loan C in theprincipal amount of $3 million on February 15, 2009 and we are required toraise $5 million in net proceeds from the sale of assets or equity by thatdate.  If we are unsuccessful in payingoff our Term Loan C and/or raising the required capital, we will be in defaultunder the terms of our credit facility and the Lender would have certainrights, including accelerating all amounts owed by us under the credit facilityto February 15, 2009.**

 

If we fail to raise the $5million in net proceeds from the sale of assets or equity prior to February 15,2009 and/or fail to repay the Term Loan C, the Lender could elect to increaseinterest rates on the existing loans to the default rates discussed in thecredit facility, limit our availability on the Revolver, or exercise any or allof its default rights pursuant to the credit facility, including acceleratingthe repayment of all borrowings under the credit facility to February 15,2009.  Any or all of these conditionscould have an adverse affect on our operations and/or ability to do businessafter that date, which may result in a significant loss of revenue, increase incosts, a decrease in our cash flow which could result in a cash flow deficit andmay require us to obtain additional or alternate financing.  These potential financing needs could be metin the form of a revised debt structure with our Lender, new financing with another lender or lenders, the sale ofcertain assets to generate cash or the sale of additional equity to raisecapital.  Our failure to secureadditional or alternate financing or capital, if needed, could have an adverseaffect on our operations and/or ability to do business after that date or couldrestrict our growth, limit our development of new products, or hinder ourability to fulfill existing or future orders.

 

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**ITEM 2.****                                                  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS.**

 

**Unregistered Sales of Equity Securities**

 

None.

 

**Dividends**

 

We have not declared or paid any cash dividends on ourcapital stock in the past, and we do not anticipate declaring or paying cashdividends on our common stock in the foreseeable future.  We will pay dividends on our common stockonly if and when declared by our board of directors.  Our board of directors’ ability to declare adividend 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 ourfinancial 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.

 

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**ITEM 6.****                                                  EXHIBITS.**

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

 

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**SIGNATURES**

 

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

 
|                          | EMRISE CORPORATION |
|-------------------------------|--------------------|
|                          |               |
| Dated: November 14, 2008 | By:                | /S/  CARMINE T. OLIVA |
|                          |               | Carmine  T. Oliva, |
|                          |               | Chief  Executive Officer |
|                          |               |   |
|                          |               |   |
| Dated: November 14, 2008 | By:                | /S/  D. JOHN DONOVAN |
|                          |               | D.  John Donovan, Vice President Finance and  Administration (principal financial and accounting  officer) |

 

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**INDEX TO EXHIBITS ATTACHED TOTHIS REPORT**

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

 

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