**Table of Contents**

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-K**

 

| **(Mark One)**                                                                                                                                                                                                                                                                                                                            |                                                                                                     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                                                                                     | **ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**     |
|                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **For the fiscal year ended****December 31,  2009****.**                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                      | ** **                                                                                               |
| **OR**                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                      | ** **                                                                                               |
| **o**                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **For the transition period from                            to                         ** |

 

**Commission file number:****1-10346**

** **

**EMRISECORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **77-0226211**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) | ** ** | (I.R.S. Employer Identification No.) |
|                                                            | ** ** | ** **                           |
| **611 Industrial Way, Eatontown, New Jersey**                   | ** ** | **07724**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |

 

Registrant’s telephone number, including area code: **(732) 389-0355**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 
| **Title of Each Class**              | ** ** | **Name of Each Exchange on Which  Registered** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|
| **Common Stock,  $0.0033 par value** | ** ** | **NYSE Arca**                                  | ** ** |

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**None**

(Title of class)

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

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

 

Indicate by check mark whether theregistrant submitted electronically and posted on its corporate website, ifany, every interactive data file required to be submitted and posted pursuantto Rule 405 of Regulation S-T (section 232.405 of this chapter) during thepreceding 12 months (or for such shorter period that registrant was required tosubmit and post such files).  Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether theregistrant 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 o(do not  check if Smaller Reporting Company) |   | Smaller Reporting Company x |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o   No x

 

Theaggregate market value of the voting common equity held by nonaffiliates of theregistrant, computed by reference to the $1.27 closing sale price of such stockon June 30, 2009, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was approximately $13,000,000.  The registrant has no non-voting commonequity.

 

Thenumber of shares outstanding of the Registrant’s common stock, $0.0033 parvalue, as of April 7, 2010 was 10,213,412.

 

 

 

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**EMRISE CORPORATION**

**ANNUAL REPORT ON**

**FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2009**

 

**TABLE OF CONTENTS**

 
| ** **                          | ** **                                                                                                          | ** ** | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **                          |                                                                                                                |       |
| **PART I**                     |                                                                                                                |       |
| Item 1.                             | Business                                                                                                            |       | 1        |
| Item 1A.                            | Risk Factors.                                                                                                       |       | 9        |
| Item 1B.                            | Unresolved  Staff Comments                                                                                          |       | 21       |
| Item 2.                             | Properties                                                                                                          |       | 22       |
| Item 3.                             | Legal Proceedings                                                                                                   |       | 22       |
| Item 4.                             | (Removed and  Reserved)                                                                                             |       | 22       |
|                                |                                                                                                                |       |     |
| **PART II**                    |                                                                                                                |       |
| Item 5.                             | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 23       |
| Item 6.                             | Selected Financial  Data                                                                                            |       | 23       |
| Item 7.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 24       |
| Item 7A.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 41       |
| Item 8.                             | Financial  Statements and Supplementary Data                                                                        |       | 41       |
| Item 9.                             | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                               |       | 41       |
| Item 9A.                            | Controls and  Procedures                                                                                            |       | 41       |
| Item 9A(T). Controls and Procedures |                                                                                                                | 41         |
| Item 9B.                            | Other Information                                                                                                   |       | 44       |
|                                |                                                                                                                |       |     |
| **PART III**                   |                                                                                                                |       |
| Item 10.                            | Directors,  Executive Officers and Corporate Governance                                                             |       | 45       |
| Item 11.                            | Executive Compensation                                                                                              |       | 51       |
| Item 12.                            | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 57       |
| Item 13.                            | Certain  Relationships and Related Transactions, and Director Independence                                          |       | 59       |
| Item 14.                            | Principal  Accounting Fees and Services                                                                             |       | 60       |
|                                |                                                                                                                |       |     |
| **PART IV**                    |                                                                                                                |       |
| Item 15.                            | Exhibits,  Financial Statement Schedules                                                                            |       | 61       |
|                                |                                                                                                                |       |     |
| Index to Financial Statements       |                                                                                                                | F-1        |
|                                |                                                                                                                |       |     |
| Signatures                          |                                                                                                                | 67         |
|                                |                                                                                                                |       |     |
| Exhibits Attached to This Report    |                                                                                                                | 68         |
|                                     |                                                                                                                     |            |          |  |

 

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**CAUTIONARYSTATEMENT**

 

*All statements included orincorporated by reference in this Annual Report on Form 10-K, other thanstatements or characterizations of historical fact, are forward-lookingstatements within the meaning of the Private Securities Litigation ReformAct.  Examples of forward-lookingstatements include, but are not limited to, statements concerning projected netsales, costs and expenses and gross margins; our accounting estimates,assumptions and judgments; the demand for our products; the competitive natureof and anticipated growth in our industries; our ability to sell assets, paydown debt and increase our per share common stock price; our ability toidentify and consummate (a) acquisitions and integrate their operationssuccessfully and (b) dispositions, both on terms favorable to us; and ourprospective needs for additional capital. These forward-looking statements arebased on our current expectations, estimates, approximations and projectionsabout our industries and business, management’s beliefs, and certainassumptions made by us, all of which are subject to change. Forward-lookingstatements can often be identified by words such as “anticipates,” “expects,” “intends,”“plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,”“would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, andvariations or negatives of these words. These statements are not guarantees offuture performance and are subject to risks, uncertainties and assumptions thatare difficult to predict. Therefore, our actual results could differ materiallyand adversely from those expressed in any forward-looking statements as aresult of various factors, some of which are listed under “Risk Factors” inItem 1A of this Report. These forward-looking statements speak only as of thedate of this Report. We undertake no obligation to revise or update anyforward-looking statement for any reason.*

 

**PART I**

** **

**Item 1.**                       Business.

** **

**Business and Industry Description**

** **

EMRISE Corporation (including oursubsidiaries, referred to collectively in this Report as “EMRISE,” the “Company,”“we,” “us” or “our”) designs, manufactures and markets proprietary electronicdevices and communications equipment for aerospace, defense, industrial, andcommunications applications. We currently have operations in the U.S., England,and France.  We organize our business in two operating segments:electronic devices and communications equipment. In 2009, our electronicdevices segment contributed approximately 79% of overall net sales while thecommunications segment contributed approximately 21% of overall net sales. Oursubsidiaries within our electronic devices segment design, develop, manufacture and market a range of power systems, radiofrequency (RF), microwave and other electronic devices for defense, aerospaceand industrial markets.  Oursubsidiaries within our communications equipment segment design, develop,manufacture and market network access equipment, including network timing andsynchronization products, for communications applications in defense, publicand private networks and industrial markets.

 

***Electronic Devices***

 

Within our electronic devices segment we produce a range ofpower systems, RF and microwave devices. The following is a description of the major product categories withinthis segment:

 

·                  *Power Systems*.  Our powersystems product category is comprised of high and low voltage, highspecification, high reliability custom and standard power conversion productsdesigned for hostile environments.  Theseproducts are used predominately in the defense, commercial aerospace,industrial and communications markets.

 

·                  *RF and Microwave Devices*.  Our RF andmicrowave devices product category is comprised of RF and microwave devices,including switch matrices, frequency control products, limiters and detectorstogether with custom integrated assemblies and sub-systems. These products areused in applications which include communications, air traffic control,navigation and location equipment, radar and signal jamming devices, andweather radar, among others.

 

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The electronic devices segment is primarily “project”driven with the majority of revenues being derived from custom products withlong development cycles, long life cycles and high barriers to entry.  Manufacturing and testing is performedin-house or through sub-contract manufacturers. Our electronic devices are used in a wide range of military airborne,seaborne and land-based systems, and in-flight entertainment systems, includingthe latest next generation in-flight entertainment and connectivity (“IFE&C”)systems — such as applications for mobile phone, e-mail and internetcommunications and real time, on-board satellite and broadcast TV — which arebeing installed in new commercial aircraft as well as being retrofitted intoexisting commercial aircraft.

 

The electronic device industry is comprised predominantlyof military and commercial aerospace applications.  Large military programs, such as theEurofighter Typhoon aircraft and other land and seaborne military platforms,are high revenue generating opportunities, but are few in number and often morelikely to be affected by budgetary constraints. As a result, we also focus on multiple smaller defense projects andcommercial aerospace opportunities.

 

***Communications Equipment***

 

Within our communications equipment segment we produce arange of network access products including network timing and synchronizationproducts, for public and private communications networks.  The following is a description of the majorproduct categories within this segment:

 

·                  *Network Access*.  Our networkaccess product category is comprised of a wide range of LAN/WAN interconnectionequipment and systems over copper, fiber or wireless networks, covering variousspeeds as required by our customers.  Weprovide a combination of proprietary products and third party products to meetcustomer requirements.  Products aretargeted to key markets such as the military, utilities and other privatenetworks, government administration, point of sale and public communicationsservice providers primarily in Europe.

 

·                  *Timing and Synchronization*. Our timing and synchronization product category iscomprised of a range of timing products primarily for the outer edges ofservice provider networks, which we refer to as an “Edge Network”.  Products are targeted to key markets such astelephone companies, cable carriers, government administration, utilitycompanies, and other defense and homeland security related applicationsprimarily in the U.S., but also, to a lesser extent, in Europe.

 

The communications equipment segment is “end user product”based with typically internally funded development and marketing prior toselling via direct and indirect sales channels. Manufacturing is primarily outsourced.

 

The communications equipment industry is extremelycompetitive, with the primary growth expected to be in Next Generation Network(“NGN”) applications.  The NGN merges thetransmission of data, voice, video and other media onto a single network.  We believe that this will be the standardnetwork infrastructure for the next 10 to 20 years.  As competition to deliver content over theNGN grows, so does the need for precise timing and synchronization.  To be competitive in this market, serviceproviders must focus on performance.  Webelieve that quality of transmission will be a significant competitivedifferentiator.  Precise timesynchronization is an essential component for the reliable transport andswitching necessary to deliver smooth transmission of voice, video and data, aswell as a new generation of services and applications that will emerge.  We are highly focused on this market.  Our latest generation timing andsynchronization products provide significant cost, space saving and capacityadvantages, particular for Edge Network applications, as well as providing theplatform with which to address central office requirements.

 

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**Customers**

** **

We sell our commercial and military electronic devicesprimarily to original equipment manufacturers (“OEMs”), including manufacturersof aerospace and defense systems and industrial instruments.  During 2009, our top five electronics devicescustomers in terms of revenues were ITT Corporation, Rockwell Collins, Selex,MCL Industries, and National Radio Astronomy Observatory.  We sell our communications equipment topublic, private and corporate telecommunications service providers and endusers, including telephone companies, cable service providers, utilitycompanies and numerous other communications service providers.  During 2009, our top five communicationsequipment customers, including distributors, in terms of revenues, were Power &Telephone, Cherry & White, Defense Finance & Accounting Services,Harris, and the U.S. military and Federal Aviation Administration (“FAA”).

 

We have a well diversified customer base for both ourelectronic device products and our communications equipment products.  During 2008, no customer accounted for 10% ormore of our total net sales.  During2009, sales to ITT Corporation, a customer within our electronic devicesegment, accounted for 10% of our total net sales.  No other customer accounted for more than 10%of our total net sales in 2009.

 

**Sales, Marketing and CustomerSupport**

** **

We market and sell our productsthrough our operating subsidiaries within both of our operating segments.  Our sales force and marketing staff consistsprimarily of engineers and technical professionals supplemented by a smalldirect sales force and, in some cases, a network of independent salesrepresentatives or distributors.  Oursales professionals in each country within which we operate are wellexperienced and highly knowledgeable about their respective markets, customeroperations and strategies and regulatory environments.  We believe this experience and knowledgesignificantly enhances the ability of our sales and marketing staff to buildlong-standing customer relationships as they are more consultative in natureand can communicate back to us valuable input on systems and features that ourcustomers desire in future products.

 

Our electronic devices productsare sold through a combination of direct sales, independent representatives,and third-party distributors.  We sellour electronic devices primarily to OEMs and system integrators in the militaryand commercial aerospace and industrial electronics industries.  We typically have long-term relationshipswith our customers within our electronic devices segment and projects and programsoften span multiple years, with military programs sometimes in excess of 5years.  We obtain revenues throughlong-term purchase orders and repeat business from our existing customers, bymarketing subsystem assemblies that incorporate our own and third partyproducts to our existing customers, and by entering new product markets, suchas the IFE&C market, the signal jamming market for military applicationsand new geographic markets.

 

Military and defense customersgenerally require our products to be formally qualified for theirapplication.  The total system will thentypically undergo flight qualification or the equivalent on a land or sea basedsystem.  A further development orprototyping phase may follow to meet additional requirements.  This can lead to lengthy development andapproval cycles and very long prototype phases, sometimes spanning severalyears, prior to the product entering production.  As a result of these long development andapproval cycles, the overall program is subject to external political andeconomic constraints over which we have little control and which makes salesforecasting difficult.  Further, delays associated withcustomer internal approval processes, contracting procedures and/or procurementpractices may cause potential sales of our electronic device products to bedelayed.  After a customer has approved our product forpurchase, there are considerable barriers to entry due to the need tore-qualify the application for any new prospective supplier. As a result, oncequalified, our products typically enjoy a long production life.

 

Our communications equipmentproducts are sold primarily through a combination of our local in-house salesforce, independent representatives, and third-party distributors.  We sell our communications equipment primarily toprivate network operators and to large communication service providers as wellas 

 

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resellersand value added resellers and, in Europe, to military customers.  Communications service providers generally commitsignificant resources to an evaluation of our products and our competitors’products and require each vendor to expend substantial time, effort and moneyeducating them about the value of the vendor’s solutions and, in many cases, toqualify products for their networks. Consequently, sales to this type of customer generally require anextensive sales effort throughout the prospective customer’s organization andfinal approval by an executive officer or other senior level employee.  The result is lengthy sales and approvalcycles, which make sales forecasting difficult. In addition, even after a customer has approved our product forpurchase, future purchases are uncertain because while we generally enter intolong-term supply agreements with our customers, these agreements do not requirespecific levels of purchases.

 

Delays associated with potentialcustomers’ internal approval and contracting procedures, procurement practices,testing and acceptance processes are common and may cause potential sales ofour communications products to be delayed or foregone.  As a result of these and related factors, thesales cycle of new products for large customers typically ranges from six totwelve months or more.  In addition, wehave some distribution channels that generally are box stocking distributorswith significant independent sales forces selling our products to finalcustomers, integrators and other resellers on a regional and nationwidebasis.  We perform periodic productapplications training for our distributor and reseller workforce and we funnelmany of the leads we generate to the distribution channels for their follow-upand closure.

 

**Competition**

** **

We believe that our competitiveadvantage is founded on the application of leading edge technology, the qualityof our products, our ability to quickly address and adapt to individualcustomer requirements and to the overall marketplace, the strength of ourdistribution channels, and our compliance with government and industrystandards.

 

The electronic devices market ishighly fragmented and competitive and is comprised of a diverse group of OEMs. Nonetheless, we believe that our significant experience in the industry and thecustomized nature of our products have acted and will continue to act asbarriers to entry for potential competitors. This is particularly true in the military and defense markets which havehigh barriers to entry after a product has been qualified.  Competition for development programs includesmultinational and local engineering and manufacturing companies includingcustomer in-house capabilities. Competitors in this segment include Herely, Aeroflex, Cobham, Vicor, ITTand Martek, among others.  Our RF devicesand power supplies are similarly positioned in the IFE&C markets.  Significant competitors in this marketinclude Panasonic, Rockwell Collins and Thales all of whom are also ourcustomers.

 

The communications equipmentmarket is intensely competitive and subject to rapid technological change,evolving industry standards and regulatory developments.  Our principal competitors within this segmentinclude Symmetricom, Frequency Electronics and Oscilloquartz for timing andsynchronization products and RAD, Zhone/Paradyne, Adtran and Patton ElectronicsCorporation, among others, for other network access products.  The design of many of our network access products enables us to offernumerous product combinations to our customers and to serve both central sitedata communications needs and remote access sites on both the enterprise-wideand single location level.  We believethat this design flexibility helps us to excel at many of the above competitivefactors by enabling us to offer quality products that meet and are adaptable toevolving customer requirements, technologies and government and industrystandards.

 

Most of our competitors have greater sales, marketing,technological, research and financial resources than we do.  Our competitors’ advantage with regard tothese resources may reduce our ability to obtain or maintain market share forour products in cases where our competitors are better able than we are tosatisfy customer needs.

 

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**Backlog**

** **

**At December 31, 2009, ourbacklog from continuing operations of firm, unshipped orders was approximately$28.7 million compared to $32.6 million a year ago.  This backlog was related approximately 94% toour electronic devices business, which tends to provide us with long lead-timesfor our manufacturing processes due to the custom nature of the products, andapproximately 6% to our communications equipment business. **We believe thatthe majority of our current backlog will be shipped within the next 12 months.  However, wecannot provide assurance that we will be successful in fulfilling these ordersin a timely manner or that we will ultimately recognize as revenue the amountsreflected as backlog.  At March 31,2010, our backlog from continuing operations was approximately $27.0 millioncompared to $29.3 million at March 31, 2009.

** **

**Warranties**

** **

Generally, ourproducts carry a standard one-year, limited parts and labor warranty.  In certain circumstances, we provide atwo-year limited parts and labor warranty. We offer extended warranties beyond the standard one or two yearwarranty, as may be applicable, for an additional cost to our customers.  Products returned under warranty typicallyare tested and repaired or replaced at our option.  Historically, we have not experiencedsignificant warranty costs or returns. However, we cannot provide assurance that this will continue to be thecase or that disputes over specifications, materials or workmanship will notarise in the future.

 

**Product Development and Engineering**

** **

Our product development andengineering activities during 2009 and 2008 primarily related to new productdevelopment for network access and timing and synchronization products, RFfrequency control products and power conversion devices.  We expended $2.6 million in 2009 and $2.1million in 2008 on product development and engineering activities.  The investments we are making in productdevelopment and engineering are designed to increase our range of productofferings to our customers, keep up with the technological and regulatorychanges in our industry and anticipate and satisfy our customers’ preferencesand requirements on existing and/or future anticipated orders.  We continually review and evaluatetechnological and regulatory changes that may affect our products and we seekto offer products and capabilities that solve our customers’ operationalchallenges and improve their efficiency.

 

**Manufacturing, Assembly and QualityAssurance**

** **

Our communications equipment including network accessproducts and communication timing and synchronization products generally areassembled from outsourced subassemblies, with final assembly, configuration andquality testing typically performed in house. We believe that outsourcing certain aspects of manufacturing, especiallyfull assemblies, lowers our manufacturing costs, in particular our componentsand labor costs, provides us with more flexibility to scale our operations tomeet changing demand, and allows us to focus our engineering resources on newproduct development and product enhancements.

 

We manufacture our electronic devices through a combinationof in-house and external outsource manufacturing processes depending on theproduct, application and volume.  Wemaintain broad mechanical and electronic assembly capabilities such asfabrication, machining and surface mount technology, all of which are primarilyutilized to maintain our flexibility to produce small volume batch products andquick turnaround prototypes.  Many of theremaining portions of manufacturing, including assembly of our morestandardized and/or large volume production orders are outsourced.  Although many of our electronic devicesincorporate standard designs and specifications, most of our products arenevertheless built to meet customer specifications.  This approach of incorporating standarddesigns into custom products allows us to maintain a relatively small finishedgoods inventory.  Our electronic devicessegment produces products in one-piece to several hundred-piece batches, with atypical lead time between 6 and 30 weeks. The lead-time is predominantly to source sub-component piece parts suchas electronic components, mechanical components and services.  Typical build time is six to eight weeks fromreceipt of external components, but can, at times, extend to 26 weeks or more.

 

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We operate five manufacturing andassembly facilities worldwide.  All ofthese operations are certified as ISO 9001 or 9002 compliant.

 

The purchased components we use to build our products aregenerally available from a number of suppliers. However, we do rely on a number of limited or sole source suppliers forcertain specific components and parts.  Wedo not have long-term supply agreements with these vendors.  In general, we make advance purchases of somecritical components to ensure an adequate supply, particularly for productsthat require long lead-times, sometimes of up to 36 weeks, to manufacture.  If we were required to locate new suppliersor additional sources of supply, we could experience a disruption in ouroperations or incur additional costs in procuring required materials.

 

**Intellectual Property**

** **

We regard our software, hardware and manufacturingprocesses as proprietary and we rely primarily on trade secrets, confidentialityprocedures and contractual provisions to protect our proprietary rights.  Where applicable, we seek to protect oursoftware, documentation and other written materials under trade secret andcopyright laws, although due to the standardized nature of the underlyingtechnology of our products, this protection is often not applicable.  Our product development and manufacturing processtypically involves the use and development of a variety of forms ofintellectual property and proprietary technology.  In addition, in some cases, we incorporatetechnology and software that we license from third party sources into ourproducts.  These licenses generallyinvolve a one-time fee and no time limit, but in some cases may involve ongoinglicensing fees or royalties based on future sales.  We believe that alternative technologies forthis licensed technology are available both domestically and internationallyand we intend to expand these licensing opportunities in the future.

 

We may receive, in the future, notices from holders ofpatents that raise issues as to possible infringement by our products.  Questions of infringement and the validity ofpatents in the fields of electronic devices, communications and informationtechnology involve highly technical and subjective analyses.  These kinds of proceedings are time consumingand expensive to defend or resolve, result in substantial diversion ofmanagement resources, cause product shipment delays or could force us to enterinto royalty or license agreements rather than dispute the merits of theproceeding initiated against us.  At thistime, we are not aware of any infringement notices.

 

**Government Regulation and IndustryStandards and Protocols**

** **

We design our products to comply with a significant numberof industry standards and regulations, some of which are evolving as newtechnologies are deployed.  In the U.S.,our products must comply with various regulations defined by the U.S. FederalCommunications Commission, or FCC, and Underwriters Laboratories as well asindustry standards such as the Network Electronic Build Standards, or NEBS,established by Telcordia Technologies, Inc., formerly Bellcore, and thosedeveloped by the American National Standards Institute.  Internationally, our products must complywith standards established by the European Committee for ElectrotechnicalStandardization, the European Committee for Standardization, the EuropeanTelecommunications Standards Institute and telecommunications authorities invarious countries, as well as with recommendations of the InternationalTelecommunications Union.  The failure ofour products to comply, or delays in compliance, with the various existing andevolving standards could negatively affect our ability to sell ourproducts.  Our products for the militarymarkets are typically type tested and require the production of a first articleand other prototypes, which are subject to testing to meet specific customerand government regulations governing operating environment, performance andoperational capability.

 

Our product lines are subject to statutes governing safetyand environmental protection.  We believethat we are in substantial compliance with these statutes and are not aware ofany proposed or pending safety or environmental rule or regulation that,if adopted, would have a material effect on our business or financialcondition.

 

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Many or our military related products are subject tonational or international trade import and/or export restrictions.   In the U.S., we are subject to the International Traffic in Arms Regulations(ITAR).  Similar protocols apply in Europe.  In many cases, we are also required to obtainexport and/or “end-use” permits when we are asked by our customers to shipcertain products outside our native country where the products aremanufactured.  We believe that we are insubstantial compliance with all of these statutes and regulations.

 

**Seasonality**

** **

There are no significant seasonal aspects to our business,except that purchases of our communications equipment by public communicationscarriers tend to be higher than average at the end of the year and lower thanaverage during the first quarter of each year because their capital equipmentbudgets typically are not approved until late in the first quarter.  Furthermore, shipments within our electronicdevice segment can vary significantly quarter to quarter due to variances in thenature and timing of customer orders, especially as they relate to high-volume,long term production contracts.   Thetiming of such contracts can dramatically affect the volume of shipments andour profitability from one quarter to the next or even from year to year.

 

**Employees**

** **

As of March 31, 2010, we employed approximately 335persons, of which 307 were full time, in our various divisions andsubsidiaries.  None of our employees arerepresented by labor unions, and there have not been any work stoppages atany of our facilities.  We believe thatour relationship with our employees is good.

 

**Corporate Information andSecurities Filings**

** **

EMRISE Corporation is a Delawarecorporation that was formed in 1989.  Our principal executive offices are located at 611Industrial Way, Eatontown, New Jersey 07724. Our internet website address is www.emrise.com.  We do not intend our website address to be anactive link or to otherwise incorporate by reference the contents of thewebsite into this Report.  The public mayread and copy any materials that we file with the United States Securities andExchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, DC 20549, on official business days during the hours of10:00 am to 3:00 pm, or electronically through the SEC website(www.sec.gov).  The public may obtaininformation on the operation of the Public Reference Room by calling theSEC at 1-800-SEC-0330.  Within theCorporate Governance section of our website, we provide information concerningcorporate governance, including our Board of Directors committee charters,Codes of Conduct and other information.

 

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**Recent Dispositions**

** **

**On March 20,2009, EMRISE Electronics Corporation, (“EEC”), a wholly owned subsidiary ofEMRISE Corporation, completed the sale of**substantially all the assets of EEC’s Digitran division and all thecapital stock of EEC’s Tokyo based wholly-owned subsidiary, XCEL Japan Ltd.,which primarily acted as a sales office for EEC’s Digitran division in Japanand other countries in Asia, to Massachusetts based Electro SwitchCorporation.  In this Report, we refer tothe businesses of EEC’s Digitran Division and XCEL Japan, Ltd. as the “DigitranOperations,” and we refer to the sale of EEC’s Digitran division and XCELJapan, Ltd. as the “Digitran Transaction.” EEC’s Digitran division, located in Rancho Cucamonga, California,manufactured, marketed and sold electro-mechanical digital and new patentedtechnology very low profileTM rotaryswitches to the worldwide aerospace, defense and industrial markets.  EEC’s Digitran division was classified withinour electronic devices business segment and is excluded from the Business andIndustry Description provided below and classified as a discontinued operationthroughout this Report.

** **

**On March 22, 2010, EMRISEcompleted the sale of substantially all the assets of EEC’s subsidiary, ROAssociates to Massachusetts based Astrodyne Corporation.  In this Report, we refer to the businesses ofRO Associates as the “RO Operations,” and we refer to the sale of the assets ofRO Associates as the “RO Transaction.” RO Associates, located in San Jose, California, manufactured, marketedand sold standard power supplies to the defense and industrial markets.  The RO Associates operation was classifiedwithin our electronic devices business segment and is excluded from theBusiness and Industry Description provided below and classified as a held forsale operation throughout this Report.**

 

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**Item 1A.**              Risk Factors.

** **

*The following summarizes material risks that investorsshould carefully consider before deciding to buy or maintain an investment inour common stock.  Any of the followingrisks, if they actually occur, would likely harm our business, financialcondition and results of operations.  Asa result, the trading price of our common stock could decline, and investorscould lose the money they paid to buy our common stock.*

 

**Risks Related to Our Business**

 

***We are a highly leveragedcompany and we have approximately $12.3 million outstanding debt as of March 31,2010 owed to our senior lender under both term loans and a revolving creditfacility that matures on June 30, 2010. Pursuant to a January 2010 amendment to this credit facility, weare obligated to sell certain assets and to achieve certain sale relatedmilestones by certain dates leading up to the maturity date.  If we are unable to sell the assets, meetthese milestones or pay the debt, each on a timely basis or at all, the Companywill be materially adversely affected.***

*** ***

Under ouramended Credit Agreement with GVEC Resource IV Inc. (the or our “Lender”),which is an affiliate of Private Equity Management Group LLC, the outstandingprincipal balance owed to the Lender for the term loans at March 31, 2010was $7.9 million (plus an additional $0.3 million in accrued interest and fees)and the balance owed on the revolving line of credit at March 31, 2010 wasapproximately $4.1 million, which fluctuates daily depending upon cashcollections and advances.  The CreditAgreement, as amended from time to time, is referred to herein as the CreditFacility.  We must make bi-weeklyprincipal payments of $75,000 through maturity on June 30, 2010.  We agreed to sell certain assets, and willretain a percentage of the proceeds of some of such sales for working capitaland will use the remaining proceeds to pay down the obligations owed to theLender, and to achieve certain key milestone events related to the salesprocess.

 

There canbe no assurance that net proceeds from the sales of assets contemplated by theamended Credit Facility will be sufficient to pay the obligations owed toLender in full.  Many factors couldaffect our ability to complete such sales, could affect the terms, conditionsor consideration to be paid for such assets and the timeliness of closing suchtransactions, many of which are described in these risk factors and many ofwhich are out of the control of the Company. If we are unable to sell assets, if the net proceeds of these sales areinadequate, or if the related milestones are not achieved on a timely basis, orif some other event of default were to occur, the Lender could accelerate thedebt and exercise its rights and remedies under the Credit Facility, whichcould include a foreclosure on our assets before the contemplated asset salescould be completed.  There can be noassurance that the Company will be able to successfully sell the contemplatedassets in the agreed time frames and/or at prices sufficient to satisfy thedebt owed to the Lender, if at all.  Evenif the Company does successfully sell the contemplated assets and pay theobligations owed to the Lender in full, the ongoing revenues of the Companywill be substantially reduced which could have a material adverse affect on theCompany’s operations and financial condition.

 

In addition, the Lender has the current right toappoint an outside observer to review our books and records and businessoperations.  While the agreement containscertain limitations designed to minimize disruption to our business operations,the appointment of such an observer is likely to cause management and thefinance staff to divert significant time and effort to meeting the observer’srequests for information and is likely to limit management’s ability to focuson the operation of the Company and the sale of assets, which could have amaterially adverse impact on our compliance with the Credit Facilityobligations, the results of our operations and our financial position.

 

***Actions taken by the Securities and Exchange Commission (Commission) in2009 against an affiliate of our Lender may adversely affect our ability tocontinue to borrow funds under the terms of our revolving credit facility withour Lender.  If our Lender limits orterminates our ability to borrow funds under the revolving credit facility, ourcash position and our ability to continue day to day operations would beadversely affected, almost immediately.***

 

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Actionstaken by the Commission in 2009 against Private Equity Management Group, Inc.,an affiliate of our Lender and our Lender, including an order granted in April 2009by a federal court freezing all assets of Private Equity Management Group, Inc.and its affiliates, including our Lender. At the request of the Commission, the federal court also appointed atemporary receiver of our Lender’s agent and of our Lender.   The Company continues to be vulnerable tothe Lender’s difficult position with regard to the Commission, frozen assetsand the Receiver.  As a result, we may befurther adversely affected.  If, for anyreason, the receiver were to limit or terminate our ability to continue toborrow funds under our revolving credit facility, our cash position and ourability to continue day to day operations would be adversely affected, almostimmediately.  If that were to occur, wewould be required to seek additional and/or replacement financing, which if wewere not able to secure such replacement financing on a timely basis or onterms favorable to us would have an immediate and material adverse effect onour operations and/or ability to conduct business after that date.

 

***We have a significantamount of debt outstanding under our Credit Facility with our Lender which hashad negative consequences for us.  In theevent of a default under our credit facility, our Lender may limit futureavailability under our revolving line of credit and/or may accelerate paymentof all principal balances under this facility. Any of these conditions wouldhave a material adverse effect on our operations and /or our ability to conductbusiness after that date.***

 

Wecurrently use a significant portion of our operating income for debt service.Our leverage has made us vulnerable to an increase in interest rates, thedownturn in the operating performance of our business and the decline ingeneral economic conditions.

 

Thisamount of indebtedness could have further negative consequences for us,including:

 

·                  therisks outlined in the preceding risk factors;

 

·                  limitationson our ability to obtain replacement financing or other financing in thefuture;

 

·                  muchof our cash flow is dedicated to debt service obligations and is unavailablefor other purposes;

 

·                  limitationson our flexibility to deal with changing economic, business and competitiveconditions; and

 

·                  vulnerabilityto an increase in interest rates, a downturn in our operating performance ordecline in general economic conditions.

 

In addition, failure to comply with the covenantsand asset sale related milestones in the agreements governing the terms of ourcredit facility could result in an event of default.  In the event of a default and continuation ofa default, our Lender may limit future availability under our revolving line ofcredit and/or accelerate the payment of all principal balances and accrued interestrequiring us to pay the entire indebtedness under our credit facilityoutstanding on that date.  Upon the occurrence and during the continuationof an event of default, our Lender may also elect to increase the interest rateapplicable to the outstanding balance of our term loans by four percentagepoints above the per annum interest rate that would otherwise beapplicable.   Lender has additionalremedies available to it such as appointment of an outside observer or forcingthe Company into a bankruptcy.  Any ofthese conditions would have a material adverse effect on our operations and/orability to conduct business after that date.

 

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***Our planned asset salesmay materially adversely affect our current operations, our future financialresults, our future ability to meet cash flow demands and operateprofitably.  The values and terms of suchsales may not be as favorable to us as we anticipate which may result inadditional asset sales.***

 

Wehave begun the process of selling a significant portion of our assets asrequired by the Credit Facility.  Asdiscussed further in Note 22 “Subsequent Events” in our December 31, 2009financial statements, these assets contributed approximately $20 million ofnet sales or 37% of the Company’s net sales from continuing operations andoperating income of approximately $3 million of the Company’s total operatingincome from continuing operations of $1.4 million for 2009.  The preparation for suchsales, meeting of due diligence demands of potential buyers, preparation andnegotiation of deal documentation and otherwise driving such sales toconclusion is a time consuming process that creates a significant distractionof management and other key team members from the operations of thebusiness.  Certain key officers or otherteam members may not be cooperative in the sale process or may leave our employaltogether, making a successful asset sale more difficult or impossible toachieve.  The successful close of suchasset sales may require third party consents, governmental permits, stockholderapprovals or other consents, assignments or approvals that are out of ourcontrol and therefore may delay or prevent a successful closing.  Stockholders, or the market generally, maynot approve of the value at which assets might be sold, or the assets we sellwhich may cause our stock price to decrease or lead to litigation.  We may sell additional assets if the netproceeds are insufficient to pay down debt or for other reasons unrelated tothe debt.  If we do successfully sell theassets we are obligated to sell and/or other of our assets, the size, tenor andstrategy of the Company is likely to be materially different, the revenues,profits, cash flows and other financial measures, may be materially adverselyaffected, and, even though our debt may be substantially reduced, the viabilityof the Company as a going concern may be uncertain.

 

***We rely heavily on ourmanagement, and the loss of their services could adversely affect our business.***

** **

Our success is highly dependentupon the continued services of key members of our management, including CarmineT. Oliva, our Chairman of the Board and Chief Executive Officer, GrahamJefferies, our President and Chief Operating Officer and John Donovan, ourChief Financial Officer.  Mr. Olivaco-founded EEC and has developed personal contacts and other skills that werely upon in connection with our financing, acquisition and general businessstrategies.  Mr. Jefferies is along-time employee of EMRISE who we have relied upon in connection with ouracquisitions and operations in England and France and who fulfills significantoperational responsibilities in connection with our foreign and domesticoperations.  Mr. Donovan provides uswith extensive experience in financial reporting and compliance matters.  The loss of Mr. Oliva, Mr. Jefferiesor Mr. Donovan, or one or more other key members of management couldadversely affect us.  Although we haveentered into employment agreements with each of our executive officers, thoseagreements do not guarantee continued employment of these individuals.  We maintain key-man life insurance on Mr. Olivaand Mr. Jefferies.  However, wecannot provide any assurance that we will be able to maintain this insurance ineffect or that the coverage will be sufficient to compensate us for the loss ofthe services of Mr. Oliva or Mr. Jefferies.

 

Based on our current position withregard to our Lender and the sales of assets we have undertaken, our dependenceon Messrs. Oliva, Jefferies and Donovan, in addition to other key teammembers within the company and within certain divisions has significantlyincreased, particularly as it relates to the Company’s obligation to achieveasset sale related milestones as agreed upon with the Lender.  Therefore, we are in the process ofevaluating possible compensatory packages to these persons to incentivize themto remain in the service of the Company, cooperate fully with the sales processand work towards successful completion of the Company’s goals.  There can be no assurance that thesemeasures, once finalized and approved, will be successful in retaining andproperly incentivizing these persons.

 

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***Weincurred a net loss from continuing operations in 2009 and 2008 and may incurlosses in the future. If we continue to incur losses, we will experiencenegative cash flow, which may hamper our operations, may prevent us fromexpanding our business and may cause our stock price to decline.***

*** ***

Weincurred a $2.9 million net loss from continuing operations for 2009 and a $10million net loss from continuing operations for 2008, including a write off ofintangible and goodwill assets of $6.6 million. We expect to rely on cash on hand,cash generated from our operations, cash generated from the sale of assets andexisting and possible future financing activities to fund the cash requirementsof our business. If our net losses continue, we will experience negative cashflow, which may hamper current operations and may prevent us from expanding ourbusiness. We may be unable to attain, sustain or increase profitability on aquarterly or annual basis in the future. If we do not achieve, sustain orincrease profitability, our stock price may decline.

 

***There issubstantial doubt as to our ability to continue as a going concern.  If we are unable to restructure ourindebtedness, raise additional capital or sell assets in a timely manner, wemay******voluntarilyseek, or be******forced to seek,protection under the U.S. Bankruptcy Code or be forced into liquidation or tosubstantially restructure or alter our business operations and/or debtobligations******.***

 

Our ability tocontinue as a going concern is dependent upon our ability to (i) sellassets and meet milestones as required under our credit facility, (ii) payoff our credit facility prior to its maturity on June 30, 2010, (iii) obtainalternate financing to fund our ongoing operations after June 30, 2010,and (iv) achieve profitable operations.

 

In addition, if we default on the termsof our credit facility, our Lender may limit future availability under theRevolver and/or accelerate the payment of all principal balances and accruedinterest requiring us to pay the entire indebtedness under the credit facility.

 

If we (a) are not able to attain,sustain or increase profitability on a quarterly or annual basis, (b) arenot able to obtain alternate financing prior to June 30, 2010, or (c) defaultunder the terms of the credit facility and our Lender were to limit futureavailability under the Revolver and/or accelerate the payment of all principalbalances and accrued interest requiring us to pay the entire indebtedness underthe credit facility, then our ability to continue operations will bematerially, adversely affected and we may voluntarily seek, or be forced to seek, protection under the U.S.Bankruptcy Code or be forced into liquidation or to substantially restructureor alter our business operations and/or debt obligations.  In addition, due to any or all of the reasonsdiscussed above, we may cease to continue as a going concern.

 

If wecease to continue as a going concern, due to lack of available capital orotherwise, you may lose your entire investment in our company.

 

***We have material weaknesses in our internal control over financialreporting structure, which, until remedied, may cause errors in our financialstatements that could require restatements of our financial statements andinvestors may lose confidence in our reported financial information, whichcould lead to a decline in our stock price.***

 

We have identified four material weaknesses****in our internal control over financial reporting and cannotassure you that additional material weaknesses will not be identified in thefuture.  Management has concluded that (i) we did not effectively implement comprehensive entity-level internalcontrols; (ii) we did not maintain effective controls over changes tocritical financial reporting applications and over access to these applicationsand related data; and (iii) we did not maintain a sufficient level ofinformation technology personnel to execute general computing controls over ourinformation technology structure and (iv) we lack sufficient resourceswithin the accounting department, and that the foregoing represented materialweaknesses in our internal control over financial reporting.  If ourinternal control over financial reporting or disclosure controls and proceduresare not effective, there may be errors in our financial statements and in ourdisclosure that could require restatements. Investors may lose confidence in our reported financial information andin our disclosure, which could lead to a decline in our stock price.

 

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Section 404 of the Sarbanes-Oxley Act of 2002 requiresus to evaluate the effectiveness of our internal control over financialreporting as of the end of each year, and to include a management reportassessing the effectiveness of our internal control over financial reporting ineach Annual Report on Form 10-K.

 

Our management, including our Chief Executive Officer andChief Financial Officer, does not expect that our internal control overfinancial reporting will prevent all errors and all fraud. A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the controls.Over time, controls may become inadequate because changes in conditions ordeterioration in the degree of compliance with policies or procedures mayoccur. Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

As a result, we cannot assure you that significantdeficiencies or material weaknesses in our internal control over financialreporting will not be identified in the future. Any failure to maintain orimplement required new or improved controls, or any difficulties we encounterin their implementation, could result in significant deficiencies or materialweaknesses, cause us to fail to timely meet our periodic reporting obligations,or result in material misstatements in our financial statements. Any such failurecould also materially adversely affect the results of periodic managementevaluations regarding disclosure controls and procedures and the effectivenessof our internal control over financial reporting required under Section 404of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.The existence of a material weakness could result in errors in our financialstatements that could result in a restatement of financial statements, cause usto fail to timely meet our reporting obligations and cause investors to loseconfidence in our reported financial information, leading to a decline in ourstock price.

 

***We are not in compliancewith the continued listing requirements of the NYSE Arca because our CommonStock is trading at less than $1 per share. While NYSE Arca Regulation staff has allowed us approximately six monthsto seek to improve our stock price by selling assets and paying down the debtowed to our Lender, we may ultimately be delisted and begin trading on the Overthe Counter market.***

*** ***

On January 5,2010, we received notice from the staff of NYSE Arca, Inc. that theCompany was no longer in compliance with the minimum $1 per share pricerequired for continued listing on the NYSE Arca under NYSE Arca Equities Rule 5.5(h)(4).  We notified the staff of NYSE Regulation ofour intent to cure the deficiency by taking specific actions that includeselling certain assets and paying outstanding obligations to the Lender by thematurity date of June 30, 2010. Based on its evaluation of the planned actions, NYSE Regulation acceptedour request to conduct the planned actions to seek to achieve compliance withNYSE Arca continued listing standards in the time period through approximately June 30,2010.

 

TheCompany understands that the NYSE Regulation staff will conduct periodiccompliance reviews prior to the expiration of this period to assess the Company’sability to achieve compliance with the NYSE Arca’s continued listingstandards.  There are many risksassociated with successfully completing the planned actions discussed elsewherein these risk factors, and there can be no assurance that we will be able tosell the assets, at adequate prices or on a timely basis.  Even if we are successful in these efforts,there can be no assurance that doing so will have a positive impact on theprice of our common stock in a timely manner or at all.  In the event that a $1 price per share, orgreater, of the Company’s common stock is not attained within the prescribedtime period, the NYSE Arca is expected to commence suspension and delistingprocedures.

 

If our common stock is delisted from the NYSE Arca, then we wouldexpect to trade on the Over the Counter market, which could have a materiallynegative impact on the liquidity of our stock and the price of our commonstock.

 

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***The current global financial crisis******and globaleconomic recession******a) has had and may continue to havesignificant negative effects on our customers and our suppliers b) has had andmay continue to have significant negative effects on our access to credit andour ability to raise capital, c)******may prevent us from accurately forecasting demand forour product, d)******may******increase the risk that we could suffer unrecoverablelosses on our customers’ accounts receivable******, or e)may increase the risk that we cannot sell inventory that is on hand resultingin excess inventory levels and may therefore******affect ourbusiness market share, results of operations, and financial condition.***

 

The current global financial crisis - which has included, among otherthings, significant reductions in available capital and liquidity from banksand other providers of credit, substantial reductions and/or fluctuations inequity and currency values worldwide, and concerns that the worldwide economicrecession may be prolonged — has had and may continue to have a significantnegative effect on our business andoperating results.* *The potential effects ofthe current global financial crisis and recession are difficult to forecast andmitigate. As a consequence, our operating results for a particular period aredifficult to predict, and, therefore, prior results are not necessarily indicativeof results to be expected in future periods.

 

The current economic crisis and recession has affected and may continueto affect our direct and indirect customers’ access to capital or willingnessto spend capital on our products, and/or their levels of cash liquidity withwhich or willingness to pay for products that they will order or have alreadyordered from us.  The effect of thecurrent economic conditions on our customers may therefore lead to decreaseddemand, including order delays or cancellations, which in turn may result inlower revenue and materially adversely affect our business, results ofoperations and financial condition.

 

Likewise, the current global financial crisis and recession maynegatively affect our suppliers’ access to capital and liquidity with which tomaintain their inventories and production levels and could cause them to raiseprices or lower production levels, or result in their ceasing operations.  The challenges that our suppliers may face inselling their products or otherwise in operating their businesses may lead toour inability to obtain the materials we use to manufacture our products. Theseactions could cause reductions in our revenue, increased price competition andincreased operating costs, which could materially adversely affect ourbusiness, results of operations and financial condition.

 

If the Company successfully pays the obligations owed toour Lender, the ongoing revenues and profitability of the Company will besubstantially reduced as a result of our sale of the contemplated assets of theCompany, to satisfy such obligations. This would have a material adverse effect on the Company’s operations,financial condition and ability to continue operations and we may need tosecure additional or alternative financing as a result.  Failure to secure additional or alternatefinancing, including a new revolver, if and when needed, would have an adverseeffect on our operations and/or ability to do business or could restrict ourgrowth, limit the development of new products, or hinder our ability to fulfillexisting or future orders.  Moreover, ifwe are unsuccessful in securing the necessary financing to continue operations,when needed, then we may be forced toseek protection under the U.S. Bankruptcy Code or be forced into liquidation orsubstantially restructuring or altering our business operations and/or debtobligations.

 

The current economic recession and related market instability makes itincreasingly difficult for us, our customers and our suppliers to accuratelyforecast future product demand trends, particularly in our communicationsequipment segment.  If, as a result weproduce excess products, our inventory carrying costs will increase and resultin obsolete inventory.  Alternatively,due to the forecasting difficulty caused by the unstable economic conditions,we may be unable to satisfy demand for our products which may in turn result ina loss of market share.

 

We finance a portion of our sales through trade credit. While weperform ongoing credit evaluations of our customers’ financial condition, wecould suffer significant losses if our customers are unable or unwilling to payus. As global economic conditions continue or worsen, there is an increasingrisk of significant losses of accounts receivable that may have a negativeimpact on our financial results.

 

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***Our defense and aerospace programs are highly dependent on economic andpolitical factors which are outside of our control. Changes in defense budgetsin countries around the world and/or changes in priorities on such spendingcould materially adversely affect our business.***

 

We sellour commercial and military electronic devices primarily to OEMs, includingmanufacturers of aerospace and defense systems and industrial instruments.  We are highly dependent on defense budgets toutilize our products in various electronic warfare applications.  Changes in defense budgets and/or change inpriorities of defense budgets may reduce and/or redirect defense spending.  If defense spending is reduced or redirected,it may affect our current contracts as well as our ability to procureadditional defense contracts, which could have a negative effect on ourbusiness, results of operations and financial condition.

 

***Ourlack of long-term purchase orders or commitments may materially adverselyaffect our business if demand is reduced.***

*** ***

During 2009, the sales of electronicdevices accounted for approximately 79% of our total net sales, and the salesof communications equipment and related services accounted for approximately21% of our total net sales.  In somecases we have long-term contracts with our electronic devices andcommunications equipment customers that cover the general terms and conditionsof our relationships with them and can include long-term purchase orders orcommitments.  However, typically ourcustomers issue purchase orders requesting the quantities of products theydesire to purchase from us, and if we are able and willing to fill thoseorders, then we fill them under the terms of the contracts.  Accordingly, we cannot rely on long-termpurchase orders or commitments to protect us from the negative financialeffects of reduced demand for our products that could result from a generaleconomic downturn, from changes in the electronic devices and communicationsequipment industries, including the entry of new competitors into thesemarkets, from the introduction by others of new or improved technology, from anunanticipated shift in the needs of our customers, or from other causes.

 

***The unpredictability of ourquarterly and annual operating results may cause the price of our common stockto fluctuate or decline.***

** **

Our quarterly operating resultshave varied significantly in the past and will likely continue to do so in thefuture due to a variety of factors, many of which are not within ourcontrol.  Sometimes these factors cancause more prolonged periods of increased or decreased operating results,measured in quarters or years.

 

The cyclical nature of thecommunications equipment business due to the budgetary cycle of many of our keycustomers in this segment has had and will likely continue to have, for theforeseeable future, an effect on our quarterly operating results.  Companies that utilize our communicationequipment products generally obtain approval for their annual budgets duringthe first quarter of each calendar year. If a company’s annual budget is not approved early in the calendar yearor is insufficient to cover its desired purchases for the entire calendar year,then we are unable to sell products to the company during the period of thedelay or shortfall.  In addition, thesebudgets historically tend to vary significantly year by year depending on avariety of factors, including overall economic conditions.  A significant reduction in any one customer’sor group of customer’s budgets could severely reduce our overall sales, profitsand cash flows in the future.

 

Our electronic devices sales areoften made in conjunction with large military or commercial aerospacecontracts.  The timing of requireddeliveries under these contracts can be delayed based on issues related to theoverall contract, which can cause delays in our shipment schedules, revenuerecognition, profits and cash flows.  Inperiods between completion of one long term contract and commencement of salesunder a new contract, our revenues will be reduced.  In addition, the negative impact of suchperiods on our bottom line will be greater than the reduction in revenues dueto the continued, and relatively constant, cost of overhead.  The impact of these periods between contractscan last for months, quarters or, occasionally, years.

 

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Quarter-to-quarter fluctuations mayalso result from the uneven pace of technological innovation, the developmentof products responding to these technological innovations by us and ourcompetitors, our customers’ acceptance of these products and innovations, thevaried degree of price, product and technological competition and our customers’and competitors’ responses to these changes.

 

Due to these factors and otherfactors, including changes in general economic conditions, we believe thatperiod-to-period comparisons of our operating results will not necessarily bemeaningful in predicting future performance. If our operating results do not meet the expectations of investors, ourstock price may fluctuate or decline.

 

***The sales cycles of some of our products are lengthy, exposing us tothe risks of delays, foregone orders and fluctuations in operating results.***

 

Sales of some of our productsdepend upon potential customers’ internal approval and contracting procedures,procurement practices, and testing and acceptance processes, all of whichrequire a significant amount of time.  Asa result of these and related factors, the sales cycle of many of our products,especially for large customers, typically ranges from six to twelve months ormore.  Lengthy sales cycles subject us torisks of delays, foregone orders and fluctuations in operating results.

 

***Most of our competitors havegreater resources than we do.  In orderto compete successfully, we must keep pace with our competitors in anticipatingand responding to the rapid changes involving the electronic devices and communicationsequipment industries.***

** **

Our future success depends, inpart, upon our ability to enhance our current products and services and todevelop and introduce new products and services that keep pace withtechnological developments, respond to the growth in the electronic devices andcommunications equipment markets in which we compete, encompass evolvingcustomer requirements, and to provide a broad range of products and achievemarket acceptance of our products.  Most of our existing and potential competitors have larger technicalstaffs, more established and larger marketing and sales organizations andsignificantly greater financial resources than we do.  Our lack of resources relative to ourcompetitors may cause us to fail to anticipate or respond adequately totechnological developments and customer requirements or to experiencesignificant delays in developing or introducing new products and services.  These failures or delays could reduce ourcompetitiveness, revenues, profit margins or market share, cash flow and stockprice.

 

***Our results ofoperations could be materially adversely affected if we lose ITT Corporation asa customer or if our sales to ITT Corporation were to decline.***

 

In the year ended December 31, 2009, sales toITT Corporation, a customer within our electronic devices segment, accountedfor 10% of our total net sales.  The lossof or a significant adverse change in our relationship with ITT Corporation orany other major customer could cause a material decrease in our net sales andour results of operations could be materially adversely affected as aresult.  There can be no assurance thatITT Corporation will continue to be a customer within our electronic devicessegment.

 

***Our results ofoperations could be materially adversely affected as a result of impairments ofgoodwill and other intangible assets which may cause the price of our commonstock to fluctuate or decline.***

 

When we acquire a business, we assign estimated values to certainintangible assets and we also record an asset called “goodwill” equal to theexcess amount we pay for the business, including liabilities assumed, over thefair value of the tangible and intangible assets of the business we acquire.For example, in connection with the acquisition of ACC and CCI, we recordedapproximately $10.2 million in goodwill and $4.8 million of intangible assetsbased on the application of purchase accounting.  Guidance issued by the Financial AccountingStandards Board (“FASB”) under the FASB Accounting Standards CodificationTM (“Codification”)provides that goodwill and other intangible assets that have indefinite usefullives not be amortized, but instead be tested at least annually for impairment,and intangible assets that have finite useful lives continue to be amortizedover their useful lives. The Codification provides

 

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specificguidance for testing goodwill and other non-amortized intangible assets forimpairment. This guidance requires management to make certain estimates andassumptions when allocating goodwill to reporting units and determining thefair value of reporting unit net assets and liabilities, including, among otherthings, an assessment of market conditions, projected cash flows, investmentrates, cost of capital and growth rates, which could significantly impact thereported value of goodwill and other intangible assets. Fair value isdetermined using a combination of the discounted cash flow, market multiple andmarket capitalization valuation approaches. Absent any impairment indicators,we perform our impairment tests annually during the fourth quarter. As part ofour 2009 annual test for impairment to goodwill and other intangible assets, wenoted no events of impairment.  However,as a result of the sale of our RO Operations, we recorded a non-cash charge forthe impairment of goodwill and indefinite-lived intangibles of $0.9 million andamortized intangible assets of $0.5 million, which amounts reflect the writedown of all of the intangible assets of the RO Operations.  As a result of our 2008 annual test forimpairment to goodwill and other intangible assets, we recorded a non-cashcharge for the impairment of goodwill and indefinite lived intangible assets of$6.6 million in the fourth quarter of 2008, which reflects the write down of substantially all of the carrying value of thegoodwill and other intangible assets for our communications equipment segment.Any future impairments, including impairments of the goodwill or intangibleassets recorded in connection with the acquisition of ACC and CCI, or any otheracquisition we may make in the future, would negatively impact our results ofoperations for the period in which the impairment is recognized which, in turn,may cause our stock price to fluctuate or decline.

 

***Our acquisition strategy mayresult in unanticipated accounting charges or otherwise materially adverselyaffect our results of operations, and result in difficulties in assimilatingand integrating the operations, personnel, technologies, products andinformation systems of acquired companies or businesses, or be dilutive toexisting shareholders.***

** **

Our business strategy may involveadditional expansion through the acquisition of businesses, assets, products ortechnologies that allow us to complement our existing product offerings orexpand our market coverage. We continually evaluate and explore strategic opportunitiesas they arise, including business combination transactions, strategicpartnerships, and the purchase or sale of assets.

 

Acquisitions may requiresignificant capital infusions, typically entail many risks, and could result indifficulties in assimilating and integrating the operations, personnel,technologies, products and information systems of acquired companies orbusinesses. We have in the past and may in the future experience delays in thetiming and successful integration of an acquired company’s technologies andproduct development through volume production, unanticipated costs andexpenditures, changing relationships with customers, suppliers and strategicpartners, or contractual, intellectual property or employment issues. Inaddition, key personnel of an acquired company may decide not to work for us orto leave the employ of the Company soon after closing. These challenges coulddisrupt our ongoing business, distract our management and employees, harm ourreputation and increase our expenses. These challenges are magnified as thesize of the acquisition increases. Furthermore, these challenges would be evengreater if we acquired a business or entered into a business combinationtransaction with a company that was larger and more difficult to integrate thanthe companies we have historically acquired.

 

Acquisitions may require largeone-time charges and can result in increased debt or contingent liabilities,adverse tax consequences, additional stock-based compensation expense, and therecording and later amortization of amounts related to certain purchasedintangible assets, any of which items could negatively impact our results ofoperations. Any of these charges could cause the price of our common stock todecline.

 

Acquisitions or asset purchasesmade entirely or partially for cash may reduce our cash reserves.  Depending on the circumstances, we may seekto obtain additional cash to fund an acquisition by selling equity or debtsecurities. Any issuance of equity or convertible debt securities may bedilutive to our existing stockholders, which could be significant. In addition,the equity or debt securities that we may issue could have rights, preferencesor privileges senior to those of our common stock.

 

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We cannot assure you that we willbe able to consummate any pending or future acquisitions or that we willrealize any anticipated benefits from these acquisitions. We may not be able tofind suitable acquisition opportunities that are available at attractivevaluations, if at all. Even if we do find suitable acquisition opportunities,we may not be able to consummate the acquisitions on commercially acceptable terms,and any decline in the price of our common stock may make it significantly moredifficult and expensive to initiate or consummate additional acquisitions.

 

***Due to our internationaloperating units, we are exposed to various legal, business, political andeconomic risks associated with our international operations. These risks maysubstantially increase or decrease if we sell assets as we are required to doby our Lender.***

** **

Sales by our foreign business unitsaccounted for 54.4% and 75.8% of our net sales in 2009 and 2008, respectively.We undertake various sales and marketing activities through our facilities inEngland and France.  Heightened securityfrom terrorist attacks in the U.S. and abroad and the increasing risk ofextended international military conflicts may materially adversely impact ourinternational sales and could make our international operations more expensive.International operations are subject to many other inherent risks, includingbut not limited to:

 

·                  fluctuations in currency exchange rates;

·                  import and export license requirementsand restrictions of the U.S. and each other country in which we operate;

·                  political, social and economicinstability;

·                  exposure to different business practicesand legal standards, particularly with respect to intellectual property;

·                  natural disasters and public healthemergencies;

·                  nationalization of business and blockingof cash flows;

·                  trade and travel restrictions;

·                  the imposition of governmental controlsand restrictions;

·                  burdens of complying with a variety offoreign laws;

·                  unexpected changes in regulatoryrequirements;

·                  foreign technical standards;

·                  changes in taxation and tariffs;

·                  difficulties in staffing and managinginternational operations;

·                  difficulties in collecting receivablesfrom foreign entities or delayed revenue recognition; and

·                  potentially adverse tax consequences.

 

Any of the factors described abovemay have a material adverse effect on our ability to increase or maintain ourforeign sales. Many of the factors described above, particularly currencyexchange rates, have an impact on our financial results and/or on our liquidityand working capital position, which can be negative and can be material.  If we sell additional assets, as required byour Lender, our percentage of sales generated from foreign units maysubstantially increase or decrease, thus substantially increasing or decreasingthe possible impact of risks discussed in this risk factor.

 

***If we are unable to fulfillbacklog orders due to circumstances involving us or one or more of oursuppliers or customers, our anticipated results of operations will suffer***.

** **

As of December 31, 2009, wehad $28.7 million in backlog orders forour products.  Backlog orders representrevenue that we anticipate recognizing in the future, as evidenced by purchaseorders and other purchase commitments received from customers, but on whichwork has not yet been initiated or with respect to which work is currently inprogress.  Our backlog orders are due, inlarge part, to the long lead-times associated with our electronic deviceproducts, which products generally are custom built to order.  We cannot provide assurance that we will besuccessful in fulfilling orders and commitments in a timely manner or that wewill ultimately recognize as revenue the amounts reflected as backlog.  Factors that could affect our ability tofulfill backlog orders include difficulty we may experience in obtaining rawmaterials or 

 

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sub-assembliesfrom suppliers, whether due to obsolescence, production difficulties on thepart of suppliers or other causes, or customer-induced delays and productholds.  Our anticipated results ofoperations and cash flows will suffer to the extent we are unable to fulfillbacklog orders within the timeframes we establish, particularly if delays infulfilling backlog orders cause our customers to reduce or cancel their orders.

 

***If our products fail to complywith evolving government and industry standards and regulations, we may havedifficulty selling our products and/or we may incur significant warrantyliabilities associated with existing products.***

** **

We design our products to complywith a significant number of industry standards and regulations, some of whichare evolving as new technologies are deployed. Our products must comply with various regulations defined by the FCC andUnderwriters Laboratories, the American National Standards Institute, amongothers as well as industry standards such as those established by TelcordiaTechnologies, Inc. (communications), Federal Aviation Authority(aerospace) and Boeing, among others. Internationally, our products must comply with standards established bythe European Committee for Electrotechnical Standardization, the EuropeanCommittee for Standardization, the European Telecommunications StandardsInstitute, and telecommunications authorities in various countries as well aswith recommendations of the International Telecommunications Union, Airbus andvarious civil aviation authorities, among others.  The failure of our products to comply, ordelays in compliance, with the various existing and evolving standards couldnegatively affect our ability to manufacture and/or sell our products in thefuture and/or may result in significant warranty liability for noncompliance onexisting products.

 

***Financial statements of ourforeign subsidiaries are prepared using the relevant foreign currency that mustbe converted into U.S. dollars for inclusion in our consolidated financialstatements.  As a result, exchange ratefluctuations have historically and may in the future materially adverselyaffect our reported results of operations. These risks may substantiallyincrease or decrease if we sell assets as we are required by our Lender.***

** **

Our subsidiaries in England andFrance prepare their financial statements in the relevant local foreigncurrency.  In order to be included in ourconsolidated financial statements, the balance sheets are converted, at thethen current exchange rate, into U.S. dollars, and the statements of operationsare converted using weighted average exchange rates for the applicable period.  Fluctuations of the foreign currenciesrelative to the U.S. dollar have materially affected and may in the futurematerially affect our consolidated financial statements.  Our exposure to fluctuations in currencyexchange rates has decreased as a result of the acquisition of ACC.  Sales of our products and services from thesesubsidiaries outside of the U.S. accounted for approximately 54.4% and 75.8% ofour net sales for 2009 and 2008, respectively. We have at times used derivatives to manage foreign currency rate riskfor certain sales shipped from England. Our ultimate realized gain or loss with respect to currency fluctuationswill depend on the currency exchange rates and other factors in effect as thecontracts mature.  Net foreign exchange translation gains and losses included in other income and expensein our consolidated statements of operations resulted in a $278,000 loss for2009 and a $269,000 loss for 2008.  Ifwe sell additional assets, as required by our Lender, our percentage of salesgenerated from foreign units may substantially increase or decrease, thussubstantially increasing or decreasing the possible impact of risks discussedin this risk factor.

 

***Because we believe thatproprietary rights are material to our success, misappropriation of these rightscould materially adversely affect our financial condition.***

** **

Our future success is highlydependent on proprietary technology, particularly in our communicationsequipment business.  However, we do nothold any patents and we currently rely on a combination of contractual rights,copyrights, trademarks and trade secrets to protect our proprietary rights inthis area.  Our management believes thatbecause of the rapid pace of technological change in the industries in which weoperate, the legal intellectual property protection for our products is a lesssignificant factor in our success than the knowledge, abilities and experienceof our employees, the frequency of our product enhancements, the effectivenessof our marketing activities and the timeliness and quality of our 

 

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supportservices.  Consequently, we rely to agreat extent on trade secret protection for much of our technology.  However, there can be no assurance that ourmeans of protecting our proprietary rights will be adequate or that ourcompetitors or customers will not independently develop comparable or superiortechnologies or obtain unauthorized access to our proprietary technology, whichcan be difficult and expensive to monitor and enforce.  Our financial condition would be materiallyadversely affected if we were to lose our competitive position due to ourinability to adequately protect our proprietary rights as our technologyevolves.

 

**RisksRelated to Our Common Stock**

** **

***Our common stock price has beenvolatile, which has resulted in substantial losses for investors purchasingshares of our common stock and could result in further losses or litigationagainst us.***

** **

The market prices of securities oftechnology-based companies have been and will likely continue to be highlyvolatile.  The market price of our commonstock has fluctuated significantly in the past. During 2009, the high and low closing sale prices of a share of ourcommon stock were $1.76 and $0.63, respectively.  We completed a 1-for-3.75 reverse split ofits common stock in November, 2008.  Ourstock price since the reverse split has exhibited volatility and may continueto do so in the future.  In addition, themarket price of our common stock may continue to fluctuate in response to thefollowing factors, many of which are beyond our control:

 

·                  announcements related to sales ofassets;

·                  actions taken by our Lender or withrespect to the Lender by the Commission or the Receiver;

·                  additions or departures of keypersonnel;

·                  foreign currency translations gainsor losses;

·                  fluctuations in our quarterly orannual operating results;

·                  changes in market valuations ofsimilar companies and stock market price and volume fluctuations generally;

·                  general global economic weakness;

·                  economic conditions specific to theelectronic devices or communications equipment industries;

·                  announcements by us or ourcompetitors of new or enhanced products, technologies or services orsignificant contracts, acquisitions, strategic relationships, joint ventures orcapital commitments;

·                  delays in our introduction of newproducts or technological innovations or problems in the functioning of thesenew products or innovations;

·                  third parties’ infringement of ourintellectual property rights;

·                  changes in our pricing policies orthe pricing policies of our competitors;

·                  regulatory developments;

·                  future sales of our common stock orother securities; and

·                  perception and confidence ofinvestors regarding future prospects for EMRISE.

 

The price at which you purchaseshares of common stock may not be indicative of the price of our stock thatwill prevail in the trading market.  Youmay be unable to sell your shares of common stock at or above your purchaseprice, which may result in substantial losses to you.  Moreover, in the past, securities classaction litigation has often been brought against a company following periods ofvolatility in the market price of its securities.  We may in the future be the target of similarlitigation.  Securities litigation couldresult in substantial costs and divert management’s attention and resources andcould have a significant impact on profitability, future cash flows and stockprice. If we are delisted from the NYSE Arca, the liquidity of our stock andour stock price could be materially adversely affected.

 

***Future sales of shares of ourcommon stock by our stockholders could cause our stock price to decline.***

** **

We cannot predict the effect, ifany, that market sales of shares of our common stock or the availability ofshares of common stock for sale will have on the market price prevailing fromtime to time.  

 

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As of April 9,2010, we had outstanding 10.2 millionshares of common stock and options and warrants to purchase an aggregate of 2.5million shares of common stock.  Asubstantial number of these shares are eligible for public resale.  Sales of shares of our common stock in thepublic market, or the perception that those sales may occur, could cause thetrading price of our common stock to decrease or to be lower than it might bein the absence of those sales or perceptions.

 

***The Company could be a target for a hostile takeover, which couldresult in a change of the Company’s management and directors.***

 

Because of the Company’s currentper share price, aggregate market capitalization and potential market value ofits assets, and its annual revenue, the Company may be an attractive target toa hostile takeover at a depressed value. The Company does not have a shareholder rights plan, commonly known as apoison pill, in place.  The lack of thisparticular anti-takeover measure could make a change in control of our Companyeasier to accomplish.  If a takeoverattempt occurred, it might cause distractions for our management and our boardof directors and might otherwise prevent us from executing on our strategicplans, including the sale of assets and other strategies to pay down debt,preserve the value of the Company for creditors and stockholders and again growthe Company.  In addition, a successfultakeover attempt might result in a change of the Company’s management anddirectors.

 

**Item 1B.**              Unresolved Staff Comments.

** **

None.

 

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**Item 2.**                       Properties.

** **

As of March 31,2010, we leased or owned approximately 135,000 square feet of administrative,engineering, production, storage and shipping space.  All of this space was leased from thirdparties other than our facility located in Abondant, France, which is owned byour CXR Anderson Jacobson subsidiary, which is part of the communicationsequipment segment.  The following tablerepresents the Company’s leased properties as of March 31, 2010:

 
| **Business Unit**                                              | ** ** | **Location**                 | ** ** | **Segment**                                    | ** ** | **Use**                                                 | ** ** | **Approximate  Size** |
|----------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------|
|                                                           |       |                         |       |                                           |       |                                                    |       |                  |
| EMRISE Corporation and Advanced  Control Components, Inc. |       | Eatontown, NJ, U.S.          |       | Corporate headquarters and  electronic devices |       | Administration, Engineering and  Manufacturing          |       | 30,000sq. feet        |
|                                                           |       |                         |       |                                           |       |                                                    |       |                  |
| XCEL Power Systems, Ltd. and  EMRISE Electronics Ltd.          |       | Ashford, Kent, England       |       | electronic devices                             |       | Administration, Engineering and  Manufacturing          |       | 27,000 sq. feet       |
|                                                           |       |                         |       |                                           |       |                                                    |       |                  |
| CXR Larus Corporation                                          |       | San Jose, CA, U.S.           |       | communications equipment                       |       | Administration, Engineering,  Manufacturing and Testing |       | 30,000 sq. feet       |
|                                                           |       |                         |       |                                           |       |                                                    |       |                  |
| Pascall Electronics Limited                                    |       | Ryde, Isle of Wight, England |       | electronic devices                             |       | Administration, Engineering and  Manufacturing          |       | 35,000 sq. feet       |

 

Webelieve that these facilities are suitable for the purposes for which we usethem.  We believe that we have sufficientfacilities to conduct and grow our operations during 2010.  The majority of our facilities have warehousespace that can be converted to production areas in the event that expansion isnecessary without purchasing or leasing of additional property.  However, we will continue to evaluate thepurchase or lease of additional properties, as our business requires.

 

**Item 3.**                       Legal Proceedings.

** **

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

 

**Item 4.**                       (Removed and Reserved).

 

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**PART II**

** **

**Item 5.**                       Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.

** **

**Market Price and Holders**

 

Our common stock has traded on NYSEArca since March 8, 2006, under the symbol “ERI.”  On November 19, 2008, we completed a 1for 3.75 reverse split of our common stock. The table below shows, for each fiscal quarter presented, the high andlow closing prices on NYSE Arca for shares of our common stock.  The prices for periods prior to November 19,2008 have been retroactively restated as if the reverse stock split hadoccurred as of January 1, 2008.  Theprices shown reflect inter-dealer prices, without retail mark-up, mark-down orcommission, and may not necessarily represent actual transactions.

 
| ** **                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| ***Year ended December 31, 2009*** |       |     |       |    |       |
| First                                   |       | $        | 1.76       |    | $          | 1.13 |   |
| Second                                  |       | $        | 1.70       |    | $          | 1.18 |   |
| Third                                   |       | $        | 1.50       |    | $          | 1.20 |   |
| Fourth                                  |       | $        | 1.60       |    | $          | 0.63 |   |
|                                    |       |     |       |    |       |
| ***Year ended December 31, 2008*** |       |     |       |    |       |
| First                                   |       | $        | 3.41       |    | $          | 1.73 |   |
| Second                                  |       | $        | 3.04       |    | $          | 1.76 |   |
| Third                                   |       | $        | 2.29       |    | $          | 1.35 |   |
| Fourth                                  |       | $        | 2.50       |    | $          | 1.05 |   |

 

As of April 9, 2010, we hadoutstanding 10,213,412****shares of common stock outstandingheld of record by approximately 950stockholders.  These holders of recordinclude depositories that hold shares of stock for brokerage firmswhich, in turn, hold shares of stock for numerous beneficial owners.  On April 9, 2010, the closing sale priceof our common stock on NYSE Arca was $1.02 per share.

 

**Dividend Policy**

 

We have not declared or paid anycash dividends on our capital stock in the past.  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 imposedby Delaware law and by our Lender, GVECResource IV, Inc.  Indetermining whether to declare dividends, the board of directorswill consider these restrictions as well as our financial condition, results ofoperations, working capital requirements, future prospects and other factors itconsiders relevant.

 

**Item 6.**                       Selected Financial Data.

** **

Notapplicable.

 

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**Item 7.**                       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

** **

The following discussion should beread in conjunction with our consolidated financial statements and the relatednotes thereto contained elsewhere in this report. This report and the followingdiscussion contain forward-looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, which generally include theplans and objectives of management for future operations, including plans andobjectives relating to our future economic performance and our current beliefsregarding revenues we might generate, expenses we might incur and profits wemight earn if we are successful in implementing our business and growthstrategies. The forward-looking statements and associated risks may include,the risk factors described in detail in this Annual Report and relate to or bequalified by other important factors, including, without limitation:

 

·                  our ability to continue to borrow fundsunder the revolver terms of our credit facility (see “ — Liquidity and CapitalResources”);

·                  our ability to sell assets and achievethe milestones for such transactions, as required by our Lender under the termsof the credit facility;

·                  the ongoingrevenues and profitability of the Company will be substantially reduced as aresult of our sale a significant portion of the Company’s assets in order tosatisfy our debt obligations.  This couldhave a material adverse effect on the Company’s operations, financial conditionand ability to continue operations;

·                  our ability to find and secure alternatefinancing to our current credit facility on or before June 30, 2010,including a replacement revolver facility in the event the obligations underthe current facility are paid in full;

·                  exposure to and impacts of variousinternational risks including legal, business, political and economic risksassociated with our international operations, also including the impact of foreigncurrency translation (see “-Foreign Currency Translation”);

·                  the projected growth or contraction inthe electronic devices and communications equipment markets in which weoperate;

·                  our strategies for expanding, maintainingor contracting our presence in these markets;

·                  anticipated trends in our financialcondition and results of operations;

·                  our ability to meet our working capitaland other financing needs;

·                  our ability to distinguish ourselves fromour current and future competitors;

·                  our ability to secure long term purchaseorders;

·                  our ability to deliver against existingor future backlog;

·                  technical or quality issues experiencedby us, our suppliers and/or our customers;

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

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

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

·                  the impact of current and/or futureeconomic conditions, including but not limited to the overall condition of thestock market, the overall credit market, the global recession, political,economic and/or other constraints which are or may negatively impact theindustries in which we participate and/or the ability for us to market theproducts which we sell; and

·                  our ability to successfully competeagainst competitors that in many cases are larger than we, have access tosignificantly more working capital than we and have significant resources incomparison to us.

 

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

 

Any of the factors described aboveor in the “Risk Factors” sections contained in this report could cause ourfinancial results, including our net income or loss or growth in net income orloss to differ materially from prior results, which in turn could, among otherthings, cause the price of our common stock to fluctuate substantially.

 

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**RecentTransactions**

 

***Discontinued Operations***

 

On March 22, 2010, EMRISEcompleted the sale of substantially all the assets of its subsidiary, ROAssociates to Massachusetts based Astrodyne Corporation.  In this Report, we refer to the businesses ofRO Associates as the “RO Operations,” and we refer to the sale of the ROAssociates assets as the “RO Transaction.” Our RO Associates subsidiary, located in San Jose, California,manufactured, marketed and sold standard power supplies to the defense and industrialmarkets.  The RO Associates operation wasclassified within our electronic devices business segment.   The financial statements in this AnnualReport include the RO Operations as an asset held for sale for all periodspresented.

 

On March 20,2009, we completed the sale of substantially all the assets of the Digitrandivision of our wholly-owned subsidiary, EMRISE Electronics Corporation, orEEC, and all the capital stock of ECC’s wholly-owned subsidiary, XCEL JapanLtd., which primarily acted as a sales office for the Digitran division, toElectro Switch Corp.  In this report werefer to the businesses of the Digitran Division and XCEL Japan, Ltd. as the “DigitranOperations,” and we refer to the sale of the Digitran division and XCEL Japan,Ltd. as the “Digitran Transaction.” Within our Digitran division we manufactured, marketed and soldelectro-mechanical digital and new patented technology very low profileTMrotary switches for the worldwide aerospace, defense and industrial markets.  Tokyo-based XCEL Japan Ltd. primarily soldDigitran’s switch product lines in Japan and other countries in Asia. Thesebusinesses were part of our electronic devices business segment.   For purposes of the following discussion andanalysis, the Digitran Operations have been removed from the prior periodcomparisons and the quarterly results of the Digitran Operations are reportedin our Consolidated Statements of Operations for all periods presented as adiscontinued operation.

 

***Credit Facility and Obligation to Sell Additional Assets***

 

On January 25,2010, EMRISE and GVEC Resources IV Inc. (referred to as the or our “Lender”)entered into Amendment Number 8 to Loan Documents, which amends EMRISE’s CreditAgreement as of December 31, 2009. All references to the Credit Facility herein refer to the CreditAgreement as amended from time to time. The Credit Facility requires the sale of a significant portion of ourassets by June 30, 2010 (the “Maturity Date”).  Asdiscussed further in Note 22 “Subsequent Events” in our December 31, 2009financial statements, these assets contributed approximately $20 million of netsales or 37% of the Company’s net sales from continuing operations andoperating income of approximately $3 million of the Company’s total operatingincome from continuing operations of $1.4 million for 2009. The Company isrequired to achieve certain milestones in connection with these sale activitiesand to maintain capital expenditure financial covenants.  Lender has the current right to appoint anoutside observer to review our books and records and business operations, withcertain limitations designed to minimize disruption to our businessoperations.  In addition, we must makebi-weekly payments of $75,000 through the Maturity Date.  Upon the sale of the assets we agreed tosell, we will retain a percentage of the proceeds of some of such sales forworking capital and are obligated to use the remaining proceeds to pay down theobligations owed to the Lender.  We arealso obligated to provide financial information and status reports to theLender on a regular basis.

 

Thepractical effect of Amendment 8 was to provide a forbearance by the Lenderthrough the Maturity Date on the equity raise default and the possiblefinancial covenant defaults that was and may have been otherwise triggeredunder the Credit Agreement as of December 31, 2009 and allow us time tosell certain assets in order to pay down the obligations to the Lender.  We believe that net proceeds from the salesof assets contemplated by the Credit Facility will be sufficient to pay theobligations owed to Lender in full.

 

On April 13,2010, EMRISE and the Lender entered into Amendment Number 9 to Loan Documents,which removes the obligation to sell certain assets while retaining theobligation to sell other assets, and provides some clarity that the Lender willnot charge fees for making adjustments to the milestones required to be metbefore the maturity date, provided certain conditions are satisfied.

 

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If a new event of default were tooccur, including the failure to achieve any of the milestones, the Lender couldaccelerate the debt and exercise its rights and remedies under the CreditAgreement, which could include a foreclosure on our assets before thecontemplated asset sales could be completed. There can be no assurance that we will be able to successfully sell thecontemplated assets in the agreed time frames and/or at prices sufficient tosatisfy the debt owed to Lender, if at all. Even if we do successfully sell the contemplated assets and pay theobligations owed to the Lender in full, our ongoing revenues will besubstantially reduced which could have a material adverse affect on ouroperations and financial condition.

 

**BusinessDescription**

 

Wedesign, manufacture and market proprietary electronic devices andcommunications equipment for aerospace, defense, industrial, and communicationsapplications. We have operations in the U.S., England, and France.  We organize our business in two operating segments: electronic devices andcommunications equipment. In 2009, our electronic devices segment contributed approximately79% of overall net sales while the communications segment contributedapproximately 21% of overall net sales. Our subsidiaries within our electronicdevices segment design, develop,manufacture and market power supplies, radio frequency, or RF, and microwavedevices for defense, aerospace and industrial markets.  Our subsidiaries within ourcommunications equipment segment design, develop, manufacture and marketnetwork access equipment, including network timing and synchronizationproducts, for communications applications in public and private networks,defense and industrial markets, including utilities and transportation.

 

Within ourelectronic devices segment, we produce a range of power systems and RF and microwave devices.  This segment is primarily “project”driven with the majority of revenues being derived from custom products withlong life cycles and high barriers to entry. The majority of manufacturing and testing is performed in-house orthrough sub-contract manufacturers.  Ourelectronic devices are used in a wide range of military airborne, seaborne andland-based systems, and in-flight entertainment systems, including the latestnext generation in-flight entertainment and connectivity, or IFE&C,systems, such as applications for mobile phone, e-mail and internetcommunications and real time, on-board satellite and broadcast TV, which arebeing installed in new commercial aircraft as well as being retrofitted intoexisting commercial aircraft.

 

Within our communications equipmentsegment, we produce a range of network access equipment, including networktiming and synchronization products, for public and private communicationsnetworks.  This segment is “end userproduct” based with a traditional cycle of internally funded development andmarketing prior to selling via direct and indirect sales channels.  Manufacturing is primarily outsourced.  Our communications equipment is used in abroad range of network applications primarily for private communicationsnetworks, public communications carriers, and also for utility companies andmilitary applications, including homeland security.

 

**Critical Accounting Policies**

** **

Our discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the U.S. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amount ofnet sales and expenses for each period. The following represents a summary ofour critical accounting policies, defined as those policies that we believe arethe most important to the portrayal of our financial condition and results ofoperations and that require management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effects ofmatters that are inherently uncertain.

 

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

 

Wederive revenues from sales of electronic devices and communications equipmentproducts and services.  Our sales arebased upon written agreements or purchase orders that identify the type andquantity of the item and/or services being purchased and the purchaseprice.  We recognize revenues whenshipment of products has occurred or services have been rendered, nosignificant obligations remain on our part, and collectibility is reasonably assuredbased on our credit and collections practices and policies.

 

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Werecognize revenues from domestic sales of our electronic devices andcommunications equipment at the point of shipment of those products.  An estimate of warranty cost is recorded atthe time the revenue is recognized. Product returns are infrequent and require prior authorization becauseour sales are final and we quality test our products prior to shipment toensure the products meet the specifications of the binding purchase ordersunder which those products are shipped. Normally, when a customer requests andreceives authorization to return a product, the request is accompanied by apurchase order for a repair or for a replacement product.

 

Revenuerecognition for products and services provided by ACC and our subsidiaries inEngland depends upon the type of contract involved.  Engineering/design services contractsgenerally entail design and production of a prototype over a term of up toseveral years, with revenue deferred until each milestone defined in thecontract is reached.  Productioncontracts provide for a specific quantity of products to be produced over aspecific period of time.  Customers issuebinding purchase orders or enter into binding agreements for the products to beproduced.  We recognize revenues on theseorders as the products are shipped. Returns are infrequent and permitted only with prior authorization becausethese products are custom made to order based on binding purchase orders andare quality tested prior to shipment.  Anestimate of warranty cost is recorded at the time revenue is recognized.

 

Werecognize revenues for products sold by our subsidiary in France at the pointof shipment.  Customer discounts areincluded in the product price list provided to the customer.  Returns are infrequent and permitted onlywith prior authorization because these products are shipped based on bindingpurchase orders and are quality tested prior to shipment.  An estimate of warranty cost is recorded atthe time revenue is recognized.

 

Revenuesfrom services such as repairs and modifications are recognized when the serviceis completed and invoiced.  For repairsthat involve shipment of a repaired product, we recognize repair revenues whenthe product is shipped back to the customer. Service revenues contribute lessthan 5% of total revenue and, therefore, are considered to be immaterial tooverall financial results.

 

***Product Warranty Liabilities***

 

Generally, our products carry a standardone-year, limited parts and labor warranty. In certain circumstances, we provide a two-year limited parts and laborwarranty.  We offer extended warrantiesbeyond two years for an additional cost to our customers.  Products returned under warranty typicallyare tested and repaired or replaced at our option.  Historically, we have not experiencedsignificant warranty costs or returns.

 

We record a liability for estimated costs thatwe expect to incur under our basic limited warranties when product revenue isrecognized.  Factors affecting ourwarranty liability include the number of units sold, the types of productsinvolved, historical and anticipated rates of claim and historical andanticipated costs per claim.  Weperiodically assess the adequacy of our warranty liability accrual based onchanges in these factors.

 

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

 

Our finished goods electronicdevices inventories generally are built to order.  Our communications equipment inventoriesgenerally are built to forecast, which requires us to produce a larger amountof finished goods in our communications equipment business so that ourcustomers can be served promptly.  Ourproducts consist of numerous electronic and other materials, which necessitatethat we exercise detailed inventory management. We value our inventory at the lower of the actual cost to purchase ormanufacture the inventory (first-in, first-out) or the current estimated marketvalue of the inventory (net realizable value). We perform cycle counts ofinventories using an ABC inventory methodology, which groups inventory itemsinto prioritized cycle counting categories, or we conduct physical inventoriesat least once a year.  We regularlyreview inventory quantities on hand and record a provision for excess andobsolete inventory based primarily on our estimated forecast of product demandand production requirements for the next 12 to 24 months. Additionally, todetermine inventory write-down provisions, we review product line inventorylevels and individual items as necessary and periodically review assumptionsabout forecasted demand and market conditions. Any inventory that we determine to be obsolete, either in connection 

 

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withthe physical count or at other times of observation, are reserved for andsubsequently written-off.  As of December 31,2009, our total inventory reserves amounted to $4.7 million of which $3.1million, or 20.0% of total inventory, related to our electronic devices segmentand $1.6 million, or 11% of total inventory, related to our communicationsequipment segment.

 

The electronic devices andcommunications equipment industries are characterized by rapid technologicalchange, frequent new product development, and rapid product obsolescence thatcould result in an increase in the amount of obsolete inventory quantities onhand. Also, our estimates of future product demand may prove to be inaccurate,in which case we may have understated or overstated the provision required forexcess and obsolete inventory. Although we make every effort to ensure theaccuracy of our forecasts of future product demand, any significantunanticipated changes in demand or technological developments could have asignificant impact on the value of our inventory and our reported operatingresults.

 

***Foreign Currency Translation***

 

We have foreignsubsidiaries that together accounted for approximately 54.4% and 75.8% of ournet revenues, 34.2% and 37.5% of our total assets and 20.8% and 23.1% of ourtotal liabilities as of and for the years ended December 31, 2009 and2008, respectively.  In preparing our consolidated financial statements,we are required to translate the financial statements of our foreignsubsidiaries from the functional currencies in which they keep their accountingrecords into U.S. dollars. This process results in exchange gains and losseswhich, under relevant accounting guidance, are included either within ourstatement of operations under the caption “other income (expense)” or as aseparate part of our net equity under the caption “accumulated othercomprehensive income (loss).”

 

Under relevant accounting guidance,the treatment of these translation gains or losses depends upon management’sdetermination of the functional currency of each subsidiary. This determinationinvolves consideration of relevant economic facts and circumstances affectingthe subsidiary. Generally, the currency in which the subsidiary transacts a majorityof 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’sfunctional currency to be its local currency, then any gain or loss associatedwith the translation of that subsidiary’s financial statements is included as aseparate component of stockholders’ equity in accumulated other comprehensiveincome (loss).  However, if managementdeems the functional currency to be U.S. dollars, then any gain or lossassociated with the translation of these financial statements would be includedin other income (expense) within our statement of operations.

 

If we dispose of any of oursubsidiaries, any cumulative translation gains or losses would be realized intoour statement of operations. If we determine that there has been a change inthe functional currency of a subsidiary to U.S. dollars, then any translationgains or losses arising after the date of the change would be included withinour statement of operations.

 

Based on our assessment of thefactors discussed above, we consider the functional currency of each of our internationalsubsidiaries to be each subsidiary’s local currency. Accordingly, we hadcumulative translation losses of $1.6 million and $2.8 million that wereincluded as part of accumulated other comprehensive loss within our balancesheets at December 31, 2009 and December 31, 2008, respectively.During the year ended December 31, 2009 and 2008, we included translationgains of $1.2 million and losses of $3.9 million, respectively, underaccumulated other comprehensive income.

 

Themagnitude of these gains or losses depends upon movements in the exchange ratesof the foreign currencies in which we transact business as compared to thevalue of the U.S. dollar. During 2009, these currencies include the euro andthe British pound sterling. Any future translation gains or losses could besignificantly higher or lower than those we recorded for these periods.

 

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A 2.5 million British poundsterling loan payable from one of oursubsidiaries in England to EMRISE was outstanding as of December 31,2009 ($4.0 million based on the exchange rate at December 31, 2009).  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 ourintangibles, including goodwill, for potential impairment. Our judgmentsregarding the existence of impairment are based on many factors includingmarket conditions and operational performance of our acquired businesses.  In assessingpotential impairment of goodwill, we consider these factors as well asforecasted financial performance of the acquired businesses.  If forecasts are not met, we may have torecord additional impairment charges not previously recognized. In assessingthe recoverability of our goodwill and other intangibles, we must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of those respective assets. If these estimates or their relatedassumptions change in the future, we may be required to record impairmentcharges for these assets that were not previously recorded.  If that were the case, we would have torecord an expense in order to reduce the carrying value of our goodwill.  Under the Codification guidance for Goodwill and Other Intangible Assets, we are requiredto analyze our goodwill for impairment issues at least annually or morefrequently if an event occurs or circumstances change that would more likelythan not reduce the fair value of a reporting unit below its carryingamount.  We performed our annualimpairment test for goodwill at all of our reporting units as of December 31,2009.  In performing the valuations, weused cash flows that reflected management’s forecasts and discount rates thatreflect the risks associated with the current market.  We consider the results of an income approachand a market approach in determining the fair value of the reporting units.  For the income approach we assumed growth 4.0%as a result of expected shipments on existing contracts and futureopportunities.  We discounted theprojected cash flows at 14% to determine the fair value for the electronicdevices reporting unit.  For the marketapproach, weused the guideline public company method, under which the fair value of abusiness is estimated by comparing the subject company to similar companieswith publicly traded ownership interests. From these “guideline” companies,valuation multiples are derived and then applied to the appropriate operatingstatistics of the subject company to arrive at indications of value.

 

At December 31,2009, our reported goodwill totaled $15.6 million, all of which belonged to theelectronics devices reporting unit. Based on the results of our testing, the fair values of the electronicdevices reporting unit exceeded its book values.    However, asa result of the sale of our RO Operations, we recorded a non-cash charge forthe impairment of goodwill and indefinite-lived intangibles of $0.9 million andamortized intangible assets of $0.5 million, which amounts reflect the writedown of all of the intangible assets of the RO Operations.  These write downs are reflected within incomefrom discontinued and held for sale operations in the Consolidated Statement ofOperations.

 

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**Overview**

 

The majority of our products arecustomized to the unique specifications of our customers and are subject tovariable timing of delivery.  Shipmentsof products can be accelerated or delayed due to many reasons including, butnot limited to, exceeding or not meeting customer contract requirements, achange in customer timing or specifications, technology related issues, delaysin acquiring raw materials, and other production related issues.  Comparability of our revenues and grossprofit is difficult from period to period as we typically do not have recurringorders.  Exceptions to this includecertain long-term military contracts and certain long-term telecommunicationscontracts.

 

Overall net sales increased 14% in2009 as compared to 2008.  During 2009,we had a full year of ACC sales compared to approximately four months of netsales from ACC in the previous year, which was acquired August 20,2008.  ACC provided positive salesresults within our electronic devices segment in 2009 attributable to increasedsales across several of ACC’s product lines, partially offset by U.S. dollardeclines in sales at all of our other subsidiaries, although such businessesexperienced slight increases in net sales in 2009 on a local currencybasis.  While our French communicationsubsidiary experienced a decline in sales due to the impact of the globaleconomic crisis, the declines at our other foreign units were largely due tothe impact of exchange rates between the U.S. dollar and the British poundsterling and the euro.

 

Overall gross profit, as apercentage of sales, (“gross margin”), increased to 38.4% in 2009 from 35.4% in2008.  The increase in gross margin wasdue primarily to the inclusion of ACC sales in 2009 and associated gross profitsin our results partially offset by a decrease in gross margin within ourcommunication segment primarily as a result of lower sales volumes within thatsegment.

 

The following is a detaileddiscussion of our results of operations by business segment.  As a result of the sale of our DigitranOperations in March 2009 and the classification of our RO Operations asheld for sale at December 31, 2009, for purposes of the following discussion andanalysis, the Digitran Operations and RO Operations, both in the electronicdevices segment, have been removed from the prior period comparisons.  The results of the Digitran Operations and ROOperations are reported as a held for sale operation for all periods presented.

 

Asrequired under the Credit Facility, we plan to sell a significant portion ofour total assets during 2010 (See Notes 2, 10, 11 and 22 in the accompanyingnotes to consolidated financial statements). We may sell additional assets for strategic or other reasons (togetherwith the significant assets we agreed to sell under the Credit Facility, the “FutureAsset Sales”).  As a result of the FutureAsset Sales, we are expecting overall declines in net sales, gross profit,operating income and net income within all of our reporting segments and on a consolidatedbasis as a Company.  However, themagnitude of such declines will largely depend on which assets we actually selland the timing of such sales, all of which are uncertain at this time, andcould be magnified or offset by other factors or events that are also difficultto anticipate at this time.  Whereapplicable, we will discuss possible future impacts of Future Assets Salesherein; however, we will not attempt to address all potential impacts or toquantify the magnitude of such sales on our future results due to thesignificant uncertainties associated with doing so.

 

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**Results of Operations**

 

***Comparison of the Year Ended December 31, 2009 to the Year Ended December 31,2008***

 

**Net Sales**

 
| ** **                                  | ** ** | **Year Ended**        | ** ** | **Variance**                | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **December 31,** | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in  thousands)**                         | ** ** | **2009**              | ** ** | **2008**                    | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                        |       |                  |       |                        |       |   |   |   |   |
| Electronic  devices                         |       | $                     | 41,818     |                        | $          | 32,465 |   | $ | 9,353 |   | 28.8 | % |
| *as % of net sales*                         | * *   | *74.3*                | *%*        | *54.6*                      | *%*        | * * | * * | * * | * * |
| Communications  equipment                   |       | 11,932                |       | 14,768                      |       | (2,836 | ) | (19.2 | )% |
| *as % of net sales*                         | * *   | *21.2*                | *%*        | *24.8*                      | *%*        | * * | * * | * * | * * |
| Total  net sales from continuing operations |       | 53,750                |       | 47,233                      |       | 6,517 |   | 13.8 | % |
| Discontinued  operations                    |       | 2,558                 |       | 12,274                      |       | * * | * * | * * | * * |
| Total  net sales                            |       | $                     | 56,308     |                        | $          | 59,507 |   |   |   |   |   |
|                                             |            |                       |            |                             |            |  |  |  |  |  |  |  |

* *

*ElectronicDevices*

 

The approximately 29% increase insales of our electronic devices in 2009 as compared to 2008 was primarily theresult of the inclusion of a full year of net sales from ACC, which we acquiredin August 2008, compared to only 4 months of ACC net sales included in2008, and which contributed $13.2 million more to our net sales in 2009 ascompared to 2008.  This increase waspartially offset by a decrease in net sales of approximately $3.9 million (or a14% decline) in net sales at our U.K. subsidiaries, primarily due to the impactof exchange rates on those operation’s U.S. dollar results.  On a local currency basis, net sales at ourU.K. electronic device companies were slightly higher in 2009 as compared to2008.  However, exchange rates betweenthe U.S. dollar and the British pound sterling negatively impacted theconsolidated results of our U.K. subsidiaries when translated into U.S. dollarsin 2009 as compared to 2008.  Ourelectronic devices subsidiaries in the U.K. experienced a 2% increase in salesin local currency, the British pound sterling, for 2009 compared to 2008.  However, when translated into U.S. dollars,these subsidiaries experienced a 14% decline in net sales for the same periodwith the difference from an increase of 2% to a decrease of 14% being due tothe impact of exchange rates.

 

Excludingthe impact of Future Asset Sales, we expect the increase in net sales fromcontinuing operations that we experienced from 2008 to 2009 to decline in 2010as compared to 2009, primarily due to the fact that ACC will be included for afull year in both 2010 and 2009, whereas ACC was only included for 4 monthsduring 2008.  However, in addition, weexpect overall minor reductions of around 10% in net sales of our electronicdevice segment in 2010 as compared to 2009, in part due to the impact of theeconomy, which resulted in lower bookings for our electronic device segmentthroughout most of 2009 as compared to 2008, but also due to the timing ofproduction requirements for certain long term contracts, which has resulted inexpected reductions in shipments during 2010, but which we expect will resultin higher shipments in 2011 and beyond.

 

*CommunicationsEquipment*

 

The approximately 19% decrease insales of our communications equipment in 2009 as compared to 2008 is due to anoverall decrease in orders and shipments for network access products,especially at our French subsidiary.  Netsales at our French subsidiary were down $2.7 million in 2009 compared to 2008due largely to the impact of the global economic crisis and spendingreductions, especially by the French government including the French DefenseMinistry.  Net sales at our French subsidiarywere also slightly impacted by the unfavorable effects of exchange rates in2009 as compared to 2008 between the U.S. dollar and the euro on thetranslation of the financial results of our European operations into U.S.dollars.  Our French subsidiaryexperienced a 24% decrease in sales in local currency, the euro, for 2009compared to 2008.  However, whentranslated into U.S. dollars, our French subsidiary experienced a 29% declinein net sales for the same period with the difference from 24% to 29% being dueto the impact of exchange rates.  Netsales at our U.S. communications equipment subsidiary remained relatively flatfrom 2009 as compared to 2008.

 

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Excluding the impact of FutureAsset Sales, we expect net sales in our communications equipment segment toincrease slightly in 2010 as compared to 2009.

 

**Gross Profit**

 
| ** **                                      | ** ** | **Year Ended**        | ** ** | **Variance**                | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **December 31,** | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in  thousands)**                             | ** ** | **2009**              | ** ** | **2008**                    | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                            |       |                  |       |                        |       |   |   |   |   |
| Electronic  devices                             |       | $                     | 16,284     |                        | $          | 10,754 |   | $ | 5,530 |   | 51.4 | % |
| *as % of net sales*                             | * *   | *38.9*                | *%*        | *33.1*                      | *%*        | * * | * * | * * | * * |
| Communications  equipment                       |       | 4,344                 |       | 5,977                       |       | (1,633 | ) | (27.3 | )% |
| *as % of net sales*                             | * *   | *36.4*                | *%*        | *40.5*                      | *%*        | * * | * * | * * | * * |
| Total  gross profit from continuing operations  |       | 20,628                |       | 16,731                      |       | 3,897 |   | 23.3 | % |
| *Total gross margin from continuing operations* | * *   | *38.4*                | *%*        | *35.4*                      | *%*        | * * | * * | * * | * * |
| Discontinued  operations                        |       | 90                    |       | 6,391                       |       |   |   |   |   |
| Total  gross profit                             |       | $                     | 20,718     |                        | $          | 23,122 |   |   |   |   |   |
|                                                 |            |                       |            |                             |            |  |  |  |  |  |  |  |

 

*ElectronicDevices*

 

The increase in gross profit in2009 of approximately $5.5 million was primarily the result of the inclusion ofa full year of net sales from ACC, which we acquired in August 2008,compared to only 4 months of ACC net sales included in 2008.  ACC contributed $6.5 million of additionalgross profit in 2009 as compared to 2008. Gross profit at our European subsidiaries decreased by $0.8 million,primarily due to changes in product mix and the impact of exchange ratesbetween the U.S. dollar and the British pound sterling.  This increase was partially offset byapproximately $0.1 million of severance costs incurred in the second quarter of2009 associated with our cost reduction efforts.

 

Overall segment gross marginsimproved from 33.1% to 38.9%, primarily due to the inclusion of higher marginproducts at ACC, and to a lesser extent, due to the effects of favorableproduct mix and the impacts of our cost reduction efforts at our Europeansubsidiaries, which has resulted in lower fixed overhead manufacturing costs.

 

Excludingthe impact of Future Assets Sales, during 2010, we expect gross profit andgross margin to decline within our electronic devices segment, primarily due toexpected reductions in sales volume as discussed under Net Sales, but also dueto expected changes in product mix in 2010 as compared to 2009, including theexpectation of more customer development projects in 2010 as compared to 2009,which typically generate lower gross margins.

 

*CommunicationsEquipment*

 

Thedecrease in gross profit within our communications equipment segment by $1.6million is primarily due to the decline in sales and a related decline in grossmargin at our French subsidiary, where gross profit declined $1.4 million ascompared to the prior year.  For primarilythe same reasons, gross margin within our communications equipment segmentdeclined from 40.5% in 2008 to 36.4% in 2009. Gross profit at our French subsidiary was unfavorably impacted as aresult of the changes in foreign currency exchange rates between the U.S.dollar and the euro in 2009 as compared to 2008 as well. Gross profit at ourU.S. communication subsidiary decreased slightly in 2009 as compared to 2008,due primarily to changes in product mix.

 

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**OperatingExpenses**

 
| ** **                                           | ** ** | **Year Ended**        | ** ** | **Variance**                | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **December 31,** | ** ** | **Favorable (Unfavorable)** | ** ** |
| **(in  thousands)**                                  | ** ** | **2009**              | ** ** | **2008**                    | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
|                                                 |       |                  |       |                        |       |   |   |   |   |
| Selling,  general and administrative                 |       | $                     | 16,606     |                        | $          | 14,030 |   | $ | (2,576 | ) | (18.4 | )% |
| *as % of net sales*                                  | * *   | *30.9*                | *%*        | *29.7*                      | *%*        | * * | * * | * * | * * |
| Engineering  and product development                 |       | 2,619                 |       | 2,077                       |       | (542 | ) | (26.1 | )% |
| *as % of net sales*                                  | * *   | *4.9*                 | *%*        | *4.4*                       | *%*        | * * | * * | * * | * * |
| Loss  on asset impairment                            |       | —                |       | 6,584                       |       | 6,584 |   | 100.0 | % |
| Total  operating expenses from continuing operations |       | 19,225                |       | 22,691                      |       | 3,466 |   | 15.3 | % |
| Discontinued  operations                             |       | 3,174                 |       | 3,921                       |       |   |   |   |   |
| Total  operating expenses                            |       | $                     | 22,399     |                        | $          | 26,612 |   |   |   |   |   |
|                                                      |            |                       |            |                             |            |  |  |  |  |  |  |  |

 

*Selling,General and Administrative*

 

The increase in selling, general and administrativeexpenses (“SG&A”) is primarily the result of approximately $3.4 million ofadditional expenses relating to ACC, which we acquired in August 2008, andtherefore we incurred such expense during only a portion of 2008 compared tothe full year of 2009.  Additionally, weincurred $0.4 million in severance related costs associated with our generaland administrative cost reduction efforts. These increases were partially offset by significant decreases inSG&A, primarily at our corporate headquarters, as a result of costreduction activities.

 

Excluding the impact of FutureAssets Sales, during 2010 we expect SG&A expenses to decline significantlydue, in part, to lower overall sales (which impacts commissions and othervariable selling related expenses), but also largely due to our cost reductionefforts in 2009, which we expect to result in approximately $1 million inannualized savings during 2010 as compared to 2009.  The impact of Future Asset Sales will resultin a significant reduction of overall SG&A expenses in total dollars, butwill most likely result in a significant increase in SG&A as a percentageof net sales.  We expect this because alarge portion of our SG&A are fixed costs associated with our corporateoverhead structure, especially the fixed costs of being a public company.

 

*Engineeringand Product Development*

 

The increase in engineering and product development costsis primarily due to the added engineering costs at ACC for the full year of2009 and a slight increase in engineering costs at our U.S. communications equipmentsubsidiary related to development of new products and enhancements of existingproducts, offset by a slight reduction in engineering costs at our otherbusiness units as compared to the prior year.

 

During2010, engineering and product development expenses are expected to remain at orslightly below 2009 levels.

 

**Loss on AssetImpairment**

 

In2008, we incurred a loss on the impairment of our goodwill and indefinite livedintangible assets of $6.6 million, due to adecline in the forecasted financial performance of our communications segment,the estimated fair market value of that segment’s intangible assets declined ascompared to the carrying value of such assets on our balance sheet.  As a result, the 2008 impairment chargereflects the write down of substantially all of the carrying value of thegoodwill and other intangible assets for our communications segment.

 

Theimpact of Future Asset Sales may trigger the need to perform additionalassessments on recoverability associated with the long-lived assets even priorto such sales being concluded.  Suchassessments could result in material impairments having to be recorded.  In addition, the conclusion of such salescould result in the need to record additional impairments of our goodwill andindefinite lived intangible assets.

 

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**InterestExpense**

 

Interest expense was $4.3 million for 2009 compared to $3.2million for 2008.  Included in interestexpense in 2009 were $0.5 million in fees paid to our Lender or accrued inconnection with modifications to our credit facility and $1.4 million ofnon-cash amortization of deferred financing costs and non-cash amortization ofdebt discount, including $0.5 million due to the acceleration of deferredfinancing costs and debt discount amortization associated with the partialrepayment of our Term Loan B in the first quarter of 2009, compared to $0.9million of non-cash amortization in 2008.

 

We expect interest expense in 2010to be significantly lower than 2009 levels as a result of actual and expectedoverall debt level reductions in 2010 as compared to 2009, in part due to thereduction of acquisition related debt by approximately $10 million in March 2009,but also because we expect to repay all of our existing debt obligation withour current lender by mid-2010.  Thisreduction in debt may be offset by replacement revolver financing on ourremaining operations; however, we expect that the fees associated with suchdebt would be substantially less in amount than current debt levels due to asignificantly lower balance and also due to an expected reduction in interestrates since the risk associated with such revolving debt would be much lowerthan our current credit facility.

 

**Other Income(Expense)**

 

We recorded other income of $433,000 in 2009 compared toexpense of $734,000 in 2008.  Otherincome (expense) consists primarily of (i) short-term exchange rate gainsand losses associated with the volatility of the U.S. dollar to the Britishpound sterling and euro on the current portion of certain assets andliabilities and (ii) fair value adjustments on warrants.  The change in the fair value of warrantsduring 2009 resulted in income of $718,000, which was not present in 2008.  The remaining expense of $285,000 for 2009was predominantly related to short-term exchange rate losses.

 

**Income tax expense**

 

Income tax expense amounted to $0.6 million for 2009compared to $0.2 million for 2008.  Werecorded income tax expense primarily as a result of foreign income tax onforeign earned profits in Europe and New Jersey state income taxes on incomegenerated by ACC.

 

Future Asset Sales may trigger additional income taxobligations in 2010.  The Company hasexhausted a significant portion of its net operating losses available to becarried forward into future periods and, as a result, any income fromoperations and/or gain on sales of assets could result in significant taxobligations in 2010.

 

**Income from Discontinued and Held For Sale Operations**

 

In connection with the sale of our Digitran Operations on March 20,2009, we reported income from discontinued and held for sale operations of $4.0million (net of $0.5 million in taxes) during 2009, which includes a $7.4million gain on the sale of our Digitran Operations.  In 2008, these operations contributedcomparative income of $3.1 million. Additionally, at December 31, 2009, we classified our RO Operationsas assets held for sale in the consolidated balance sheets and statements ofoperations, which resulted in reclassification of a loss of $3.1 million and$0.5 million in 2009 and 2008, respectively, to income from discontinued andheld for sale operations.  The 2009 lossfrom RO operations included a write down of $1.8 million in assets comprised of$0.9 million of goodwill and indefinite-lived intangible assets; $0.6 millionof long-lived assets and definite lived intangible assets; and $0.3 million offair value adjustments.

 

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**Net Loss**

 

**We reported net income of $1.0 million in 2009 and a netloss of $7.4 million in 2008.  Includedin the net loss for 2008 was a $6.6 million impairment charge associated withthe impairment of goodwill and indefinite lived intangible assets of ourcommunications equipment reporting unit. Included in net income in 2009 was a $6.9 million (net of $0.5 million intaxes) income/gain on discontinued and held for sale operations associated withthe sale of our Digitran Operations and approximately $3.1 million loss relatedto the operations of RO.  Additionally,included in net income for 2009 was $0.5 million in accelerated non-cashamortization of deferred financing costs and debt discount associated with thepartial repayment of our Term Loan B in March 2009, $0.5 million ofoverall employee termination costs associated with the cost reduction effortsat several of our facilities, $0.5 million in fees associated with waivers andamendments of our credit facility with our Lender in 2009 and $0.1 million ofexpenses incurred in connection with various refinancing efforts.**

 

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** **

**Liquidityand Capital Resources**

 

In making an assessment of our liquidity, we believe thatthe items in our financial statements that are most relevant to our ongoingoperations are working capital, cash generated from operating activities andcash available from financing activities. During 2009, we funded our daily cash flow requirements through fundsprovided by operations and through borrowings under our credit facility withGVEC Resource IV Inc. (“GVEC” or the “Lender”).  Working capital from continuing operationswas a negative $7.7 million at December 31, 2009 as compared to a positive$3.6 million at December 31, 2008, primarily due to the reclassificationof all of our debt with our primary lender from long term to short term during2009, and also due to the accrual of additional contingent cash considerationassociated with the acquisition of ACC and, to a lesser extent, a decrease inaccounts receivable of $1.7 million due to improved collections.  At December 31, 2009 and 2008, we had accumulated deficits of $26.6 millionand $28.1 million, respectively, and cash andcash equivalents of $4.0 million and $3.3 million, respectively.  Our cash balancesare often significantly higher at the end of the month than at other timesthroughout the remainder of the month as a result of borrowings under ourcredit facility generally occurring toward the end of the month and timing ofpayments to vendors in the form of accounts payable, payroll and interestpayments generally occurring at the beginning of the month.

 

Net cash used in operating activities during 2009 totaled$0.4 million.  Our reported net income of$1.0 million included a gain on the sale of the Digitran Operations of $7.4million, net of taxes of $0.5 million and a net loss from Digitran and ROOperations of $2.9 million.  Significantnon-cash adjustments to our net income from continuing operations for 2009include (i) the amortization of debt discount and amortization of deferredfinancing costs which, on a combined basis, totaled $1.4 million, both of whichare non-cash components of interest expense associated with our creditfacility, (ii) depreciation and amortization expense which totaled $1.7million, and (iii) a change in fair value of common stock warrants whichcontributed $0.7 million as non-cash component of net income.  Significant uses of cash associated withoperating activities during 2009 included a decrease in accounts payable andaccrued liabilities by approximately $1.0 million, in part due to payments madeon previously accrued amounts related to the sale of the Digitran Operationsand also due to timing of vendor payments. The primary source of cash associated with operating activities during2009 was a decrease in accounts receivable, which decreased by approximately$1.7 million, due primarily to increased efforts to collect outstandingbalances on a more timely basis.

 

Cash generated from our investingactivities during 2009 totaled $10.6 million. This amount consisted primarilyof net cash proceeds generated by the March 2009 sale of our DigitranOperations, all of which was used to partially repay the $13 million in term debtthat we incurred in connection with our purchase of ACC in August 2008.

 

Cash used in financing activities during2009 totaled $10.4 million, which consisted of $11.5 million in repayments ofprincipal owed on long term debt and notes to stockholders, offset by $1.1million in net borrowings on our revolving credit facility.

 

As of December 31,2009, we had outstanding borrowings of $5.2 million under the revolving loanportion of our credit facility.  At December 31,2009, we had remaining actual availability under a formula-based calculation of$1.8 million under the credit facility.  Actual remainingavailability represents the additional amount we were eligible to borrow as of December 31,2009 pursuant to our $7.0 million revolving line of credit.  The availability under our revolving line ofcredit fluctuates periodically throughout each month depending on timing ofborrowings and repayments.  At March 31,2010, our eligible collateral was $7.1 million (compared to the maximum of $7million) and our outstanding borrowings at that date were $4.1 million.  Therefore, our actual availability was $2.9million.

 

In addition to the revolving line of credit, at December 31,2009, we had debt obligations of $13.1 million, which includes term loans fromour Lender, capitalized lease and equipment loan obligations and notes payableto shareholders, the current portion of which loans and obligations totaled$12.9 million.

 

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Our backlog from continuing operations decreased to $28.7 million as of December 31, 2009 as compared to $32.6million as of December 31, 2008. Thedecrease is due to the reduction of backlog at all of our electronic devicesbusiness units associated with lower bookings in 2009 and has declined as wesatisfied existing contracts during the year. We experienced an increase in backlog at our U.S. communications equipmentbusiness unit associated with new orders for telecommunications testequipment.  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 December 31, 2009 wasapproximately 94% 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 6% 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 within the next 12months.  However, there can be noassurance that we will be successful in fulfilling such orders and commitmentsin a timely manner or that we will ultimately recognize as revenue the amountsreflected as backlog.

 

*Credit Facility*

 

EMRISE(including each of its direct subsidiaries), are parties to a Credit Agreement,as amended, with the Lender, providing for a credit facility in the aggregateamount of $26 million.  As of December 31, 2009, we owed a total of $13.4million under the terms of the credit facility.

 

On January 25,2010, EMRISE and its Lender entered into Amendment Number 8 to Loan Documents,which amends EMRISE’s Credit Agreement as of December 31, 2009.  All references to the Credit Facility hereinrefer to the Credit Agreement as amended. The Credit Facility requires the sale of a significant portion of ourassets by June 30, 2010 (the “Maturity Date”).  As discussed further in Note 22 “Subsequent Events”in our December 31, 2009 financial statements, these assets contributed approximately $20 million or37% of the Company’s net sales from continuing operations and operating incomeof approximately $3 million of the Company’s total operating income fromcontinuing operations of $1.4 million for 2009. The Company is required to achieve certain milestones in connection withthese sale activities and the maintenance of maximum capital expenditurefinancial covenants.  Lender has thecurrent right to appoint an outside observer to review our books and recordsand business operations, with certain limitations designed to minimizedisruption to our business operations. Upon the sale of the assets we agreed to sell, we will retain apercentage of the proceeds of some of such sales for working capital and areobligated to use the remaining proceeds to pay down the obligations owed to theLender.  We are also obligated to providefinancial information and status reports to the Lender on a regular basis.  The practical effect of the January 25th amendment wasto provide a forbearance by the Lender through the Maturity Date on the equityraise default and the possible financial covenant defaults that was and mayhave been otherwise triggered under the Credit Agreement as of December 31,2009 and allow us time to sell certain assets in order to pay down theobligations to the Lender.

 

On April 13,2010, the Borrowers and the Lender entered into Amendment Number 9 to LoanDocuments, which removes the obligation to sell certain assets while retainingthe obligation to sell other assets, and provides some clarity that the Lenderwill not charge fees for making adjustments to the milestones required to bemet before the maturity date, provided certain conditions are satisfied.

 

The credit facility currently consists of (i) arevolving loan for up to $7 million that expires on June 30, 2010 (the “Revolver”),and (ii) two term loans (Term Loan A and Term Loan B) with an aggregatenet outstanding principal amount of $4.1 million as of March 31, 2010. Theterm loans require remaining combined scheduled principal payments of $75,000bi-weekly, which began on February 1, 2010 and continue throughmaturity.  The facility also requiresmonthly interest payments and a final balloon payment of principal uponmaturity on June 30, 2010 of approximately $7.4 million in term debt plusthe outstanding balance of the revolver, which at December 31, 2009 was$5.2 million.

 

TheRevolver is formula-based and 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.

 

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Interest on the Revolver is payablemonthly.  The interest rate is variable and is adjusted monthly based onthe 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% per annum.  The Revolvercontains a capital expenditures covenant, prohibiting any such expenditures (a) inexcess of $600,000 for the fiscal year ended December 31, 2009, and (b) inexcess of $1,800,000 through June 30, 2010.  Additionally, the Revolver prohibits us fromincurring unfinanced capital expenditures in excess of $62,500 in any fiscalquarter and from incurring purchase money commitments in excess of $2 millionover the life of the facility.  However,if we incur unfinanced capital expenditures of less than $62,500 in any fiscalquarter, the difference between the amount incurred in a certain fiscal quarterand $62,500 maybe incurred in the two fiscal quarters immediately followingsuch fiscal quarter. The Company was in compliance with all covenants at December 31,2009.

 

The termloans bear interest at the Base Rate plus 4.25%, subject to a minimum rate of12.5% per annum.  Under the creditfacility, we may make full or partial prepayment of the term loans providedthat any such prepayment is accompanied by the applicable prepayment premiumdiscussed below.

 

To secure payment of the indebtedness under the creditfacility, we irrevocably pledged and assigned to, and granted to the Lender acontinuing security interest in all the personal property of the Company andits direct subsidiaries including our interest in any deposit accounts, thestock of each of our direct and indirect subsidiaries, the intellectualproperty owned by each of the Company and its direct subsidiaries, and theproceeds of the intellectual property owned by each of these entities.  Inan event of default, the Lender may, at its option, exercise any or allremedies available to it with respect to the collateral.  In addition,certain of our foreign subsidiaries have agreed to guarantee our performanceunder the credit facility.

 

There can be no assurance that wewill be able to successfully sell the contemplated assets that we are obligatedto sell, pursuant to the credit facility, in the agreed time frames, achievethe related milestones on a timely basis, and/or sell the assets at pricessufficient to satisfy the debt owed to Lender, if at all.  Even if we do successfully sell thecontemplated assets and pay the obligations owed to the Lender in full, ourongoing revenues will be substantially reduced which could have a materialadverse affect on our operations and financial condition.

 

If anevent of default were to occur, including the failure to achieve any of themilestones related to asset sales required by the Credit Facility, the Lendercould accelerate the debt and exercise its rights and remedies under the CreditAgreement.  An acceleration of theprincipal, deferred fees and accrued interest due on the date of a declaredevent of default would be a significant amount that would be due on suchdate.  If such an acceleration weredeclared as of March 31, 2010, the amount would equal $12.3 million.  We do not have the ability to pay this amount fromcurrently available sources at this time. The rights and remedies available to the Lender under the CreditAgreement in the event of a declared event of default include a foreclosure on our assets before thecontemplated asset sales could be completed. Thelender may also elect to increase the interest rate applicable to theoutstanding balance of the Term Loans A and B by four percentage points abovethe per annum interest rate that would otherwise be applicable. Additionally, if the lender terminates the credit facility during a defaultperiod then we are subject to a penalty equal to 2% of the outstandingprincipal balance of the Revolver and the Term Loans.

 

*Liquidity*

 

Our current business planrequires additional funding beyond our anticipated cash flows fromoperations.  These and other factorsdescribed in more detail below raise substantial doubt about our ability tocontinue as a going concern.  In itsReport of Independent Registered Public Accounting Firm, our principalaccountants, BDO Seidman LLP, has also stated that the Company requiresadditional funding to achieve profitable operations and repay its current debtobligations beyond its anticipated cash flows from operations, which raises asubstantial doubt about its ability to continue as a going concern.  Our ability to continue as a going concern isdependent upon our ability to (i) sell the assets as required in theCredit Facility, (ii) repay our credit facility on or prior to itsmaturity on June 30, 2010, (iii) obtain alternate revolver financingto fund operations after June 30, 2010 and (iv) achieve profitableoperations.

 

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If our net losses continue, we may experience negative cashflow, which may prevent us from continuing operations.  We have exhausted a significant portion ofour net operating losses available to be carried forward into future periodsand, as a result, any income from operations and/or gain on sales of assetscould result in significant tax obligations in 2010.  If we are not able to attain, sustain orincrease profitability on a quarterly or annual basis, we may not be able tocontinue operations and our stock price may decline.

 

If we (i) default under the Credit Facility for anyreason, including missing a milestone, (ii) are unable to timely sellassets at sufficient prices, (iii) cannot borrow funds under the terms ofthe Revolver, for any reason, through June 30, 2010, or (iv) fail toobtain alternate financing to replace our credit facility prior to June 30,2010 or a new revolving facility once the current credit facility is paid infull, we do not believe that current and future capital resources, revenuesgenerated from operations and other existing sources of liquidity will beadequate to meet our anticipated short term, working capital and capitalexpenditures needs for the next 12 months.  Further, if any of these occurfor any reason, or if we experience a significant loss of revenue or increasein costs, then our cash flow would be negatively impacted resulting in a cashflow deficit.  A cash flow deficit willrequire us to seek additional or alternate financing, with little or no noticewhich would be difficult to obtain in these economic conditions and our anticipatedfinancial condition in such circumstances.  To address these potentialfinancing needs, we may have to explore revised debt structure with our currentlender, seek additional or new financing with another lender or lenders, selladditional assets to generate cash, sell equity to raise capital.  Successfully executing these strategies isuncertain and there are many risks associated with attempting to execute each,in addition to the risks and uncertainties of the short and long term impact ofexecuting on any of these strategies.  Failure to meet our financing requirements, if and when needed,would have an adverse effect on our operations and/or ability to do businessafter that date or could restrict our growth, limit the development of newproducts, hinder our ability to fulfill existing or future orders or negativelyaffect our ability to secure new customers or product orders.

 

If we are unsuccessful in securing the necessary financingto continue operations, when needed, then we may be forced to seek protection under the U.S. Bankruptcy Code or be forcedinto liquidation or substantially restructuring or altering our businessoperations and/or debt obligations.

** **

**Effects of Inflation**

 

The impact ofinflation and changing prices has not been significant on the financialcondition or results of operations of either our company or our operatingsubsidiaries.

** **

**Impacts of New AccountingPronouncements**

 

**FASBAccounting Standards Codification.TM**  On September 30,2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”)to the authoritative hierarchy of Generally Accepted Accounting Principles (“GAAP”).  These changes establish the FASB AccountingStandards CodificationTM (“Codification”) as thesource of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in preparation of financial statements inconformity with GAAP.  Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standardsin the form of Statements, FASB Staff Positions, or Emerging Issues Task ForceAbstracts; instead the FASB will issue Accounting Standards Updates.  Accounting Standards Updates will not beauthoritative in their own right as they will only serve to update theCodification.  These changes and theCodification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced,the adoption of these changes had no impact on our consolidated financialstatements.

 

**FairValue Measurements and Disclosure**.  In January 2009,we adopted changes issued by the FASB to fair value accounting and reporting asit relates to non-financial assets and non-financial liabilities that are notrecognized or disclosed at fair value in the financial statements on at leastan annual basis.  These changes definefair value, establish a framework for measuring fair value in GAAP and expenddisclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair valuemeasurements and is to be applied prospectively with limited exceptions.  The adoption of these changes, as it relatesto non-financial assets and liabilities, had no impact on our financialstatements.

 

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In August 2009, the FASBissued an update to the fair value measurement guidance to clarify how anentity should measure liabilities at fair value.  The update reaffirms fair value is based onan orderly transaction between market participants, even though liabilities areinfrequently transferred due to contractual or other legal restrictions.  However, identical liabilities traded in theactive market should be used when available. When quoted prices are not available, the quoted price of the identicalliability traded as an asset, quoted prices for similar liabilities or similarliabilities traded as an asset, or another valuation approach should beused.  This update also clarifies thatrestrictions preventing the transfer of a liability should not be considered asa separate input or adjustment in the measurement of fair value.  The adoption of this update for fair valuemeasurements of liabilities had no impact on our financial statements.

 

**BusinessCombinations**.  On January 1,2009, we adopted an update to existing accounting standards for businesscombinations.  The update, which retainsthe underlying concepts of the original standard in that all businesscombinations are still required to be accounted for at fair value under theacquisition method of accounting, changes the method of applying theacquisition method.  Acquisition costsare no longer considered part of the fair value of an acquisition and willgenerally be expensed as incurred, non-controlling interests are valued at fairvalue at the acquisition date, in-process research and development is recordedat fair value as an indefinite-lived intangible asset at the acquisition date,restructuring costs associated with a business combination are generallyexpensed subsequent to the acquisition date, and changes in deferred tax assetvaluation allowances and income tax uncertainties after the acquisition dategenerally will affect income tax expense.

 

In April 2009,the FASB issued a further update in relation to accounting for assets acquiredand liabilities assumed in a business combination that arise fromcontingencies, which amends the previous guidance to require contingent assetsacquired and liabilities assumed in a business combination to be recognized atfair value on the acquisition date if fair value can be reasonably estimatedduring the measurement period.  If fairvalue cannot be reasonably estimated during the measurement period, thecontingent asset or liability would be recognized in accordance with standardsand guidance on accounting for contingencies and reasonable estimation of theamount of a loss.  Further, this updateeliminated the specific subsequent accounting guidance for contingent assetsand liabilities without significantly revising the original guidance.  However, contingent considerationarrangements of an acquiree assumed by the acquirer in a business combinationwould still be initially and subsequently measured at fair value.  These updates are applicable prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.  The adoption of these provisionswill have an impact on accounting for any business acquired after January 1,2009.

 

**Derivativesand Hedging**.  On January 1, 2009, weadopted changes issued by the FASB to disclosures about derivative instrumentsand hedging activities.  These changesrequire enhanced disclosures about an entity’s derivative and hedgingactivities, including (i) how and why an entity uses derivativeinstruments, (ii) how derivative instruments and related hedged items areaccounted for, and (iii) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows.  Other than the requireddisclosures, the adoption of these changes had no impact on our consolidatedfinancial statements.

 

On January 1,2009, we adopted an update issued by the FASB to the accounting for instruments(or embedded features) indexed to an entity’s own stock.  These changes clarify the determination ofwhether an instrument (or embedded feature) is indexed to an entity’s ownstock, which would qualify as a scope exception under previously issuedguidance.  The adoption of these changesresulted in the reclassification of certain of our outstanding warrants fromstockholders’ equity to liabilities, which requires the warrants to be fairvalued at each reporting period, with the changes in fair value recognized inour consolidated statement of operations.

 

**Intangibles— Goodwill and Other**.  On January 1,2009, we adopted changes issued by the FASB to account for intangibleassets.  These changes amend the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset in order toimprove the consistency between the useful life of a recognized intangibleasset outside of a business combination and the period of expected cash flowsused to measure the fair value of an intangible asset in a businesscombination.  The adoption of thesechanges did not have an impact on our consolidated financial statements.

 

**FinancialInstruments**.  On June 30, 2009, we adoptedan update to accounting standards for disclosures about the fair value offinancial instruments, which requires publicly-traded companies to providedisclosures on the fair value of financial instruments in the interim financialstatements.  Other than the requireddisclosures, the adoption of this update had no impact on our consolidatedfinancial statements.

 

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**Subsequent Events**.  On June 30, 2009, we adopted changesissued by the FASB to accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued, otherwise known as “subsequent events.”  Specifically, these changes set forth (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements: (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financials statements; and (3) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. The adoption of these changes did not have a material impact on ourfinancial statements.

 

**RevenueRecognition**.  In October 2009, the FASBissued an update to existing guidance on revenue recognition for arrangementswith multiple deliverables.  This updatewill allow companies to allocate consideration received for qualified separatedeliverables using estimated selling prices for both delivered and undelivereditems when vendor-specific objective evidence or third-party evidence isunavailable.  Additional disclosuresdiscussing the nature of multiple element arrangements, the types ofdeliverables under the arrangements, the general timing of their deliver, andsignificant factors and estimates used to determine estimated selling pricesare required.  We will adopt this updatefor new revenue arrangements entered into or materially modified beginning January 1,2011.  We are still evaluating theimpact, if any, this update may have on our consolidated financial statements.

 

**Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.**

 

Not applicable.

 

**Item 8.**                     FinancialStatements and Supplementary Data.

 

Referenceis made to the financial statements included in this Report, which begin at page F-1.

 

**Item** 9.                     Changes in and DisagreementsWith Accountants on Accounting and Financial Disclosure.

 

None.

 

**Item 9A.**            Controls and Procedures.

 

Notapplicable.

 

**Item 9A(T).**                               Controls and Procedures.

** **

**Evaluationof Disclosure Controls and Procedures**

** **

As of December 31,2009, the Company carried out an assessment, under the supervision of and withthe participation of the Company’s Chief Executive Officer and the ChiefFinancial Officer, of the effectivelness of our disclosure controls andprocedures (as defined in the Exchange Act Rules 13a-15(f) and15d-15(f)).  The Chief Executive Officerand the Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were not effective as of December 31, 2009.

 

**Management’s Report on InternalControl Over Financial Reporting**

** **

Management is responsible forestablishing and maintaining adequate internal control over financialreporting.  The Company maintains internalcontrols over financial reporting to include those policies and procedures thatare designed to ensure that information required to be disclosed in the Company’sExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the U.S. Securities and Exchange Commission’s (“SEC’s”)rules and forms, and that such information is accumulated and communicatedto the Company’s management, including its Principal Executive Officer andPrincipal Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the internal controlsover financial reporting, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Under the supervision and with theparticipation of management, including the Company’s Principal ExecutiveOfficer and Principal Financial Officer, the Company conducted an evaluation ofthe effectiveness of its internal control over financial reporting based on theframework in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. This evaluationincluded an 

 

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assessmentof the design of the Company’s internal control over financial reporting andtesting of the operational effectiveness of its internal control over financialreporting. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded as of December 31, 2009 that our internal controls overfinancial reporting were not effective at the reasonable assurance level due tothe material weaknesses discussed below.

 

In light of the four material weaknesses described below,we performed additional analysis and other post-closing procedures to ensurethat our consolidated financial statements were prepared in accordance withgenerally 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.

 

Our ChiefExecutive Officer and Chief Financial Officer concluded that as of December 31,2009 the following four material weaknesses existed:

 

(1)                               We did not effectivelyimplement comprehensive entity-level internal controls.

 

(2)                               We did not maintaineffective controls over changes to critical financial reporting applicationsand over access to these applications and related data.

 

(3)                               We did not maintain asufficient level of information technology personnel to execute generalcomputing controls over our information technology structure.

 

(4)                               We did not maintain asufficient level of resources within our accounting department.

 

If not remediated, these material weaknesses could resultin one or more material misstatements in our reported financial statements in afuture annual or interim period.

 

**InherentLimitations on the Effectiveness of Controls**

** **

Managementdoes not expect that our disclosure controls and procedures or our internalcontrol over financial reporting will prevent or detect all errors and allfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystems are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in acost-effective control system, no evaluation of internal control over financialreporting can provide absolute assurance that misstatements due to error orfraud will not occur or that all control issues and instances of fraud, if any,have been or will be detected.

 

Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of a simple error ormistake. Controls can also be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of thecontrols. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Projections of any evaluation of controlseffectiveness to future periods are subject to risks. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures.

 

**MaterialWeaknesses and Related Remediation Initiatives**

** **

Set forthbelow is a summary of the various significant deficiencies which causedmanagement to conclude that we had the four material weaknesses identifiedabove.  Through the efforts ofmanagement, external consultants and our Audit Committee, we are currently inthe process of executing specific action plans to remediate the materialweaknesses identified above and discussed more fully below.  We expect to complete these various actionplans during 2010.  If we are able tocomplete these actions in a timely manner, we anticipate that all controldeficiencies and material weaknesses will be remediated by June 30, 2011.

 

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(1)           We did not effectivelyimplement comprehensive entity-level internal controls, as evidenced by thefollowing 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 formalized assessments to consider riskfactors that influence the likelihood of someone committing a fraud and theimpact 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.

 

·                  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 information technology controls, whereapplicable, designed and implemented to support the achievement of financialreporting objectives.

 

·                  Ongoing and Separate Evaluations.  We did not effectively create and maintaineffective evaluations on the progress of our remediation efforts nor theconstant evaluations of the operating effectiveness of our internal controlsover financial reporting.

 

·                  Reporting Deficiencies. We did not perform timely and sufficient internal or external reportingof our progress and evaluation of prior year material weaknesses or the currentfiscal year internal control deficiencies.

 

(2)           We didnot maintain effective controls over changes to critical financial reportingapplications and over access to these applications and related data, asevidenced by the fact that certain of our personnel had unrestricted access tovarious financial application programs and data beyond the requirements oftheir individual job responsibilities. This control deficiency could result ina material misstatement of significant accounts or disclosures, including thosedescribed above, that could result in a material misstatement of our interim orannual consolidated financial statements that would not be prevented ordetected.

 

(3)           We didnot maintain a sufficient level of information technology personnel to executegeneral computing controls over our information technology structure, whichinclude the implementation and assessment of information technology policiesand procedures. This control deficiency did not result in an audit adjustmentto our 2008 interim or annual consolidated financial statements, but could resultin a material misstatement of significant accounts or disclosures, which wouldnot have been prevented or detected.

 

(4)  We are a relatively complex company withoperations conducted in multiple countries, multiple currencies and multiplelanguages.  We have divested four separate operations in the past 18months, acquired a large subsidiary during the same time, and we are in theprocess of divesting additional assets in order to repay our currentobligations.  All of these transactions give rise to complex accountingand tax treatments. Most recently, we have been concentrating our efforts insecuring amendments to our current credit facility and ensuring adherence tomilestones set forth in one of our most recent credit facility amendments.  Our finance team is a relatively small butexperienced staff. Although we believe the accounting staff are qualified toperform their functions, due to reasons above, the quantity of staff may beinsufficient to deal with the work load and complexities created, which couldresult in material misstatements to our financial statements.

 

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**Remediationof Internal Control Deficiencies and Expenditures**

** **

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.

 

We aredeveloping specific action plans for each of the above materialweaknesses.  In addition, our auditcommittee has authorized the hiring of additional temporary staff and/or theuse of financial and information technology consultants, as necessary, toensure that we have the depth and experience to remediate the above listedmaterial weaknesses, including the implementation and monitoring of theappropriate level of control procedures related to all of our manufacturinglocations and our corporate offices.  Theaudit committee will also work directly with management and outsideconsultants, as necessary to ensure that board level deficiencies areaddressed.  We are uncertain at this timeof the costs to remediate all of the above listed material weaknesses, however,we anticipate the cost to be in the range of $200,000 to $400,000 (includingthe cost of the consolidation software described above), most of which costs weexpect to incur during 2010.  We cannotguarantee that the actual costs to remediate these deficiencies will not exceedthis amount.

 

Through these steps, we believe that we are addressing thedeficiencies that affected our internal control over financial reporting as of December 31,2009. 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 weaknesses have 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 Commissionreporting obligations.

 

***Changes in Internal Control overFinancial Reporting***

 

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

 

**Item 9B.**            Other Information.

 

On April 13,2010, the Borrowers and the Lender entered into Amendment Number 9 to theCredit Agreement (“Amendment 9”).  Amongother things, Amendment 9 removes the obligation to sell certain assets whileretaining the obligation to sell other assets, and provides some clarity thatthe Lender will not charge fees for making adjustments to the milestonesrequired to be met before the maturity date, provided certain conditions aresatisfied.  Except for this amendment,the Credit Agreement remains in full force and effect.

 

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**PART III**

 

**Item 10.**              Directors,Executive Officers and Corporate Governance.

 

**Biographical Information**

 

The names, ages and positions held by our directors and executiveofficers as of March 24, 2010 and their business experience are asfollows:

 
| **Name**                            | ** ** | **Age** | ** ** | **Titles**                                                                           |
|-------------------------------------|------------|---------|------------|--------------------------------------------------------------------------------------|
|                                |       |    |       |                                                                                 |
| Carmine  T. Oliva                   |       | 67      |       | Chairman  of the Board, Chief Executive Officer, and Director                        |
|                                |       |    |       |                                                                                 |
| Graham  Jefferies                   |       | 52      |       | President,  Chief Operating Officer and Managing Director of EMRISE Electronics Ltd. |
|                                |       |    |       |                                                                                 |
| D.  John Donovan                    |       | 43      |       | Chief  Financial Officer, Secretary and Treasurer                                    |
|                                |       |    |       |                                                                                 |
| Laurence  P. Finnegan, Jr. (1) |       | 71      |       | Director                                                                             |
|                                |       |    |       |                                                                                 |
| Otis  W. Baskin (1)                 |       | 64      |       | Director                                                                             |
|                                |       |    |       |                                                                                 |
| Richard  E. Mahmarian (1)           |       | 72      |       | Director                                                                             |

 

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(1) Memberof the compensation committee, corporate governance and nominating committeeand audit committee.

 

**Carmine T. Oliva** has been Chairman of the Board, ChiefExecutive Officer and a Class III director of EMRISE Corporation since March 26,1997 and of our subsidiary, EMRISE Electronics Corporation, since he foundedEMRISE Electronics Corporation in 1983.  From March 1997 until July 2009he was President of EMRISE Corporation.  Mr. Olivaserved as Acting Chief Financial Officer and Secretary of EMRISE Corporationfrom August 18, 2006 to May 15, 2007 and served as Acting ChiefFinancial Officer from April to July 2005.  Mr. Oliva hasbeen Chairman of the Board of EMRISE Electronics Ltd. since 1985, and Chairmanand Chief Executive Officer of CXR Larus since March 1997. In 2002, Mr. Olivaobtained a French government working permit and assumed responsibility asPresident of our CXR-AJ subsidiary. From January 1999 to January 2000,Mr. Oliva served as a director of Digital Transmission Systems Inc. From1980 to 1983, Mr. Oliva was Senior Vice President and General Manager, ITTAsia Pacific Inc.  Prior to holding that position, Mr. Oliva held anumber of executive positions with ITT Corporation and its subsidiaries over aneleven-year period.  Mr. Oliva attained the rank of Captain in theUnited States Army and is a veteran of the Vietnam War.  Mr. Olivaearned a B.A. degree from Seton Hall University and an M.B.A. degree from TheOhio State University.  Mr. Oliva isfounder of EMRISE from inception.  This,in addition to his vast business acumen and experience in the aerospace anddefense and communications equipment industries for over 40 years along withhis judgment, integrity and reputation and his extensive international businessbackground including his extensive acquisition and divestiture expertise, makesMr. Oliva an ideal director of the Company as well as its Chairman.

 

**Graham Jefferies** was appointed as President in July 2009.  He served as Executive Vice President from October 21,1999 until July 2009. Mr. Jefferies was also appointed as our ChiefOperating Officer on January 3, 2005, after having served as ChiefOperating Officer of our Telecommunications Group since October 21, 1999. Mr. Jefferiesserved as Executive Vice President of EMRISE Corporation from April 1999through October 1999. Mr. Jefferies has served CXR-AJ as a directorsince March 1997 and as General Manager since July 2002, has servedas Managing Director of Belix Power Conversions Ltd.,****Belix Wound Components Ltd. and Belix 

 

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CompanyLtd. since our acquisition of those companies in April 2000, as ManagingDirector of XCEL Power Systems, Ltd. since September 1996 and as ManagingDirector of EMRISE Electronics Ltd. since March 1992.  Prior tojoining us in 1992, he was Sales and Marketing Director of Jasmin ElectronicsPLC, a major United Kingdom software and systems provider, from 1987 to 1992. Mr. Jefferiesheld a variety of project management positions at GEC Marconi from 1978 to1987. Mr. Jefferies earned a B.S. degree in Engineering from LeicesterUniversity, and has experience in mergers and acquisitions. Mr. Jefferiesis a citizen and resident of the United Kingdom.

 

**D. John Donovan** was appointed as our Chief Financial Officerin July 2009.  He served as VicePresident Finance and Administration, Secretary and Treasurer from May 16,2007 to July 2009. Prior to joining us, Mr. Donovan served as amanagement consultant at DLC, Inc. where he was employed from December 2004to April 2007.  During that time, he handled various financial andaccounting functions for the firm’s clients, including his principal client,AeroVironment, Inc. (NasdaqGM: AVAV). From March 2002 to October 2004,Mr. Donovan served as president and chief financial officer of Chem LabProducts, Inc., a private manufacturer of chemicals. Prior to that, heserved as chief financial officer of Gainey Ceramics, as controller ofRembrandt Photo Services, as director of financial reporting at TransamericaCorporation, as manager of financial reporting at Capitol Multimedia, Inc.,and as a certified public accountant at Price Waterhouse and Ernst &Young LLP. Mr. Donovan earned a B.S. degree in Accounting and a Master ofAccountancy degree in Information Systems from Brigham Young University and isa certified public accountant.

 

**Laurence P. Finnegan, Jr.**has served as a Class II director since March 26,1997.  In addition, he was a director of EMRISE Electronics Corporationfrom 1985 to March 1997, and was EMRISE Electronic Corporations part-timeChief Financial Officer from 1994 to 1997. Mr. Finnegan has held positionswith ITT (1970-1974) as controller of several divisions, Narco Scientific(1974-1983) as Vice President Finance, Chief Financial Officer, Executive VicePresident and Chief Operating Officer, and Fischer & Porter(1986-1994) as Senior Vice President, Chief Financial Officer and Treasurer.Since August 1995, he has been a principal of GwynnAllen Partners,Bethlehem, Pennsylvania, an executive management consulting firm. From1996-2008 Mr. Finnegan was a director and the President of GA Pipe, Inc.,a manufacturing company based in Langhorne, Pennsylvania. From September 1997to January 2001, Mr. Finnegan served as Vice President Finance andChief Financial Officer of QuestOne Decision Sciences, an efficiency consultingfirm based in Pennsylvania. Since August 2001, Mr. Finnegan hasserved as a director and the Vice President and Chief Financial Officer ofVerdaSee Solutions, Inc., a consulting and software company based inPennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St.Joseph’s University.  Mr. Finnegan’seducation and lifetime of experience in accounting, including several positionsas Chief Financial Officer and controller at industrial and manufacturingcompanies, as well as his business acumen, judgment, integrity and reputation mmakes him an ideal director and chair of our Audit Committee.

 

**Otis W. Baskin** has served as a Class I director since February 6,2004.  He has been a Professor of Management at The George L.Graziadio School of Business and Management at Pepperdine University in Malibu,California since June 1995 through present and also served as dean from1995 to 2001.  As dean at Pepperdine hewas responsible for all aspects of the management of an organization with 200employees and $47 million in annual revenue.  He has been a member of thefull-time faculty of the University of Houston - Clear Lake (1975-1987), wherehe served as Coordinator of the Management Faculty and Director of the Centerfor Advanced Management Programs. He has also been Professor of Management atArizona State University, West Campus (1987-1991) and The University of Memphis(1991-1995), in addition to serving as dean at both universities.  In each of these assignments he as hadresponsibilities for recruitment and setting compensation of both professionaland support personnel.  Dr. Baskinworked with AACSB International (Association for the Advancement of CollegiateSchools of Business) as Special Advisor to the President and as Chief ExecutiveOfficer from July 2002 to June 2004. He is an Associate with theFamily Business Consulting Group, where he advises family owned and closelyheld businesses. He has served as an advisor to Exxon/Mobile Research andEngineering Corporation, NASA and the United States Air Force.  Dr. Baskin is an expert in internationalbusiness who has worked with companies and business schools in more than 40countries.  He earned a Ph.D. in Management, Public Relations andCommunication Theory from The University of Texas at Austin, an M.A. degree inSpeech Communication from the University of Houston, and a B.A. degree inReligion from Oklahoma Christian University. Dr. Baskin brings a unique blend of business, management,communications and leadership skills, experience and education, as well as hisjudgment, integrity and reputation, to his role as director and chair of theCompensation Committee.

 

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**Richard E. Mahmarian** was appointed as a Class III directoron March 1, 2006. He is currently serving as a principal and Chairman,President and Chief Executive Officer of Control Solutions, Inc., acompany that specializes in providing business systems including hardware,software, consumable products and services to major United States corporations,since December 2003. Mr. Mahmarian also is serving as the ManagingMember and Chairman and Chief Executive Officer of REM Associates, LLC, aprivate investment and consulting company, since 1997. From 1998 until 2001, Mr. Mahmarianwas the owner of Alpha Microsystems, LLC, a company that manufactured and soldmini-computer systems, personal computers and servers, provided networkservices and support, and information technology hardware and software servicesthroughout North America through 50 field offices. In addition, from 1997 until2006, Mr. Mahmarian owned R&R Palos Verdes Enterprises, Inc., ahome construction company in Los Angeles, California.  He served in theUnited States Navy and was honorably discharged. While in the Navy, he receivedextensive training in advanced electronic technologies. Mr. Mahmarian earneda B.A. degree in Accounting from Upsala College and an M.B.A. in Marketing andEconomics from Seton Hall University. Mr. Mahmarian is a member of theBoard of Regents of Seton Hall University and the Board of Advisors ofCrestmont College of the Salvation Army. Mr. Mahmarian makes an ideal director and chair of the Nominatingand Corporate Governance Committee because of his long and deep experience infounding, running and growing technology companies with similar technical,engineering, manufacturing, sales and marketing, and distribution issues andchallenges, in addition to his business acumen, judgment, integrity andreputation.

 

**Term of Office and Family Relationships**

 

Our officers are appointed by, and serve at the discretion of, ourboard of directors. There are no family relationships among our executiveofficers, and directors.

 

**Board of Directors**

 

*Board Composition, Responsibilities and Leadership Structure*

 

Our business, property and affairs are managed under the direction ofour Board of Directors. Directors are kept informed of our business throughdiscussions with our executive officers, by reviewing materials provided tothem and by participating in meetings of our board and its committees.

 

Our bylaws provide that our board of directors shall consist of atleast four directors. Our board is divided into three classes of directors: Class I,Class II and Class III. The term of office of each class of directorsis three years, with one class expiring each year at our annual meeting ofstockholders. We currently have four directors on our board, with no vacancies.** **Our current board consists of one Class Idirector whose term expires at our 2012 annual meeting, one Class IIdirector whose term expires at our 2010 annual meeting, and two Class IIIdirectors whose terms expire at our 2011 annual meeting.

 

The independent members of our Board of Directors areselected because of their independence from management; depth of understandingof technology, manufacturing, sales and marketing, finance and/or otherelements directly relevant to the technology and business of EMRISE; andeducation and professional background; judgment, skill, integrity andreputation.

 

The leadership of our Company and our board is split between theexecutive and chairman leadership of Mr. Oliva, our founder, on the onehand and our independent directors, which make up 75% of the board, on theother hand.  Mr. Oliva has over 40years of experience in the electronics and communications industry.  His in-depth knowledge of each of ourbusinesses and the competitive challenges each business faces, as well as hisextensive experience as a director and senior member of management, make himthe best qualified director to serve as chairman.  Our independent directors are strong leaderswith diverse educations, skills and backgrounds.  They are appropriately skeptical, leading tothorough review and oversight of the strategies and actions proposed by thechairman and management.  The independentmembers meet regularly in executive session, with the most 

 

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qualifiedmember taking the lead in such sessions based on the issues being discussed.  The board may subsequently decide to changeits leadership structure, as there is no formal policy that requires the chiefexecutive and chairman to be served by one person.

 

We believe the combination of Mr. Oliva as our Chief ExecutiveOfficer and Chairman in combination with our strong independent board membershas been an effective leadership structure for EMRISE.  The division of duties and the level ofcommunication between the board and our management provides the basis for theproper functioning of our board and its oversight of management.

 

Management of the Company is primarily responsible for managing therisks we face in the ordinary course of operating the business.  The board actively oversees potential risksand risk management activities by receiving operational and strategicpresentations from management which include discussions of key risks to ourbusiness.  In addition, the board hasdelegated risk oversight to each of its key committees within their areas ofresponsibility.  For example, the auditcommittee assists the Board in its risk oversight function by reviewing anddiscussing with management our system of disclosure controls and our internalcontrols over financial reporting.  Thenominating and corporate governance committee assists the board in its riskoversight function by periodically reviewing and discussing with managementimportant compliance and quality issues. The compensation committee assists the board in its risk oversightfunction by overseeing strategies with respect to our incentive compensationprograms and key employee retention issues. There is a significant amount of cross over of the membership of thevarious committees, allowing information to flow freely outside of a full boardmeeting.

 

*Board Committees*

 

Our board of directors currently has an audit committee, a compensationcommittee and a nominating and corporate governance committee.

 

*Audit Committee*

 

The audit committee selects our independent registered publicaccountants; reviews the results and scope of the audit and other servicesprovided by our independent registered public accountants; reviews ourfinancial statements for each interim period and for our year end and ourinternal financial and accounting controls; and recommends, establishes and monitorsour disclosure controls and procedures. Our three independent directors, Messrs. Finnegan,Baskin, and Mahmarian, served on our audit committee throughout 2009, with Mr. Finneganserving as chairman.  Our board of directors has determined that Messrs. Finneganand Mahmarian are audit committee financial experts. The audit committeeoperates pursuant to a charter approved by our board of directors and auditcommittee, according to the rules and regulations of the SEC.

 

*Compensation Committee*

 

The compensation committee is responsible for establishing andadministering our policies involving the compensation of all of our executiveofficers and establishing and recommending to our board of directors the termsand conditions of all employee and consultant compensation and benefit plans.Our entire board of directors also may perform these functions with respect toour employee stock option plans. Messrs. Finnegan and Mr. Baskin haveserved on the compensation committee throughout 2009, with Mr. Baskinserving as chairman.  Mr. Mahmarian was appointed to the compensationcommittee in March 2008.  The compensation committee operatespursuant to a charter approved by our board of directors and compensationcommittee.

 

*Nominating and Corporate Governance Committee*

 

The corporate governance and nominating committee reviews and providesoversight with regards to our corporate governance related policies andprocedures and also recommends nominees to our board of directors andcommittees of our board of directors, develops and recommends to our board ofdirectors corporate governance principles, and oversees the evaluation of theboard of directors and management. Messrs. Baskin, Mahmarian and Finneganhave served on the nominating committee throughout 2009.  Mr. Mahmarianserves as 

 

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chairmanof the corporate governance and nominating committee.  The nominatingcommittee utilizes a variety of methods for identifying and evaluating nomineesfor director, including candidates that may be referred by stockholders.

 

The corporate governance and nominating committee will considercandidates for director recommended by any stockholder that is the beneficialowner of shares representing more than 1.0% of the then-outstanding shares ofour common stock and that has beneficially owned those shares for at least oneyear. The corporate governance and nominating committee will evaluate thoserecommendations by applying its regular nominee criteria and considering theadditional information described in the corporate governance and nominatingcommittee’s below-referenced charter. Stockholders that desire to recommendcandidates for the board for evaluation may do so by contacting EMRISECorporation in writing, identifying the potential candidate and providingbackground and other information in the manner described in the nominatingcommittee’s charter. Candidates may also come to the attention of thenominating committee through current board members, professional search firmsand other persons. In evaluating potential candidates, the corporate governanceand nominating committee will take into account a number of factors, including,among others, the following:

 

independencefrom management;

 

depthof understanding of technology, manufacturing, sales and marketing, financeand/or other elements directly relevant to the technology and business of ourcompany;

 

educationand professional background;

 

judgment,skill, integrity and reputation;

 

existingcommitments to other businesses as a director, executive or owner;

 

personalconflicts of interest, if any; and

 

thesize and composition of the board of directors.

 

In addition, prior to nominating a sitting director for re-election atan annual meeting of stockholders, the corporate governance and nominatingcommittee considers the director’s past attendance at, and participation in,meetings of our board of directors and its committees and the director’s formaland informal contributions to their respective activities.

 

The corporate governance and nominating committeestrives to maintain a board of directors with a diverse set of skills andqualifications, to ensure that the board of directors is adequately serving theneeds of our stockholders.  Beforeevaluating director candidates, the committee reviews the skills andqualifications of the directors currently serving on the board and identifiesany areas of weakness or skills of particular importance.  On the basis of that review, the committeewill evaluate director candidates with those identified skills.  While the corporate governance and nominatingcommittee does not have a formal policy on board diversity, the committee takesinto account a broad range of diversity considerations when assessing directorcandidates, including individual backgrounds and skill sets, professionalexperiences and other factors that contribute to our board having anappropriate range of expertise, talents, experiences and viewpoints, andconsiders those diversity considerations, in view of the needs of the board asa whole, when making decisions on director nominations.

 

The corporate governance and nominating committee operates pursuant toa charter approved by our board of directors and corporate governance andnominating committee.

 

*Committee Charters*

 

The charters of our audit, compensation and nominating committees, andour codes of business conduct and ethics, are included on our website athttp://www.emrise.com. The foregoing information is also available in print toany stockholder who requests it.  All such requests should be in writingand should be sent to “c/o Secretary” at 611 Industrial Way, Eatontown, NewJersey 07724 or jdonovan@emrise.com.

 

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*Security Holder Communications with the Board of Directors*

 

The board of directors has established a process to receivecommunications from security holders. Security holders and other interestedparties may contact any member (or all members) of the board of directors, orthe independent directors as a group, any committee of the board of directorsor any chair of any such committee, by mail or electronically. To communicatewith the board of directors, any individual directors or any group or committeeof directors, correspondence should be addressed to the board of directors orany such individual directors or group or committee of directors by either nameor title. All such correspondence should be sent “c/o Secretary” at 611Industrial Way, Eatontown, New Jersey 07724. To communicate with any of ourdirectors electronically, security holders should send an email to ourSecretary at: jdonovan@emrise.com.

 

All communications received as set forth in the preceding paragraphwill be opened by the Secretary for the sole purpose of determining whether thecontents represent a message to our directors. Any contents that are not in thenature of advertising, promotions of a product or service, patently offensivematerial or matters deemed inappropriate for the board of directors will beforwarded promptly to the addressee. In the case of communications to the boardof directors or any group or committee of directors, our Secretary will makesufficient copies (or forward such information in the case of e-mail) of thecontents to send to each director who is a member of the group or committee towhich the envelope or e-mail is addressed.

 

*Risk Oversight*

 

Our Board of Directors is responsible for consideration and oversightof risks facing EMRISE and its subsidiaries. Together with the Board’s standing committees, the Board is responsiblefor ensuring that material risks are identified and managed appropriately.  The Board and its committees regularly reviewmaterial strategic, operational, financial, compensation and compliance riskswith senior management.  The AuditCommittee is responsible for discussing overall risk assessment and riskmanagement practices, as set forth in the Audit Committee’s charter.  The Audit Committee also performs a centraloversight role with respect to financial and compliance risks and meets atleast quarterly with our independent auditor, BDO Siedman LLP.  The Compensation Committee considers risk inconnection with its design of compensation programs for our executives.

 

**Code of Ethics**

 

Our board of directors has adopted an Amended and Restated Code ofBusiness Conduct and Ethics that applies to all of our directors, officers andemployees and an additional Code of Business Ethics that applies to our ChiefExecutive Officer and senior financial officers.  These codes areavailable on our Internet website, located at http://www.emrise.com.

 

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-Krelating to amendments to or waivers from provision of these codes that relateto one or more of the items set forth in Item 406(b) of Regulation S-K, bydescribing on our Internet website within four business days following the dateof a waiver or a substantive amendment, the date of the waiver or amendment,the nature of the amendment or waiver, and the name of the person to whom thewaiver was granted.

 

Information on our Internet website is not, and shall not be deemed tobe, a part of this report or incorporated into any other filings we make withthe SEC.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) of the Exchange Act requires our executiveofficers and directors, and persons who beneficially own more than 10% of aregistered class of our common stock, to file initial reports of ownership andreports of changes in ownership with the SEC.  These officers, directorsand stockholders are required by the SEC regulations to furnish us with copiesof all reports that they file.

 

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Basedsolely upon a review of copies of the reports furnished to us during the yearended December 31, 2009 and thereafter, or any written representationsreceived by us from directors, officers and beneficial owners of more than 10%of our common stock that no other reports were required, we believe that,during 2009, (i) all Section 16(a) filing requirementsapplicable to our directors and officers were met and (ii) except for any Form 5filings that may have been required, all Section 16(a) filingrequirements applicable to the beneficial owners of more than 10% of our commonstock were met.

** **

**Item 11.**                Executive Compensation.

**Summary Compensation Table**

 

The following table provides information concerning the compensationfor the years ended December 31, 2008 and December 31, 2009 for ourprincipal executive officer, our principal financial officer, and our chiefoperating officer, who were the only persons who served as executive officersduring 2009 (collectively, the “named executive officers”).

 
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Option**  | ** ** | **All Other**    | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|------------------|------------|------------|------------|
| **Name and**             | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards**  | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **Principal Position**   | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($) (1)** | ** ** | **($)**          | ** ** | **($)**    | ** ** |
|                     |       |       |       |       |       |       |       |        |       |             |       |       |       |
| Carmine  T. Oliva        |       | 2008       |       | 415,000    |       | —     |       | 51,478      |       | 26,993           | (2)        | 493,471    |       |
| Chief  Executive Officer |       | 2009       |       | 419,523    |       | —     |       | 22,325      |       | 47,011           | (2)        | 488,859    |       |
|                     |       |       |       |       |       |       |       |        |       |             |       |       |       |
| Graham  Jefferies (3)    |       | 2008       |       | 332,226    |       | —     |       | 43,823      |       | 29,306           | (4)        | 405,355    |       |
| President  and Chief     |       | 2009       |       | 278,156    |       | —     |       | 19,907      |       | 32,568           | (5)        | 330,631    |       |
| Operating  Officer       |       |       |       |       |       |       |       |        |       |             |       |       |       |
|                     |       |       |       |       |       |       |       |        |       |             |       |       |       |
| D.  John Donovan         |       | 2008       |       | 237,866    |       | 10,000     |       | 51,478      |       | 21,222           | (6)        | 320,566    |       |
| Chief  Financial Officer |       | 2009       |       | 250,506    |       | —     |       | 22,325      |       | 24,226           | (7)        | 297,057    |       |

 

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(1)          The dollar amount reflected is the fair value calculated for stockoptions granted in those years, as well as prior fiscal years, in accordancewith applicable FASB guidance.  For purposes of the amount shown in thetable above, no forfeitures were assumed to take place.  The fair value ofeach grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions for the fiscalyears indicated. For purposes of the amounts shown in the table above, noforfeitures were assumed to take place.  Information regarding thematerial terms of the grants for which we recognized compensation costs in 2007and 2008 is included in the “Outstanding Equity Awards at December 31,2008” table below.

 

| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                        |       | None     |       | None     |       |
| Expected volatility                   |       | 89.34    | %          | 62.46    | %          |
| Risk-free interest rate               |       | 0.89     | %          | 2.51     | %          |
| Expected option life (in years)       |       | 6.0      |       | 6.0      |       |
| Weighted-average fair value per share |       | $        | 1.08       |     | $          | 4.59 |   |
|                                       |            |          |            |          |            |  |  |

 

(2)          Amount represented includes $4,041 in insurance premiums we paid withrespect to a $1,000,000 term life insurance policy for the benefit of Mr. Oliva’sspouse.  This amount also includes perquisites or personal benefits provided,none of which individually exceed the greater of $25,000 or 10% of the totalamount of these benefits provided to Mr. Oliva.

 

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(3)      Mr. Jefferies is based in the United Kingdom and receives hisremuneration in British pounds sterling. The compensation amounts listed for Mr. Jefferiesare shown in United States dollars, converted from British pounds sterling usingthe average of the daily conversion rates in effect in 2009 and 2008,respectively.  Mr. Jefferies salaryin British pounds sterling was approximately £180,000 for both 2008 and 2009.

(4)          Amount represented includes $19,780 in company contributions to Mr. Jefferies’retirement account.  This amount also includes perquisites or personalbenefits provided, none of which individually exceed the greater of $25,000 or10% of the total amount of these benefits provided to Mr. Jefferies.

(5)          Amount represented includes $16,689 in company contributions to Mr. Jefferies’retirement account.  This amount also includes perquisites or personalbenefits provided, none of which individually exceed the greater of $25,000 or10% of the total amount of these benefits provided to Mr. Jefferies.

(6)      Amount represented includes approximately $1,100 in insurance premiumswe paid with respect to a term life insurance policy for the benefit of Mr. Donovan’sspouse and $12,900 in medical and dental benefits.  The value of perquisitesand other personal benefits Mr. Donovan received was less than $10,000 inaggregate.

(7)          Amount represented includes approximately $1,000 in insurance premiumswe paid with respect to a term life insurance policy for the benefit of Mr. Donovan’sspouse and $13,200 in medical and dental benefits. ** **This amount also includes perquisites or personalbenefits provided, none of which individually exceed the greater of $25,000 or10% of the total amount of these benefits provided to Mr. Donovan.

 

**Termination Payments**

 

*Carmine T.Oliva*

 

We may terminate Mr. Oliva’s employment at any time, with orwithout due cause. “Due cause” includes any intentional misapplication of ourfunds or other material assets, or any other act of dishonesty injurious to us,or conviction of a felony or a crime involving moral turpitude. “Due cause”also includes abuse of controlled substances or alcohol and breach,nonperformance or nonobservance of any of the terms of the agreement, providedthat Mr. Oliva fails to satisfactorily remedy the performance problemfollowing 30 days’ written notice.

 

Mr. Oliva may terminate his employment at any time, with orwithout good reason. However, termination for good reason must occur within 90days of the occurrence of an event constituting good reason, and Mr. Olivamust furnish us with written notice of the event within 30 days after theinitial existence of the event and provide us with at least a 30-day cureperiod. “Good reason” includes: a material diminution in his authority, duties,responsibilities, titles or offices; a purported reduction in Mr. Oliva’sbase salary amounting to a material diminution in his salary to an amount lessthan 10% below the base salary in effect at the time of the reduction; ourfailure to timely cure or diligently initiate a cure of any material breachwithin 30 days after Mr. Oliva gives us written notice of the breach.

 

If we terminate Mr. Oliva’s employment for due cause or due to Mr. Oliva’sbreach of his employment agreement by refusing to continue his employment, orif Mr. Oliva terminates his employment without good reason, then allcompensation and benefits for Mr. Oliva will cease, other than amountsunder retirement and benefit plans and programs that were earned and vested bythe date of termination, pro rata annual salary through the date oftermination, any stock options that were vested as of the date of termination,and accrued vacation as required by California law.

 

If Mr. Oliva becomes incapacitated, we may terminate hisemployment under the agreement upon 30 days’ prior written notice.  Upon Mr. Oliva’sdeath, the agreement terminates immediately. If Mr. Oliva’s employmentterminates due to his incapacity or death, Mr. Oliva or his estate orlegal representative will be entitled to receive benefits under our retirementand benefits plans and programs that were earned and vested at the date oftermination, a prorated incentive bonus for the fiscal year in which incapacityor death occurred (to the extent he would otherwise be eligible), and a lump sumcash payment in an amount equal to one year of his then current annual salary,grossed up to cover applicable taxes that are deducted from such amount.

 

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If Mr. Oliva’s employment terminates for good reason or other thanas a result of due cause, incapacity, death or retirement, Mr. Oliva willbe entitled to his salary through the end of the month in which terminationoccurs plus credit for accrued vacation, and a prorated incentive bonus, ifeligible, for the fiscal year during which termination occurred. In addition,under those circumstances, if Mr. Oliva enters into a separation andrelease agreement with us, then he will be entitled to receive (i) aseverance payment equal to three times his then current annual salary (grossedup to cover applicable taxes that are deducted from such amount), (ii) allmedical insurance benefits to which he was entitled immediately prior to thedate of termination for a period of eighteen months or the date that Mr. Oliva’scontinued participation in our medical insurance plan was not possible underthe plan, whichever was earlier, (iii) a lump-sum cash payment equal toeighteen times the estimated monthly COBRA premiums at the time of termination(taking into account all known or anticipated premium increases) to be used by Mr. Olivato maintain his medical insurance coverage for an additional eighteen months,and (iv) a lump-sum cash payment equal to thirty-six times the estimatedmonthly life insurance premiums at the time of termination (taking into accountall known or anticipated premium increases) to be used by Mr. Oliva tomaintain his existing group life insurance coverage and the $1,000,000 lifeinsurance policy on his life for three years.  If our medical insuranceplan did not allow Mr. Oliva’s continued participation, then we will berequired to pay to Mr. Oliva, in monthly installments, the monthly premiumor premiums for COBRA coverage, covering the eighteen month period described inclause (ii) in the preceding sentence.

 

Immediately preceding the occurrence of a change in control, andregardless of whether Mr. Oliva’s employment terminates and/or he receivesseverance payments as a result of the change in control, Mr. Oliva will beentitled to receive a payment equal to three times his then current annualsalary (grossed up to cover applicable taxes that are deducted from suchamount).

 

A “change in control” includes the following circumstances:

 

(a) theacquisition by any person or group of beneficial ownership of securitiesentitled to vote generally in the election of our directors (“voting securities”)that represent 40% or more of the combined voting power of our then outstandingvoting securities or 50% or more of the combined fair market value of our thenoutstanding stock, other than:

 

(i) anacquisition by a trustee or other fiduciary holding securities under anyemployee benefit plan (or related trust) sponsored or maintained by us or anyperson controlled by us or by any employee benefit plan (or related trust)sponsored or maintained by us or any person controlled by us, or

 

(ii) anacquisition of voting securities by us or a corporation owned, directly or indirectly,by our stockholders in substantially the same proportions as their ownership ofour stock;

 

(b) amajority of members of our board is replaced during any 12-month period bydirectors whose appointment or election is not endorsed by a majority of membersof our board before the date of the appointment or election, excluding anyindividual whose initial assumption of office occurs as a result of an actualor threatened election contest with respect to the election or removal ofdirectors or other actual or threatened solicitation of proxies or consents byor on behalf of a person other than our board;

 

(c) theacquisition by any person or group, or combined acquisitions during the12-month period ending on the date of the most recent acquisition by suchperson or group, of ownership of assets from us that have a total gross fairmarket value equal to or more than 40% of the total gross fair market value ofall of our assets immediately before such acquisition; and

 

(d) stockholderapproval of a complete liquidation or dissolution of our company.

 

Notwithstanding circumstance (a) above, however, if we make anacquisition of our securities that (x) causes our voting securitiesbeneficially owned by a person or group to represent 40% or more of the combinedvoting power of our then outstanding voting securities or (y) causes ourstock beneficially owned by a person or group to represent 50% or more of thecombined fair market value of our then outstanding stock, the acquisition willnot be considered an acquisition by any person or group for purposes ofcircumstance (a) unless the person or group subsequently becomes thebeneficial owner of additional securities of EMRISE Corporation.

 

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For purposes of circumstance (a) above, the calculation of votingpower will be made as if the date of the acquisition were a record date for avote of our stockholders, and for purposes of circumstance (c) above, thecalculation of voting power will be made as if the date of the consummation ofthe transaction were a record date for a vote of our stockholders.

 

Notwithstanding the above, there will be no change in control eventwhen there is a transfer to an entity that is controlled by our stockholdersimmediately after the transfer.  A transfer of assets by us is not treatedas a change in control if the assets are transferred to: a stockholder of ours(immediately before the asset transfer) in exchange for or with respect to thestockholders’ stock; an entity, 50% or more of the total value or voting powerof which is owned, directly or indirectly, by us; a person or group that owns,directly or indirectly, 50% or more of the total value or voting power of allof our outstanding stock; or an entity, at least 50% of the total value orvoting power of which is owned, directly or indirectly, by a person or groupdescribed in the immediately preceding clause.

 

*GrahamJefferies*

 

Mr. Jefferies may terminate his employment at any time, with orwithout good reason. However, termination for good reason must occur within 30days of the occurrence of an event constituting good reason. The term “goodreason” has the same meaning as in Mr. Oliva’s employment agreementdescribed above.

 

We may terminate Mr. Jefferies employment at any time, immediatelyupon written notice, with or without due cause. The term “due cause” has thesame meaning as in Mr. Oliva’s employment agreement described above, exceptthat Mr. Jefferies may satisfactorily remedy the performance problemfollowing 90 days’ written notice. If we terminate Mr. Jefferies’employment for due cause or due to Mr. Jefferies’ breach of his employmentagreement by refusing to continue his employment, or if Mr. Jefferiesterminates his employment without good reason, then all compensation andbenefits for Mr. Jefferies will cease, other than amounts under retirementand benefit plans and programs that were earned and vested by the date oftermination, pro rata annual salary through the date of termination, and anystock options that were vested as of the date of termination, and accruedvacation as required by applicable law.

 

If Mr. Jefferies becomes mentally or physically incapable ofperforming the services required under the agreement for a period of 180consecutive days, the agreement terminates; provided, however, that Mr. Jefferieswill remain an employee of EMRISE Electronics Ltd. and be entitled toremuneration in an amount equal to the amount paid under EMRISE ElectronicsLtd.’s permanent health insurance scheme, subject to the paragraph immediatelybelow. Upon Mr. Jefferies’ death, the agreement terminates immediately.

 

If Mr. Jefferies’ employment terminates due to his incapacity ordeath, Mr. Jefferies or his estate or legal representative will beentitled to receive benefits under our retirement and benefits plans andprograms that were earned and vested at the date of termination, a proratedincentive bonus for the fiscal year in which incapacity or death occurred (tothe extent he would otherwise be eligible), and a lump sum cash payment in anamount equal to one year of his then current annual salary, grossed up to coverapplicable taxes that are deducted from such amount.

 

If Mr. Jefferies’ employment terminates for good reason or otherthan as a result of due cause, incapacity, death or retirement, Mr. Jefferieswill be entitled to his salary through the end of the month in whichtermination occurs plus credit for accrued vacation, and a prorated incentivebonus, if eligible, for the fiscal year during which termination occurred. Inaddition, under those circumstances, if Mr. Jefferies enters into aseparation and release agreement with us, then he will be entitled to receive aseverance payment equal to two times his then current annual salary (grossed upto cover applicable taxes that are deducted from such amount), to receive allmedical and life insurance benefits to which he was entitled immediately priorto the date of termination (or at the election of Mr. Jefferies in theevent of a change in control, immediately prior to the date of the change incontrol) for a period of two years or the date or dates that Mr. Jefferies’continued participation in our medical and/or life 

 

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insuranceplans was not possible under the plans, whichever was earlier.  If ourmedical and/or life insurance plans did not allow Mr. Jefferies’ continuedparticipation, then we will be required to pay to Mr. Jefferies, inmonthly installments, the monthly premium or premiums that had been payable byus covering the two-year period.

 

Immediately preceding the occurrence of a change in control, andregardless of whether Mr. Jefferies’ employment terminates and/or hereceives severance payments as a result of the change in control, Mr. Jefferieswill be entitled to receive a payment equal to two times his then current annualsalary (grossed up to cover applicable taxes that are deducted from suchamount). The term “change in control” has the same meaning as in Mr. Oliva’semployment agreement described above.

 

*D. JohnDonovan*

 

Mr. Donovan may terminate his employment at any time, with orwithout good reason. However, termination for good reason must occur within 90days of the occurrence of an event constituting good reason, and Mr. Donovanmust furnish us with written notice of the event within 30 days after theinitial existence of the event and provide us with at least a 30-day cureperiod. The term “good reason” has the same meaning as in Mr. Oliva’semployment agreement described above.

 

If we terminate Mr. Donovan’s employment for due cause or due to Mr. Donovan’sbreach of his employment agreement by refusing to continue his employment, orif Mr. Donovan terminates his employment without good reason, then allcompensation and benefits for Mr. Donovan will cease, other than amountsunder retirement and benefit plans and programs that were earned and vested bythe date of termination, pro rata annual salary through the date oftermination, any stock options that were vested as of the date of termination,and accrued vacation as required by California law.

 

If Mr. Donovan becomes incapacitated, we may terminate hisemployment under the agreement upon 30 days’ prior written notice.  Upon Mr. Donovan’sdeath, the agreement terminates immediately. If Mr. Donovan’s employmentterminates due to his incapacity or death, Mr. Donovan or his estate orlegal representative will be entitled to receive benefits under our retirementand benefits plans and programs that were earned and vested at the date oftermination, a prorated incentive bonus for the fiscal year in which incapacityor death occurred (to the extent he would otherwise be eligible), and a lumpsum cash payment in an amount equal to one year of his then current annualsalary, grossed up to cover applicable taxes that are deducted from suchamount.

 

If Mr. Donovan’s employment terminates for good reason or otherthan as a result of due cause, incapacity, death or retirement, Mr. Donovanwill be entitled to his salary through the end of the month in whichtermination occurs plus credit for accrued vacation, and a prorated incentivebonus, if eligible, for the fiscal year during which termination occurred. Inaddition, under those circumstances, if Mr. Donovan enters into aseparation and release agreement with us, then he will be entitled to receive (i) aseverance payment equal to his then current annual salary (grossed up to coverapplicable taxes that are deducted from such amount), (ii) all medicalinsurance benefits to which he was entitled immediately prior to the date oftermination for a period of eighteen months or the date that Mr. Donovan’scontinued participation in our medical insurance plan was not possible underthe plan, whichever was earlier, and (iii) a lump-sum cash payment equalto $1,650 to be used by Mr. Donovan to maintain his existing life insurance coverage for a period of eighteen months.  If our medicalinsurance plan did not allow Mr. Donovan’s continued participation, thenwe will be required to pay to Mr. Donovan, in monthly installments, themonthly premium or premiums for COBRA coverage, covering the eighteen monthperiod described in clause (ii) in the preceding sentence.

 

Immediately preceding the occurrence of a change in control, andregardless of whether Mr. Donovan’s employment terminates and/or hereceives severance payments as a result of the change in control, Mr. Donovanwill be entitled to receive a payment equal to his then current annual salary(grossed up to cover applicable taxes that are deducted from such amount).

 

The terms “due cause” and “change in control” have the same meaning asin Mr. Oliva’s employment agreement described above.

 

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**Outstanding Equity Awards at December 31, 2009**

 

The following table sets forth information about outstanding equityawards held by our named executive officers as of December 31, 2009. The information below has been adjusted to reflect a 1 for 3.75 reverse splitof our common stock that we completed in November 2008.

 
| ** **        | ** ** | **Option Awards**                                                             | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** |
|              |       |                                                                          |       |   |   |   |   |   |   |
| Carmine  T. Oliva |       | 26,667                                                                        |       | — |   | 1.88 |   | 01/31/2011 |   |
|              |       | 14,134                                                                        |       | — |   | 1.31 |   | 01/22/2013 |   |
|              |       | 6,934                                                                         |       | — |   | 3.75 |   | 02/24/2014 |   |
|              |       | 13,334                                                                        |       | — |   | 7.50 |   | 12/29/2015 |   |
|              |       | 8,889                                                                         |       | 11,111 | (1) | 2.18 |   | 08/22/2018 |   |
|              |       | 8,889                                                                         |       | 11,111 | (2) | 3.06 |   | 08/22/2018 |   |
|              |       | 5,000                                                                         |       | 15,000 | (3) | 1.53 |   | 03/24/2019 |   |
|              |       |                                                                          |       |   |   |   |   |   |   |
| Graham  Jefferies |       | 14,400                                                                        |       | — |   | 1.31 |   | 01/22/2013 |   |
|              |       | 10,667                                                                        |       | — |   | 3.75 |   | 02/24/2014 |   |
|              |       | 13,334                                                                        |       | — |   | 7.50 |   | 12/29/2015 |   |
|              |       | 8,889                                                                         |       | 11,111 | (1) | 2.18 |   | 08/22/2015 |   |
|              |       | 8,889                                                                         |       | 11,111 | (2) | 3.06 |   | 08/22/2015 |   |
|              |       | 5,000                                                                         |       | 15,000 | (3) | 1.53 |   | 03/24/2016 |   |
|              |       |                                                                          |       |   |   |   |   |   |   |
| D.  John Donovan  |       | 6,667                                                                         |       | — |   | 4.24 |   | 05/15/2017 |   |
|              |       | 6,667                                                                         |       | — |   | 4.61 |   | 07/01/2017 |   |
|              |       | 8,889                                                                         |       | 11,111 | (1) | 2.18 |   | 08/22/2015 |   |
|              |       | 8,889                                                                         |       | 11,111 | (2) | 3.06 |   | 08/22/2015 |   |
|              |       | 5,000                                                                         |       | 15,000 | (3) | 1.53 |   | 03/24/2016 |   |

 

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(1) Theoption becomes exercisable in three equal installments on August 22, 2009,2010 and 2011.

(2) Theoption shall be exercisable in three equal installments on the latter of (a) August 22,2009, August 22, 2010 and August 22, 2011, respectively, or (b) thedate the Company files its financial statements with the SEC for the secondconsecutive fiscal quarter in which the Company reports net income (aftertaxes) on its Condensed Consolidated Statements of Operations after August 22,2008.

(3) Theoption becomes exercisable in three equal installments on March 24, 2010,2011 and 2012.

 

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**Director Compensation - 2009**

 

Each non**-**employee directoris entitled to receive $1,000 per month as compensation for his services. Inaddition, each board member chairing a standing committee is entitled toreceive $500 per month as compensation for his services. We reimburse alldirectors for out-of-pocket expenses incurred in connection with attendance atboard and committee meetings. We may periodically award options or warrants toour directors under our existing option and incentive plans.

 

The following table provides information concerning the compensation ofour non-employee directors for the year ended December 31, 2009:

 
| ** **                          | ** ** | **Fees Earned**     | ** ** | **Option**  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------|------------|-------------|------------|------------|------------|
| ** **                          | ** ** | **or Paid in Cash** | ** ** | **Awards**  | ** ** | **Total**  | ** ** |
| **Name**                            | ** ** | **($)**             | ** ** | **($) (1)** | ** ** | **($)**    | ** ** |
|                                |       |                |       |        |       |       |       |
| Laurence  P. Finnegan, Jr. (2) |       | 18,000              |       | 11,162      |       | 29,162     |       |
| Otis  W. Baskin (3)                 |       | 18,000              |       | 11,162      |       | 29,162     |       |
| Richard  E. Mahmarian (4)           |       | 18,000              |       | 11,162      |       | 29,162     |       |

 

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(1) Thedollar amount reflected is the fair value calculated for stock options grantedin that year in accordance with applicable FASB guidance.  We did notrecognize compensation cost for financial reporting purposes for the 2009fiscal year for stock options granted in prior years.  For purposes of theamount shown in the table above, no forfeitures were assumed to takeplace.  The fair value of each grant isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions for the fiscal years indicated:

 

| ** **                            | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|
| Dividend yield                        |       | None     |       |
| Expected volatility                   |       | 89.34    | %          |
| Risk-free interest rate               |       | 0.89     | %          |
| Expected option life (in years)       |       | 7.0      |       |
| Weighted-average fair value per share |       | $        | 1.12       |   |
|                                       |            |          |            |  |

 

(2) AtDecember 31, 2009, Mr. Finnegan held vested and unvested options topurchase an aggregate of 87,601 shares of common stock.

(3) AtDecember 31, 2009, Mr. Baskin held vested and unvested options topurchase an aggregate of 52,668 shares of common stock.

(4) AtDecember 31, 2009, Mr. Mahmarian held vested and unvested options topurchase an aggregate of 43,334 shares of common stock.

 

**Item 12.**                SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

 

*BeneficialOwnership Table*

 

Except as otherwise indicated in the related footnotes, the followingtable sets forth information with respect to the beneficial ownership of ourcommon stock as of March 31, 2010, by:

 

·                  each person known by us to beneficially ownmore than 5% of the outstanding shares of our common stock;

·                  each of our directors;

 

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·                  each of the named executive officers in thesummary compensation table contained above; and

·                  all of our directors and our executiveofficers as a group.

 

Beneficial ownership is determined in accordance with the rules ofthe Securities and Exchange Commission, and includes voting or dispositivepower with respect to the securities.  To our knowledge, except asindicated by footnote, and subject to community property laws where applicable,the persons named in the table below have sole voting and dispositive powerwith respect to all shares of common stock shown as beneficially owned bythem.  Except as indicated in the discussion of contractual beneficialownership limitations below and except as indicated in the footnotes to the tablebelow, shares of common stock underlying derivative securities, if any, thatcurrently are exercisable or convertible or are scheduled to become exercisableor convertible for or into shares of common stock within 60 days after the dateof the table are deemed to be outstanding in calculating the percentageownership of each listed person or group but are not deemed to be outstandingas to any other person or group.  Percentage of beneficial ownership isbased on 10,213,412 shares of common stock outstanding as of the date of thetable.  The information below has been adjusted to reflect a 1 for 3.75reverse split of our common stock that we completed in November 2008.

 

The address of each of the following stockholders, unless otherwiseindicated in the footnotes to the table, is c/o EMRISE Corporation, 611Industrial Way, Eatontown, New Jersey 07724.  Messrs. Oliva,Finnegan, Baskin, and Mahmarian are directors of EMRISE Corporation.  Messrs. Oliva,Donovan and Jefferies are named executive officers and current executiveofficers of EMRISE Corporation.

 
| **Name of Beneficial Owner**                  | ** ** | **Amount and Nature  of Beneficial Ownership** | ** ** | **Percent of  Class** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------|------------|
|                                                         |       |                                                               |       |                       |       |
| Carmine T. Oliva                                             |       | 418,329                                                            | (1)        | 4.06                       | %          |
| Laurence P. Finnegan, Jr.                               |       | 83,435                                                             | (2)        | *                          |       |
| Otis W. Baskin                                               |       | 36,723                                                             | (3)        | *                          |       |
| Richard E. Mahmarian                                         |       | 28,889                                                             | (4)        | *                          |       |
| Graham Jefferies                                             |       | 62,053                                                             | (5)        | *                          |       |
| D. John Donovan                                              |       | 37,895                                                             | (6)        | *                          |       |
| Private Equity Management Group LLC                          |       | 775,758                                                            | (7)        | 7.60                       | %          |
| All executive officers and directors as a group (6  persons) |       | 667,324                                                            | (8)        | 6.34                       | %          |

 

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*                 Less than 1.00%

(1)          Includes 21,837 shares held individually by Mr Oliva’s spouse, and83,847 shares underlying vested options.

(2)          Includes 68,989 shares underlying vested options.

(3)          Includes 34,056 shares underlying vested options.

(4)          Includes 24,722 shares underlying vested options.

(5)          Includes 61,179 shares underlying vested options.

(6)          Includes 36,112 shares underlying vested options.

(7)          Based on share beneficial ownership information contained in a Schedule13G filed February 11, 2008, by Private Equity Management Group LLC(“PEM”).  PEM has indicated that it is deemed to be the beneficial ownerof an aggregate of 775,758 shares underlying warrants, over which the Estate ofDanny Pang, Robert Anderson, Wilbur Quon, Todd Gillespie, Peter Paul Mendel,Lian-Hung Chan, Yuan-Feng Sandra Chang and Anthony Bufinsky, as members of PEM,acting by majority in membership interests may be deemed to have the power tovote or direct the vote and the power to dispose or to direct the dispositionof the shares.  The address for PEM is One Park Plaza, Suite 550,Irvine, California 92614.

(8)          Includes 308,905 shares underlying vested options and 21,837outstanding shares held individually by Mr Oliva’s wife.

 

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**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

The following table gives information about ourcommon stock that may be issued upon the exercise of options, warrants andrights under all of our existing equity compensation plans as of December 31,2009.

 
| **Plan category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                               | ** ** |
| Equity compensation plans approved by security holders      |       | 2,474,504                                                                                          | (1)        | $                                                                                  | 4.37       |                                                                                                                                                  | 8,736,575  | (2) |
| Equity compensation plans not approved by security  holders |       | —                                                                                             |       | —                                                                             |       | —                                                                                                                                                |       |
| Total                                                       |       | 2,474,504                                                                                          |       | $                                                                                  | 4.37       |                                                                                                                                                  | 8,736,575  |   |

 

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(1)               Represents shares ofcommon stock underlying options that are outstanding under our 1993 StockOption Plan, our Employee Stock and Stock Option Plan, our 1997 Stock IncentivePlan, our Amended and Restated 2000 Stock Option Plan and our 2007 StockIncentive Plan. The material features of these plans are described innote 11 to our consolidated financial statements for the years ended December 31,2009 and 2008.

(2)               Represents shares ofcommon stock available for issuance under options that may be issued under ourAmended and Restated 2000 Stock Option Plan and our 2007 Stock Incentive Plan.

 

**Item 13.**                CertainRelationships and Related Transactions, and Director Independence.

**Director Independence**

 

Our board of directors has determined that each of Messrs. Baskin,Finnegan and Mahmarian is independent under Rule 5.3(k) of the NYSEArca Equities Rules because none of those directors has, or during thepast three years has had, a material relationship with us, either directly oras a partner, stockholder or officer of an organization that has a relationshipwith us, and none of those directors is disqualified from being deemedindependent under any of subparagraphs (A)-(F) of Rule 5.3(k)(1) ofthe NYSE Arca Equities Rules. Our board of directors has also determined thateach of member of the audit committee is independent under Rule 10A-3(b)(1) ofthe Securities and Exchange Commission.

 

Under the NYSE Arca Equities Rules, the non-management members of ourboard of directors must meet at regularly scheduled executive sessions withoutmanagement, with a non-management director presiding over each executivesession. A presiding director for each session is selected by the board membersin attendance at the session based upon the topics to be discussed at thesession. The non-management directors can be contacted by calling the chairmanof the audit committee.  Further, if the non-management directors includedirectors who are not independent, then we should at least once a year schedulean executive session including only independent directors. Under the NYSE ArcaEquities Rules, we must disclose if any member of our nominating committee orcompensation committee is not independent.

 

**Transactions with Related Persons**

 

We are party to indemnification agreements with each of our directorsand executive officers.  The indemnification agreements and ourcertificate of incorporation and bylaws require us to indemnify our directorsand officers to the fullest extent permitted by Delaware law.

 

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**Item 14.**                PrincipalAccounting Fees and Services.

 

*Fees andServices for 2009*

 

The following table sets forth the aggregate fees billed to us by BDOSiedman, LLP, our principal accountant, for professional services rendered inconnection with the audit of our consolidated financial statements for the yearended December 31, 2009.

 
| **Fee Category**    | ** ** | **2009** | ** ** |
|---------------------|------------|----------|------------|
|                |       |     |       |
| Audit  Fees         |       | $        | 326,838    |   |
| Audit-Related  Fees |       | 30,000   |       |
| Tax  Fees           |       | 5,000    |       |
| All  Other Fees     |       | —   |       |
| Total               |       | $        | 361,838    |   |

 

Audit Fees.Audit fees consist of fees billed for professional services for (i) auditof our 2009 consolidated financial statements, (ii) review of the interimconsolidated financial statements included in our 2009 quarterly reports, and (iii) servicesthat are normally provided by an independent registered public accounting firmin connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees. Audit related fees in 2009 consisted of fees billed for professionalservices performed with respect to a disposition completed in 2009 and equitytransaction related activities.

 

Tax Fees. Taxfees for 2009 consisted of fees billed for professional services for taxcompliance, tax advice and tax planning. These services include assistanceregarding federal, state and international tax compliance, tax audit defense,customs and duties, mergers and acquisitions, and international tax planning.

 

All Other Fees.No other fees were incurred for 2009.

 

*Pre-Approval Policies and Procedures*

 

Our audit committee pre-approves all services provided by our principalaccountant. Our audit committee also considers in advance whether or not toapprove any non-audit services to be performed by the independent accountingfirm required to be approved by the audit committee pursuant to any applicable rules andregulations.

 

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**PART IV**

**Item 15.**                Exhibitsand Financial Statement Schedules.

 

**(**a)(1)  Financial Statements.

 

**Reference is made to the financial statements listed on and attachedfollowing the Index to Financial Statements contained at page F-1 of thisreport.**

 

**(a)(2) and (c) Financial Statement Schedules.**

 

**Not applicable.**

 

(a)(3) and(b) Exhibits.

* *
| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |   |
|             | 2.1        |            | Stock  Purchase Agreement dated July 13, 2004 between MicroTel International  Inc.; Noel C. McDermott; Warren P. Yost; Noel C. McDermott, as Trustee of the  Noel C. McDermott Revocable Living Trust dated December 19, 1995; and  Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust  dated March 9, 1988 (1) |
|             |       |            |   |
|             | 2.2        |            | Agreement  dated March 1, 2005 among Intelek Properties Limited, XCEL Corporation  Limited, Intelek PLC and EMRISE Corporation relating to the sale and purchase  of the outstanding capital shares of Pascall Electronic (Holdings) Limited  (10) |
|             |       |            |   |
|             | 2.3        |            | Supplemental  Agreement dated March 18, 2005 among Intelek Properties Limited, XCEL  Corporation Limited, Intelek PLC and EMRISE Corporation (10) |
|             |       |            |   |
|             | 2.4        |            | Loan  Agreement dated March 18, 2005 among XCEL Corporation Limited, Pascall  Electronics Limited and Pascall Electronic (Holdings) Limited (10) |
|             |       |            |   |
|             | 2.5        |            | Stock  Purchase Agreement dated September 2, 2005 between EMRISE Electronics  Corporation, a New Jersey corporation, Robert H. Okada, as Trustee of the  Robert H. Okada Trust Agreement dated February 11, 1992, and Sharon  Vavro, an individual (13) |
|             |       |            |   |
|             | 2.6        |            | Amendment No. 1 dated  effective as of September 28, 2005 to Stock Purchase Agreement dated September 2, 2005 between EMRISE  Electronics Corporation, a New Jersey corporation, Robert H. Okada, as  Trustee of the Robert H. Okada Trust Agreement dated February 11, 1992,  and Sharon Vavro, an individual (14) |
|             |       |            |   |
|             | 2.7        |            | Stock  Purchase Agreement dated May 23, 2008 by and among EMRISE Electronics  Corporation, EMRISE Corporation, Charles S. Brand, Advanced Control  Components, Inc., Thomas P. M. Couse, Joanne Couse, Michael Gaffney and  Custom Components, Inc.(20) |
|             |       |            |   |
|             | 2.8        |            | Amendment  No. 1 to Stock Purchase Agreement dated August 20, 2008 by and  among EMRISE Electronics Corporation, EMRISE Corporation, Charles S. Brand,  Advanced Control Components, Inc., Thomas P. M. Couse, Joanne Couse,  Michael Gaffney and Custom Components, Inc.(20) |
|             |       |            |   |
|             | 2.9        |            | Asset  and Stock Purchase Agreement, dated March 20, 2009, by and among EMRISE  Corporation, EMRISE Electronics Corporation, Electro Switch Corp., and ESC  Worldwide, Inc. (23) |
|             |       |            |   |
|             | 2.10       |            | Amendment  No. 2 to Stock Purchase Agreement, dated as of November 20, 2009,  by and among EMRISE Electronics Corporation, Charles S. Brand,  Thomas P.M. Couse, Joanne Couse and Michael Gaffney. (27) |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |   |
|             | 2.11       |            | Asset  Purchase Agreement by and among Astrodyne Corporation, RO Associates  Incorporated and EMRISE Electronics Corporation dated March 22, 2010.  The schedules to the Asset Purchase Agreement in this exhibit 2.11 have been  omitted pursuant to Item 601(b) of Regulation S-K. A description of the  omitted schedules is contained within the Asset Purchase Agreement. The  Company hereby agrees to furnish a copy of any omitted schedule to the  Commission upon request. (28) |
|             |       |            |   |
|             | 3.1        |            | Amended  and Restated Certificate of Incorporation of EMRISE Corporation filed with  the Secretary of State of Delaware on May 9, 2005 (21) |
|             |       |            |   |
|             | 3.2        |            | Amended  and Restated Bylaws adopted by the Board of Directors of the Corporation on  July 23, 2008 (3) |
|             |       |            |   |
|             | 3.3        |            | Certificate  of Amendment to Certificate of Incorporation of EMRISE Corporation, filed on  November 19, 2008 (11) |
|             |       |            |   |
|             | 10.1       |            | 1993  Stock Option Plan (#) (4) |
|             |       |            |   |
|             | 10.2       |            | Employee  Stock and Stock Option Plan (#) (5) |
|             |       |            |   |
|             | 10.3       |            | 1997  Stock Incentive Plan (#) (6) |
|             |       |            |   |
|             | 10.4       |            | Amended  and Restated 2000 Stock Option Plan (#) (8) |
|             |       |            |   |
|             | 10.5       |            | Form of  Executive Officer and Director Indemnification Agreement entered into between  the Registrant and each of Carmine T. Oliva, Laurence P. Finnegan, Jr.,  Otis W. Baskin, Richard E. Mahmarian, D. John Donovan and Graham Jefferies  (2) |
|             |       |            |   |
|             | 10.6       |            | Description  of Compensation of Directors (#) (16) |
|             |       |            |   |
|             | 10.9       |            | Subordinated  Secured Promissory Note dated July 13, 2004 in the principal amount of  $1,681,318.68 made by MicroTel International Inc. in favor of Noel C.  McDermott Revocable Living Trust dated December 19, 1995 (9) |
|             |       |            |   |
|             | 10.10      |            | Subordinated  Secured Promissory Note dated July 13, 2004 in the principal amount of  $1,318,681.32 made by MicroTel International Inc. in favor of Warren P. Yost  and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated  March 9, 1988 (9) |
|             |       |            |   |
|             | 10.11      |            | Pledge  and Security Agreement dated July 13, 2004 between MicroTel  International Inc.; Noel C. McDermott, as Collateral Agent; Noel C.  McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated  December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees  Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.12      |            | Intercreditor  Agreement dated July 13, 2004 between MicroTel International Inc.; Noel  C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust  dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as  Co-Trustees Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.13      |            | Continuing  Guarantee dated July 13, 2004 made by Larus Corporation in favor of Noel  C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust  dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as  Co-Trustees Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.14      |            | Continuing  Guarantee dated July 13, 2004 made by Vista Labs Incorporated in favor  of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living  Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as  Co-Trustees Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.15      |            | Continuing  Guarantee dated July 13, 2004 made by CXR Telcom in favor of Noel C.  McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated  December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees  Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.16      |            | Security  Agreement dated July 13, 2004 made by Larus Corporation in favor of Noel  C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust  dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as  Co-Trustees Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.17      |            | Security  Agreement dated July 13, 2004 made by Vista Labs Incorporated in favor  of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living  Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as  Co-Trustees Under Declaration of Trust dated March 9, 1988 (9) |

 

62

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |   |
|             | 10.18      |            | Security  Agreement dated July 13, 2004 made by CXR Telcom in favor of Noel C.  McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated  December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees  Under Declaration of Trust dated March 9, 1988 (9) |
|             |       |            |   |
|             | 10.21      |            | Commercial  Lease dated July 13, 2004 between the Registrant, as Tenant, and Noel C.  McDermott and Warren P. Yost, as Landlord, for the premises located at 894  Faulstich Court, San Jose, California (9) |
|             |       |            |   |
|             | 10.22      |            | Executive  Employment Agreement dated November 1, 2007 by and between the  Registrant and Carmine T. Oliva (#) (15) |
|             |       |            |   |
|             | 10.23      |            | Executive  Employment Agreement dated November 1, 2007 by and between the Company  and Graham Jefferies (#) (15) |
|             |       |            |   |
|             | 10.24      |            | Executive  Employment Agreement dated November 1, 2007 by and between the Company  and D. John Donovan (#) (15) |
|             |       |            |   |
|             | 10.27      |            | Loan  Agreement dated March 18, 2005 among XCEL Corporation Limited, Pascall  Electronics Limited and Pascall Electronic (Holdings) Limited (10) |
|             |       |            |   |
|             | 10.28      |            | Form of  Incentive Stock Option Agreement Under Amended and Restated 2000 Stock Option  Plan (#) (12) |
|             |       |            |   |
|             | 10.29      |            | Form of  Non-Qualified Stock Option Agreement Under Amended and Restated 2000 Stock  Option Plan (#) (12) |
|             |       |            |   |
|             | 10.30      |            | 2007  Stock Incentive Plan (#) (18) |
|             |       |            |   |
|             | 10.31      |            | Credit  Agreement by and among EMRISE Corporation, EMRISE Electronics Corporation,  CXR Larus Corporation and RO Associates and GVEC Resource IV Inc dated  November 30, 2007(19) |
|             |       |            |   |
|             | 10.32      |            | Security  Agreement between EMRISE Corporation, Emrise Electronics Corporation, CXR  Larus Corporation and RO Associates Incorporated and GVEC Resource IV Inc  dated November 30, 2007(19) |
|             |       |            |   |
|             | 10.33      |            | Patent  Security Agreement between EMRISE Corporation, RO Associates Incorporated and  GVEC Resource IV Inc dated November 30, 2007(19) |
|             |       |            |   |
|             | 10.34      |            | Trademark  Security Agreement between EMRISE Corporation, EMRISE Electronics Corporation  and RO Associates Incorporated and GVEC Resource IV Inc dated  November 30, 2007(19) |
|             |       |            |   |
|             | 10.35      |            | Revolver  Loan Note dated November 30, 2007 executed by EMRISE Corporation, Emrise  Electronics Corporation, CXR Larus Corporation and RO Associates Incorporated  in favor of GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.36      |            | Term  Loan A Note dated November 30, 2007 executed by EMRISE Corporation,  Emrise Electronics Corporation, CXR Larus Corporation and RO Associates  Incorporated in favor of GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.37      |            | Term  Loan B Note dated November 30, 2007 executed by EMRISE Corporation,  Emrise Electronics Corporation, CXR Larus Corporation and RO Associates  Incorporated in favor of GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.38      |            | Warrant  issued to Private Equity Management Group LLC dated November 30,  2007(19) |
|             |       |            |   |
|             | 10.39      |            | Guaranty  dated November 30, 2007 by and between XCEL Japan Ltd. and GVEC Resource  IV Inc.(19) |
|             |       |            |   |
|             | 10.40      |            | Guaranty  dated November 30, 2007 by and among Emrise Electronics Ltd., XCEL Power  Systems, Ltd. Pascall Electronic (Holdings) Limited, Pascall Electronics  Limited, Belix Would Components Ltd. and The Belix Company Ltd. and GVEC  Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.41      |            | Composite  Debenture dated November 30, 2007 by and among Emrise Electronics Ltd.,  XCEL Power Systems, Ltd. Pascall Electronic (Holdings) Limited, Pascall  Electronics Limited, Belix Would Components Ltd. and The Belix Company Ltd.  and GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.42      |            | Share  Charge dated November 30, 2007 by and between Emrise Electronics  Corporation and GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.43      |            | Guaranty  dated November 30, 2007 by and between CXR Anderson Jacobson, SAS and  GVEC Resource IV Inc.(19) |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |   |
|             | 10.45      |            | Agreement  For The Pledge Of Account Of Financial Instruments Relating To Shares Of CXR  Anderson Jacobson SAS dated November 30, 2007 by and between Emrise  Corporation and GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.46      |            | Convention  de Nantissement de fonds de commerce dated November 30, 2007 by and  between CXR Anderson Jacobson, SAS and GVEC Resource IV Inc.(19) |
|             |       |            |   |
|             | 10.47      |            | Going  Concern Pledge (English Translation of Convention de Nantissement de fonds de  commerce dated November 30, 2007 by and between CXR Anderson Jacobson,  SAS and GVEC Resource IV Inc. filed as Exhibit 10.16 to this  Report.)(19) |
|             |       |            |   |
|             | 10.48      |            | Form of  Subordinated Secured Contingent Promissory Notes issued by the Company to  Charles S. Brand, Thomas P. M. Couse, Joanne Couse, and Michael Gaffney(20) |
|             |       |            |   |
|             | 10.49      |            | Security  Agreement, dated August 20, 2008, by and among EMRISE Electronics  Corporation, Charles S. Brand, Advanced Control Components, Inc., Thomas  P. M. Couse, Joanne Couse, and Michael Gaffney(20) |
|             |       |            |   |
|             | 10.50      |            | Continuing  Guaranty, dated August 20, 2008, by and among EMRISE Corporation,  Charles S. Brand, Advanced Control Components, Inc., Thomas P. M. Couse,  Joanne Couse, and Michael Gaffney(20) |
|             |       |            |   |
|             | 10.51      |            | Credit  Agreement, dated November 30, 2007, by and among EMRISE Corporation,  EMRISE Electronics Corporation, CXR Larus Corporation, and RO Associates  Incorporated and GVEC Resource IV Inc. (20) |
|             |       |            |   |
|             | 10.52      |            | Amendment  Number 1 to Loan Documents, dated August 20, 2008, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc. and Custom  Control Components, Inc. and GVEC Resource IV Inc. (20) |
|             |       |            |   |
|             | 10.53      |            | Term  Loan C Note dated August 20, 2008 executed by EMRISE Corporation, Emrise  Electronics Corporation, CXR Larus Corporation and RO Associates Incorporated  in favor of GVEC Resource IV Inc. (20) |
|             |       |            |   |
|             | 10.54      |            | Collateral  Assignment of Rights under Purchase Agreement, dated August 20, 2008, by  and among EMRISE Corporation, Emrise Electronics Corporation and GVEC  Resource IV Inc. (20) |
|             |       |            |   |
|             | 10.55      |            | Amended  and Restated Warrant issued to Private Equity Management Group LLC, dated  November 30, 2007(20) |
|             |       |            |   |
|             | 10.56      |            | Form of  Stock Option Agreement issued to EMRISE Corporation’s directors and executive  officers under 2007 Stock Incentive Plan(#)(20) |
|             |       |            |   |
|             | 10.57      |            | Amendment  to Forbearance Agreement and Amendment Number 3 to Loan Documents, dated  April 9, 2009, by and among EMRISE Corporation, EMRISE Electronics  Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced  Control Components, Inc., Custom Control Components, Inc. and GVEC  Resource IV Inc. (22) |
|             |       |            |   |
|             | 10.58      |            | Amendment  Number 4 to Loan Documents dated April 14, 2009, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc. and Custom  Control Components, Inc. and GVEC Resources IV Inc. |
|             |       |            |   |
|             | 10.59      |            | Amendment Number 2 to  Loan Documents dated February 12, 2009 by and among EMRISE Corporation,  EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates  Incorporated, Advanced Control Components, Inc., Custom  Components, Inc. and GVEC Resource IV Inc.(24) |
|             |       |            |   |
|             | 10.60      |            | Letter Agreement, dated  May 14, 2009, by and among EMRISE Corporation, EMRISE Electronics  Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced  Control Components, Inc., Custom Control Components, Inc. and GVEC  Resource IV Inc. (22) |
|             |       |            |   |
|             | 10.61      |            | Second Amended and  Restated Warrant dated February 12, 2009 issued to Private Equity  Management Group, LLC (24) |
|             |       |            |   |
|             | 10.62      |            | Second Amended and Restated  Warrant dated February 12, 2009 issued to Private Equity Management  Group, LLC (24) |

 

64

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |   |
|             | 10.63      |            | Amendment  Number 5 to Loan Documents, dated August 14, 2009, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc., Custom  Control Components, Inc. and GVEC Resource IV Inc. (25) |
|             |       |            |   |
|             | 10.64      |            | Amendment  Number 6 to Loan Documents, dated November 3, 2009, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc., Custom  Control Components, Inc. and GVEC Resource IV Inc. (26) |
|             |       |            |   |
|             | 10.65      |            | Amendment  Number 7 to Loan Documents, dated November 13, 2009, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc., Custom  Control Components, Inc. and GVEC Resource IV Inc. (26) |
|             |       |            |   |
|             | 10.66      |            | Amendment  Number 8 to Loan Documents dated as of December 31, 2009, by and among  EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc. and Custom  Control Components, Inc. and GVEC Resource IV Inc. * (±) |
|             |       |            |   |
|             | 10.67      |            | Amendment  No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of  November 20, 2009, by and between EMRISE Electronics Corporation and  Charles S. Brand. (27) |
|             |       |            |   |
|             | 10.68      |            | Amendment  No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of  November 20, 2009, by and between EMRISE Electronics Corporation and  Thomas P.M. Couse. (27) |
|             |       |            |   |
|             | 10.69      |            | Amendment  No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of  November 20, 2009, by and between EMRISE Electronics Corporation and  Joanne Couse. (27) |
|             |       |            |   |
|             | 10.70      |            | Amendment  No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of  November 20, 2009, by and between EMRISE Electronics Corporation and  Michael Gaffney. (27) |
|             |       |            |   |
|             | 10.71      |            | Amendment  Number 9 to Loan Documents dated April 13, 2010, by and among EMRISE  Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO  Associates Incorporated, Advanced Control Components, Inc. and Custom  Control Components, Inc. and GVEC Resource IV Inc. * (±) |
|             |       |            |   |
|             | 14.1       |            | Amended  and Restated Code of Business Conduct and Ethics (16) |
|             |       |            |   |
|             | 14.2       |            | Code  of Business Ethics for CEO and Senior Financial Officers (16) |
|             |       |            |   |
|             | 16         |            | Letter  dated May 5, 2009 from Hein & Associates LLP regarding change  in certifying accountant (17) |
|             |       |            |   |
|             | 21         |            | Subsidiaries  of the Registrant * |
|             |       |            |   |
|             | 23.1       |            | Consent  of Hein & Associates LLP Independent Registered Public Accounting  Firm * |
|             |       |            |   |
|             | 23.2       |            | Consent  of BDO Seidman LLP Independent Registered Public Accounting Firm * |
|             |       |            |   |
|             | 31.1       |            | Certification  of Principal Executive Officer Required by Rule 13a-14(a) or  15d-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) or  15d-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       |            | Certifications  of Chief Executive Officer and Chief Financial Officer Pursuant to  18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 * |

 

----

*                              Filed herewith.

 

(#)                      Management contract or compensatory plan, contractor arrangement required to be filed as an exhibit.

 

(±)                      Confidential treatment has been requested forportions of exhibit marked with (±).

 

(1)                       Filed as an exhibit to the Registrant’s currentreport on Form 8-K for July 13, 2004 and incorporated herein byreference.

 

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(2)                       Filed as an exhibit to the Registrant’s currentreport on Form 8-K for December 8, 2004 and incorporated herein byreference.

 

(3)                       Filed as an exhibit to the Registrant’s currentreport on Form 8-K for July 23, 2008 and incorporated herein byreference.

 

(4)                       Filed as an exhibit to the Registrant’s annualreport on Form 10-K for the year ended December 31, 2000 andincorporated herein by reference.

 

(5)                       Filed as an exhibit to the Registrant’s definitiveproxy statement for the Registrant’s annual meeting of stockholders held June 11,1998 and incorporated herein by reference.

 

(6)                       Filed as an exhibit to the Registrant’s definitiveproxy statement for the special meeting of stockholders held January 16,2001 and incorporated herein by reference.

 

(8)                    Filed as an exhibit to the Registrant’s quarterlyreport on Form 10-Q for September 30, 2001 and incorporated herein byreference.

 

(9)                       Filed as an exhibit to the Registrant’s quarterlyreport on Form 10-Q for June 30, 2004 and incorporated herein byreference.

 

(10)                 Filed as an exhibit to the Registrant’s currentreport on Form 8-K for March 18, 2005 and incorporated herein byreference.

 

(11)                 Filed as an exhibit to the Registrant’s currentreport on Form 8-K for November 19, 2008 and incorporated herein byreference.

 

(12)                 Filed as an exhibit to the Registrant’s annualreport on Form 10-K for the year ended December 31, 2004 andincorporated herein by reference.

 

(13)                 Filed as an exhibit to the Registrant’s currentreport on Form 8-K for September 2, 2005 and incorporated herein byreference.

 

(14)                 Filed as an exhibit to amendment no. 1 to theRegistrant’s current report on Form 8-K for September 2, 2005 andincorporated herein by reference.

 

(15)                 Filed as an exhibit to the Registrant’s Form 10-Qfor September 30, 2007 and incorporated herein by reference.

 

(16)                Filed as an exhibit to the Registrant’s annualreport on Form 10-K for the year ended December 31, 2005.

 

(17)                Filed as an exhibit to the Registrant’s Form 8-Kfor May 5, 2009 and incorporated herein by reference.

 

(18)                Filed as an exhibit to the Registrant’s definitiveproxy statement for the Registrant’s annual meeting of stockholders held December 12,2007 and incorporated herein by reference.

 

(19)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for November 30, 2007 and incorporated herein byreference.

 

(20)             Filed as an exhibit to the Registrant’s currentreport on Form 8-K for August 20, 2008 and incorporated herein byreference.

 

(21)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for May 6, 2005 and incorporated herein byreference.

 

(22)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for April 9, 2009 and incorporated herein byreference.

 

(23)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for March 20, 2009 and incorporated herein byreference.

 

(24)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for February 12, 2009 and incorporated herein byreference.

 

(25)                Filed as an exhibit to the Registrant’s quarterlyreport on Form 10-Q for June 30, 2009 filed with the Securities andExchange Commission on August 14, 2009 and incorporated herein byreference.

 

(26)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for November 3, 2009 and incorporated herein byreference.

 

(27)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for November 25, 2009 and incorporated herein byreference.

 

(28)                Filed as an exhibit to the Registrant’s currentreport on Form 8-K for March 22, 2010 and incorporated herein byreference.

 

66

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**Table of Contents**

 

**EMRISECORPORATION AND SUBSIDIARIES**

** **

**Index to Financial Statements**

 
| ** **                                                                                                | ** ** | **Page**   |
|-----------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                | ** ** | ** ** |
| Financial  Statements                                                                                     |       |       |
|                                                                                                      |       |       |
| Report  of Independent Registered Public Accounting Firm                                                  |       | F-2        |
|                                                                                                      |       |       |
| Report  of Independent Registered Public Accounting Firm                                                  |       | F-3        |
|                                                                                                      |       |       |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                        |       | F-4        |
|                                                                                                      |       |       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2009 and 2008                |       | F-5        |
|                                                                                                      |       |       |
| Consolidated Statements of Stockholders’ Equity for the  Years Ended December 31, 2009 and 2008 |       | F-6        |
|                                                                                                      |       |       |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2009 and 2008                |       | F-7        |
|                                                                                                      |       |       |
| Notes to Consolidated Financial Statements                                                                |       | F-9        |

 

F-1

----

Table of Contents

 

**Report of Independent Registered Public Accounting Firm**

 

Board of Directors andStockholders

EMRISE Corporation

Eatontown, New Jersey

 

We have audited the accompanying consolidated balance sheetof EMRISE Corporation (the “Company”) as of December 31, 2009 and therelated consolidated statements of operations, stockholders’ equity, and cashflows for the year then ended.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of EMRISE Corporation at December 31, 2009, and the results ofits operations and its cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.

 

As discussed in Note 13 to the consolidated financial statements,the Company adopted an update issued by the Financial Accounting StandardsBoard related to the accounting for instruments (or embedded features) indexedto an entity’s own stock.

 

The accompanying consolidated financial statements have beenprepared assuming that the Company will continue as a going concern. Asdiscussed in Note 2 to the financial statements, the Company requiresadditional funding to achieve profitable operations and repay its current debtobligations beyond its anticipated cash flows from operations, which raisessubstantial doubt about its ability to continue as a going concern. Management’splans in regard to these matters are also described in Note 2. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

 

(Signed BDO Seidman, LLP)

 

Woodbridge, New Jersey

April 15, 2010

 

F-2

----

Table of Contents

 

**Report ofIndependent Registered Public Accounting Firm**

 

Boardof Directors

andStockholders of EMRISE Corporation

 

Wehave audited the accompanying consolidated balance sheet of EMRISE Corporation,a Delaware corporation, as of December 31, 2008, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows forthe year then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

Inour opinion, the consolidated financial statements referred to above present fairly,in all material respects, the financial position of EMRISE Corporation as of December 31,2008, and the results of its operations and its cash flows for the year thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 

(SignedHein & Associates LLP)

 

 

Irvine,California

April 15,2009

 

F-3

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Table of Contents

 

**EMRISECORPORATION**

**Consolidated Balance Sheets**(in thousands, except share and per shareamounts)

 
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                   |       |                  |       |                  |       |
| Current  assets:                                                                                                                                                                             |       |                  |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                   |       | $                     | 4,046      |                  | $          | 3,286 |   |
| Accounts  receivable, net of allowances for doubtful accounts of $262 at  December 31, 2009 and $501 at December 31, 2008                                                          |       | 8,248                 |       | 9,804                 |       |
| Inventories,  net                                                                                                                                                                            |       | 10,525                |       | 10,565                |       |
| Current  deferred tax assets                                                                                                                                                                 |       | 158                   |       | 271                   |       |
| Prepaid  and other current assets                                                                                                                                                            |       | 977                   |       | 1,271                 |       |
| Current  assets of discontinued and held for sale operations                                                                                                                                 |       | 1,497                 |       | 5,157                 |       |
| Total  current assets                                                                                                                                                                        |       | 25,451                |       | 30,354                |       |
|                                                                                                                                                                                         |       |                  |       |                  |       |
| Property,  plant and equipment, net                                                                                                                                                          |       | 2,313                 |       | 2,779                 |       |
| Goodwill                                                                                                                                                                                     |       | 15,633                |       | 9,657                 |       |
| Intangible  assets other than goodwill, net                                                                                                                                                  |       | 4,881                 |       | 5,701                 |       |
| Deferred  tax assets                                                                                                                                                                         |       | 1,818                 |       | 1,981                 |       |
| Other  assets                                                                                                                                                                                |       | 181                   |       | 676                   |       |
| Noncurrent  assets of discontinued and held for sale operations                                                                                                                              |       | —                |       | 2,475                 |       |
| Total  assets                                                                                                                                                                                |       | $                     | 50,277     |                  | $          | 53,623 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |       |                  |       |                  |       |
| Current  liabilities:                                                                                                                                                                        |       |                  |       |                  |       |
| Accounts  payable                                                                                                                                                                            |       | $                     | 4,484      |                  | $          | 4,256 |   |
| Accrued  expenses                                                                                                                                                                            |       | 6,163                 |       | 6,790                 |       |
| Line  of credit                                                                                                                                                                              |       | 5,156                 |       | 4,084                 |       |
| Current  portion of long-term debt, net of discount of $290 at December 31, 2009                                                                                                        |       | 12,558                |       | 5,110                 |       |
| Notes  payable to stockholders, current portion                                                                                                                                              |       | 348                   |       | 542                   |       |
| Income  taxes payable                                                                                                                                                                        |       | 604                   |       | 451                   |       |
| Other  current liabilities                                                                                                                                                                   |       | 2,335                 |       | 357                   |       |
| Current  liabilities of discontinued and held for sale operations                                                                                                                            |       | 745                   |       | 1,194                 |       |
| Total  current liabilities                                                                                                                                                                   |       | 32,393                |       | 22,784                |       |
|                                                                                                                                                                                         |       |                  |       |                  |       |
| Long-term  debt, net of discount of $980 at December 31, 2008                                                                                                                           |       | 154                   |       | 13,479                |       |
| Notes  payable to stockholders, less current portion                                                                                                                                         |       | —                |       | 250                   |       |
| Deferred  income taxes                                                                                                                                                                       |       | 1,654                 |       | 1,864                 |       |
| Other  liabilities                                                                                                                                                                           |       | 688                   |       | 502                   |       |
| Noncurrent  liabilities of discontinued and held for sale operations                                                                                                                         |       | —                |       | 740                   |       |
| Total  liabilities                                                                                                                                                                           |       | 34,889                |       | 39,619                |       |
| Commitments  and contingencies                                                                                                                                                               |       |                  |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                  |       |                  |       |                  |       |
| Preferred  stock,$0.01 par value. Authorized 10,000,000 shares, no shares issued and  outstanding                                                                                            |       | —                |       | —                |       |
| Common  stock,$0.0033 par value. Authorized 150,000,000 shares; 10,213,000 and  10,204,000 shares issued and outstanding at December 31, 2009 and  December 31, 2008, respectively |       | 126                   |       | 126                   |       |
| Additional  paid-in capital                                                                                                                                                                  |       | 43,480                |       | 44,806                |       |
| Accumulated  deficit                                                                                                                                                                         |       | (26,586               | )          | (28,101               | )          |
| Accumulated  other comprehensive income                                                                                                                                                      |       | (1,632                | )          | (2,827                | )          |
| Total  stockholders’ equity                                                                                                                                                             |       | 15,388                |       | 14,004                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                             |       | $                     | 50,277     |                  | $          | 53,623 |   |

 

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

 

F-4

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Table of Contents

 

**EMRISECORPORATION**

**Consolidated Statements ofOperations**

(in thousands, except per share amounts)

 
| ** **                                                                            | ** ** | **Year Ended**        | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                  |       |                  |       |   |   |
| Net  Sales                                                                            |       | $                     | 53,750     |   | $ | 47,233 |   |
| Cost  of Sales                                                                        |       | 33,122                |       | 30,502 |   |
| Gross  profit                                                                         |       | 20,628                |       | 16,731 |   |
|                                                                                  |       |                  |       |   |   |
| Operating  expenses:                                                                  |       |                  |       |   |   |
| Selling,  general and administrative                                                  |       | 16,606                |       | 14,030 |   |
| Engineering  and product development                                                  |       | 2,619                 |       | 2,077 |   |
| Loss  on asset impairment                                                             |       | —                |       | 6,584 |   |
| Total  operating expenses                                                             |       | 19,225                |       | 22,691 |   |
| Income  (loss) from operations                                                        |       | 1,403                 |       | (5,960 | ) |
|                                                                                  |       |                  |       |   |   |
| Other  income (expense):                                                              |       |                  |       |   |   |
| Interest  income                                                                      |       | 98                    |       | 115 |   |
| Interest  expense                                                                     |       | (4,250                | )          | (3,213 | ) |
| Other,  net                                                                           |       | 433                   |       | (734 | ) |
| Total  other expense, net                                                             |       | (3,719                | )          | (3,832 | ) |
|                                                                                  |       |                  |       |   |   |
| Loss  before income taxes                                                             |       | (2,316                | )          | (9,792 | ) |
| Income  tax provision                                                                 |       | 593                   |       | 198 |   |
| Loss  from continuing operations                                                      |       | (2,909                | )          | (9,990 | ) |
| Discontinued  and held for sale operations:                                           |       |                  |       |   |   |
| Income  from discontinued and held for sale operations including gain on sale in 2009 |       | 4,484                 |       | 2,672 |   |
| Tax  provision on discontinued and held for sale operations                           |       | 533                   |       | 122 |   |
| Net  income on discontinued and held for sale operations                              |       | 3,951                 |       | 2,550 |   |
|                                                                                  |       |                  |       |   |   |
| Net  Income (loss)                                                                    |       | $                     | 1,042      |   | $ | (7,440 | ) |
|                                                                                  |       |                  |       |   |   |
| Weighted  average shares outstanding                                                  |       |                  |       |   |   |
| Basic                                                                                 |       | 10,209                |       | 10,204 |   |
| Diluted                                                                               |       | 10,209                |       | 10,204 |   |
|                                                                                  |       |                  |       |   |   |
| Earnings  per share:                                                                  |       |                  |       |   |   |
| Basic                                                                                 |       |                  |       |   |   |
| Continuing  operations                                                                |       | $                     | (0.28      | ) | $ | (0.98 | ) |
| Discontinued  operations                                                              |       | $                     | 0.39       |   | $ | 0.25 |   |
| Net  earnings                                                                         |       | $                     | 0.10       |   | $ | (0.73 | ) |
| Diluted                                                                               |       |                  |       |   |   |
| Continuing  operations                                                                |       | $                     | (0.28      | ) | $ | (0.98 | ) |
| Discontinued  operations                                                              |       | $                     | 0.39       |   | $ | 0.25 |   |
| Net  earnings                                                                         |       | $                     | 0.10       |   | $ | (0.73 | ) |

 

*The accompanying Notes are an integral part of these ConsolidatedFinancial Statements*

 

F-5

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Table of Contents

 

**EMRISECORPORATION**

**Consolidated Statements ofStockholders’ Equity**

(in thousands)

* *
| ** **                                                                                           | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                           | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **      | ** ** |
| ** **                                                                                           | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**      | ** ** | **Total**  | ** ** |
|                                                                                                 |       |             |       |        |       |            |       |              |       |            |       |       |       |
| Balance  at December 31, 2007                                                                   |       | 10,204           |       | $           | 126        |            | $          | 44,527            |       | $               | (20,661    | )          | $          | 1,054 |   | $ | 25,046 |   |
| Stock  option exercises                                                                              |       | —           |       | —      |       | —          |       | —            |       | —          |       | —     |       |
| Stock-based  compensation expense                                                                    |       | —           |       | —      |       | 88              |       | —            |       | —          |       | 88         |       |
| Warrants  issued related to debt financing                                                           |       | —           |       | —      |       | 183             |       | —            |       | —          |       | 183        |       |
| Warrants  issued for services                                                                        |       | —           |       | —      |       | 8               |       | —            |       | —          |       | 8          |       |
| Net  loss and comprehensive loss                                                                     |       | —           |       | —      |       | —          |       | (7,440            | )          | (3,881          | )          | (11,321    | )          |
|                                                                                                 |       |             |       |        |       |            |       |              |       |            |       |       |       |
| Balance  at December 31, 2008                                                                   |       | 10,204           |       | 126         |       | 44,806          |       | (28,101           | )          | (2,827          | )          | 14,004     |       |
| Cumulative  effect of change in accounting principle due to adoption of updated  derivative guidance |       | —           |       | —      |       | (1,483          | )          | 473               |       | —          |       | (1,010     | )          |
| Stock  option exercises                                                                              |       | 9                |       | —      |       | 7               |       | —            |       | —          |       | 7          |       |
| Stock-based  compensation                                                                            |       | —           |       | —      |       | 148             |       | —            |       | —          |       | 148        |       |
| Warrants  issued for services                                                                        |       | —           |       | —      |       | 2               |       | —            |       | —          |       | 2          |       |
| Net  income and comprehensive income                                                                 |       | —           |       | —      |       | —          |       | 1,042             |       | 1,195           |       | 2,237      |       |
| Balance  at December 31, 2009                                                                   |       | 10,213           |       | $           | 126        |            | $          | 43,480            |       | $               | (26,586    | )          | $          | (1,632 | ) | $ | 15,388 |   |

 

*The accompanying Notes are an integral part of these ConsolidatedFinancial Statements*

 

F-6

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Table of Contents

 

**EMRISECORPORATION**

**Consolidated Statements of CashFlows**

(in thousands)

 
| ** **                                                                                                                             | ** ** | **Year Ended**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                                               |       |                  |       |   |   |
| Net  Income (loss)                                                                                                                     |       | $                     | 1,042      |   | $ | (7,440 | ) |
| Adjustments  to arrive at net loss from continuing operations                                                                          |       | (3,966                | )          | (2,550 | ) |
| Net  loss from continuing operations                                                                                                   |       | (2,924                | )          | (9,990 | ) |
| Reconciliation  to net cash (used in) provided by operating activities:                                                                |       |                  |       |   |   |
| Depreciation  and amortization                                                                                                         |       | 1,540                 |       | 1,076 |   |
| Provision  for doubtful accounts                                                                                                       |       | 200                   |       | 132 |   |
| Provision  (credit) for inventory obsolescence                                                                                         |       | 740                   |       | (153 | ) |
| Provision  (credit) for warranty reserve                                                                                               |       | 146                   |       | (84 | ) |
| Deferred  taxes                                                                                                                        |       | (66                   | )          | 93 |   |
| Gain  on sale of assets                                                                                                                |       | —                |       | 41 |   |
| Amortization  of deferred issuance costs                                                                                               |       | 753                   |       | 462 |   |
| Amortization  of debt discount                                                                                                         |       | 690                   |       | 466 |   |
| Stock-based  compensation expense                                                                                                      |       | 150                   |       | 96 |   |
| Change  in fair value of common stock warrant                                                                                          |       | (718                  | )          | — |   |
| Loss  on impairment of assets                                                                                                          |       | —                |       | 6,584 |   |
| Changes  in assets and liabilities:                                                                                                    |       |                  |       |   |   |
| Accounts  receivable                                                                                                                   |       | 1,521                 |       | 18 |   |
| Inventories                                                                                                                            |       | (967                  | )          | 1,609 |   |
| Prepaid  and other assets                                                                                                              |       | 51                    |       | (1,693 | ) |
| Accounts  payable and accrued expenses                                                                                                 |       | (2,832                | )          | 748 |   |
| Operating  cash flow used in continuing operations                                                                                     |       | (1,716                | )          | (595 | ) |
| Operating  cash flow provided by discontinued operations                                                                               |       | 1,337                 |       | 2,299 |   |
| Net  cash (used in) provided by operating activities                                                                                   |       | (379                  | )          | 1,704 |   |
|                                                                                                                                   |       |                  |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                              |       |                  |       |   |   |
| Purchases  of property, plant and equipment                                                                                            |       | (32                   | )          | (110 | ) |
| Payments  received on notes receivable                                                                                                 |       | —                |       | 40 |   |
| Purchase  of subsidiary, net of cash acquired                                                                                          |       | 266                   |       | (12,356 | ) |
| Investing  cash flow provided by (used in) continuing operations                                                                       |       | 234                   |       | (12,426 | ) |
| Investing  cash flow provided by (used in) discontinued operations including proceeds  from sale of subsidiary operations, net of cash |       | 10,413                |       | (62 | ) |
| Net  cash provided by (used in) investing activities                                                                                   |       | 10,647                |       | (12,488 | ) |
|                                                                                                                                   |       |                  |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                              |       |                  |       |   |   |
| Proceeds  from issuance of debt                                                                                                        |       | —                |       | 13,000 |   |
| Borrowings  from lines of credit                                                                                                       |       | 56,045                |       | 36,021 |   |
| Repayments  of lines of credit                                                                                                         |       | (54,973               | )          | (35,894 | ) |
| Repayments  of long-term debt                                                                                                          |       | (10,942               | )          | (262 | ) |
| Payments  of notes to stockholders                                                                                                     |       | (443                  | )          | (479 | ) |
| Proceeds  from exercise of stock options and warrants                                                                                  |       | 7                     |       | — |   |
| Financing  cash flow (used in) provided by continuing operations                                                                       |       | (10,306               | )          | 12,386 |   |
| Financing  cash flow used in discontinued operations                                                                                   |       | (77                   | )          | (60 | ) |
| Net  cash (used in) provided by financing activities                                                                                   |       | (10,383               | )          | 12,326 |   |
| Effect  of exchange rate changes on cash                                                                                               |       | 740                   |       | (2,885 | ) |
| Net  increase (decrease) in cash and cash equivalents                                                                                  |       | 625                   |       | (1,343 | ) |
| Cash  and cash equivalents at beginning of period                                                                                      |       | 3,421                 |       | 4,764 |   |
| Cash  and cash equivalents at end of period                                                                                            |       | $                     | 4,046      |   | $ | 3,421 |   |

 

*The accompanying Notes are an integral part of these ConsolidatedFinancial Statements*

 

F-7

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Tableof Contents

 

**EMRISECORPORATION**

**Consolidated Statements of Cash Flows (Continued)**

(in thousands)

 
| ** **                                                                                                                                                     | ** ** | **Year Ended**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**                                                                                                         |       |                  |       |   |   |
| Cash  paid during the year for:                                                                                                                                |       |                  |       |   |   |
| Interest                                                                                                                                                       |       | $                     | 2,804      |   | $ | 1,602 |   |
| Income  taxes                                                                                                                                                  |       | $                     | 1,403      |   | $ | 706 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING****AND FINANCING ACTIVITIES:**                                                                                |       |                  |       |   |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Acquisition  of equipment through capital lease                                                                                                                |       | $                     | 119        |   | $ | 511 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Cumulative  effect of change in accounting principle - reclassification of common stock  warrants to liability upon adoption of updates to derivative guidance |       | $                     | 473        |   | $ | — |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Issuance  of notes and accruals relating to ACC purchase adjustment                                                                                            |       | $                     | 6,262      |   | $ | — |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Fair  value of warrants issued                                                                                                                                 |       | $                     | —     |   | $ | 183 |   |

 

*The accompanying Notes are an integral part of these Consolidated FinancialStatements*

 

F-8

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated FinancialStatements**

 

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

 

*Organization and 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 and France. The Company conducts its business through two operating segments:electronic devices and communications equipment. The subsidiaries within theelectronic devices segment design, develop,manufacture and market electronic devices for defense, aerospace and industrialmarkets and operate out of facilities located in the U.S. and England.  The subsidiaries within thecommunications equipment segment design, develop, manufacture and marketnetwork access equipment, including network timing and synchronization productsand operate out of facilities located in the U.S. and France.

 

*Basis of Presentation*

 

The accompanying consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) andinclude the accounts of the Company and each of its subsidiaries, afterelimination of intercompany accounts and transactions.  Certain prior years’ amounts have been reclassifiedto conform to the current year presentation.

 

In March of2009, the Company sold substantially all the assets related to the Digitrandivision of the Company’s wholly-owned subsidiary, EMRISE ElectronicsCorporation’s (“EEC”), and all of the issued and outstanding equity interestsof EEC’s wholly-owned subsidiary, XCEL Japan, Ltd. (collectively the “DigitranOperations”).  The accompanyingfinancial statements include the Digitran Operations as a discontinuedoperation for all periods presented.

 

On March 22, 2010, EMRISEcompleted the sale of substantially all the assets of EEC’s subsidiary, ROAssociates to Massachusetts based Astrodyne Corporation.  See Note 22. In this Report, we refer to the businesses of RO Associates as the “ROOperations,” and we refer to the sale of the RO Associates assets as the “ROTransaction.”  Our RO Associatessubsidiary, located in San Jose, California, manufactured, marketed and soldstandard power supplies to the defense and industrial markets.  The RO Associates operation was classifiedwithin our electronic devices business segment.   The accompanying financial statementsinclude the RO Operations as discontinued operations and assets held for salefor all periods presented.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could materially differ from those estimates.

 

***Cash and Cash Equivalents***

 

The Company considers cash and cashequivalents to include cash in banks, commercial paper and deposits withfinancial institutions that can be liquidated without prior notice orpenalty.  The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.

 

***Trade Accounts Receivable***

** **

**Trade accounts receivable are recorded at the invoiced amount and do notbear interest.  The allowance for doubtful accounts is the Company’s bestestimate of the amount of probable credit losses in the Company’s existingaccounts receivable. The Company determines the allowance based on historicalwrite-off experience, customer payment history, and current economic data. TheCompany reviews its allowance for doubtful accounts monthly. **

 

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**Account balances are charged off against the allowance after all means ofcollection have been exhausted and the potential for recovery is consideredremote.**

 

***Fair Value of Financial Instruments***

 

The carrying amount of cash andcash equivalents, accounts receivable, accounts payable and accrued expensesare reasonable estimates of their fair value because of the short maturity ofthese items. The Company believes the carrying amounts of its notes payable andlong-term debt approximate fair value because the interest rates on theseinstruments are subject to change with, or approximate, market interest rates.

 

***Inventories***

 

The Company’s finished goodselectronic devices inventories generally are built to order.  The Company’s communications equipmentinventories generally are built to forecast, which requires production of alarger amount of finished goods in the communications equipment business sothat customers can be served promptly. The Company’s products consist of numerous electronic parts and othermaterials, which necessitates the exercise of detailed inventorymanagement.  The Company values itsinventory at the lower of the actual cost to purchase or manufacture theinventory (first-in, first-out) or the current estimated market value of theinventory (net realizable value). The Company performs cycle counts ofinventories using an ABC inventory methodology, which groups inventory intocycle counting categories, or conducts physical inventories at least once ayear.  The Company regularly reviewsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on its estimated forecast of product demand andproduction requirements for the next 12 to 24 months. Additionally, todetermine inventory write-down provisions, the Company reviews product lineinventory levels and individual items as necessary and periodically reviews assumptionsabout forecasted demand and market conditions. Any inventory that the Company determines to be obsolete, either inconnection with the physical count or at other times of observation, arereserved for and subsequently written-off. As of December 31, 2009, total inventory reserves amounted to $4.7million of which $3.1 million, or 20% of total inventory, related to theelectronic devices segment and $1.6 million, or 11% of total inventory, relatedto the communications equipment segment. As of December 31, 2008, total inventory reserves amounted to $4.1million of which $2.5 million, or 17% of total inventory, related to theelectronic devices segment and $1.6 million, or 11% of total inventory, relatedto the communications equipment segment.

 

The electronics devices andcommunications equipment industries are characterized by rapid technologicalchange, frequent new product development, and rapid product obsolescence thatcould result in an increase in the amount of obsolete inventory quantities onhand. Also, estimates of future product demand may prove to be inaccurate, inwhich case the Company may have understated or overstated the provisionrequired for excess and obsolete inventory. Although the Company makes everyeffort to ensure the accuracy of its forecasts of future product demand, anysignificant unanticipated changes in demand or technological developments couldhave a significant impact on the value of the Company’s inventory and itsreported operating results.

 

***Property, Plant and Equipment***

 

Property, plant and equipment arestated at cost, less accumulated depreciation and amortization. Depreciationand amortization are computed principally using the straight-line method overthe useful lives of the assets (or lease term, if shorter) as follows:

 
| Buildings                         |   | 50 years  |
|-----------------------------------|--------|-----------|
| Machinery, equipment and fixtures |   | 3-7 years |
| Leasehold improvements            |   | 5 years   |

 

Maintenance and repairs areexpensed as incurred, while renewals and betterments are capitalized.  Research and development costs are expensedas incurred.

 

F-10

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

***Debt Issuance Costs***

 

Deferred financing costs, which areincluded in other assets, are costs incurred to obtain debt financing,including all related fees, and are included in the accompanying consolidatedbalance sheets and are amortized as interest expense over the term of the relatedfinancing using the straight-line method which approximates the interest ratemethod.  Total deferred financing costsamortized to interest expense were $0.8 million and $0.5 million in 2009 and2008, respectively.

 

***Long-Lived Assets***

 

The Company reviews the carryingamount of its long-lived assets for possible impairment whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable. Recoverability of assets to be held and used is measured bya comparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

As aresult of the current expectation that RO would be sold before the end of theestimated useful lives of its long-lived assets, the Company performed anassessment of recoverability associated with the long-lived assets of RO.  In connection with that assessment, animpairment loss of $0.6 million was recognized in 2009, which is included inthe Company’s statement of operations within income from discontinued and heldfor sale operations.

 

***Goodwill and Other Intangible Assets***

 

Financial Accounting StandardsBoard (“FASB”) guidance for goodwilland other intangible assets disallows the amortization of goodwill andprovides for impairment testing of goodwill carrying values on an annual basisor more frequently if an event occurs or circumstances change that would morelikely than not reduce the fair value of a reporting unit below its carryingamount.  The Company’s reporting unitshave been identified as electronic devices and communications equipment.  The Company performed its annual requiredtests of impairment as of December 31, 2009 and 2008 for goodwill in theelectronic devices and the communications equipment reporting units.  As a result of this annual test, in 2008 theCompany incurred a loss on the impairment of goodwill and indefinite livedintangible assets of $6.6 million within the Company’s communications equipmentsegment.  As a result, the 2008 impairment charge reflects the write down ofsubstantially all of the carrying value of the goodwill and other intangibleassets for the communications equipment segment.  In performingthe valuation in 2009, we used cash flows that reflected management’s forecastsand discount rates that reflect the risks associated with the currentmarket.  We consider the results of anincome approach and a market approach in determining the fair value of thereporting units.  For the income approach we assumed growth of4.0% as a result of expected shipments on existing contracts and futureopportunities.  We discounted theprojected cash flows at 14% to determine the fair value for the electronicdevices reporting unit.  For the marketapproach, we used the guideline public company method, underwhich the fair value of a business is estimated by comparing the subjectcompany to similar companies with publicly traded ownership interests. Fromthese “guideline” companies, valuation multiples are derived and then appliedto the appropriate operating statistics of the subject company to arrive atindications of value.

 

At December 31,2009, our reported goodwill totaled $15.6 million, all of which belonged to theelectronic devices reporting unit.  Basedon the results of our testing, the fair values of the electronic devicesreporting unit exceeded its book values. However, as a result of the sale of our ROOperations, we recorded a non-cash charge for the impairment of goodwill andindefinite-lived intangibles of $0.9 million.  The write down is reflectedwithin income from discontinued and held for sale operations in theConsolidated Statement of Operations..

 

Intangible assets with identifiableuseful lives are amortized using the straight-line method over their usefullives.  Definite-lived intangible assetsare stated at cost, less accumulated amortization, and are amortized on thestraight-line method over their estimated useful lives ranging from two totwenty years.  The Company periodically 

 

F-11

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

reviewsthe original estimated useful lives of long-lived assets and makes adjustmentswhen appropriate.  Intangible assets withfinite useful lives are tested for impairment whenever events or changes incircumstances indicate that an asset’s carrying amount may not berecoverable.  The Company evaluates itsintangible assets for impairment by comparing the future undiscounted cashflows of the underlying assets to their respective carrying amounts.  As aresult of the current expectation that RO would be sold before the end of theestimated useful lives of its intangible assets with identifiable useful lives,the Company performed an assessment of recoverability associated with theintangible assets of RO.  In connectionwith that assessment, an impairment loss of $0.5 million was recognized in2009, which is included in the Company’s consolidated statement of operationswithin income from discontinued and held for sale operations.

 

*ProductWarranty Liabilities*

 

Generally, the Company’s productscarry a standard one-year, limited parts and labor warranty.  In certain circumstances, the Companyprovides a two-year limited parts and labor warranty on communications testinstruments and network access products. The Company offers extended warranties beyond two years for anadditional cost to its customers. Products returned under warranty typically are tested and repaired orreplaced at the Company’s option. Historically, the Company has not experienced significant warranty costsor returns.

 

The Company records a liability for estimated coststhat it expects to incur under the basic limited warranties when productrevenue is recognized.  Factors affectingthe warranty liability include the number of units sold, historical andanticipated rates of claim and costs per claim. The Company periodically assesses the adequacy of its warranty liabilityaccrual based on changes in these factors.

 

***Reverse Stock Split***

** **

**On November 19, 2008, the Company completed a board of directorsapproved 1-for-3.75 reverse split of its common stock.  All common stock, stock options and warrantsto purchase common stock and earnings per share amounts have been retroactivelyrestated as if the reverse stock split occurred at the beginning of the periodspresented.**

** **

***Stock-Based Compensation***

 

The Company estimates the fair value of itsstock option plans using the Black-Scholes option pricing model (the “OptionModel”).  The Option Model requires theuse of subjective and complex assumptions, including the option’s expected termand the estimated future price volatility of the underlying stock, which determinethe fair value of the stock-based awards. In accordance with FASB guidance on fair value, stock-based compensationexpense recognized during a period is based on the value of the portion of thestock-based awards that are expected to vest with employees.  Accordingly, the recognition of stock-basedcompensation expense has been reduced for estimated future forfeitures.  FASB guidance requires forfeitures to beestimated at the time of grant with adjustments recorded in subsequent periodcompensation expense if actual forfeitures differ from those estimates.

 

F-12

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

The following weighted average assumptionswere used for stock options granted during the year ended December 31:

 
| ** **                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                                      |       | None     |       | None     |       |
| Expected volatility                                 |       | 89       | %          | 63       | %          |
| Risk-free interest rate                             |       | 0.89     | %          | 2.53     | %          |
| Expected term                                       |       | 7 years  |       | 6 years  |       |
| Weighted average fair value per share at grant date |       | $        | 1.10       |     | $          | 1.25 |   |
|                                                     |            |          |            |          |            |  |  |

 

***Loss Per Share***

 

Loss per share is calculatedaccording to FASB guidance which requires that basic loss per share includes nodilution and is computed by dividing net income available to commonstockholders by the weighted average number of shares outstanding during theyear. Diluted loss per share reflects the potential dilution of securities thatcould share in the earnings of the Company.

 

***Foreign Currency Translation***

 

The accounts of foreignsubsidiaries have been translated using the local currency as the functionalcurrency. Accordingly, foreign currency denominated assets and liabilities havebeen translated to U.S. dollars at the current rate of exchange on the balancesheet date and at the average for the period reported for the statement ofoperations. The effects of translation are recorded either within our statementof operations under the caption “other income (expense)” or as a separate partof our net equity under the caption “accumulated other comprehensive income(loss).”  Exchange gains and lossesarising from transactions denominated in foreign currencies are translated atthe exchange rates applicable on the dates of the transactions and are includedin operations.

 

***Concentration of Credit Risk***

 

Financial instruments, whichpotentially expose the Company to concentration of credit risk, consistprimarily of cash and accounts receivable. The Company places its cash withhigh quality financial institutions. At times, cash balances may be in excessof the amounts insured by the Federal Deposit Insurance Corporation.

 

The Company’s accounts receivableresult from sales to a broad customer base. The Company extends credit to itscustomers based upon an evaluation of the customer’s financial condition andcredit history and generally does not require collateral. Accounts receivableare generally due within 30 days in the Company’s U.S., England and Franceoperations and are stated net of an allowance for doubtful accounts. Accountsoutstanding for longer than the contractual payment terms are considered pastdue. Provisions for uncollectible accounts are made based on the Company’sspecific assessment of the collectibility of all past due accounts. Creditlosses are provided for in the financial statements and consistently have beenwithin management’s expectations.  Onecustomer represented 10% of the Company’s total net sales during 2009.  Nocustomer represented 10% or more of the Company’s total net sales during 2008.

 

*Revenue**Recognition*

 

TheCompany derives revenues from sales of electronic devices and communicationsequipment products and services.  TheCompany’s sales are based upon written agreements or purchase orders thatidentify the type and quantity of the item and/or services being purchased andthe purchase price.  The Companyrecognizes revenues when shipment of products has occurred or services havebeen rendered, no significant obligations remain on the 

 

F-13

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

partof the Company, and collectability is reasonably assured based on the Company’scredit and collections practices and policies.

 

TheCompany recognizes revenues from sales of its U.S. communications equipmentbusiness units at the point of shipment of those products.  An estimate of warranty cost is recorded atthe time the revenue is recognized. Product returns are infrequent and require prior authorization becausesales are final and the Company quality tests its products prior to shipment toensure products meet the specifications of the binding purchase orders underwhich those products are shipped. Normally, when a customer requests andreceives authorization to return a product, the request is accompanied by apurchase order for a repair or for a replacement product.

 

Revenuerecognition for products and services provided by the Company’s subsidiaries inEngland and its U.S. subsidiary, ACC, depends upon the type of contractinvolved.  Engineering/design servicescontracts generally entail design and production of a prototype over a term ofup to several years, with revenue deferred until each milestone defined in thecontract is reached.  Productioncontracts provide for a specific quantity of products to be produced over aspecific period of time.  Customers issuebinding purchase orders or enter into binding agreements for the products to beproduced.  The Company recognizesrevenues on these orders as the products are shipped.  Returns are infrequent and permitted onlywith prior authorization because these products are custom made to order basedon binding purchase orders and are quality tested prior to shipment.  An estimate of warranty cost is recorded atthe time revenue is recognized.

 

TheCompany recognizes revenues for products sold by its subsidiary in France atthe point of shipment.  Customerdiscounts are included in the product price list provided to the customer.  Returns are infrequent and permitted onlywith prior authorization because these products are shipped based on bindingpurchase orders and are quality tested prior to shipment.  An estimate of warranty cost is recorded atthe time revenue is recognized.

 

Revenuesfrom services such as repairs and modifications are recognized when the serviceis completed and invoiced.  For repairsthat involve shipment of a repaired product, the Company recognizes repair revenueswhen the product is shipped back to the customer. Service revenues contributeless than 5% of total revenue and, therefore, are considered to be immaterialto overall financial results.

 

*Shipping and Handling Costs*

 

Shipping and handling costs recordedin cost of goods sold were $364,000 and $145,000 in 2009 and 2008,respectively.  Shipping and handlingcosts recorded in selling, general and administrative expenses were $170,000and $15,000 in 2009 and 2008, respectively.

 

*Advertising Costs*

 

Advertising costs are charged toexpense as incurred.  Advertising costsfor 2009 and 2008 were immaterial.

 

*Income Taxes*

 

Income taxes are accounted forusing an asset and liability approach that requires the recognition of deferredtax assets and liabilities for the expected future tax consequences oftemporary differences between the financial statement and tax bases of assetsand liabilities at the applicable tax rates. A valuation allowance is providedwhen it is more likely than not that some portion or all of the deferred taxassets will not be realized.  The Companyevaluates the realizability of its deferred tax assets by assessing itsvaluation allowance and by adjusting the amount of such allowance, ifnecessary.  The factors used to assessthe likelihood of realization are the Company’s forecast of future taxableincome and available tax planning strategies that could be implemented torealize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable taxjurisdictions could affect the ultimate realization of deferred tax assets andcould result in an increase in the Company’s effective tax rate on futureearnings. The provision for income taxes represents the tax payable for theyear and the change during the year in 

 

F-14

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

deferredtax assets and liabilities.  As of December 31,2009 and 2008, the Company had recorded no net unrecognized tax benefitsassociated with uncertain income tax positions.

 

*Comprehensive Income (Loss)*

 

Comprehensive income (loss)includes all changes in equity during a period except those that resulted frominvestments by or distributions to the Company’s stockholders.  Other comprehensive income refers torevenues, expenses, gains and losses that, under GAAP, are included incomprehensive income, but excluded from net income (loss) as these amounts arerecorded directly as an adjustment to stockholders’ equity.  The Company’s other comprehensive incomeconsists of foreign currency translation adjustments.  The following table reflects the componentsof comprehensive income (loss),in thousands:

 
| ** **                               | ** ** | **Year Ended**        | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **December 31,** | ** ** |
| ** **                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                     |       |                  |       |   |   |
| Net  income (loss)                       |       | $                     | 1,042      |   | $ | (7,440 | ) |
| Other  comprehensive income (loss):      |       |                  |       |   |   |
| Foreign  currency translation adjustment |       | 1,195                 |       | (3,881 | ) |
| Comprehensive  income (loss)             |       | $                     | 2,237      |   | $ | (11,321 | ) |

 

F-15

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 2 — GOINGCONCERN**

 

The accompanying consolidated financial statementshave been prepared in conformity with GAAP, which contemplate the continuationof the Company as a going concern.  TheCompany reported net income for the year ended December 31, 2009 of $1.0million.  Included in net income was $4.0million in income/gain (net of taxes of $0.5 million) from discontinuedoperations related to the disposition of the Company’s Digitran Operations (seeNote 4).  Absent this income/gain, theCompany would have incurred a $3.0 million net loss for the year ended December 31,2009.  Primarily as a result of thereclassification of the majority of its debt from long to short term during2009, the Company also reported negative working capital from continuingoperations of $7.7 million at December 31, 2009 and positive workingcapital from continuing operations of $3.6 million at December 31,2008.  The Company’s current businessplan for the next 12 months requires additional funding beyond its anticipatedcash flows from operations.  These andother factors described in more detail below raise substantial doubt about theCompany’s ability to continue as a going concern.  The accompanying consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

The ability of the Company to continue as a goingconcern is dependent upon its ability to (i) achieve the milestones related to sale ofa significant portion of its assets as required by the Credit Agreement betweennow and June 30, 2010, (ii) repay the credit facility in full on orprior to its maturity on June 30, 2010, (iii) obtain alternatefinancing to fund operations after June 30, 2010 and (iv) achieveprofitable operations.

 

If the Company’s net losses continue, it may experiencenegative cash flow, which may prevent the Company from continuing operations.  If the Company is not able to attain, sustainor increase profitability on a quarterly or annual basis, it may not be able tocontinue operations.

 

Upon the occurrence and during the continuation of an eventof default, the lender may also elect to increase the interest rate applicableto the outstanding balance of the Term Loans A and B by four percentage pointsabove the per annum interest rate that would otherwise be applicable. Additionally, if the lender terminates the credit facility during a defaultperiod then the Company is subject to a penalty equal to 2% of the outstandingprincipal balance of the Revolver and the Term Loans.

 

If the Company (i) defaults under the Credit Facility for any reason, including missing a milestone, (ii) is unable to timely sell assets at sufficient prices, (iii) cannot borrow funds under the terms of the Revolver, for any reason, through June 30, 2010, or (iv) fails to obtain alternate financing to replace its credit facility prior to June 30, 2010 or a new revolving facility once the current credit facility is paid in full, the Company does not believe that current and future capital resources, revenues generated from operations and other existing sources of liquidity will be adequate to meet its anticipated short term, working capital and capital expenditures needs for the next 12 months.  Further, if any of these occur for any reason, or if the Company experiences a significant loss of revenue or increase in costs, then its cash flow would be negatively impacted resulting in a cash flow deficit.  A cash flow deficit will require the Company to seek additional or alternate financing, with little or no notice which would be difficult to obtain in these economic conditions and the Company’s anticipated financial condition in such circumstances.  To address these potential financing needs the Company may have to explore a revised debt structure with its current lender; additional or new financing with another lender or lenders; the sale of assets to generate cash; or the sale of equity to raise capital.  Successfully executing these strategies is uncertain and there are many risks associated with attempting to execute each, in addition to the risks and uncertainties of the short and long term impact of executing on any of these strategies.   Failure to meet the Company’s financing requirements, if and when needed, would have an adverse effect on the Company’s operations and/or ability to do business after that date or could restrict its growth, limit the development of new products, hinder its ability to fulfill existing or future orders or negatively affect its ability to secure new customers or product orders.

 

If the Company is unsuccessful in securing the necessaryfinancing to continue operations, when needed, then it may be forced to seek protection under the U.S.Bankruptcy Code or be forced into liquidation or substantially restructuring oraltering its business operations and/or debt obligations.

 

F-16

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 3 —ACQUISITION OF ADVANCED CONTROL COMPONENTS**

 

On May 23, 2008, the Company and its wholly-owned subsidiary,EMRISE Electronics Corporation (“EEC”) entered into a Stock Purchase Agreement(the “Purchase Agreement”), as amended, pursuant to which EEC agreed to acquireCustom Components, Inc. (“CCI”) and its operating subsidiary, AdvancedControl Components, Inc. (“ACC”).

 

The closing of the Purchase Agreement occurred on August 20,2008.  Under the terms of the Purchase Agreement, EEC acquired all of theissued and outstanding shares of common stock of CCI and all of the issued andoutstanding shares of common stock of ACC not owned by CCI (the “Acquisition”). In addition to the purchase price, the Company is obligated to pay up to anadditional $5 million if ACC meets certain operating income targets for one orboth of the two 12 month periods following the closing.   Additionally, pursuant to the PurchaseAgreement, there are provisions for a working capital adjustment to thepurchase price as well as an adjustment to net cash.

 

In connection with the Acquisition of ACC, EEC issuedSubordinated Secured Contingent Promissory Notes (the “Notes”), as amended, toeach of the Sellers.  The Notes bear interest at a rate per annumequal to the prime rate as reported in *TheWall Street Journal *plus 1%. On November 20, 2009, EEC entered into Amendment No. 1 to theNotes with each of the Sellers (collectively, the “Note Amendments”) pursuantto which each of the Notes were amended to (a) add $1.3 million (the sumof the closing net cash adjustment and the first earnout payment) to theaggregate principal balance of the Notes, (b) double the original interestrate of each of the Notes (the prime rate as reported in *The WallStreet Journal* plus 1%) until the aggregate principal balance of theNotes attributable to the closing net cash adjustment and the first earnoutpayment is repaid, at which time the interest rate shall be reduced back to theprime rate as reported in *The Wall Street Journal*plus 1%, and (c) revise the payment terms such that no payments are dueuntil July 1, 2010, at which time EEC will make principal payments in theaggregate amount of $1.3 million plus payments of interest accrued on suchamount from the issuance date through the date of payment of such aggregateprincipal amount.  The remaining balanceof the notes is due in November 2010.

 

The following table summarizes the components of the Notesat December 31, 2009 (in thousands):

 
| Aggregate  contingent consideration related to original Notes  |   | $     | 2,000  |   |
|----------------------------------------------------------------|--------|-------|--------|--------|
| Working  capital adjustment                                    |   | 959   |   |
| Net  cash adjustment                                           |   | 302   |   |
| Aggregate  contingent consideration related to Note Amendments |   | 1,036 |   |
| Balance  of Notes at December 31, 2009                    |   | $     | 4,297  |   |

 

In addition to the Notes, the remaining cash contingentconsideration of $2.0 million was accrued at December 31, 2009 in othercurrent liabilities in the accompanying consolidated balance sheet.  This amount is also due in November 2010.

 

In determining the purchase price for the Acquisition, theCompany took into account the historical and expected earnings and cash flow ofACC, as well as the value of companies of a size and in an industry similar toACC, comparable transactions and the market for such companies generally.  The initial purchase price represented apremium of approximately $4.1 million over the recorded net worth of ACC’sassets.  As a result of the contingentconsideration accrued, as discussed above, the total goodwill recorded relatedto the purchase of ACC was $10.2 million.

 

In conjunction with the Acquisition, the Company consideredwhether the Acquisition included various types of identifiable intangibleassets, including trade names, trademarks, patents, covenants not to compete,customers, backlog, workforce, technology and software.  As a result of the procedures performed andthe evaluation of management, the Company determined and recorded the value ofthe tangible and intangible assets in 

 

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

its Condensed Consolidated Balance Sheets in accordancewith the purchase price allocation.  TheCompany has estimated and recorded the identified intangible assets asfollows:  trade name of $1,570,000;covenant not to compete of $60,000; backlog of $570,000; and customerrelationships of $2,550,000.

 

Thefollowing table summarizes the assets and liabilities assumed in connectionwith the Acquisition (in thousands):

 
| Accounts receivable                      |   | $      | 2,185  |   |
|------------------------------------------|--------|--------|--------|--------|
| Inventories                              |   | 1,848  |   |
| Property and equipment                   |   | 1,545  |   |
| Intangible assets, net                   |   | 4,750  |   |
| Goodwill                                 |   | 4,073  |   |
| Other assets                             |   | 244    |   |
| Total assets acquired                    |   | 14,645 |   |
| Accounts payable and accrued liabilities |   | (1,678 | )      |
| Other liabilities                        |   | (611   | )      |
| Total liabilities assumed                |   | (2,289 | )      |
| Net assets acquired                      |   | $      | 12,356 |   |

 

Subsequentto August 20, 2008, the Company recorded contingent consideration in theamount of $6.3 million ($4.3 million recorded as a Note and $2.0 millionrecorded as other accrued liability), which represented an increase togoodwill.  Additional purchase priceadjustments reducing goodwill by $0.3 million were also recorded subsequent tothe acquisition.  Total goodwill at December 31,2009 recorded as a result of the acquisition of ACC was $10.2 million.

 

Thefollowing table summarizes, on a pro forma basis, the unaudited combinedresults of operations of the Company and ACC as though the Acquisition occurredas of January 1, 2008.  The pro forma adjustments are based upon availableinformation and assumptions that management believes reasonably reflect thetransaction.  The Company presents thepro forma results of operations for informational purposes only.  The pro forma results of operations are notnecessarily indicative of what the Company’s results of operations would havebeen had the Company completed 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.

 

F-18

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 
| ** **                           | ** ** | **(Unaudited)**        | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **For the Year Ended** | ** ** |
| ** **                           | ** ** | **December 31,**  | ** ** |
| ** **                           | ** ** | **2008**               | ** ** |
|                                 |       |                   |       |
| Net sales                            |       | $                      | 67,840     |   |
|                                 |       |                   |       |
| Net loss                             |       | $                      | (2,617     | ) |
|                                 |       |                   |       |
| Loss per share:                      |       |                   |       |
| Basic                                |       | $                      | (0.26      | ) |
| Diluted                              |       | $                      | (0.26      | ) |
|                                 |       |                   |       |
| Weighted average shares outstanding: |       |                   |       |
| Basic                                |       | 10,204                 |       |
| Diluted                              |       | 10,204                 |       |

 

**NOTE 4 —DISCONTINUED OPERATIONS**

 

*DigitranOperations*

 

On March 20, 2009, the Company and EEC entered into anAsset and Stock Purchase Agreement (the “Digitran Purchase Agreement”) withElectro Switch Corp., a Delaware corporation (the “Buyer”) and ESC Worldwide, Inc.,a Massachusetts corporation and subsidiary of Buyer (the “Stock Buyer”). At the closing of the Digitran Purchase Agreement on March 20, 2009, (i) theBuyer purchased from the Company and EEC substantially all the assets relatedto EEC’s Digitran division, and (ii) the Stock Buyer purchased from EECall of the issued and outstanding equity interests of its wholly-ownedsubsidiary, XCEL Japan, Ltd., for an aggregate purchase price of approximately$11,560,000 (the “Disposition”).  Under the terms of the PurchaseAgreement, the Buyer is obligated to pay up to an additional $500,000 in cashto EEC if net sales for the fiscal year ending December 31, 2009 relatedto the businesses that were sold pursuant to the Digitran Purchase Agreementexceeds $6,835,120.

 

The Buyer acquired all of the intellectual property, cash,accounts receivable, inventory, customer support and relationships, softwareand product development, and real property lease related to the Digitrandivision, which, prior to its acquisition, was in the business of manufacturinga line of electromechanical switches comprised of digital and rotary switchesused for routing electronic signals.  The Stock Buyer acquired XCEL Japan,Ltd., which, prior to its acquisition, was engaged in the business of sellingand distributing Digitran division products in the Asia Pacific market. EEC retained all accounts payable and certain other assets and liabilitiesrelated to the Digitran division.  The Company continues to operate itscommunications equipment segment and the power systems radio frequency (“RF”)and microwave devices product lines in its electronic devices segment.

 

The Digitran Purchase Agreement contains five yearnoncompetition and non-solicitation provisions covering the Company, EEC andeach of their respective affiliates.  In addition, the Company and EECprovided customary indemnification rights to the Buyer and Stock Buyer inconnection with the Disposition.

 

Inconnection with the Company’s divestiture of its Digitran division, whichcomprised a portion of the Company’s electronic devices segment, the Companyincurred approximately $900,000 in cash charges that were paid atclosing.  At December 31, 2009, the Company estimates future cashexpenditures related to the sale to be approximately $60,000 primarily foremployee termination costs and transaction related employee bonuses, which wereaccrued within “Accrued expenses” except for income taxes, which were accruedwithin income taxes payable in the accompanying consolidated balancesheets.   In addition, the Companyhas recorded a net $18,000 related to purchase price adjustments owed to theBuyer in connection with the transaction.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

TheCompany has classified the Digitran Operations, which was a component of itselectronic devices segment, as a discontinued operation in the accompanyingconsolidated financial statements for all periods presented.

 

*RO Associates*

 

In June,2009, the Company engaged an investment banking firm to evaluate thefeasibility of selling the capital stock or substantially all of the assets ofRO and to determine possible values ascribed to RO by potential buyers inconnection with a potential sale of RO. In November 2009, the Company received more than one bona fideoffer to purchase substantially all of the assets of RO.  Based on the receipt of these offers, theCompany pursued negotiations for the sale of substantially all of the assets ofRO with the intent of consummating a sale of RO during first half of 2010.

 

As a result of the current expectation that substantiallyall of the assets of RO would be sold before the end of the estimated usefullives of RO’s long-lived assets, the Company performed an assessment ofrecoverability associated with the long-lived assets of RO.  In connection with that assessment, a totalimpairment loss of $1.8 million was recognized, which is comprised of $0.6million related to long-lived assets and definite-lived intangibles, $0.9million related to goodwill and indefinite-lived intangible assets and $0.3million related to the decline in fair value of inventory and is included inthe Company’s consolidated statement of operations a within income from discontinuedand held for sale operations for the year ended December 31, 2009

 

TheCompany has classified RO, which is a component of its electronic devicessegment, as discontinued operations and assets held for sale in theaccompanying consolidated financial statements for all periods presented.

 

Thefollowing table summarizes the results from discontinued and held for saleoperations, which are associated with the electronic devices segment, for theyears ended December 31, 2009 and 2008 (in thousands):

 
| ** **                                 | ** ** | **2009**       | ** ** | **2008**       | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                 | ** ** | **Digitran**   | ** ** | **RO**         | ** ** | ** ** | ** ** | **Digitran** | ** ** | **RO** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Operations** | ** ** | **Operations** | ** ** | **Total** | ** ** | **Operations** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|                                       |       |           |       |           |       |   |   |   |   |   |   |   |   |
| Net  Sales                                 |       | $              | 1,478      |           | $          | 2,558 |   | $ | 4,036 |   | $ | 8,649 |   | $ | 3,625 |   | $ | 12,274 |   |
| Income  (loss) from operations             |       | $              | 178        |           | $          | (3,084 | ) | $ | (2,906 | ) | $ | 3,081 |   | $ | (531 | ) | $ | 2,550 |   |
|                                       |       |           |       |           |       |   |   |   |   |   |   |   |   |
| Gain  on sale of assets                    |       | 7,381          |       | —         |       | 7,381 |   | — |   | — |   | — |   |
| Tax  provision on gain from sale of assets |       | (518           | )          | —         |       | (518 | ) | — |   | — |   | — |   |
| Net  gain on sale of assets                |       | 6,863          |       | —         |       | 6,863 |   | — |   | — |   | — |   |
|                                       |       |           |       |           |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                         |       | $              | 7,041      |           | $          | (3,075 | ) | $ | 3,966 |   | $ | 3,081 |   | $ | (531 | ) | $ | 2,550 |   |

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

Thefollowing table reflects the major classes of assets and liabilities (excludinggoodwill) for discontinued and held for sale operations for the periodspresented (in thousands):

 
| ** **                                       | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **Digitran**               | ** ** | **RO**                     | ** ** | **Total Held** | ** ** | **Digitran** | ** ** | **RO** | ** ** | **Total Held** | ** ** |
| ** **                                       | ** ** | **Operations**             | ** ** | **Operations**             | ** ** | **For Sale** | ** ** | **Operations** | ** ** | **Operations** | ** ** | **For Sale** | ** ** |
| Cash  and cash equivalents                       |       | $                          | —     |                       | $          | (24 | ) | $ | (24 | ) | $ | 179 |   | $ | (44 | ) | $ | 135 |   |
| Accounts  receivable, net                        |       | —                     |       | 431                        |       | 431 |   | 1,307 |   | 409 |   | 1,716 |   |
| Inventory,  net                                  |       | —                     |       | 1,059                      |       | 1,059 |   | 1,191 |   | 1,960 |   | 3,151 |   |
| Prepaids  and other current assets               |       | —                     |       | 31                         |       | 31 |   | 150 |   | 5 |   | 155 |   |
| Total  current assets                            |       | —                     |       | 1,497                      |       | 1,497 |   | 2,827 |   | 2,330 |   | 5,157 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Property,  plant and equipment, net              |       | —                     |       | —                     |       | — |   | 200 |   | 211 |   | 411 |   |
| Intangible  assets other than goodwill, net      |       | —                     |       | —                     |       | — |   | 169 |   | 917 |   | 1,086 |   |
| Other  noncurrent assets                         |       | —                     |       | —                     |       | — |   | 768 |   | 210 |   | 978 |   |
| Total  Assets                                    |       | $                          | —     |                       | $          | 1,497 |   | $ | 1,497 |   | $ | 3,964 |   | $ | 3,668 |   | $ | 7,632 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Accounts  payable and accrued expenses           |       | $                          | —     |                       | $          | 745 |   | $ | 745 |   | $ | 711 |   | $ | 429 |   | $ | 1,140 |   |
| Current  portion of long-term debt               |       | —                     |       | —                     |       | — |   | 43 |   | 11 |   | 54 |   |
| Long-term  debt and other noncurrent liabilities |       | —                     |       | —                     |       | — |   | 401 |   | 339 |   | 740 |   |
| Total  liabilities                               |       | $                          | —     |                       | $          | 745 |   | $ | 745 |   | $ | 1,155 |   | $ | 779 |   | $ | 1,934 |   |

 

**NOTE 5 —INVENTORIES**

 

Inventoriesare stated at the lower of cost (first-in, first-out method) or market (netrealizable value) and consisted of the following at December 31 (inthousands):

 
| ** **              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Raw  materials          |       | $        | 8,810      |     | $          | 8,350 |   |
| Work-in-process         |       | 3,177    |       | 2,956    |       |
| Finished  goods         |       | 3,273    |       | 3,377    |       |
| Reserves                |       | (4,735   | )          | (4,118   | )          |
| Total  inventories, net |       | $        | 10,525     |     | $          | 10,565 |   |

 

F-21

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 6 —PROPERTY, PLANT AND EQUIPMENT**

 

Property,plant and equipment consisted of the following as of December 31 (inthousands):

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Land  and buildings                  |       | $        | 427        |     | $          | 403 |   |
| Machinery,  equipment and fixtures   |       | 4,133    |       | 4,057    |       |
| Leasehold  improvements              |       | 501      |       | 498      |       |
| Capital  leases                      |       | 208      |       | 208      |       |
|                                 |       | 5,269    |       | 5,166    |       |
| Accumulated  depreciation            |       | (2,956   | )          | (2,387   | )          |
| Total  property, plant and equipment |       | $        | 2,313      |     | $          | 2,779 |   |

 

TheCompany recorded depreciation expense associated with its property, plant andequipment of $0.8 million for each of the years ended December 31, 2009and 2008.

 

**NOTE 7 — DEBTISSUANCE COSTS**

 

On November 30,2007, the Company and its direct subsidiaries, EEC, CXR Larus Corporation andRO Associates Incorporated (collectively, the “Borrowers”) entered into acredit facility (see Note 10 and 11).  Inconnection with the credit facility, the Company incurred $1.4 million of debtissuance costs, which is included in Other assets in the accompanying consolidatedbalance sheets and is being amortized over the term of the related financing,using the straight-line method, which approximates the interest ratemethod.  Deferred debt issuance costsamortized to interest expense were $0.8 million and $0.5 million in 2009 and2008, respectively.  The remaining debtissuance costs of $0.3 million will be amortized over the six months ending June 30,2010, the maturity date of the credit facility.

 

**NOTE 8 —GOODWILL AND INTANGIBLE ASSETS**

 

Goodwillfor the Company’s reporting units consisted of the following at December 31(in thousands):

 
| ** **               | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Electronic Devices       |       | $        | 15,633     |     | $          | 9,657 |   |
| Communications Equipment |       | —   |       | —   |       |
|                     |       | $        | 15,633     |     | $          | 9,657 |   |

 

The Companyperformed its annual impairment test for goodwill at all of our reporting unitsas of December 31, 2009 and 2008. In performing the valuations, the Company used cash flows that reflectedmanagement’s forecasts and discount rates that reflect the risks associatedwith the current market.  The Companyconsiders the results of an income approach and a market approach indetermining the fair value of the reporting units.  In 2009, For theincome approach a growth rate of 4.0% was assumed as a result of expectedshipments on existing contracts and future opportunities.  The Company discounted the projected cashflows at 14% to determine the fair value for the electronic devices reportingunit.  For the market approach, the guideline public company method was used, under which the fair valueof a business is estimated by comparing the subject company to similarcompanies with publicly traded ownership interests. From these “guideline”companies, valuation multiples are derived and then applied to the appropriateoperating statistics of the subject company to arrive at indications of value.  At December 31,2009, the Company’s reported goodwill totaled $15.6 million, all of whichbelonged to the electronics devices reporting unit.  Based on the results of this testing, thefair values of the electronic devices reporting unit exceeded its bookvalues.  However,as a result of the sale of our RO Operations, we recorded a non-cash charge forthe impairment of goodwill and indefinite-lived intangibles of $0.9 million.  This writedown is reflected within income from discontinued and held for sale operationsin the Consolidated Statement of Operations.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

During 2009, the Company added $6.1million of goodwill as a result of purchase price adjustments associated withits acquisition of ACC in 2008.  During2008, the Company acquired ACC, which added $4.1 million in goodwill to itsbalance sheet.  Additionally, the Company’sannual test of goodwill reflected an impairment of goodwill for itscommunications equipment reporting unit of $5.8 million and indefinite-livedintangible assets of $0.8 million.  TheCompany incurred a total impairment charge of $6.6 million associated with thisvaluation in 2008.

 

Thefollowing table reflects changes in the Company’s goodwill balances, bysegment, for the year ended December 31, 2009 and 2008 (in thousands):

 
| ** **                        | ** ** | **Electronic** | ** ** | **Communications** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | **Devices**    | ** ** | **Equipment**      | ** ** | **Total**  | ** ** |
|                              |       |           |       |               |       |       |       |
| Balance at December 31, 2007 |       | $              | 7,295      |               | $          | 5,834      |       | $ | 13,129 |   |
| Acquisition of ACC                |       | 4,073          |       | —             |       | 4,073      |       |
| Impairment of goodwill            |       | —         |       | (5,834             | )          | (5,834     | )          |
| Foreign currency translation      |       | (1,711         | )          | —             |       | (1,711     | )          |
| Balance at December 31, 2008 |       | 9,657          |       | —             |       | 9,657      |       |
| ACC purchase price adjustments    |       | 6,078          |       | —             |       | 6,078      |       |
| Impairment of goodwill            |       | (547           | )          | —             |       | (547       | )          |
| Foreign currency translation      |       | 445            |       | —             |       | 445        |       |
| Balance at December 31, 2009 |       | $              | 15,633     |               | $          | —     |       | $ | 15,633 |   |

 

Otherchanges to goodwill balances were related to foreign currency translationadjustments on foreign goodwill amounts.

 

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

Otherintangible assets consist primarily of trademarks, trade names and technologyacquired.  The original cost andaccumulated amortization of these intangible assets consisted of the followingat December 31 (in thousands):

 
| ** **                             | ** ** | **2009**       | ** ** | **2008**           | ** ** |
|----------------------------------------|------------|----------------|------------|--------------------|------------|
| ** **                             | ** ** | **Electronic** | ** ** | **Communications** | ** ** | ** ** | ** ** | **Electronic** | ** ** | **Communications** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Devices**    | ** ** | **Equipment**      | ** ** | **Total** | ** ** | **Devices** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|                                   |       |           |       |               |       |   |   |   |   |   |   |   |   |
| **Intangibles with definite lives:**   |       |           |       |               |       |   |   |   |   |   |   |   |   |
| Technology acquired                    |       | $              | —     |               | $          | 1,150 |   | $ | 1,150 |   | $ | — |   | $ | 1,150 |   | $ | 1,150 |   |
| Customer relationships                 |       | 2,550          |       | 200                |       | 2,750 |   | 2,550 |   | 200 |   | 2,750 |   |
| Trade name                             |       | 1,570          |       | —             |       | 1,570 |   | 1,570 |   | — |   | 1,570 |   |
| Covenant-not-to-compete                |       | 260            |       | —             |       | 260 |   | 260 |   | — |   | 260 |   |
| Backlog                                |       | 770            |       | —             |       | 770 |   | 770 |   | — |   | 770 |   |
|                                   |       | 5,150          |       | 1,350              |       | 6,500 |   | 5,150 |   | 1,350 |   | 6,500 |   |
| Accumulated amortization               |       | (1,376         | )          | (743               | )          | (2,119 | ) | (691 | ) | (608 | ) | (1,299 | ) |
| Carrying Value                         |       | 3,774          |       | 607                |       | 4,381 |   | 4,459 |   | 742 |   | 5,201 |   |
|                                   |       |           |       |               |       |   |   |   |   |   |   |   |   |
| **Intangibles with indefinite lives:** |       |           |       |               |       |   |   |   |   |   |   |   |   |
| Trademarks and trade names             |       | 500            |       | —             |       | 500 |   | 500 |   | — |   | 500 |   |
|                                   |       |           |       |               |       |   |   |   |   |   |   |   |   |
| Total intangible assets, net           |       | $              | 4,274      |               | $          | 607 |   | $ | 4,881 |   | $ | 4,959 |   | $ | 742 |   | $ | 5,701 |   |

 

Inaccordance with FASB guidance for accounting for the impairment or disposal oflong-lived assets, the Company reevaluates the carrying value of identifiableintangible and long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying value may not be recoverable.  As aresult of the expectation that substantially all of the assets of RO would besold before the end of the estimated useful lives of RO’s long-lived assets,the Company performed an assessment of recoverability in 2009 associated withthe long-lived assets of RO.  Inconnection with that assessment and in addition to the goodwill impairmentdiscussed above, an impairment loss of $1.2 million was recognized, which isincluded in the Company’s statement of operations in income from discontinuedand held for sale operations for the year ended December 31, 2009,representing the write-off of $0.6 million related to long-lived assets anddefinite-lived intangible assets and $0.3 million related to the decline infair value of inventory.  No events or changesin circumstances occurred during 2008 that would have required an impairmentanalysis to be performed.

 

Assumingno additions, disposals or adjustments are made to the carrying values and/oruseful lives of the assets, annual amortization expense on intangible assets isestimated to be approximately $465,000 in 2010 and $445,000 in 2010 through2014.  The Company’s current intangibleassets have a weighted average remaining useful life of approximately 10 years.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 9 —ACCRUED LIABILITIES**

 

Accrued expenses as of December 31 consisted of the following (inthousands):

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Accrued  payroll and benefits        |       | $        | 1,659      |     | $          | 1,774 |   |
| Advance  payments from customers     |       | 939      |       | 1,364    |       |
| Warranty  reserve                    |       | 336      |       | 221      |       |
| Bank  overdrafts                     |       | 1,020    |       | 685      |       |
| Foreign  currency exposure provision |       | —   |       | 869      |       |
| Accrued  interest                    |       | 702      |       | 500      |       |
| Other  accrued expenses              |       | 1,507    |       | 1,377    |       |
| Total  accrued expenses              |       | $        | 6,163      |     | $          | 6,790 |   |

 

No other individual item represented more than 5% of total currentliabilities.

 

**NOTE 10 —LINES OF CREDIT**

 

TheCompany and certain of its subsidiaries, including EEC and CXR LarusCorporation, CCI, ACC and RO Associates Incorporated (collectively, the “Borrowers”),are parties to a Credit Agreement (as amended from time to time the “CreditAgreement”) with GVEC Resource IV Inc. (the “Lender”) providing for a creditfacility which includes term loans and a revolving credit facility and issecured by accounts receivable, other rights to payment and generalintangibles, inventories and equipment. The credit facility includes arevolving credit facility for up to $7,000,000 that expires on June 30,2010 (the “Revolver”).

 

TheRevolver is formula-based and 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.

 

Intereston the Revolver is payable monthly.  Theinterest rate is variable and is adjusted monthly based on the prime rate aspublished in the “Money Rates” column of *The Wall Street Journal*(the “Base Rate”) plus 1.25%, subject to a minimum rate of 9.5% per annum.  The interest rate in effect as of December 31,2009 was the minimum rate of 9.5%.  TheRevolver is subject to the Borrowers not incurring capital expenditures (a) inexcess of $600,000 for the fiscal year ending December 31,2009, and (b) in excess of $1,800,000 for the fiscal year ending December 31,2010.  Additionally, the Revolver issubject to the Borrowers not incurring unfinanced capital expenditures inexcess of $62,500 in any fiscal quarter and the Borrowers not incurringpurchase money commitments in excess of $2 million over the life of thefacility.  However, if the Borrowersincur unfinanced capital expenditures of less than $62,500 in any fiscalquarter, the difference between the amount incurred in a certain fiscal quarterand $62,500 maybe incurred in the two fiscal quarters immediately followingsuch fiscal quarter. The Company was in compliance with all covenants at December 31,2009, as amended.  See Note 22.

 

As of December 31, 2009, the Company had outstandingborrowings of $5.2 million under the Revolver with remaining availability underthe formula-based calculation of $1.8 million.

 

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

 

See related Note 2 “Going Concern” and Note 11 “Debt”regarding additional terms and conditions associated with the overall creditfacility and risks associated with this credit facility.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 11 —DEBT**

 

Thecredit facility, as described in Note 10, consists of (i) the Revolver(see Note 10 — “Lines of Credit”), (ii) a term loan in the originalprincipal amount of $6 million, of which $5.6 million was outstanding as of December 31,2009 and is due June 30, 2010 (“Term Loan A”), (iii) a term loan inthe original principal amount of $10 million, of which $2.7 million wasoutstanding as of December 31, 2009 and is due on June 30, 2010 (“TermLoan B”), and (iv) Term Loan C, which originally provided for a principalamount of $3 million and has since been retired.  Term Loan A was fully funded on November 30,2007 while Term Loans B and C were fully funded on August 20, 2008 inconnection with the acquisition of ACC. $6.8 million of Term Loan B and all ofTerm Loan C was repaid in March 2009, in connection with the sale of theCompany’s Digitran Operations.  Term LoanA and Term Loan B require an aggregate scheduled principal payment of $75,000bi-weekly beginning on February 1, 2010 through the maturity date of June 30,2010.  The facility also requires monthlyinterest payments and a final balloon payment of $7.4 million upon maturity on June 30,2010.  As a result of the partialrepayment on Term Loan B in March 2009, a pro-rata portion of the balanceof deferred financing costs and debt discount were accelerated and arereflected in interest expense in the accompanying Consolidated Statements ofOperations for the year ended December 31, 2009.

 

The TermLoans A and B bear interest at the Base Rate plus 4.25%, subject to a minimumrate of 12.5% per annum, and required interest only payments in the first year,scheduled principal plus interest payments in years two and three, and a finalballoon payment at June 30, 2010. Interest on the Term Loans is payable monthly.

 

As part of the consideration forentering into the Credit Agreement, the Company issued warrants to purchase788,000 shares of the Company’s common stock with a fair value of $1.5 million,which is accounted for as a discount to the Credit Facility and is amortizedover the term of the Credit Agreement. See Note 13.

 

Upon the sale or disposition by the Borrowers or any oftheir subsidiaries of property or assets, the Borrowers may be obligated toprepay the Revolver and the term loans with the net cash proceeds received inconnection with such sales or dispositions to the extent that the aggregateamount of net cash proceeds received, and not paid to the Lender as aprepayment, for all such sales or dispositions exceed $150,000 in any fiscalyear.  However, in order to repay itsobligations, the Borrowers agreed to sell a significant portion of itsassets in 2010. As discussed further in Note 22 “Subsequent Events” in our December 31,2009 financial statements, these assets contributed approximately $20 million ofnet sales or 37% of the Company’s net sales and operating income ofapproximately $3 million of the Company’s total operating income fromcontinuing operations of $1.4 million for 2009. The Company will retain a percentage of the proceeds of some of suchsales for working capital and pursuant to the agreement, will use the remainingproceeds to pay down the obligations owed to the Lender.

 

If the Lender terminates the creditfacility during a default period then the Company is subject to a penalty equalto 2% of the outstanding principal balance of the Revolver and the TermLoans.  The Revolver is subject to an unused line fee of 0.5% per annum,payable monthly, on any unused portion of the revolving credit facility.

 

In the event of a default andcontinuation of a default, the Lender may accelerate the payment of theprincipal balance requiring the Company to pay the entire indebtednessoutstanding on that date.  Upon theoccurrence and during the continuation of an event of default, the Lender mayalso elect to increase the interest rate applicable to the outstanding balanceby four percentage points above the per annum interest rate that wouldotherwise be applicable.

 

Pursuant to a January 2010amendment to the Credit Facility, the Borrowers have agreed with the Lenderthat it has the right to appoint an outside observer to review the Borrower’sbooks and records and business operations, with certain limitations designed tominimize disruption to the business operations of the Borrowers.  In addition, pursuant to that amendment,certain fees (including a $200,000 advisory fee arising in connection with thatamendment, which is recorded in accrued expenses in the accompanyingconsolidated balance sheet) and certain expenses owed by Borrowers have beendeferred until the Maturity Date of June 30, 2010.  In connection with that recent amendment,Borrowers agreed to sell a significant portion of its assets by June 30,2010 and committed to certain milestone events associated with the salesprocess.  Failure to achieve thesemilestones and/or failure to sell 

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

therequired assets by the agreed upon dates, all of which are prior to June 30,2010, can result in a default under the Credit Agreement.  Borrowers are also obligated to providefinancial information and status reports to the Lender on a regular basis.

 

See Note 2, Note 10, and Note 14regarding additional terms and conditions associated with the Company’s creditfacility and risks associated with this credit facility.

 

In connection with the acquisitionof Larus Corporation, the Company issued promissory notes, dated July 13,2004, to two former stockholders of CXR Larus Corporation (formerly LarusCorporation) totaling $3.0 million. These notes are subordinated to the Company’s bank debt.  The notes bear interest at 6% and mature in December 2010.  The balance of the notes was $0.8 million at December 31,2008, of which $0.5 million was current. The balance of the notes was $0.3 million at December 31, 2009, allof which was current.

 

The Company has capital leasesrelating to capital equipment.  Theleases generally contain bargain purchase options and expire at various datesthrough December 31, 2017. Capitalized lease obligations are calculated using interest ratesappropriate at the inception of the lease and range from 6% to 18%.  Leases are amortized over the lease termusing the effective interest method.

 

The following table is a summary oflong-term debt, as of December 31 (in thousands):

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Term Loan A                                   |       | $        | 5,605      |     | $          | 5,950 |   |
| Term Loan B                                   |       | 2,667    |       | 10,000   |       |
| Term Loan C                                   |       | —   |       | 3,000    |       |
| Term notes payable to U.S. commercial lenders |       | —   |       | 66       |       |
| Notes payable to ACC Sellers (see Note 3)     |       | 4,297    |       | —   |       |
| Capitalized lease obligations                 |       | 433      |       | 553      |       |
|                                          |       | 13,002   |       | 19,569   |       |
| Unamortized discount on debt                  |       | (290     | )          | (980     | )          |
|                                          |       | 12,712   |       | 18,589   |       |
| Current portion of long-term debt             |       | (12,558  | )          | (5,110   | )          |
| Long-term debt                                |       | $        | 154        |     | $          | 13,479 |   |

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

Principal maturities related todebt, including loans from stockholders, as of December 31, 2009, were asfollows (in thousands):

 
| ** **                     | ** ** | **Term  Loan A** | ** ** | **Term  Loan B** | ** ** | **Capitalized  Lease  Obligations** | ** ** | **Notes  Payable to  ACC Sellers  (Note 3)** | ** ** | **Stockholder  Notes (Note  18)** | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|-----------------------------------|------------|
| Year  ending December 31, |       |             |       |             |       |                                |       |                                         |       |                              |       |
| 2010                           |       | $                | 5,605      |             | $          | 2,667                               |       | $                                            | 279        |                              | $          | 4,297 |   | $ | 348 |   |
| 2011                           |       | —           |       | —           |       | 119                                 |       | —                                       |       | —                            |       |
| 2012                           |       | —           |       | —           |       | 33                                  |       | —                                       |       | —                            |       |
| 2013                           |       | —           |       | —           |       | 2                                   |       | —                                       |       | —                            |       |
| Thereafter                     |       | —           |       | —           |       | —                              |       | —                                       |       | —                            |       |
|                           |       | $                | 5,605      |             | $          | 2,667                               |       | $                                            | 433        |                              | $          | 4,297 |   | $ | 348 |   |

 

**NOTE 12 —STOCK-BASED COMPENSATION**

 

At December 31, 2009, avariety of the Company’s stock-based compensation grants or awards wereoutstanding for employees (including executive officers) and members of theboard of directors. All stock-based compensation plans were approved by theCompany’s board of directors.

 

***Description of Stock Option Plans***

 

The Company has five stock optionplans:

 

·                  Employee Stock and Stock OptionPlan, effective July 1, 1994, provides for non-qualified stock options aswell as restricted and non-restricted stock awards to both employees andoutside consultants. Up to 520,000 shares were authorized for issuance underthis plan. Terms of related grants under the plan are at the discretion of theboard of directors. The board of directors does not intend to issue anyadditional options or make any additional stock grants under this plan.

 

·                  1993 Stock Option Plan, providesfor the grant of up to 300,000 incentive and non-qualified stock options topurchase stock at not less than the current market value on the date of grant.Options granted under this plan vest ratably over three years and expire 10years after date of grant. The board of directors does not intend to issue anyadditional options under this plan.

 

·                  The 1997 Stock Incentive Plan (the “1997Plan”) provides that options granted may be either qualified or nonqualifiedstock options and are required to be granted at fair market value on the dateof grant. Subject to termination of employment, options may expire up to tenyears from the date of grant and are nontransferable other than in the event ofdeath, disability or certain other transfers that the committee of the board ofdirectors administering the 1997 Plan may permit. Up to 1,600,000 stock optionswere authorized to be granted under the 1997 Plan. The board of directors doesnot intend to issue any additional options under this plan.

 

·                  The 2000 Stock Option Plan wasadopted by the board of directors in November 2000 and approved by thestockholders on January 16, 2001. The board of directors adopted theAmended and Restated 2000 Stock Option Plan (the “2000 Plan”) effective as of August 3,2001. Under the 2000 Plan, options granted may be either incentive ornonqualified options. Incentive options must have an exercise price of not lessthan the fair market value of a share of common stock on the date of grant.Nonqualified 

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

options must have an exercise price of not less than 85% of the fairmarket value of a share of common stock on the date of grant. Up to 2,000,000options may be granted under the 2000 Plan. No option may be exercised morethan ten years after the date of grant. The board of directors does not intend to issue any additional optionsunder this plan.

 

·                  The 2007 Stock Incentive Plan (the “2007Plan”) was adopted by the board of directors in November 2007 and approvedby the stockholders on December 12, 2007. Under the 2007 Plan, theadministrator may grant or issue stock options (incentive or nonqualified),stock appreciation rights (“SARs”), restricted stock, restricted stock units,performance awards and stock payments, or any combination thereof..  Up to 5,000,000 shares of common stock may begranted pursuant to awards under the 2007 Plan. Incentive and nonqualified options must have an exercise price of notless than the fair market value of a share of common stock on the date of grantand may not be exercised more than ten years after the date of grant.  However, incentive options granted to an individualwho owns (or is deemed to own) more than 10% of the total combined voting powerof all class of EMRISE stock must have an exercise price of not less than 110%of the fair market value of a share of common stock on the date of grant andmay not be exercised more than five years after the date of grant.  The base price of any SAR granted under the2007 Plan must be at least 100% of the fair market value of a share of commonstock on the date of grant.  SARs will besettled in shares of common stock.  Restrictedstock may have a price as determined by the administrator.  Restricted stock units entitle the holder toreceive vested shares of common stock. Neither restricted stock or restricted stock units may be sold orotherwise hypothecated or transferred. Performance awards will be paid in shares of common stock and may begranted to employees, consultants or independent directors based on specificperformance criteria.  Stock payments maybe issued to employees, independent directors or consultants in the form ofcommon stock or an option or other right to purchase common stock and may beissued as part of a deferred compensation arrangement that would otherwise bepaid in cash.

 

On November 19,2008, the Company completed a board of directors approved 1-for-3.75 reversesplit of its common stock.  All commonstock, stock options and warrants to purchase common stock and earnings pershare amounts have been retroactively restated as if the reverse stock splitoccurred at the beginning of the periods presented.

 

Stockoption activity for the years ended December 31, 2009 and 2008 was asfollows:

 
| ** **                        | ** ** | **2009**            | ** ** | **2008**     | ** ** |
|-----------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                        | ** ** | ** **          | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | ** **          | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | **Shares**          | ** ** | **Exercise** | ** ** | **Shares** | ** ** | **Exercise** | ** ** |
| ** **                        | ** ** | **(in 000’s)** | ** ** | **Price**    | ** ** | **(in 000’s)** | ** ** | **Price** | ** ** |
| Outstanding, beginning of year    |       | 695                 |       | $            | 3.47       |   | 482 |   | $ | 4.20 |   |
| Granted                           |       | 90                  |       | $            | 1.53       |   | 265 |   | $ | 2.58 |   |
| Exercised                         |       | (9                  | )          | $            | 0.75       |   | — |   | $ | — |   |
| Forfeited (including expirations) |       | (93                 | )          | $            | 2.85       |   | (52 | ) | $ | 4.71 |   |
| Outstanding, end of year          |       | 683                 |       | $            | 3.34       |   | 695 |   | $ | 3.47 |   |
| Exercisable, end of year          |       | 478                 |       | $            | 3.81       |   | 432 |   | $ | 4.01 |   |

 

As of December 31, 2009, theCompany had 478,000 fully-vested stock options, with a weighted averageexercise price of $3.81 and remaining term of 9.3 years. The Company expectsthat 205,000 stock options (after forfeitures), with a weighted-averageexercise price of $2.24 and remaining term of 14.2 years, will vest in the 

 

F-29

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

future.The aggregate intrinsic value is approximately $0.9 million for unvested andvested options at December 31, 2009 based on the Company’s average commonstock closing price in 2009.

 

The following table summarizesinformation about stock options outstanding at December 31, 2009:

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | **Weighted**            | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | **Average**             | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | **Options**             | ** ** | **Remaining**           | ** ** | **Exercise** | ** ** | **Options** | ** ** | **Exercise** | ** ** |
| **Range of  Exercise Prices** | ** ** | **(in 000’s)**     | ** ** | **Life in Years**       | ** ** | **Price** | ** ** | **(in 000’s)** | ** ** | **Price** | ** ** |
| $1.01 to $3.00                |       | 336                     |       | 6.2                     |       | $ | 1.82 |   | 194 |   | $ | 1.79 |   |
| $3.01 to $5.00                |       | 222                     |       | 6.4                     |       | $ | 3.38 |   | 159 |   | $ | 3.51 |   |
| $5.01 to $7.50                |       | 125                     |       | 5.9                     |       | $ | 7.32 |   | 125 |   | $ | 7.32 |   |
| Total options                 |       | 683                     |       |                    |       |   |   | 478 |   |   |   |

 

Total stock-based compensationexpense included in wages, salaries and related costs was $148,000 and $88,000for the year ended December 31, 2009 and 2008, respectively. Thesecompensation expenses were charged to selling, general and administrativeexpenses. As of December 31, 2009, the Company had $235,000 of totalunrecognized compensation expense related to stock option grants, which will berecognized over the remaining weighted average period of 1.5 years.

 

**NOTE 13 —WARRANTS**

 

In connection with entering into the credit facility(discussed in Note 11), the Company issued a seven year warrant to PrivateEquity Management Group, Inc., (“PEM Group”), an affiliate of the Lender,to purchase up to 775,758 shares of the Company’s common stock on a cash orcashless basis at an original exercise price of $4.13 per share, (which amountreflects the Company’s 1-for-3.75 reverse split of its common stock effective November 18,2008).  The estimated fair value of thewarrants was $1.5 million, which was calculated using the Black-Scholes pricingmodel.  The warrants were originallyaccounted for as debt discount and the adjustment resulting from the repricingof the warrants increased the debt discount, which is being amortized over theremaining life of the credit facility. The warrants were previously recorded in stockholder’s equity.

 

In February 2009, the warrants were amended andreissued in conjunction with an amendment to the credit facility.  Pursuant to the Second Amendment to LoanDocuments, the original warrant was divided into two warrants (each, a “SecondAmended and Restated Warrant” and collectively, the “Second Amended andRestated Warrants”).  Each Second Amended and Restated Warrant covers387,879 shares of the Company’s common stock (which amount reflects the Company’s1-for-3.75 reverse split of its common stock effective November 18,2008).  One of the Second Amended and Restated Warrants provides for anexercise price of $1.99 per share (which amount reflects the Company’s1-for-3.75 reverse split of its common stock effective November 18,2008).  The other Second Amended and Restated Warrant provides for anexercise price of $1.80 per share (which amount reflects the Company’s1-for-3.75 reverse split of its common stock effective November 18, 2008and a reduction from a post-split exercise price of $3.06 per share).

 

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

The exercise price and/or number of shares of commonstock issuable upon exercise of the warrants may be adjusted in certaincircumstances, including certain issuances of securities at a price equal toless than the then current exercise price, subdivisions and stock splits, stockdividends, combinations, reorganizations, reclassifications, consolidations,mergers or sales of properties and assets and upon issuance of certain assetsor securities to holders of the Company’s common stock, as applicable. On January 1,2009, the Company adopted FASB updates which affected how instruments indexedto an entity’s own stock are accounted for. The adoption of the revised FASB guidance resulted in thereclassification of the PEM Group warrants from stockholders’ equity toliabilities, and now requires that the warrants to be fair valued pursuant to “markto market” provisions at each reporting period, with the changes in fair valuerecognized in the Company’s consolidated statement of operations.

 

At January 1, 2009 and December 31,2009, the Company had warrants subject to “mark to market” provisionsoutstanding to purchase 775,758 shares of common stock.  The Company computed the fair value of thewarrants using a Black-Scholes valuation model. The fair value of these warrants on the date of adoption of January 1,2009 and on December 31, 2009 was determined using the followingassumptions:

 
| ** **              | ** ** | **January 1, 2009** | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|--------------------------|------------|----------------------------|------------|
| Dividend yield          |       | None                     |       | None                       |       |
| Expected volatility     |       | 105                      | %          | 71                         | %          |
| Risk-free interest rate |       | 0.88                     | %          | 1.14                       | %          |
| Expected term           |       | 7 years                  |       | 7 years                    |       |
| Stock price             |       | $                        | 1.58       |                       | $          | 0.76 |   |
|                         |            |                          |            |                            |            |  |  |

 

On January 1, 2009, inconnection with the adoption of this treatment for the warrant, the Companyrecorded a cumulative effect of change in accounting principle adjustment toits accumulated deficit of $473,000 and a corresponding reclassification ofthese outstanding warrants from stockholders’ equity to warrant liability.  As of and for the year ended December 31,2009, the change in fair value of the warrants resulted in a $718,000 incomeadjustment to other income (expense) in the consolidated statement ofoperations and a corresponding increase or decrease to the warrantliability.  The following table reflects warrants outstanding and related activity forwarrants authorized for issuance by the board of directors to certain officers,directors, stockholders, key employees and other parties:

 
| ** **                                    | ** ** | ** **          | ** ** | ** **   | ** ** | ** **        | ** ** | **Average**        | ** ** |
|-----------------------------------------------|------------|---------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                    | ** ** | ** **          | ** ** | **Weighted** | ** ** | **Weighted**      | ** ** | **Intrinsic**      | ** ** |
| ** **                                    | ** ** | **Number**          | ** ** | **Average**  | ** ** | **Average**       | ** ** | **Value**          | ** ** |
| ** **                                    | ** ** | **of Shares**       | ** ** | **Exercise** | ** ** | **Remaining**     | ** ** | **(in-the-money)** | ** ** |
| ** **                                    | ** ** | **(in 000’s)** | ** ** | **Price**    | ** ** | **Life in Years** | ** ** | **Warrants**       | ** ** |
|                                          |       |                |       |         |       |              |       |               |       |
| Balance outstanding at December 31, 2007 |       | 1,834               |       | $            | 6.41       |              |       |               |       |   |
| Warrants issued                               |       | —              |       | $            | —     |              |       |               |       |   |
| Warrants cancelled                            |       | (36                 | )          | $            | 6.58       |              |       |               |       |   |
| Balance outstanding at December 31, 2008 |       | 1,798               |       | $            | 4.76       |              |       |               |       |   |
| Warrants issued                               |       | —              |       | $            | —     |              |       |               |       |   |
| Warrants exercised                            |       | —              |       | $            | —     |              |       |               |       |   |
| Warrants cancelled                            |       | (7                  | )          | $            | 4.54       |              |       |               |       |   |
|                                          |       |                |       |         |       |              |       |               |       |
| Balance outstanding at December 31, 2009 |       | 1,791               |       | $            | 4.76       |              | 2.2        |               | $          | — |   |
|                                               |            |                     |            |              |            |                   |            |                    |            |  |  |

 

Therewere no warrants outstanding at December 31, 2009 where the exercise pricewas below the market price for the Company’s shares (in-the-money).

 

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 14 — NETINCOME (LOSS) PER SHARE**

 

Basic income (loss) per share iscomputed by dividing net income (loss) by the weighted average common sharesoutstanding during a period.  Dilutedincome (loss) per share is based on the treasury stock method and includes thedilutive effect of stock options and warrants outstanding during theperiod.  Common share equivalents havebeen excluded where their inclusion would be anti-dilutive.  As a result of the loss incurred by theCompany in 2008, the potentially dilutive common shares have been excludedbecause their inclusion would have been anti-dilutive.  The following table illustrates thecomputation of basic and diluted income (loss) per share for the years ended December 31,2009 and 2008 (in thousands, except per share amounts):

 
| ** **                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| NUMERATOR:                                          |       |     |       |     |       |
| Net income  (loss)                                  |       | $        | 1,042      |     | $          | (7,440 | ) |
|                                                |       |     |       |     |       |
| DENOMINATOR:                                        |       |     |       |     |       |
| Basic  weighted average common shares outstanding   |       | 10,209   |       | 10,204   |       |
| Effect  of dilutive securities:                     |       |     |       |     |       |
| Dilutive  stock options and warrants                |       | —   |       | —   |       |
| Diluted  weighted average common shares outstanding |       | 10,209   |       | 10,204   |       |
|                                                |       |     |       |     |       |
| Basic  income (loss) per share                      |       | $        | 0.10       |     | $          | (0.73 | ) |
|                                                |       |     |       |     |       |
| Diluted  income (loss) per share                    |       | $        | 0.10       |     | $          | (0.73 | ) |

 

The following table shows thecommon stock equivalents that were outstanding as of December 31, 2009 and2008, but were not included in the computation of diluted earnings per share asa result of the loss incurred by the Company or because the options’ orwarrants’ exercise price was greater than the average market price of thecommon shares and, therefore, the effect would have been anti-dilutive:

 
| ** **                           | ** ** | ** **    | ** ** | **Range of**       | ** ** |
|--------------------------------------|------------|---------------|------------|--------------------|------------|
| ** **                           | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                           | ** ** | **Shares**    | ** ** | **Per Share**      | ** ** |
|                                 |       |          |       |               |       |
| Anti-dilutive common stock options:  |       |          |       |               |       |
| As of December 31, 2009         |       | 630,000       |       | $1.53 — $7.50 |       |
| As of December 31, 2008         |       | 531,000       |       | $2.18 — $7.50 |       |
|                                 |       |          |       |               |       |
| Anti-dilutive common stock warrants: |       |          |       |               |       |
| As of December 31, 2009         |       | 1,791,000     |       | $4.31 — $6.49 |       |
| As of December 31, 2008         |       | 1,410,000     |       | $4.31 — $6.49 |       |

 

F-32

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 15 —INCOME TAXES**

 

The Company files a consolidatedU.S. federal income tax return.  Statetax returns are filed on a consolidated, combined or separate basis dependingon the applicable laws relating to the Company and its domesticsubsidiaries.  Additionally, the Companyfiles tax returns in England and France.

 

The Company’s income fromcontinuing operations before provision for income taxes was generated from theU.S. and foreign operations for the years ended December 31 as follows (inthousands):

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Earnings (loss) before income taxes: |       |     |       |     |       |
| U.S.                                 |       | $        | (3,739     | )        | $          | (12,321 | ) |
| Foreign                              |       | 1,423    |       | 2,529    |       |
| Earnings (loss) before income taxes  |       | $        | (2,316     | )        | $          | (9,792 | ) |

 

The Company’s provision for incometaxes on continuing operations consisted of the following for the years ended December 31(in thousands):

 
| ** **                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Current                          |       |     |       |     |       |
| Federal                          |       | $        | 85         |     | $          | — |   |
| State                            |       | (34      | )          | 95       |       |
| Foreign                          |       | 608      |       | 138      |       |
| Total current                    |       | 659      |       | 233      |       |
|                             |       |     |       |     |       |
| Deferred                         |       |     |       |     |       |
| Federal                          |       | —   |       | (277     | )          |
| State                            |       | —   |       | —   |       |
| Foreign                          |       | (66      | )          | 242      |       |
| Total deferred                   |       | (66      | )          | (35      | )          |
| Total provision for income taxes |       | $        | 593        |     | $          | 198 |   |

 

Income tax expense (benefit) oncontinuing operations differed from the amount obtained by applying thestatutory federal income tax rate of 34% to income before income taxes asfollows for the years ended December 31 (in thousands):

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Federal income tax at statutory rates      |       | $        | (787       | )        | $          | (3,329 | ) |
| State income taxes, net of federal benefit |       | (22      | )          | 63       |       |
| Foreign income taxes                       |       | 56       |       | (480     | )          |
| Changes in valuation allowances            |       | (123     | )          | 536      |       |
| Foreign income inclusion - IRC 956         |       | 1,340    |       | 1,216    |       |
| Permanent differences                      |       | 89       |       | 2,192    |       |
| Other                                      |       | 40       |       | —   |       |
|                                       |       | $        | 593        |     | $          | 198 |   |

 

F-33

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

The Company’s business is subjectto regulation under a wide variety of U.S. federal, state and foreign tax laws,regulations and policies.  The majorityof the Company’s foreign subsidiaries have earnings and profits that arereinvested indefinitely.  However, underthe credit facility described in Notes 10 and 11, the foreign subsidiaries haveissued guarantees on the credit facility and, as a result, under IRC §956, havebeen deemed to have distributed these earnings to fund U.S. operations.  This has resulted in U.S. federal taxableincome and an increase in U.S. tax liability, which has been reduced throughutilization of available net operating loss carryforwards and foreign taxcredits.

 

The Company had federal and statenet operating loss carryforwards of approximately $5.1 million and $12.9million as of December 31, 2009 and 2008, respectively, which expire atvarious dates beginning in 2012 through 2018. As of December 31, 2009 and 2008, the Company recorded a valuationallowance on the deferred tax asset. Management believes sufficient uncertainty exists regarding therealizability of the deferred tax asset items and that a valuation allowance isrequired. Management considers projected future taxable income and tax planningstrategies in making this assessment. The amount of the deferred tax assets considered realizable, however,could materially change in the near future if estimates of future taxableincome during the carryforward period are changed.

 

Utilization of the Company’s netoperating loss and tax credit carryforwards may be subject to a substantialannual limitation due to the ownership change limitations provided by theInternal Revenue Code and similar state provisions. Such an annual limitationcould result in the expiration or elimination of the net operating loss and taxcredit carryforwards before utilization. As a result of a merger in 1997, the Company experienced a more than 50%ownership change for federal income tax purposes.  Of the pre-1997 net operating losscarryforwards subject to limitation, approximately $276,000 per year isavailable to offset future federal taxable income.

 

Deferred income taxes reflect thenet tax effects of temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amounts used forincome tax purposes.  Significantcomponents of the Company’s deferred tax assets and liabilities were as followsas of December 31 (in thousands):

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| **Current deferred tax assets:**                     |       |     |       |     |       |
| Allowance for doubtful accounts                      |       | $        | 19         |     | $          | 107 |   |
| Inventory reserves and uniform capitalization        |       | 653      |       | 492      |       |
| Other accrued liabilities                            |       | 609      |       | 761      |       |
|                                                 |       | 1,281    |       | 1,360    |       |
| Valuation allowance-current deferred tax assets      |       | (1,123   | )          | (1,089   | )          |
| Total current deferred tax assets                    |       | 158      |       | 271      |       |
|                                                 |       |     |       |     |       |
| **Long-term deferred tax assets:**                   |       |     |       |     |       |
| Depreciation on property, plant & equipment |       | (128     | )          | 10       |       |
| Deferred compensation                                |       | 235      |       | 222      |       |
| Deferred income                                      |       | 94       |       | —   |       |
| Business tax credit                                  |       | 260      |       | 142      |       |
| Alternative minimum tax credit carryforwards         |       | 273      |       | 115      |       |
| Foreign tax credit carryforwards                     |       | 1,068    |       | 823      |       |
| Net operating loss carryforwards                     |       | 1,060    |       | 1,883    |       |
| Other, net                                           |       | 13       |       | —   |       |
|                                                 |       | 2,875    |       | 3,195    |       |
| Valuation allowance-long-term deferred tax assets    |       | (1,057   | )          | (1,214   | )          |
| Total long-term deferred tax assets                  |       | 1,818    |       | 1,981    |       |
|                                                 |       |     |       |     |       |
| **Deferred tax liabilities:**                        |       |     |       |     |       |
| Intangible assets other than goodwill                |       | (1,654   | )          | (1,864   | )          |
| Total deferred tax liabilities (long-term)           |       | (1,654   | )          | (1,864   | )          |
| Net deferred tax asets (liabilities)                 |       | $        | 322        |     | $          | 388 |   |

 

The Company adopted FASB guidancefor accounting for uncertainty in income taxes on January 1, 2007. Theimplementation of this guidance did not result in a material adjustment to theCompany’s liability for unrecognized income tax benefits. At the time ofadoption and as of December 31, 2009, the Company had recorded no netunrecognized tax benefits.  The Companycurrently has no open matters with tax authorities nor is it engaged in anexamination by any tax authority.  TheCompany recognizes interest and penalties related to uncertain tax positions ininterest expense and selling, general and administrative expense, respectively,in the condensed consolidated statements of operations and comprehensiveincome. No interest or penalties were recognized during 2009. As of December 31,2009, the Company had nothing accrued for interest and penalties.

 

The Company files income taxreturns in the United States federal jurisdiction, the United Kingdom andFrance, and in the state jurisdictions of California, Texas, Pennsylvania andNew Jersey. The Company is no longer subject to United States federal and statetax examinations for years before 2006 and 2005, respectively, and is no longersubject to tax examinations for the United Kingdom and Japan for years prior to2008, and for France for years prior to 2006.

 

**NOTE 16 —OPERATING SEGMENTS**

 

The Company has two reportableoperating segments: electronic devices and communications equipment. Theelectronic devices segment manufactures and markets electronic power supplies,RF and microwave devices and subsystem assemblies. The electronic devicessegment consists of the Company’s three electronic device subsidiaries, onelocated in the U.S. and two located in England, all of which offer the same orsimilar products to the same or similar customers.  The communications equipment segment designs,manufactures and distributes network access products and timing and synchronizationproducts.  The communications equipmentsegment 

 

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Tableof Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

consistsof operating entities CXR Larus Corporation located in the U.S. and CXRAnderson Jacobson located in France, both of which offer the same or similarproducts to similar customers.  Bothsegments operate primarily in the U.S. and European markets, but they havedistinctly different customers, design and manufacturing processes andmarketing strategies.  Each segment hasdiscrete financial information and a separate management structure.

 

The Company evaluates performancebased upon contribution margin of the segments and also upon profit or lossfrom operations before income taxes exclusive of nonrecurring gains and losses.The Company accounts for intersegment sales at pre-determined prices negotiatedbetween the individual segments.

 

During the first quarter of 2009,the Company sold its Digitran Operations (see Note 4), which were part of itselectronic devices segment.  Thistransaction resulted in differences in the basis of segmentation from theamounts disclosed in the Company’s audited consolidated financial statementsincluded in its annual report on Form 10-K for the year ended December 31,2008.  Additionally, at December 31,2009, the Company had classified its RO subsidiary as an asset held for sale inthe accompanying consolidated balance sheets. In this report, the Digitran Operations and the RO assets are reportedas discontinued and held for sale operations and are excluded from theelectronics devices segment.  Therefore,prior period amounts have been adjusted to conform to this presentation.

 

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Table of Contents

 

**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

Includedin the Company’s reconciliation of segment financial data to the consolidatedamounts is unallocated corporate expenses. Selected financial data for each of the Company’s operating segmentsreconciled to the consolidated totals is shown below (in thousands):

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net sales                     |       |                             |       |   |   |
| Electronic devices            |       | $                                | 41,818     |   | $ | 32,465 |   |
| Communications equipment      |       | 11,932                           |       | 14,768 |   |
| Total                         |       | $                                | 53,750     |   | $ | 47,233 |   |
|                          |       |                             |       |   |   |
| Gross profit                  |       |                             |       |   |   |
| Electronic devices            |       | $                                | 16,284     |   | $ | 10,754 |   |
| Communications equipment      |       | 4,344                            |       | 5,977 |   |
| Total                         |       | $                                | 20,628     |   | $ | 16,731 |   |
|                          |       |                             |       |   |   |
| Depreciation and amortization |       |                             |       |   |   |
| Electronic devices            |       | $                                | 1,293      |   | $ | 751 |   |
| Communications equipment      |       | 233                              |       | 311 |   |
| All other                     |       | 14                               |       | 14 |   |
| Total                         |       | $                                | 1,540      |   | $ | 1,076 |   |
|                          |       |                             |       |   |   |
| Operating income (loss)       |       |                             |       |   |   |
| Electronic devices            |       | $                                | 7,104      |   | $ | 4,826 |   |
| Communications equipment      |       | (1,507                           | )          | (6,563 | ) |
| Corporate and other           |       | (4,194                           | )          | (4,223 | ) |
| Total                         |       | $                                | 1,403      |   | $ | (5,960 | ) |

 
| ** **                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| Total assets                          |       |                  |       |                  |       |
| Electronic devices                    |       | $                     | 36,569     |                  | $          | 27,149 |   |
| Communications equipment              |       | 8,439                 |       | 10,260                |       |
| Discontinued and held for sale assets |       | 1,497                 |       | 7,446                 |       |
| Corporate and other                   |       | 3,772                 |       | 8,768                 |       |
| Total                                 |       | $                     | 50,277     |                  | $          | 53,623 |   |

 

One customer in the electronicdevices segment accounted for 10% of the Company’s total net sales in2009.  No customer in either segmentaccounted for 10% or more of net sales during 2008.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

The Company’s segments operate indifferent geographic areas.  Thefollowing table is a summary of the Company’s net sales by geographic area forthe year ended December 31 (in thousands):

 
| ** **      | ** ** | **2009**                | ** ** | **2008**                      | ** ** |
|-----------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **      | ** ** | **Electronic  Devices** | ** ** | **Communications  Equipment** | ** ** | **Electronic  Devices** | ** ** | **Communications  Equipment** | ** ** |
|            |       |                    |       |                          |       |   |   |   |   |
| United States   |       | $                       | 19,054     |                          | $          | 5,441 |   | $ | 5,845 |   | $ | 5,599 |   |
| England         |       | 22,764                  |       | —                        |       | 26,620 |   | — |   |
| France          |       | —                  |       | 6,491                         |       | — |   | 9,169 |   |
| Total net sales |       | $                       | 41,818     |                          | $          | 11,932 |   | $ | 32,465 |   | $ | 14,768 |   |

 

Salesand purchases between geographic areas have been accounted for on the basis ofprices set between the geographic areas, general at cost plus 40%.  Net sales by geographic area have beendetermined based upon the country from which the product was shipped.

 

The following table is a summary ofthe Company’s total assets by geographic area for the year ended December 31(in thousands):

 
| ** **              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| United States           |       | $        | 30,217     |     | $          | 24,594 |   |
| England                 |       | 13,855   |       | 15,680   |       |
| France                  |       | 4,708    |       | 5,903    |       |
| Discontinued Operations |       | 1,497    |       | 7,446    |       |
| Total net sales         |       | $        | 50,277     |     | $          | 53,623 |   |

 

**NOTE 17 —RETIREMENT PLANS**

 

The Company maintains certaindefined contribution retirement plans covering substantially all U.S. domesticemployees.  The Company’s contributionsto these retirement plans were $44,000 and $38,000 in the years ended December 31,2009 and 2008, respectively.

 

TheCompany’s subsidiary in France has adefined benefit pension plan.  The planis an unfunded plan.  As such, nocontributions were made in either of the periods presented.  The plan does not have plan assets.  Employee benefits are based on years ofservice and the employees’ compensation during their employment.  The actuarially computed components of netperiodic benefit cost included the following components for the years ended December 31,(in thousands):

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Service  costs                |       | $        | 16         |     | $          | 14 |   |
| Interest  costs               |       | 16       |       | 14       |       |
| Net  periodic pension expense |       | $        | 32         |     | $          | 28 |   |

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

The following table sets forth the funded status andamounts recognized in the Company’s consolidated statement of operations forthe years ended December 31, (in thousands):

 
| ** **                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Change  in benefit obligation:                   |       |     |       |     |       |
| Projected  benefit obligation, beginning of year |       | $        | 305        |     | $          | 261 |   |
| Service  cost                                    |       | 16       |       | 14       |       |
| Interest  cost                                   |       | 16       |       | 14       |       |
| Benefits  paid                                   |       | —   |       | —   |       |
| Actuarial  loss/(gain)                           |       | (54      | )          | 17       |       |
| Effect  of foreign currency translation          |       | —   |       | (1       | )          |
| Projected  benefit obligation, end of year       |       | $        | 283        |     | $          | 305 |   |
|                                             |       |     |       |     |       |
| Unfunded  status                                 |       | $        | 283        |     | $          | 305 |   |
| Unrecognized  (gain)/loss                        |       | 60       |       | (5       | )          |
| Net  amount recognized                           |       | $        | 343        |     | $          | 300 |   |

 

The weighted average assumptions used to determinepension benefit obligations at December 31, were as follows:

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount  rate                 |       | 4.50     | %          | 5.00     | %          |
| Rate  of compensation increase |       | 2.00     | %          | 2.00     | %          |

 

**NOTE 18 —COMMITMENTS AND CONTINGENCIES**

 

***Leases***

 

The Company conducts most of itsoperations from leased facilities under operating leases that expire at variousdates through 2014. The leases generally require the Company to pay allmaintenance, insurance, property tax costs, and contain provisions for rentincreases. Total rent expense, net of sublease income, for 2009 and 2008 wasapproximately $1.5 million and $1.4 million, respectively.

 

The future minimum rental paymentsrequired under operating leases that have initial or remaining non-cancelablelease terms in excess of one year are as follows:

 
| **Year ending  December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010                               |       | $          | 1,579      |   |
| 2011                               |       | 1,336      |       |
| 2012                               |       | 1,002      |       |
| 2013                               |       | 543        |       |
| 2014                               |       | 469        |       |
| Thereafter                         |       | —     |       |
| Total                              |       | $          | 4,929      |   |

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

***Litigation***

 

The Company is not currently aparty to any material legal proceedings. However, the Company and itssubsidiaries are, from time to time, involved in legal proceedings, claims andlitigation arising in the ordinary course of business. While the amountsclaimed may be substantial, the ultimate liability cannot presently bedetermined because of considerable uncertainties that exist. Therefore, it ispossible the outcome of such legal proceedings, claims and litigation couldhave a material effect on quarterly or annual operating results or cash flowswhen resolved in a future period. However, based on facts currently available,management believes such matters will not have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

**NOTE 19 —RELATED PARTIES**

 

In connection with the acquisitionof Larus Corporation, the Company issued promissory notes, dated July 13,2004, to two former stockholders of CXR Larus Corporation (formerly LarusCorporation) totaling $3.0 million. These notes are subordinated to the Company’s bank debt and wereoriginally payable in 72 equal monthly payments of principal plus interest atthe 30-day LIBOR plus 5% with a maximum interest rate of 7% during the firsttwo years of the term of the notes, 8% during the third and fourth years, and9% thereafter.  Pursuant to a recentamendment, the notes now bear interest at the fixed rate of 6% and principalpayments have been modified to varying monthly payments between $11,000 and$42,000, per month with the final payments scheduled for December, 2010.  Future maturities of notes payable tostockholders are $348,000 in 2010. Interest paid on these notes was $30,000 and $84,000 for the year ended December 31,2009 and 2008, respectively.

 

Additionally, the Company enteredinto an above-market real property lease with the two former stockholders ofCXR Larus Corporation. The lease represented an obligation that exceeded thefair market value by approximately $756,000. The lease term is for 7 years and expires on June 30, 2011. It isrenewable for a 5-year term priced under market conditions. The base rent isbased on a minimum rent of $.90 per square foot per month, which is $27,000monthly or $324,000 per year, subject to monthly adjustments of the interestrate based on the Federal Reserve Discount Rate that match the lessor’svariable interest rate mortgage payments on the building. The maximum increasein any year is 1.5%, with a cumulative maximum increase of 8% over the life ofthe lease. The increases apply to that portion of the rent that corresponds tothe interest portion of the lessor’s mortgage. Lease payments paid to the related parties during 2009 and 2008 totaled$410,000 and $390,000, respectively. Future minimum lease payments under the operating lease payable to thestockholders are included in Note 18.

 

Inconnection with the Acquisition of ACC, EEC issued Subordinated SecuredContingent Promissory Notes (the “Notes”), as amended, to each of theSellers.  See Note 3.  Two of the sellers are still employed by ACCand, therefore, are deemed related parties and hold a majority of the balanceof the Notes.  The total balance of thenotes at December 31, 2009 was $4.3 million.  On July 1, 2010, all accrued interest atthat date and $1.3 million of principal payments are due.  The remaining balance of the Notes is due in November 2010.  In addition to the Notes, the remaining cashcontingent consideration of $2.0 million was accrued at December 31, 2009in other current liabilities in the accompanying consolidated balance sheet,the majority of which relates to the individuals still employed by ACC.  This amount is due in November 2010.

 

TheCompany obtains consulting services from Jason Oliva, a related party.  Services rendered by Mr. Oliva includeartistic design associated with the Company’s promotional materials andwebsite, evaluation and recommendations for best practices of public companies,including research related to market matters and access to key relationshipsthat he maintains with NYSE Arca and other exchanges.  Payments made to Mr. Oliva for theseservices were $12,000 and $58,000 during the year ended December 31, 2009and 2008, respectively.

 

There are no guarantees by officersor fees paid to officers or loans to or from officers of the Company.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 20 — FAIR VALUEMEASUREMENTS**

 

FASBguidance for fair value measurements defines fair value as the price that wouldbe received to sell an asset or paid to transfer a liability (an exit price) inan orderly transaction between market participants and also establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.  The fair value hierarchy distinguishesbetween three levels of inputs that may be utilized when measuring fair valueas follows:

 

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.

 

As of December 31, 2009, the Company was required toapply updated FASB guidance to the derivative that is within the warrant thatwas issued as consideration for the Company’s credit facility, which isdiscussed in Note 13 and included as a discount on the Company’s long-termdebt.  The derivative was valued usingthe Black-Scholes model.  The key inputsin the model are as follows:

 
| ** **              | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|----------------------------|------------|
| Dividend yield          |       | None                       |       |
| Expected volatility     |       | 71                         | %          |
| Risk-free interest rate |       | 1.14                       | %          |
| Expected term           |       | 7 years                    |       |
| Stock price             |       | $                          | 0.76       |   |
|                         |            |                            |            |  |

 

The derivative is measured at fair value on a recurringbasis using significant observable inputs (Level 2).  The amount of total gain in earnings for theperiod is as follows (in thousands):

 
| ** **                                | ** ** | **Warrant Liability** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
|                                      |       |                  |       |
| Beginning balance at January 1, 2009 |       | $                     | 1,010      |   |
| Total gain realized in earnings           |       | (718                  | )          |
| Ending balance at December 31, 2009  |       | $                     | 292        |   |

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

**NOTE 21 —RECENT ACCOUNTING PRONOUNCEMENTS**

 

**Adopted**

 

**FASB Accounting StandardsCodification.****TM**** **On September 30,2009, the Company adopted changes issued by the Financial Accounting StandardsBoard (“FASB”) to the authoritative hierarchy of GAAP.  These changes establish the FASB AccountingStandards CodificationTM (“Codification”) asthe source of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in preparation of financial statements inconformity with GAAP.  Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  The FASB will no longerissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts; instead the FASB will issue AccountingStandards Updates.  Accounting StandardsUpdates will not be authoritative in their own right as they will only serve toupdate the Codification.  These changesand the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced,the adoption of these changes had no impact on the Company’s consolidatedfinancial statements.

 

**Fair Value Measurements andDisclosure**.  In January 2009,the Company adopted changes issued by the FASB to fair value accounting andreporting as it relates to non-financial assets and non-financial liabilitiesthat are not recognized or disclosed at fair value in the financial statementson at least an annual basis.  Thesechanges define fair value, establish a framework for measuring fair value underGAAP and expand disclosures about fair value measurements.  This guidance applies to other GAAP thatrequire or permit fair value measurements and is to be applied prospectivelywith limited exceptions.  The adoption ofthese changes, as it relates to non-financial assets and liabilities, had noimpact on the Company’s financial statements.

 

In August 2009, the FASBissued an update to the fair value measurement guidance to clarify how anentity should measure liabilities at fair value.  The update reaffirms fair value is based onan orderly transaction between market participants, even though liabilities areinfrequently transferred due to contractual or other legal restrictions.  However, identical liabilities traded in theactive market should be used when available. When quoted prices are not available, the quoted price of the identicalliability traded as an asset, quoted prices for similar liabilities or similarliabilities traded as an asset, or another valuation approach should beused.  This update also clarifies thatrestrictions preventing the transfer of a liability should not be considered asa separate input or adjustment in the measurement of fair value.  The adoption of this update for fair valuemeasurements of liabilities had no impact on the Company’s financial statements.

 

**Business Combinations**.  On January 1, 2009, the Company adoptedan update to existing accounting standards for business combinations.  The update, which retains the underlyingconcepts of the original standard in that all business combinations are stillrequired to be accounted for at fair value under the acquisition method ofaccounting, changes the method of applying the acquisition method.  Acquisition costs are no longer consideredpart of the fair value of an acquisition and will generally be expensed asincurred, non-controlling interests are valued at fair value at the acquisitiondate, in-process research and development is recorded at fair value as anindefinite-lived intangible asset at the acquisition date, restructuring costsassociated with a business combination are generally expensed subsequent to theacquisition date, and changes in deferred tax asset valuation allowances andincome tax uncertainties after the acquisition date generally will affectincome tax expense.

 

In April 2009, the FASB issueda further update in relation to accounting for assets acquired and liabilitiesassumed in a business combination that arise from contingencies, which amendsthe previous guidance to require contingent assets acquired and liabilities assumedin a business combination to be recognized at fair value on the acquisitiondate if fair value can be reasonably estimated during the measurementperiod.  If fair value cannot bereasonably estimated during the measurement period, the contingent asset orliability would be recognized in accordance with standards and guidance onaccounting for contingencies and reasonable estimation of the amount of aloss.  Further, this update eliminatedthe specific subsequent accounting guidance for contingent assets andliabilities without significantly revising the original guidance.  However, contingent considerationarrangements of 

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

anacquiree assumed by the acquirer in a business combination would still beinitially and subsequently measured at fair value.  These updates are applicable prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.  The adoption of these provisionswill have an impact on accounting for any business acquired after January 1,2009.

 

**Derivatives and Hedging**.  On January 1, 2009, the Company adoptedchanges issued by the FASB to disclosures about derivative instruments andhedging activities.  These changesrequire enhanced disclosures about an entity’s derivative and hedgingactivities, including (i) how and why an entity uses derivative instruments,(ii) how derivative instruments and related hedged items are accountedfor, and (iii) how derivative instruments and related hedged items affectan entity’s financial position, financial performance and cash flows.  Other than the required disclosures, theadoption of these changes had no impact on the Company’s consolidated financialstatements.

 

On January 1, 2009, theCompany adopted an update issued by the FASB to the accounting for instruments(or embedded features) indexed to an entity’s own stock.  These changes clarify the determination ofwhether an instrument (or embedded feature) is indexed to an entity’s ownstock, which would qualify as a scope exception under previously issuedguidance.  The adoption of these changesresulted in the reclassification of certain of the Company’s outstandingwarrants from stockholders’ equity to liabilities, which requires the warrantsto be fair valued at each reporting period, with the changes in fair valuerecognized in the Company’s consolidated statement of operations.  See Note 13 - Warrants.

 

**Intangibles — Goodwill andOther**.  On January 1, 2009, theCompany adopted changes issued by the FASB to account for intangibleassets.  These changes amend the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset in order toimprove the consistency between the useful life of a recognized intangibleasset outside of a business combination and the period of expected cash flowsused to measure the fair value of an intangible asset in a businesscombination.  The adoption of thesechanges did not have an impact on the Company’s consolidated financialstatements.

 

**Financial Instruments**.  On June 30, 2009, the Company adopted anupdate to accounting standards for disclosures about the fair value offinancial instruments, which requires publicly-traded companies to providedisclosures on the fair value of financial instruments in the interim financialstatements.  Other than the requireddisclosures, the adoption of this update had no impact on the Company’sconsolidated financial statements.

 

**Subsequent Events**.  On June 30, 2009, the Company adoptedchanges issued by the FASB to accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued, otherwise known as “subsequent events.”  Specifically, these changes set forth (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements: (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financials statements; and (3) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. The adoption of these changes did not have a material impact on theCompany’s financial statements.

 

**Issued, butnot adopted**

 

**Revenue Recognition**.  In October 2009, the FASB issued anupdate to existing guidance on revenue recognition for arrangements withmultiple deliverables.  This update willallow companies to allocate consideration received for qualified separatedeliverables using estimated selling prices for both delivered and undelivereditems when vendor-specific objective evidence or third-party evidence isunavailable.  Additional disclosures discussingthe nature of multiple element arrangements, the types of deliverables underthe arrangements, the general timing of their delivery, and significant factorsand estimates used to determine estimated selling prices are required.  The Company will adopt this update for newrevenue arrangements entered into or materially modified beginning 

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

January 1,2011.  The Company is still evaluatingthe impact, if any, of the adoption of this new revenue recognition guidance onits consolidated financial statements.

 

**NOTE 22 —SUBSEQUENT EVENTS**

 

*Disposition ofAssets*

 

On March 22,2010, EEC, a wholly-owned subsidiary of the Company, entered into andconsummated the closing under an asset purchase agreement by and amongAstrodyne Corporation (“Astrodyne”), RO, and EEC dated March 22, 2010 (the“Purchase Agreement”) pursuant to which Astrodyne purchased substantially allof the assets, properties, and business as a going concern of RO (the “RO Sale”).  The assets of RO that were sold andtransferred to Astrodyne include, but are not limited to, the following:  (i) machinery and equipment; (ii) rawmaterials, work-in-process, and finished goods relating to RO; (iii) tangiblepersonal property, such as office furniture and equipment; (iv) advancepayments, rental deposits, and other similar assets; (v) rights topayments from customers; (vi) books and records; (vii) rights undercertain contracts; (viii) intangible rights and property, such as goodwilland rights in and to the name “RO Associates,” product names, trade names,trademarks, fictitious names and service marks; (ix) information and data;(x) unfilled purchase and sale orders; (xi) governmental authorizationsrelating to RO’s business and pending applications in connection with suchauthorizations; (xii) RO’s rights to its business of manufacturing and sellingstandard, high-density AC to DC, and DC to DC converters (the “Business”); and(xiii) all claims, causes of action, and judgments relating to theBusiness.  Such sale and transfer wasdeemed to be a disposition of an insignificant amount of assets by the Companyand EEC.  RO retained certain rights, asfully described in the Purchase Agreement, including certain records, rights tobenefits plans and insurance policies and proceeds, and certain assets.

 

Aspart of the transactions contemplated by the Purchase Agreement, Astrodyneassumed certain specified liabilities of RO pursuant to an Assignment andAssumption Agreement by and between Astrodyne and RO (the “Assignment andAssumption Agreement”).  Pursuant to thePurchase Agreement, EEC also agreed to guarantee the full, complete, and timelycompliance with and performance of all agreements, covenants and obligations ofRO in connection with the RO Sale.

 

Astrodynepaid RO an aggregate purchase price for the RO Sale of $1,000,000, plus theassumption of certain assumed liabilities pursuant to the Assignment andAssumption Agreement, subject to a purchase price adjustment.  As additional consideration for Astrodyne’sentry into the Purchase Agreement and consummation of the contemplatedtransactions under such agreement, EEC and RO agreed that, for a certain periodimmediately following the closing date, they would not compete with theBusiness, perform services for any person in competition with the Business orsolicit certain specified customers of the Business, or hire any employees of Astrodyneor its affiliates.

 

Inconnection with the Company’s divestiture of RO, which comprised a portion ofthe Company’s electronic devices segment, the Company incurred approximately$250,000 in cash charges that were paid at closing or just subsequent toclosing relating to legal, accounting and investment banking fees.  The Company does not expect to incur anyadditional costs associated with this transaction.  The Company estimates that it will incur aloss on the sale of the RO assets of approximately $0.4 million, which couldincrease or decrease as closing costs and other matters are finalized.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

*Amendments toCredit Facility*

 

On January 25,2010, EMRISE and the Lender entered into Amendment Number 8 to Loan Documents,which amends EMRISE’s Credit Agreement as of December 31, 2009.  All references to the Credit Facility hereinrefer to the Credit Agreement as amended from time to time.  The Credit Facility requires the sale of asignificant portion of the Company’s assets by June 30, 2010 (the “MaturityDate”).  The Company is required toachieve certain milestones in connection with these sale activities and themaintenance of maximum capital expenditure financial covenants.  The Lender has the current right to appointan outside observer to review the Company’s books and records and businessoperations, with certain limitations designed to minimize disruption to thebusiness operations.  In addition, theCompany must make bi-weekly payments of $75,000 through the Maturity Date.  Upon the sale of the assets the Companyagreed to sell, the Company will retain a percentage of the proceeds of some ofsuch sales for working capital and are obligated to use the remaining proceedsto pay down the obligations owed to the Lender. The Company is also obligated to provide financial information andstatus reports to the Lender on a regular basis.

 

Thepractical effect of Amendment 8 was to provide a forbearance by the Lenderthrough the Maturity Date on the equity raise default and the possiblefinancial covenant defaults that was and may have been otherwise triggeredunder the Credit Agreement as of December 31, 2009 and allows the Companytime to sell the specified assets in order to pay down the obligations to theLender.  The Company believes that netproceeds from the sales of assets contemplated by the Credit Facility will besufficient to pay the obligations owed to Lender in full.

 

On April 13,2010, the Borrowers and the Lender entered into Amendment Number 9 to LoanDocuments (“Amendment 9”).  Among otherthings, Amendment 9 removes the obligation to sell certain assets whileretaining the obligation to sell other assets, and provides some clarity thatthe Lender will not charge fees for making adjustments to the milestonesrequired to be met before the maturity date, provided certain conditions aresatisfied.  Except for this amendment,the Credit Agreement remains in full force and affect.

 

If anew event of default were to occur, including the failure to achieve any of themilestones, the Lender could accelerate the debt and exercise its rights andremedies under the Credit Agreement, which could include a foreclosure on theCompany’s assets before the contemplated asset sales could be completed.  There can be no assurance that the Companywill be able to successfully sell the contemplated assets in the agreed timeframes and/or at prices sufficient to satisfy the debt owed to Lender, if atall.  Even if the Company doessuccessfully sell the contemplated assets and pay the obligations owed to theLender in full, the Company’s ongoing revenues will be substantially reducedwhich could have a material adverse affect on its operations and financialcondition.

 

*Assets Heldfor Sale*

 

Inconnection with Amendment 8 as discussed above, the Company is required to sella significant portion of its assets in order to repay the debt obligations owedto Lender and, subsequent to the balance sheet date, met the criteria underFASB guidance to reclassify assets as held for sale.  The Company has identified multiple assets itintends to market for sale.  The assetsidentified as held for sale represent a substantial portion of the Company’sassets in primarily electronic devices segment. These assets contributed approximately $20 million of net sales or 37%of the Company’s net sales and operating income of approximately $3 million ofthe Company’s total operating income from continuing operations of $1.4 millionfor 2009.

 

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**EMRISE CORPORATION**

**Notes to Consolidated Financial Statements**

 

Thefollowing table reflects the major classes of assets and liabilities, bysegment, classified as held for sale subsequent to the balance sheet date forthe periods presented (in thousands):

 
| ** **                                  | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Electronic**             | ** ** | **Electronic**             | ** ** |
| ** **                                  | ** ** | **Devices**                | ** ** | **Devices**                | ** ** |
| Cash  and cash equivalents                  |       | $                          | 52         |                       | $          | 285 |   |
| Accounts  receivable, net                   |       | 2,189                      |       | 2,507                      |       |
| Inventory,  net                             |       | 2,494                      |       | 1,996                      |       |
| Prepaids  and other current assets          |       | 136                        |       | 93                         |       |
| Total  current assets                       |       | 4,871                      |       | 4,881                      |       |
|                                        |       |                       |       |                       |       |
| Property,  plant and equipment, net         |       | 1,326                      |       | 1,569                      |       |
| Goodwill                                    |       | 12,755                     |       | 4,002                      |       |
| Intangible  assets other than goodwill, net |       | 3,773                      |       | 4,458                      |       |
| Other                                       |       | 60                         |       | 58                         |       |
| Total  assets                               |       | $                          | 22,785     |                       | $          | 14,968 |   |
|                                        |       |                       |       |                       |       |
| Total  current liabilities                  |       | $                          | 9,094      |                       | $          | 2,009 |   |
|                                        |       |                       |       |                       |       |
| Total  long-term liabilities                |       | $                          | 62         |                       | $          | 203 |   |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on this 15th day of April,2010.

 
|   | EMRISE CORPORATION |
|--------|--------------------|
|   |               |
|   | By:                | /S/  CARMINE T. OLIVA |
|   |               | Carmine  T. Oliva, |
|   |               | Chairman  of the Board and |
|   |               | Chief  Executive Officer (principal executive officer) |
|   |               |   |
|   |               |   |
|   | By:                | /S/  D. JOHN DONOVAN |
|   |               | D.  John Donovan, |
|   |               | Chief  Financial Officer (principal financial officer and principal accounting  officer) and Secretary |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**                       | ** ** | **Capacity**                                                                                | ** ** | **Date**             |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------|
| ** **                          | ** ** | ** **                                                                                  | ** ** | ** **           |
| /s/  Carmine T. Oliva               |       | Chairman  of the Board, Chief Executive Officer (principal executive officer) and  Director |       | April 15,  2010 |
| Carmine  T. Oliva                   |       |
|                                |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
| /s/  D. John Donovan                |       | Chief  Financial Officer (principal financial officer and principal accounting  officer)    |       | April 15,  2010 |
| D.  John Donovan                    |       |
|                                |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
| /s/  Laurence P. Finnegan, Jr. |       | Director                                                                                    |       | April 15,  2010 |
| Laurence  P. Finnegan, Jr.     |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
| /s/  Otis W. Baskin                 |       | Director                                                                                    |       | April 15,  2010 |
| Otis  W. Baskin                     |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
|                                |       |                                                                                        |       |                 |
| /s/ Richard E. Mahmarian            |       | Director                                                                                    |       | April 15,  2010 |
| Richard  E. Mahmarian               |       |                                                                                        |       |                 |

 

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Tableof Contents

 

**EMRISE CORPORATION**

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                     |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                          |
| 10.66               |       | Amendment Number 8 to Loan Documents dated as of  December 31, 2009, by and among EMRISE Corporation, EMRISE Electronics  Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced  Control Components, Inc. and Custom Control Components, Inc. and  GVEC Resource IV Inc. (±) |
|                |       |                                                                                                                                                                                                                                                                                                                |
| 10.71               |       | Amendment Number 9 to Loan Documents dated April 13,  2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR  Larus Corporation, RO Associates Incorporated, Advanced Control  Components, Inc. and Custom Control Components, Inc. and GVEC  Resource IV Inc. (±)          |
|                |       |                                                                                                                                                                                                                                                                                                                |
| 21                  |       | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                |
| 23.1                |       | Consent of Hein and Associates LLP, Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                |
| 23.2                |       | Consent of BDO Seidman LLP, Independent Registered Public  Accounting Firm                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                |
| 31.1                |       | Certification  of Principal Executive Officer required by Rule 13a-14(a) or 15d-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) or  15d-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 Chief Financial Officer 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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(±)           Confidentialtreatment has been requested for portions of exhibit marked with (±).

 

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