<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
(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, 2004.

                                       OR

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

         For the transition period from ____________ to _____________

                         Commission file number: 1-10346

                               EMRISE CORPORATION
             (Exact name of registrant as specified in its charter)

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

    9485 HAVEN AVENUE, SUITE 100,                                 91730
    RANCHO CUCAMONGA, CALIFORNIA                               (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (909) 987-9220

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $0.0033 PAR VALUE
                                (Title of class)

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

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

         The aggregate market value of the voting common equity held by
nonaffiliates of the registrant, computed by reference to the closing sale price
of such stock on June 30, 2004, is approximately $16,671,000. The registrant has
no non-voting common equity.

         The number of shares of the registrant's common stock, $0.0033 par
value, outstanding as of March 22, 2005 was 37,384,708.

         DOCUMENTS INCORPORATED BY REFERENCE:  None.

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


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<TABLE>
                                               TABLE OF CONTENTS
                                               -----------------
                                                                                                          Page
                                                                                                          ----
<S>           <C>                                                                                           <C>

                                                    PART I

Item 1.       Business.......................................................................................2

Item 2.       Properties....................................................................................26

Item 3.       Legal Proceedings.............................................................................27

Item 4.       Submission of Matters to a Vote of Security Holders...........................................27

                                                    PART II

Item 5.       Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
              Purchases of Equity Securities................................................................28

Item 6.       Selected Financial Data.......................................................................29

Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations.........30

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk....................................54

Item 8.       Financial Statements and Supplementary Data...................................................55

Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........55

Item 9A.      Controls and Procedures.......................................................................55

Item 9B       Other Information.............................................................................55

                                                   PART III

Item 10.      Directors and Executive Officers of the Registrant............................................56

Item 11.      Executive Compensation........................................................................59

Item 12.      Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters...............................................................66

Item 13.      Certain Relationships and Related Transactions................................................68

Item 14.      Principal Accountant Fees and Services........................................................69

                                                    PART IV

Item 15.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................69

Index to Financial Statements and Financial Statement Schedule.............................................F-1

Index to Exhibits...........................................................................................70

Signatures    ..............................................................................................75

Exhibits Attached to This Report............................................................................76


                                                      i
</TABLE>

<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

CORPORATE OVERVIEW

         We are a Delaware corporation that was formed July 14, 1989. We have
three wholly-owned operating subsidiaries, XET Corporation, a New Jersey
corporation that was formed in 1983, CXR Larus Corporation, a Delaware
corporation that was formed in 1984 ("CXR Larus"), and CXR Anderson Jacobson, a
French company that was formed in 1973 ("CXR-AJ"). XET Corporation and its
subsidiaries design, develop, manufacture and market electronic components for
defense, aerospace and industrial markets. CXR Larus and CXR-AJ design, develop,
manufacture and market network access and transmission products and
communications test equipment. CXR Larus also manufactures and sells
communication timing and synchronization products.

         In December 2004, CXR Larus changed its name from CXR Telcom
Corporation when it succeeded by merger to the assets and liabilities of Larus
Corporation, a San Jose, California-based manufacturer and seller of
telecommunications products, and Vista Labs, Incorporated, a subsidiary of Larus
Corporation that provided engineering services to Larus Corporation. As
described in more detail elsewhere in this report, we acquired Larus
Corporation and Vista Labs, Incorporated in July 2004.

         In March 2005, XCEL Corporation Ltd., a United Kingdom-based subsidiary
of XET Corporation, acquired Pascall Electronic (Holdings) Limited and its
wholly-owned subsidiary, Pascall Electronics Limited ("Pascall"). Pascall is
based in the United Kingdom and manufactures a range of proprietary power
systems and radio frequency ("RF") components and subsystems.

         Through our operating subsidiaries, CXR Larus, CXR-AJ and XET
Corporation, and through the divisions and subsidiaries of those subsidiaries,
we design, develop, manufacture, assemble, and market products and services in
the following two material business segments:

         o        Electronic Components

                  --       digital and rotary switches

                  --       electronic power supplies

                  --       RF components

                  --       subsystem assemblies

         o        Communications Equipment

                  --       network access and transmission products

                  --       communication timing and synchronization products

                  --       communications test instruments

         Our sales are primarily in North America, Europe and Asia. Sales to
customers in the electronic components segment, primarily to defense and
aerospace customers, defense contractors and industrial customers, were 51.1%,


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<PAGE>

63.4% and 59.1% of our total net sales for the years 2004, 2003 and 2002,
respectively. Sales of communications equipment and related services, primarily
to private telecommunications network customers and public carriers, were 48.9%,
36.6% and 40.9% of our total net sales during the years 2004, 2003 and 2002,
respectively.

         Our objective in our electronic components business is to become the
supplier of choice for harsh environment digital and rotary switches, custom
power supplies and RF and microwave products. Our objective in our
communications equipment business is to become a leader in quality, cost
effective solutions to meet the requirements of communications equipment
customers. We believe that we can achieve these objectives through
customer-oriented product development, superior product solutions, and
excellence in local market service and support.

INDUSTRY OVERVIEW

     ELECTRONIC COMPONENTS

         The electronic components industry comprises three basic segments,
which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, aerospace, defense, commercial, industrial and other
environments, each of which places constraints that define performance and
permitted use of differing grades of components.

         We are active only in the industry segments that are characterized by
low volume, high margin and long lead-times, namely the aerospace, defense and
industrial segments. To support the myriad customers that rely on digital and
rotary switches and electronic power supplies, we believe that our electronic
components must offer high levels of reliability and in many cases must be
tailored to the size, appearance, functionality and pricing needs of each
particular customer.

         The defense market, which is a predominant market for our electronic
components, makes use of sophisticated electronic assemblies in diverse
applications that involve both original equipment and retrofit of existing
equipment.

         The Digitran division of XET Corporation ("Digitran"), which
division was acquired by XET Corporation from Becton Dickinson in 1985,
has been manufacturing digital switches since the division was formed in the
1960s. XCEL Power Systems Ltd. ("XPS"), a second tier subsidiary of XET
Corporation, has been manufacturing electronic power supplies since 1989.
Pascall was formed in 1977.

     COMMUNICATIONS EQUIPMENT

         Over the past decade, telecommunications and data communications
infrastructures have undergone major growth and have become a critical part of
the global business and economic infrastructure that has been driven by:

         o        a surge in demand for broadband access used to conduct
                  e-commerce activities and transmit growing volumes of data,
                  voice and video information;

         o        the adoption of Internet protocol, or IP, which is a protocol
                  developed to enable the transmission of information as packets
                  of data from a source to a recipient using dynamically
                  changing routes, with the data being reassembled at the
                  recipient's location into the original information format; and


                                       3

<PAGE>

         o        an apparent worldwide trend toward deregulation of the
                  communications industry, which has enabled a large number of
                  new communications service providers to enter the market.

         This rapid growth has been succeeded by a period of consolidation.
Private and corporate communications providers and other businesses that rely
heavily on information technology continue to devote significant resources to
the purchase of network access and transmission equipment, such as high-speed
DSL and fiber optic modems, through which data and voice information may be
transmitted. DSL, or digital subscriber line, technology transmits data up to 50
times faster than a conventional dial-up modem using existing copper telephone
wires. We believe that the demand for test equipment with which to test, deploy,
manage and optimize communications networks, equipment and services remains
depressed for public carrier markets.

         To support the rapidly changing needs of telecommunications companies
and information technology dependent businesses, we believe that network access
and transmission products and communications test instruments must offer high
levels of functional integration, automation and flexibility to operate across a
variety of network protocols, technologies and architectures. Because the
competition for subscribers for high-speed bandwidth access is intense, the
quality and reliability of network service has become critical to
telecommunications companies due to the expense, loss of customers and negative
publicity resulting from poor service. Quality and reliability of network
service are also important to information technology dependent businesses that
rely on broadband high-speed data links for a variety of purposes.

         Technicians who use service verification equipment in the field or in
central or branch offices assist businesses in verifying and repairing service
problems effectively and, thus, increase the quality and reliability of their
networks. We believe that as broadband services are deployed further and as
competition for telecommunications subscribers and e-commerce customers
proliferates, telecommunications companies and other information
technology-reliant businesses will increasingly depend on new and improved
integrated access transmission devices and advanced field and central or branch
office testing and monitoring solutions.

OUR SOLUTION

         We have developed a range of electronic components, such as digital and
rotary switches, custom electronic power supplies and RF components and
subsystems, used primarily by aerospace, defense and industrial customers. We
have developed and we manufacture and market various network access and
transmission devices used by businesses and other users to efficiently transmit
data, voice and video information to destinations within and outside of their
respective networks.

         We have developed and we manufacture and market a broad range of test
instruments used by operators of public and private telecommunications networks
for the installation, maintenance and optimization of advanced communications
networks.

         We have also developed and we manufacture and market an extensive range
of communication timing and synchronization products used by operators of public
and private telecommunications networks to provide a consistent source of timing
alignment, or synchronization, for digital networks when the principal network
timing source is lost.

         Our extensive knowledge and understanding of our customers' needs,
together with the broad capabilities of our network access and transmission
products, test instrumentation products and our sophisticated electronic
components, enable us to provide the following features and benefits to our
customers:


                                       4

<PAGE>

         DEVELOPMENT OF NEW SWITCH TECHNOLOGY. We have complemented our
long-established range of products with a new range of patent-pending
space-saving rotary switches we refer to as VLP(TM), which are very low profile
switches. These products have been specifically designed to target harsh
environment and aerospace applications where space is at a premium, providing a
substantial advantage over larger switches offered by our competitors.

         PROVISION OF RF COMPONENTS AND SUBASSEMBLIES. We have developed and
provide a range of RF components and subassemblies that meet the requirements of
defense, aerospace and industrial applications.

         DEVELOPMENT OF COMMUNICATION TIMING AND SYNCHRONIZATION EQUIPMENT. We
have extended the existing range of communication timing and synchronization
products with a new range of equipment designed specifically to target the more
extensive Regional Bell Operating Companies ("RBOC") market.

         PROVISION OF MORE EFFICIENT AND COST-EFFECTIVE POWER SYSTEMS. We have
developed and we provide high and low voltage power systems that are highly
integrated within the application hardware, which minimizes cost, space and
complexity and maximizes overall system reliability and efficiency. We believe
that our ability to partner with major international defense contractors and to
provide power systems solutions based on both standard modules and custom
designs provides us with an important competitive advantage.

         BROAD RANGE OF NETWORK ACCESS AND TRANSMISSION PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of professional network
access and transmission products that are capable of connecting to a wide range
of remote monitoring devices and equipment. Many of these products are designed
to operate in extended temperatures and harsh environments and generally exceed
the surge protection standards of the industry and are adaptive to wide ranges
of AC or DC power inputs. The design of many of our data transmission products
enables them to either interface with or complement one another. The versatility
of this concept has enabled us to offer numerous different product combinations
to our customers. These variations include customized selection of data speeds,
data interfaces, power inputs, operating temperatures, data formats and power
consumption. In addition, our desktop and rack mount transmission product lines
allow us to serve both central site data communications needs and remote access
and transmission sites on both the enterprise-wide and single location level.

         HANDHELD DESIGN OF FIELD TEST EQUIPMENT. We design many of our test
equipment products to be used in the field. Most of our digital and analog
products weigh less than four pounds and offer handheld convenience. The
compact, lightweight design of these products enables field technicians to
access problems and verify line operation quickly.

         RAPID AND EFFICIENT DIGITAL SERVICES DEPLOYMENT. Our test equipment
products allow field and office technicians to test lines rapidly and
efficiently to ensure that they are properly connected to the central office and
that they can support a specific type and speed of service. In a single device,
our products can be used to pre-qualify facilities for services, identify the
source of problems and verify the proper operation of newly installed service
before handing service over to customers.

         COMPREHENSIVE CONNECTIVITY. Our network access and transmission
products and communications test instruments are the result of significant
product research and engineering and are designed to connect to a broad range of
operation configurations and to connect over a wide range of prevailing
transmission conditions. Our products incorporate a wide range of standard
international connectivity protocols as well as proprietary protocols.

         CUSTOMER-DRIVEN FEATURES. Most of our digital and rotary switches and
each of our power supplies are highly tailored to our customers' needs. We
manufacture digital and rotary switches for insertion into new equipment as well


                                       5

<PAGE>

as for retrofit into existing equipment. Our engineers continually interact with
our customers during the design process to ensure that our electronic components
are the best available solution for them. For example, based on conversations
with our customers, we delivered a compact multiple output power supply to allow
BAE Systems to produce a single-heads up display suitable for fitting on a large
range of commercial and military aircraft.

         CUSTOMER RELATIONS. Our electronic components business currently enjoys
a preferred supplier status with several key accounts, which means that we work
in close association with the customer to develop custom products specifically
addressing their needs. Our electronic components also are considered qualified
products with many key accounts, which means that our products are designed into
equipment specifications of some of our customers for the duration of their
production of their equipment.

         LONG-TERM RELATIONSHIPS. Market procurement methods encourage long-term
relationships between electronic components suppliers and customers, with
customers committing to a single source of supply because of the high cost
involved in qualifying a product or its alternative for use. For example, a
large proportion of XPS' products are qualified products that have been involved
in many hours of flight trials.

OUR STRATEGY

         Our objectives are to become the supplier of choice for harsh
environment switches and custom power supplies in the aerospace, defense and
industrial markets, in addition to becoming a leading provider of network access
and transmission products and communications test instruments for a broad range
of applications within the global communications industry. The following are the
key elements of our strategy to achieve these objectives:

         FOCUS ON OUR ELECTRONIC COMPONENTS BUSINESS. We plan to continue to
grow our electronic components business by marketing our electronic components
products in their established market niches, identifying opportunities to
broaden our customer base for our power supply products and introducing RF
components and subsystems offered by our newly acquired Pascall subsidiary.

         RAMP UP OUR NEW COMMUNICATION TIMING AND SYNCHRONIZATION PRODUCTS AND
CONTINUE TO FOCUS ON NETWORK ACCESS AND TRANSMISSION PRODUCTS. We plan to build
upon our existing strong base businesses in the communications equipment market
introducing additional new customer premises products, especially new carrier
class communication timing and synchronization products, utilizing our broader
reach with CXR Larus to address new markets.

         PURSUE STRATEGIC ACQUISITIONS. The communication timing and
synchronization products market and network access and transmission market are
large and highly fragmented. We plan to extend our market position by acquiring
or investing in complementary businesses or technologies on a selected basis. We
also intend to expand our United Kingdom-based electronic power supplies
division's United States presence through acquisition of businesses that offer
complementary products or technology for manufacture in the United States.
In this regard, we are currently in discussions to acquire a United States-
based power supply company.

         CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH GROWTH
MARKET OPPORTUNITIES. We plan to continue investing in markets and technologies
that we believe offer substantial growth prospects. We believe that the
expertise we have developed in creating our existing products will permit us to
enhance these products, develop new products and respond to emerging
technologies in a cost-effective and timely manner.


                                       6

<PAGE>

         LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase network access and transmission products and
test instrument products and services. We intend to aggressively market new and
enhanced products and services to our existing customers. We also believe that
our existing customer base represents an important source of references and
referrals for new customers in new markets.

         PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to increase
the functionality of our communications equipment products, enabling products to
be upgraded by the downloading of software or the addition of hardware to an
existing unit, allowing customers to protect their investment in test equipment
and generating follow-on sales opportunities as we develop new modules in the
future. We plan to continue to approach our existing digital switch customers to
determine whether they need rotary switches that we do not currently manufacture
for them.

         SEEK COMPETITIVE WORLD-CLASS MANUFACTURING IN ASIA FOR SELECTED
PRODUCTS. Toward the end of 2002, we cut costs by using Asian manufacturing
sources for selected communications equipment products and subassemblies. We
intend to build on this strategy to increase our competitiveness in the
marketplace.

         SEEK ALTERNATIVE MARKET OPPORTUNITIES. We plan to expand our focus and
efforts to identify and capture more new customers, such as private network
utilities and transit customers, for our test equipment.

         DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. We plan to continue to
develop our strategic relationships with network access and transmission and
test instrument manufacturers in order to enhance our product development
activities and leverage shared technologies and marketing efforts to build
recognition of our brands. In particular, in Europe, we intend to continue to
expand our relationships with offshore vendors as a reseller of their products
to enhance our position and reputation as a provider of a comprehensive line of
test equipment products.

         PURSUE TECHNOLOGY TRANSFER AND LICENSING. We plan to continue our
established practice of purchasing or licensing core technologies where this
reduces time and cost to market, as we did with the base platform for our remote
access server products purchased from Hayes Corporation.

         DEVELOP CUSTOMER-FOCUSED SOLUTIONS. We design, develop, and manufacture
many products and provide services that are tailored to the specific needs of
our customers with an emphasis on ease of use. We intend to continue to adapt
our core communications technologies to deliver focused products that improve
our customers' ability to test and manage increasingly large and complex
networks and that are easily used by field technicians and central office
personnel.

         EXTEND OUR GLOBAL PRESENCE. Our customers' needs evolve through
industry expansion and consolidation as well as with the deployment of new
technologies and services. To support our customers more effectively, we intend
to augment our sales, marketing and customer support organizations.

PRODUCTS AND SERVICES

         Our products and services currently are divided into the following two
main business segments:

         o        Electronic Components

                  --       digital and rotary switches

                  --       electronic power supplies


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                  --       RF components

                  --       subsystem assemblies

         o        Communications Equipment

                  --       network access and transmission products

                  --       communication timing and synchronization products

                  --       communications test instruments

         During the years 2004, 2003 and 2002, our total net sales were
$29,861,000, $25,519,000 and $22,664,000, respectively, and the percentages of
total net sales contributed by each product group within our two main business
segments were as follows:

<TABLE>
                                                                               Year Ended December 31,
                                                                  --------------------------------------------------
       Segment and Product Type                                       2004               2003               2002
       ------------------------                                   ------------       ------------       ------------
<S>                                                                  <C>                <C>                <C>
       Electronic Components
           Digital and Rotary Switches                                18.5%              20.9%              20.9%
           Electronic Power Supplies                                  26.7%              34.3%              31.3%
           Subsystem Assemblies                                        0.7%               5.9%               5.0%
           Other Products and Services                                 5.2%               2.3%               1.9%
                                                                  ------------       ------------       ------------
                                                                      51.1%              63.4%              59.1%
       Communications Equipment
           Network Access and Transmission Products                   27.6%              24.0%              23.8%
           Test Instruments                                           13.6%               9.2%              12.7%
           Timing and Synchronization Products                         4.3%                --                 --
           Other Products and Services                                 3.4%               3.4%               4.4%
                                                                  ------------       ------------       ------------
                                                                      48.9%              36.6%              40.9%

       Totals                                                        100.0%             100.0%             100.0%
                                                                  ============       ============       ============
</TABLE>

     BACKLOG

         Our business is not generally seasonal, with the exception that
purchases of our communications equipment by telecommunications customers tend
to be lower than average during the first quarter of each year because capital
equipment budgets typically are not approved until late in the first quarter. At
December 31, 2004, our backlog of firm, unshipped orders was approximately $7.7
million. Our backlog was related approximately 82.3% to our electronic
components business, which tends to provide us with long lead-times for our
manufacturing processes due to the custom nature of the products, and 17.7% to
our communications equipment business, the majority of which portion relates to
our network access and transmission products. Of these backlog orders, we
anticipate fulfilling approximately 80% of our electronic components orders and
100% of our communications equipment orders within the current fiscal year.
However, we cannot assure you that we will be successful in fulfilling these
orders in a timely manner or that we will ultimately recognize as revenue the
amounts reflected as backlog.

     WARRANTIES

         Generally, our electronic components, network access and transmission
products and communication timing and synchronization products carry a one-year
limited parts and labor warranty and our communications test instruments and


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European network access and transmission products carry a two-year limited parts
and labor warranty. Products returned under warranty typically are tested and
repaired or replaced at our option. Historically, product returns have not had a
material effect on our operations or financial condition. However, we cannot
assure you that this will continue to be the case or that disputes over
components or other materials or workmanship will not arise in the future.

                       OUR ELECTRONIC COMPONENTS BUSINESS

         Our electronic components segment includes digital and rotary switches,
electronic power supplies, RF components and subsystem assemblies. During the
years ended December 31, 2004, 2003 and 2002, this segment accounted for 51.1%,
63.4% and 59.1%, respectively, of our total net sales.

     DIGITAL AND ROTARY SWITCHES

         Digitran manufactures, assembles and sells digital and rotary switch
products serving aerospace, defense and industrial applications. Digital and
rotary switches are manually operated electromechanical devices used for routing
electronic signals. Thumbwheel, push button, lever-actuated and rotary modules,
together with assemblies comprised of multiple modules, are manufactured in many
different model families. Digitran also offers a wide variety of custom keypads
and digital and rotary switches for unique applications.

         Our switches may be ordered with different combinations of a variety of
features and options, including:

         o        8, 10, 11, 12, 16 or a special number of dial positions;

         o        special markings and dial characters;

         o        fully sealed, dust sealed or panel (gasket) sealed switch
                  chambers to increase resistance to the elements in hostile
                  environments, such as dust, sand, oils, salt spray, high
                  humidity and temperature and explosive atmospheres;

         o        available with radio frequency interference shielding;

         o        rear mount (flush) or front mount switches that are sold with
                  the needed installation hardware, or snap in mount switches
                  that do not require installation hardware;

         o        provision for mounting components on output terminals on
                  special personal computer boards;

         o        wire wrap terminals, pin terminals or special terminations; o
                  night vision compatibility;

         o        rotary; and

         o        VLP(TM) rotary.

     ELECTRONIC POWER SUPPLIES

         XPS and Pascall, based in England, manufacture a range of high and low
voltage, high specification, high reliability custom power conversion products
and RF components and subsystems designed for hostile environments and supplied
to an international customer base, predominantly in the military and civil
aerospace, military vehicle and telecommunications markets.


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<PAGE>

         Power conversion units supplied by XPS and Pascall range from 10VA to
1.5 KVA power ratings, low voltage (1V) to high voltage (20KV+), and convert
alternating current, or AC, to direct current, or DC, convert DC to AC and
convert DC to AC. Units can be manufactured to satisfy input requirements
determined by military, civil aerospace, telecommunications or industrial
businesses, and sophisticated built-in test equipment, or BITE, and control
circuitry often is included. Operating environments for our units are diverse
and range from fighter aircraft to roadside cabinets.

     RF COMPONENTS

         Pascall designs, develops, manufactures and markets a range of
RF and microwave amplifiers, components, subsystems and systems to 18GHz
for applications that include defense, aerospace, communications, air traffic
control and weather radar.

     SUBSYSTEM ASSEMBLIES

         Subsystem assemblies incorporate various input and display devices and
are manufactured for integration with various aerospace, defense, industrial and
transportation industry systems.

                      OUR COMMUNICATIONS EQUIPMENT BUSINESS

         Our communications equipment business comprises network access and
transmission products, communication timing and synchronization products, and
communications test equipment. During the years ended December 31, 2004, 2003
and 2002, the sale of communications equipment products and related services
accounted for 48.9%, 36.6% and 40.9%, respectively, of our total net sales.
These products, many of which are described below, are configured in a variety
of models designed to perform analog and digital measurements or to transmit
data at speeds varying from low-speed voice grade transmission to high-speed
broadband access.

         Some of the acronyms and terms used most frequently in the product
discussions on the following pages include:

         o        Time division multiplexing, or TDM, which is a technique for
                  consolidating multiple data sources into a single data stream
                  by allocating time slots to each data source

         o        Traditional telephone services, such as modems and plain old
                  telephone service, or POTS

         o        Competitive local exchange carriers, or CLECs

         o        Independent local exchange carriers, or ILECs

         o        Bit error rate test, or BERT

         o        Dial tone multi-frequency, or DTMF

         o        Transmission impairment measurement, or TIMS


                                       10

<PAGE>

         o        Central office and private business exchange, or CO/PBX,
                  services, where the central office houses the local exchange
                  equipment that routes calls to and from customers and to
                  Internet service providers and long-distance carriers

         o        Synchronous - in digital telephone transmission, synchronous
                  means that the bits from one call are carried within one
                  transmission frame

         o        Digital data services, or DDS, including the USA and worldwide
                  standards described below:
                  I.    USA standards, including:
                        --    ISDN, which is an enhanced digital network that
                              offers more bandwidth and faster speed than the
                              traditional telephone network
                        --    Caller identification or caller-ID services
                        --    Digital subscriber line technology, or DSL,
                              technology which transmits data up to 50 times
                              faster than a conventional dial-up modem using
                              existing copper telephone wires
                        --    Multi-rate symmetric DSL, or MSDSL, which allows
                              the transmission of data over longer distances
                              than single-rate technologies by adjusting
                              automatically or manually the transmission speed
                        --    T-1, which is a standard for digital transmission
                              in North America used by large businesses for
                              broadband access
                        --    FT-1, or fractional T-1, which uses only a
                              selected number of channels from a T-1
                        --    T-3, which is the transmission rate of 44
                              megabits, or millions of bits, per second, or 44
                              Mbps, with 672 channels
                        --    Digital signal level 0, or DS0, which is 64
                              kilobits, or thousands of bits, per second, or 64
                              kbps, with one channel of a T-1, E-1, E-3 or T-3
                        --    Digital signal level 1, or DS1, which is the T-1
                              transmission rate of 1.54 Mbps, with 24 channels
                        --    Digital signal level 3, or DS3, which is the T-3
                              transmission rate of 44 Mbps, with 672 channels
                        --    Router, which is an intelligent device used to
                              connect local and remote networks
                        --    Terminal adapter, which is situated between
                              telephones or other devices and an ISDN line and
                              allows multiple voice/data to share an ISDN line
                        --    Transmission control protocol/Internet protocol,
                              or TCP/IP
                        --    STS/SONET, which is an acronym for synchronous
                              transport signal/synchronous optical networks or
                              fiber optic networks
                        --    SDH is an acronym for synchronous digital
                              hierarchy
                        --    STM1 (SDH) is a standard technology for
                              synchronous data transmission on optical media and
                              is the international equivalent of synchronous
                              optical network; SDH uses the following
                              synchronous transport modules, or STMs, and rates:
                              STM1- 155 Mbps, STM-4 - 622 Mbps, STM-16 - 2.5
                              gigabits per second (Gpbs), and STM-64 - 10 Gbps
                        --    G703/G704 is a standard for transmitting voice
                              over digital carriers such as T-1 and E-1; G703
                              provides the specifications for pulse code
                              modulation at data rates from 64 Kbps to 2.048
                              Mbps and is typically used for interconnecting
                              data communications equipment such as bridges,
                              routers and multiplexers
                        --    V11/V35/X21 are types of serial interfaces; serial
                              interfaces work best for short (perhaps less than
                              20 meters), low-speed applications
                        --    X.25 is a protocol that allows computers on
                              different public networks or a TCP/IP network to
                              communicate through an intermediary computer at
                              the network layer level


                                       11

<PAGE>

                  II.   International standards, including:
                        --    E-1, which is the European standard for
                              international digital transmission used by large
                              businesses for broadband access, with 2.108 Mbps,
                              with 30 channels
                        --    FE-1, or fractional E-1, which uses only a
                              selected number of channels from an E-1
                        --    E-3, which is the European standard for T-3, with
                              34.368 Mbps and 480 channels

     NETWORK ACCESS AND TRANSMISSION PRODUCTS

         CXR Larus and CXR-AJ design, develop, manufacture and market a broad
range of network access and transmission products. These products include
high-quality network access devices such as fiber optic, DSL and voice
frequency, or VF, modems, ISDN terminal adapters, ISDN concentrators,
multiplexers, terminal servers, interface converters and remote access servers,
which combine to provide users with a complete solution for voice and data
transmission.

         Modems
         ------

         Our modem product range includes professional grade traditional VF
modems covering the performance spectrum, a range of fiber optic modems and a
range of DSL modems. Our modems are sold as standalone devices for remote sites
or as rack-mountable versions for central sites. Our customers use our
high-quality professional grade modems worldwide for networking and for central
office telecommunications applications such as voicemail and billing systems and
secure communications. Our modems are feature rich and we believe generally
offer more capabilities and better performance than competing products,
especially when operating over poor quality lines. This characteristic alone has
made our modems the modems of choice for voicemail applications throughout the
United States. Our modems are also available in more rugged versions for
industrial applications such as telemetry and remote monitoring in harsh
environments.

         ISDN Terminal Adapters
         ----------------------

         Together with modems, we offer a line of ISDN terminal adapters, which
are the popular digital equivalent of analog modems used primarily in Europe.
These terminal adapters are used in a broad range of applications, including
point-of-sale and videoconferencing, and are available in standalone as well as
rack-mountable versions.

         Terminal Servers
         ----------------

         Terminal servers include a range of products that enable the connection
of asynchronous applications to the Ethernet Network. These products were
designed to meet the requirements of our customers to interface equipment to the
corporate local area network, commonly called the LAN, and therefore to the
outside world, via our range of network access products.

         Drop and Insert Multiplexers
         ----------------------------

         Our broad range of drop and insert multiplexers covers E-1, T-1, FE-1,
E-3, T-3 and STM1 (SDH) over both copper wires and fiber optic networks. The
units enable users to manage the consolidation of their information from a
variety of voice or data sources (G703, G704, X21, V11 and V35) through an
easy-to-use menu-driven and Microsoft Windows-based user interface.


                                       12

<PAGE>

         Modular Routers
         ---------------

         Our commercial/industrial router product range is modular, which
provides users the flexibility to configure or have configured a unit that meets
their specific requirements. Our routers provide access to the Internet or
remote sites via ISDN, leased line, X.25, frame relay and DSL connections. The
router creates or maintains a table of available routes and their conditions and
uses this information, along with distance and cost algorithms, to determine the
best route for a given packet of data.

         Interface Converters
         --------------------

         Our range of interface converters provides users the ability to
interface data from LAN, V11 or V35 to E-1, T-1, E-3, T-3 and STM1. A channel
service unit/data service unit, or CSU/DSU, converts a digital data frame from a
LAN into a frame appropriate to a wide area network, or WAN.

         ISDN Concentrators
         ------------------

         We also manufacture and offer a line of ISDN intelligent concentrators
called CB2000. These products, which were designed primarily for the European
market, allow for better use of ISDN resources.

         TDMoIP Voice and Data Transmission
         ----------------------------------

         Our IP-Jet TDMoIP products facilitate the use of TDM services and
equipment over the Packet Switched Network bringing simplicity with lower cost
without the costly need to replace existing TDM hardware for both carrier and
enterprise users. TDM over IP, or TDMoIP, takes advantage of the internet
protocol, or IP, infrastructure and changing economics of data services delivery
to deliver high revenue leased line services such as E1 and T1. TDMoIP is also
ideal for the enterprise looking to reduce network expenses without compromising
features of their existing PBX and TDM equipment allowing all TDM traffic to be
carried transparently over Ethernet and IP networks irrespective of protocols or
signaling. Typical TDMoIP applications include: transmission of E1/T1, voice,
video and TDM data and IP, centralized voice services over Ethernet or IP,
secure data transmission E1/T1, and transmission of HDLC over IP.

         The following are descriptions of a few of our more prominent network
access and transmission products:

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

POWER MODEMS                    A family of products that allow asynchronous and
                                synchronous transmission over dial-up or leased
                                lines; asynchronous transmission is a very
                                high-speed transfer mode that allows telephone
                                companies to mix formerly incompatible signals,
                                such as voice, video and data.
                                    --       in dial-up applications, a unique
                                             line qualification mechanism
                                             assesses the quality of the line
                                             and automatically redials before
                                             entering the transmission mode when
                                             a poor line is detected, which
                                             avoids having to transmit in a
                                             degraded mode and leads to money
                                             savings in long transmission
                                             sessions
                                    --       available in standalone units or as
                                             rack mountable cards to be inserted
                                             into our Smart Rack
                                    --       industrial versions designed for
                                             harsh environments are available
                                             with features such as extra line
                                             protection, metallic enclosures,
                                             extended temperature ranges and
                                             high humidity protection


                                       13

<PAGE>

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

MD 2000 RANGE                   A multi-rate MSDSL modem that has the ability to
                                manually or automatically adjust line
                                transmission speed to provide the optimum
                                performance for a particular pair of copper
                                wires.
                                    --       operates over a single twisted pair
                                             of copper wires, which allows
                                             telecommunications companies to
                                             take advantage of the large
                                             installed base of copper twisted
                                             pairs that has been deployed around
                                             the world over many years and upon
                                             private copper wire infrastructures
                                             that exist for networking purposes
                                             in locations such as universities,
                                             hospitals, military bases, power
                                             plants and industrial complexes
                                    --       allows data transmission over a
                                             single copper pair at E-1 speed
                                             over a distance of up to 8.0 miles
                                    --       available as both a standalone unit
                                             and as a rack-mountable card

CB 2000 RANGE                   The primary function of this unit is to split
                                one or two primary rate interface links, or
                                PRIs, into multiple basic rate interfaces, or
                                BRIs.
                                    --       this allows substantial cost
                                             savings by allowing more effective
                                             use of available ISDN resources
                                             without the limitations of
                                             conventional voice PBX
                                    --       this allows for migration from BRI
                                             to PRI when the number of ports
                                             needs to be increased while
                                             preserving the user's investment in
                                             existing BRI-based terminal
                                             equipment
                                    --       this unit can be used in a wide
                                             variety of situations where
                                             multiple BRI and PRI access is
                                             required, such as:
                                             -    videoconferencing, where the
                                                  unit can be used to aggregate
                                                  bandwidth of multiple BRI
                                                  lines to provide the necessary
                                                  bandwidth, and to connect the
                                                  videoconferencing system to
                                                  the ISDN network through a PRI
                                                  access while still providing
                                                  connectivity to other ISDN
                                                  devices, or to connect two or
                                                  more videoconferencing systems
                                                  together within the same
                                                  building or campus without
                                                  going through the ISDN public
                                                  network
                                             -    ISDN network simulation, which
                                                  can be used in places such as
                                                  showrooms, exhibition and
                                                  technical training centers to
                                                  eliminate the need to have
                                                  access to, and pay for access
                                                  to, the ISDN public network
                                                  for telephone or data calls
                                             -    remote access servers, which
                                                  usually use multiple BRIs,
                                                  often need a method for
                                                  migration from multiple BRIs
                                                  to a single PRI as traffic and
                                                  the number of users expands

ISDN TERMINAL ADAPTERS          These devices are the ISDN equivalent of a
                                modem.
                                    --       these devices connect non-ISDN
                                             devices to the ISDN via a network
                                             termination unit, or NT1, which
                                             converts the "U" interface from the
                                             telephone company into a 4-wire S/T
                                             interface
                                    --       allow users to access the data
                                             rates of the digital network
                                    --       available as both a standalone unit
                                             and as a rack-mountable card

TERMINAL SERVERS                This range of products is used to provide the
                                connection of asynchronous applications to the
                                TCP/IP Ethernet network. These can include
                                point-of-sale terminals, industrial machines,
                                point-to-point RS232 connections and the visual
                                display units/keyboards.

DROP AND INSERT MULTIPLEXERS    These products provide users the ability to
                                manage the consolidation of data and/or voice
                                information over a variety of TDM networks such
                                as E-1, T-1, E-3, T-3 and STM (SDH).
                                    --       easily configured via management
                                             software
                                    --       remotely manageable over IP or
                                             dedicated time slot


                                       14

<PAGE>

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

ROUTERS                         A router provides connection between the primary
                                rate ISDN and local area networks.
                                    --       dynamically route incoming and
                                             outgoing data packets to the
                                             appropriate destination
                                    --       available as both a standalone unit
                                             and as a rack-mountable card to
                                             supplement the functions of our
                                             Smart Rack system

         Smart Rack
         ----------

         Our modem cards and our ISDN terminal adapter cards generally are
available in standalone versions or in versions that can be mounted in our Smart
Rack, our universal card cage that provides remote management through a
menu-driven user interface. Each part of the framework, or chassis, of the Smart
Rack has slots to house up to 16 cards (or up to 4 cards in a smaller
installation) plus one optional management card. Each slot can be used to insert
any member of our transmission products family, such as analog modems, ISDN
terminal adapters, ISDN digital modems and high-speed MSDSL modems. The optional
Simple Network Management Protocol/Internet Protocol, or SNMP/IP, management
card that can be inserted into each chassis can be used to configure any card in
the chassis and can provide additional features, including alarm reporting,
tracking of configurations, running of diagnostic routines and generation of
statistics. Up to eight chassis can be linked together to form a fully-managed
node with 128 slots. Our Smart Rack arrangement allows each chassis to be used
to its full capacity while reducing floor space needed to house complex systems.

     COMMUNICATION TIMING AND SYNCHRONIZATION PRODUCTS

         CXR Larus designs, develops, manufactures and markets a series of
communication timing and synchronization products that provide a consistent
source of timing alignment, or synchronization, for digital communication
networks. When the principal network timing source is lost, a CXR Larus
communication timing system can provide an alternative source of reference
synchronization until the principal source can be restored. This is called
operating in the "holdover" state. The various levels of accuracy in holdover
mode are referred to as "stratum levels." Stratum 1 is the most precise,
followed by Stratum 2, Stratum 3E, Stratum 3, and finally Stratum 4. Stratum 4
has no holdover mode and is the least precise. All CXR Larus communication
timing products offer Stratum 3E stability, or better, and all are available
with options that meet or exceed Stratum 1.

         Some of the key communication timing and synchronization products we
offer are described below:

                                       15

<PAGE>

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

STAR SYNC(TM) 5850 PRIMARY      The Larus StarSync(TM) Model STS 5850 is an
REFERENCE SOURCE                economical GPS timing clock designed for
                                retrofits of existing BITS clocks and for remote
                                sites that require timing. The StarSync(TM)
                                provides GPS Stratum 2 clock with Stratum 2 or
                                3E holdover performance.

                                The STS 5850 features two accurate T1 timing
                                references that are synthesized from GPS for use
                                by BITS clocks, SONET NEs, intelligent
                                multiplexers, and PCS systems as well as other
                                systems requiring synchronization. Options
                                permit the STS 5850 to be configured for Stratum
                                1 Input Track and either Stratum 2 or Stratum 3E
                                Hold. Superior performance is achieved by Kalman
                                filtering, patented digital frequency synthesis
                                technology, and use of GPS UTC information to
                                measure a rubidium oscillator (Stratum 2) or an
                                ultra stable ovenized reference oscillator
                                (Stratum 3E).

STARCLOCK(TM) STS 5800          The Larus StarClock(TM) STS 5800 Timing System
TIMING SYSTEM                   provides GPS Stratum 1 clock and/or network
                                tracking with Stratum 2 or Stratum 3E holdover
                                performance. The Larus StarClock(TM) represents
                                the optimal local synchronization solution for
                                the new distributed network. The STS 5800 is an
                                economical extended temperature timing system
                                that is designed for small installations and
                                remote sites requiring timing (cell sites, PCS
                                networks, customer premises, etc.). The output
                                MTIE of the STS 5800 meets the mask performance
                                specified by GR-2830 for Stratum 1 clocks,
                                resulting in an improvement of ten to twenty
                                times over other GPS solutions.


                                       16

<PAGE>

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

STARCLOCK(TM) 100 AND           The innovative StarClock(TM) 100 and 200
STARCLOCK(TM) 200 T1/E1         Synchronization solutions for Stratum Timing
SYNCHRONIZATION TIMING SYSTEMS  Systems offers flexible and cost-effective 1,
                                Stratum 2E, and Stratum 3E timing for digital
                                transmission and synchronization applications.
                                The systems provide a redundant and jitter-free
                                source of framed ones and composite clock and
                                are synchronized to an equal or higher stratum
                                framed reference source. The StarClock(TM) 100
                                and 200 systems can be employed in either DS1 or
                                E1 digital transmission environments simply by
                                selecting the appropriate modules.

                                The StarClock(TM) 100 and 200 systems are the
                                next generation of Larus'
                                industry-performance-standard STS 5400
                                Synchronization System and features backward
                                compatibility with the STS 5400. StarClock(TM)
                                100 and 200 circuit card switch settings and
                                operating functions are software generated,
                                affording both speed and flexibility for system
                                application changes, testing, and monitoring.

                                The StarClock(TM) 100 system supplies up to 100
                                timing outputs for use in the synchronization of
                                transmultiplexers, digital cross-connect
                                systems, and SONET equipment as well as other
                                equipment requiring network synchronization.
                                Hundreds of these systems have been deployed
                                into major local exchange carriers, and
                                international central offices worldwide.

                                The StarClock(TM) 200, designed specifically for
                                the RBOC and large central office environment,
                                offers up to 200 timing outputs unprotected, or
                                100 timing outputs with 1:1 protection.
                                Expansion shelves can be added to the
                                StarClock(TM) 200 system that will boost the
                                number of timing outputs into the thousands,
                                enough for the largest central office.

                                Optional modules for both systems include a GPS
                                Stratum 1 track and Stratum 2E hold or Stratum 1
                                track and Stratum 3E hold card, with integral
                                GPS receiver, a Composite Input Signal module, a
                                module that uses 5 or 10 MHz inputs, and the
                                Model 54580 Network Time Server.

     COMMUNICATIONS TEST INSTRUMENTS

         Our primary field test instruments, built by CXR Larus, are our CXR
HALCYON 700 series of products, which we believe provide performance and value
in integrated installation, maintenance and testing of communications services.
These test instruments are modular, rugged, lightweight, hand-held products used
predominantly by telephone and Internet companies to pre-qualify facilities for
services, verify proper operation of newly installed services and diagnose
problems. Original equipment manufacturers, or OEMs, also use service
verification equipment to test simulated networks during equipment development
and to verify the successful production of equipment.


                                       17

<PAGE>

         The unique modular nature of our CXR HALCYON 700 series test equipment
provides an easy configuration and upgrade path for testing of the specific
services offered by the various national and international service providers.
Key performance enhancements to this product family address the trend toward
conversion of analog service installations to high-speed digital access lines.
Some of these key features include:

         o        ability to conduct the 23-tone test, which is an automated
                  single key-stroke test that performs the equivalent of over 12
                  individual test sequences;

         o        load-coil analysis, which identifies the presence of voice
                  coils that prevent high-speed digital access; and

         o        voice analysis and testing of individual T-1 channels.

         We believe that these enhancements will allow further penetration of
CXR HALCYON 700 series test equipment into the telecommunications services
market. Some of the key test equipment products we offer are described below:

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

                           TYPICAL BASE UNIT
                           -----------------

HALCYON 756A               --       handheld integrated test set for
                                    installation and maintenance of digital data
                                    circuits, including DDS, Switched 56K,
                                    2-wire Datapath, ISDN, T-1 and FT-1
                           --       provides users with intuitive user interface
                                    allowing quick circuit diagnosis and repair
                                    without extensive training

                           TYPICAL OPTIONAL CONFIGURATIONS
                           -------------------------------

HALCYON 704A-NTS1          --       704A universal data test set with 1.5 MHz
                                    TIMS, full signaling, caller ID and full
                                    4-wire loop DDS test functions, as well as
                                    DDS/DS0 test functions and T-1, DS1, DS0 and
                                    FT-1 test package
                           --       T-1 test package includes reference receiver
                                    for T-1 level, frequency and slip
                                    measurements

HALCYON 704A-NTS2          --       universal data test set
                           --       handheld wideband test set for installation
                                    and maintenance of analog voice and data and
                                    digital data circuits including Switched 56K
                           --       expands upon the features of the 704A-400 to
                                    add DDS BRI/ISDN and DS1/T-1/FT-1 test
                                    functions

HALCYON 704A-PKG2          --       704A universal data test set with 1.5 MHz
                                    TIMS, full signaling, full 4-wire loop DDS
                                    test functions, as well as DDS/DS0 test
                                    functions for DS0-DP and OCU-DP DS0 and
                                    sub-rate testing

HALCYON 756A-PG            --       handheld integrated test set designed for
                                    the testing and performance monitoring of
                                    digital data communication links for
                                    "protective relaying backbone
                                    communications" for power utility companies
                           --       provides users with a test set which closely
                                    emulates the live operating conditions of
                                    the data links while providing an intuitive
                                    user interface allowing quick circuit
                                    diagnosis and repair without extensive
                                    training


                                       18

<PAGE>

       PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS
       ------------                     --------------------------------

                           CENTRAL OFFICE TEST EQUIPMENT
                           -----------------------------

T-COM 440B T-ACE           This is a high-performance integrated digital
                           communications test instrument.
                           --       used to monitor and assure service
                                    reliability of high-density digital test
                                    nodes and switch centers
                           --       provides comprehensive digital test
                                    measurements ranging from STS/SONET, DS3,
                                    through T-1, FT-1, DSO and DDS services

CUSTOMERS

     ELECTRONIC COMPONENTS

         We sell our components primarily to OEMs in the electronics industry,
including manufacturers of aerospace and defense systems and industrial
instruments. During 2004, our top five electronic components customers in terms
of revenues were the BAE Systems companies, MBDA (U.K.) Ltd., Teldix, Raytheon
Corporation and L3 Communications. Sales to various BAE Systems companies in the
Europe and the United States, as a group, represented approximately 14.6% of our
total net sales revenues during 2004. No other customer represented 10% or more
of our total net sales during 2004.

     COMMUNICATIONS EQUIPMENT

         We market our network access and transmission products, communication
timing and synchronization products and communications test instruments
primarily to public, private and corporate telecommunications service providers
and end users. Typically, communications service providers use a variety of
network equipment and software to originate, transport and terminate
communications sessions. Communications service providers rely on our products
and services as elements of the communications infrastructure and to configure,
test and manage network elements and the traffic that runs across them. Also,
our products help to ensure smooth operation of the network and increase the
reliability of services to customers.

         The major communications service providers to whom we market our
telecommunications test instruments, network access and transmission products
and services and communication timing and synchronization products include
RBOCs, inter-exchange carriers, incumbent local exchange carriers, competitive
local exchange carriers, Internet service providers, integrated communications
providers, cable service providers, international post, telephone and telegraph
companies, banks, brokerage firms, government agencies and other service
providers. During 2004, our top five communications test instruments, network
access and transmission products and communication timing and synchronization
products customers in terms of our net sales were Verizon, Siemens, SBC, Coris
and Carte, SA. None of our communications equipment customers represented 10% or
more of our revenues during 2004.

         Because we currently derive a significant portion of our revenues from
sales to RBOCs and other telecommunications service providers, we have
experienced and will continue to experience for the foreseeable future an effect
on our quarterly operating results due to the budgeting cycles of the RBOCs.
RBOCs generally obtain approval for their annual budgets during the first
quarter of each calendar year. If an RBOC's annual budget is not approved early
in the calendar year or is insufficient to cover its desired purchases for the
entire calendar year, we are unable to sell products to the RBOC during the
period of the delay or shortfall.

         Due to a general downturn in business activity in the public carrier
telecommunications capital equipment market from 2000 to 2004, RBOCs reduced
their capital expenditures, which negatively affected our 2002 and 2003 sales of


                                       19

<PAGE>

test instruments. Our observance was that capital expenditure levels of RBOCs
and other telecommunications carriers remained at reduced levels in 2003.
However, we reduced costs and improved our business operations so that our
current monthly break-even sales requirement is approximately 50% of our
requirement in 2002. This, coupled with an increase in the sales of test
equipment in the fourth quarter of 2004, resulted in improved sales of test
instruments in 2004 as compared to 2003.

         Communications equipment manufacturers design, develop, install and
maintain voice, data and video communications equipment. Network equipment
manufacturers such as Cisco and Nortel rely on our test equipment products to
verify the proper functioning of their products during final assembly and
testing. Increasingly, because communications service providers are choosing to
outsource installation and maintenance functions to the equipment manufacturers
themselves, equipment manufacturers are using our instruments, systems and
software to assess the performance of their products during installation and
maintenance of a customer's network.

         In July 2004, we acquired Larus Corporation, a manufacturer of
communication timing and synchronization products. The business formerly
conducted by Larus Corporation contributed $3,424,000 in net sales from
July through December 2004.

SALES, MARKETING AND CUSTOMER SUPPORT

     ELECTRONIC COMPONENTS

         We market and sell our electronic components through Digitran, XCEL
Corporation Ltd., XPS, Pascall, and XCEL Japan, Ltd., a wholly-owned subsidiary
of XET Corporation based in Japan. In some European countries and the Pacific
Rim, these products are sold through a combination of direct sales and through
third-party distributors.

         We sell our electronic components primarily to OEMs in the electronics
industry, including manufacturers of aerospace and military systems and
industrial instruments. Our efforts to market our electronic components
generally are limited in scope since we rely on sales to a broad base of
historical customers with whom we have long-term business dealings.

         XCEL Japan, Ltd. resells Digitran's digital and rotary switch and
keypad products and some third-party-sourced components primarily into Japan
and also into other highly industrialized Asian countries. Marketing of our
electronic components is primarily through referrals from our existing
customers, with sales either direct or via a small number of selected
representatives.

         We rely on long-term orders and repeat business from our existing
customers. We also approach our existing customers and their competitors to
discuss opportunities for us to provide them with subsystem assemblies that
typically incorporate our own products. Also, Digitran's history spans over 40
years in the electronic components industry, and major OEMs have designed many
of our switches, subsystem assemblies, power supplies and RF components into
their product specifications. These factors have frequently resulted in
customers seeking us out to manufacture for them unique subsystem assemblies as
well as special variations of our standard digital switches.

     COMMUNICATIONS EQUIPMENT

         Our sales and marketing staff consist primarily of engineers and
technical professionals. Our staff undergo extensive training and ongoing
professional development and education. We believe that the skill level of our
sales and marketing staff has been instrumental in building longstanding


                                       20

<PAGE>

customer relationships. In addition, our frequent dialogue with our customers
provides us with valuable input on systems and features they desire in future
products. We believe that our consultative sales approach and our product and
market knowledge differentiate our sales forces from those of our competitors.

         Our local sales forces are highly knowledgeable about their respective
markets, customer operations and strategies and regulatory environments. In
addition, our representatives' familiarity with local languages and customs
enables them to build close relationships with our customers.

         We provide repair and training services to enable our customers to
improve performance of their networks. We also offer on-line support services to
supplement our on-site application engineering support. Customers can also
access information regarding our products remotely through our domestic,
European and Japanese technical assistance centers.

         We sell many of our communications equipment products to large
telecommunications service providers as well as through distributors, resellers
and value added resellers. Telecommunications service providers generally commit
significant resources to an evaluation of our and our competitors' products and
require each vendor to expend substantial time, effort and money educating them
about the value of the vendor's solutions. Consequently, sales to this type of
customer generally require an extensive sales effort throughout the prospective
customer's organization and final approval by an executive officer or other
senior level employee. The result is lengthy sales and approval cycles, which
make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase, their
future purchases are uncertain because while we generally enter into long-term
supply agreements with those parties, these agreements do not require specific
levels of purchases.

         Delays associated with potential customers' internal approval and
contracting procedures, procurement practices, testing and acceptance processes
are common and may cause potential sales of communications test equipment to be
delayed or foregone. As a result of these and related factors, the sales cycle
of new products for large customers typically ranges from six to twelve months
or more. In addition to the latter case, we also have some the distribution
channels that generally are box stocking distributors with significant
independent sales forces selling our products to final customers, integrators
and other resellers on a regional and nationwide basis. We perform product
applications training for the distributor and reseller workforce and funnel many
of the leads we generate to the distribution channels for their follow-up and
closure.

COMPETITION

     ELECTRONIC COMPONENTS

         The market for our components is highly fragmented and composed of a
diverse group of OEMs, including Power One, Interpoint/Grenson, Martek and Celab
Ltd. for power supplies and Esterline (Janco), Greyhill, Inc., Omron
Electronics, Transico Inc. and C&K Components Inc. for digital switches. We
believe that the principal competitive factors affecting our components business
include:

         o        capability and quality of product offerings;

         o        status as qualified products; and

         o        compliance with government and industry standards.

         We have made substantial investments in machinery and equipment in our
digital and rotary switch and power supply operations. In addition, Digitran's
long history in the electronic components industry and the fact that major


                                       21

<PAGE>

OEMs have designed many of our digital switches into their product
specifications have acted as barriers to entry for other potential competitors
and aided us in establishing and maintaining both distribution channels and
customers for our products by making us a sole source supplier for approximately
30% to 50% of the digital switches that we sell and have caused some customers
to seek us out to manufacture for them unique as well as our standard digital
and rotary switches.

         Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.

     COMMUNICATIONS EQUIPMENT

         The markets for our communications equipment and services are
fragmented and intensely competitive, both inside and outside the United States,
and are subject to rapid technological change, evolving industry standards and
regulatory developments. We believe that the principal competitive factors
affecting our communications equipment business include:

         o        quality of product offerings;

         o        adaptability to evolving technologies and standards;

         o        ability to address and adapt to individual customer
                  requirements;

         o        price and financing terms;

         o        strength of distribution channels;

         o        ease of installation, integration and use of products;

         o        system reliability and performance; and

         o        compliance with government and industry standards.

         Our principal competitors for our communications equipment include
Symmetricom and Oscilloquartz, for communication timing and synchronization
products, RAD, Paradyne, Patton Electronics Corporation, Digital Engineering,
Ltd. and GDC, for network access and transmission products, and TTC Corporation
(a subsidiary of Dynatech Corporation), Ameritech Corporation, Fluke, Sunrise
Telecom, Inc. and Electrodata, Inc., for communications test instruments.

         The design of many of our data transmission products enables us to
offer numerous different product combinations to our customers and to serve both
central site data communications needs and remote access and transmission sites
on both the enterprise-wide and single location level. We believe that this
design flexibility helps us to excel at many of the above competitive factors by
enabling us to offer quality products that meet and are adaptable to evolving
customer requirements, technologies and government and industry standards.

         We currently derive a significant portion of our revenues from sales to
RBOCs. We believe we derive a competitive advantage from efforts we expended to
establish many of our communications equipment products as approved products for
all of the RBOCs and for other key customers in the United States and abroad.


                                       22

<PAGE>

Our products' approved status facilitates the ability of our customers to order
additional products from us as their needs arise without the long delays that
might otherwise be needed to obtain the approval of our customers' upper
management or governing body prior to each purchase.

         Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

         Our network access and transmission products, communication timing and
synchronization products and communications test instruments generally are
assembled from outsourced components, with final assembly, configuration and
quality testing performed in house.

         Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead-times for delivery often are
available. Typically, our electronic components segment produces products in
one- to 300-piece batches, with a ten- to thirty-week lead-time. The lead-time
is predominantly to source sub-component piece parts such as electronic
components, mechanical components and services. Typical build time is six to
eight weeks from receipt of external components.

         We operate five manufacturing and assembly facilities worldwide. All of
these facilities are certified as ISO 9001- or 9002-compliant. We manufacture
our network access and transmission products at CXR-AJ's facility in France and
at CXR Larus' facility in San Jose, California. We manufacture RF components and
subsystems at Pascall's facility in Ryde, Isle of Wight, England. We manufacture
all of our test equipment and communication timing and synchronization products
at the San Jose facility. We manufacture all of our digital and rotary switches
in our Rancho Cucamonga, California facility. We manufacture our electronic
power supplies in Ashford, Kent, England.

         The purchased components we use to build our products are generally
available from a number of suppliers. We rely on a number of limited-source
suppliers for specific components and parts. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
components to ensure an adequate supply, particularly for products that require
lead-times of up to nine months to manufacture. If we were required to locate
new suppliers or additional sources of supply, we could experience a disruption
in our operations or incur additional costs in procuring required materials.

         We intend to increase the use of outsource manufacturing for our
communications equipment products. We believe that outsourcing will lower our
manufacturing costs, in particular our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.

PRODUCT DEVELOPMENT AND ENGINEERING

         We believe that our continued success depends on our ability to
anticipate and respond to changes in the electronics hardware industry and
anticipate and satisfy our customers' preferences and requirements. We
continually review and evaluate technological and regulatory changes affecting
the electronics hardware industry and seek to offer products and capabilities
that solve customers' operational challenges and improve their efficiency.


                                       23

<PAGE>

         For the years ended December 31, 2004, 2003 and 2002, our engineering
and product development costs were approximately $1,521,000, $951,000 and
$1,015,000, respectively.

         Our product development costs during the past three years were related
to development of new communications test equipment and voice, data and video
transmission equipment and development of a new line of rotary switches at our
Digitran facility. We have continued incurring engineering costs applicable to
the development of new digital and rotary switches since 2001. Current research
expenditures in the communications equipment segment are directed principally
toward enhancements to the current test instrument product line, the expansion
of our range of network access and transmission products and the development and
expansion of our range of Network Equipment Building System ("NEBS") qualified
communication timing and synchronization systems. These expenditures are
intended to improve market share and gross profit margins, although we cannot
assure you that we will achieve these improvements.

         We strive to take advantage of the latest computer-aided engineering
and engineering design automation workstation tools to design, simulate and test
advanced product features or product enhancements. Our use of these tools helps
us to speed product development while maintaining high standards of quality and
reliability for our products. Our use of these tools also allows us to
efficiently offer custom designs for OEM customers whose needs require the
integration of our electronic components with their own products.

INTELLECTUAL PROPERTY

         We regard our software, hardware and manufacturing processes as
proprietary and rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. We have filed patent applications, and intend to file
additional patent applications in the future, for various products with the
United States Patent and Trademark Office and in the European Union, Japan,
Canada and Brazil. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford some
limited protection. The laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States. Our
research and development and manufacturing process typically involves the use
and development of a variety of forms of intellectual property and proprietary
technology. In addition, we incorporate technology and software that we license
from third party sources into our products. These licenses generally involve a
one-time fee and no time limit. We believe that alternative technologies for
this licensed technology are available both domestically and internationally.

         We may receive in the future notices from holders of patents that raise
issues as to possible infringement by our products. As the number of test
equipment products and transmission instruments increases and the functionality
of these products further overlaps, we believe that we may become subject to
allegations of infringement given the nature of the telecommunications and
information technology industries and the high incidence of these kinds of
claims. Questions of infringement and the validity of patents in the fields of
telecommunications and information technology involve highly technical and
subjective analyses. These kinds of proceedings are time consuming and expensive
to defend or resolve, result in substantial diversion of management resources,
cause product shipment delays or could force us to enter into royalty or license
agreements rather than dispute the merits of the proceeding initiated against
us.


                                       24

<PAGE>

GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the United States Federal Communications Commission, or
FCC, and Underwriters Laboratories as well as industry standards such as NEBS
established by Telcordia Technologies, Inc., formerly Bellcore, and those
developed by the American National Standards Institute. Internationally, our
products must comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute and telecommunications
authorities in various countries, as well as with recommendations of the
International Telecommunications Union. The failure of our products to comply,
or delays in compliance, with the various existing and evolving standards could
negatively affect our ability to sell our products.

         Our product lines are subject to statutes governing safety and
environmental protection. We believe that we are in substantial compliance with
these statutes and are not aware of any proposed or pending safety or
environmental rule or regulation that, if adopted, would have a material affect
on our business or financial condition.

EMPLOYEES

         As of March 22, 2005, we employed approximately 335 persons in our
various divisions and subsidiaries. None of our employees are represented by
labor unions, and there have not been any work stoppages at any of our
facilities. We believe that our relationship with our employees is good.


                                       25

<PAGE>

ITEM 2.  PROPERTIES.

         As of March 22, 2005, we leased or owned approximately 108,000 square
feet of administrative, engineering, production, storage and shipping space. All
of this space was leased other than the Abondant, France facility.

<TABLE>
                                                                                             FUNCTION /
            BUSINESS UNIT                            LOCATION                         LEASE EXPIRATION DATE
------------------------------------------ ------------------------------------- ---------------------------------
<S>                                        <C>                                   <C>
Emrise Corporation                         Rancho Cucamonga, California          Administration;
(corporate headquarters)                                                         Expires October 2005

XET Corporation/Digitran                   Rancho Cucamonga, California          Administration, Engineering and
(electronic components)                                                          Manufacturing;
                                                                                 Expires November 2005

                                           Monrovia, California                  Expires February 2006

XCEL Power Systems, Ltd.                   Ashford, Kent, England                Administration, Engineering and
 and XCEL Corporation Ltd.                                                       Manufacturing; Expires March 2013
 (electronic components)

XCEL Japan, Ltd. Higashi-Gotanda           Tokyo, Japan                          Sales;
(electronic components)                                                          Expires December 2005

CXR-AJ                                     Paris, France                         Administration;
(network access and transmission                                                 Expires April 2007
products)

CXR-AJ                                     Abondant, France                      Administration, Engineering,
(network access and transmission                                                 Manufacturing;
products)                                                                        Facility is owned

CXR Larus                                  San Jose, California                  Administration, Engineering,
(network access and transmission                                                 Manufacturing;
products, communications test                                                    Expires June 2011 and is renewable
instruments, communication timing and
synchronization products)

Pascall Electronics Limited                Ryde, Isle of Wight, England          Administration, Engineering,
                                                                                 Manufacturing;
                                                                                 Expires May 2016
</TABLE>

         On November 1, 2004, CXR Larus relocated from its Fremont facility to
the facility in San Jose occupied by Larus Corporation at the time it was
acquired in July 2004. Our lease on that facility expires June 30, 2011, with an
option to renew.

         Our lease for the Ashford, Kent, England facility is a fifteen-year
lease that expires in March 2013, subject to the rights of the landlord or us to
terminate the lease after ten years.

         We believe the listed facilities are adequate for our current business
operations.


                                       26

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

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

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

         On October 19, 2004, we held our 2004 annual meeting of stockholders.
The total number of outstanding votable shares was 24,745,458. Our stockholders
were asked to consider and vote upon the following six proposals:

         (1) Re-election of Laurence P. Finnegan, Jr. as a Class II director to
serve a three-year term.

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

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

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

         (5) Ratification of the amendment and restatement of our bylaws.

         (6) Ratification of the selection of Grant Thornton LLP as our
independent registered public accounting firm to audit our consolidated
financial statements for 2004.

<TABLE>
         Results of the vote were as follows:

      Proposal               For               Against            Abstain           Withheld          Total Voted
      --------               ---               -------            -------           --------          -----------
<S>      <C>
         (1)              21,040,940                 --                --            142,039           21,182,979
         (2)               6,346,592            669,867            31,432                 --            7,047,891
         (3)               6,843,729            158,625            45,537                 --            7,047,891
         (4)               6,947,468             75,054            25,369                 --            7,047,891
         (5)               6,820,204            201,208            26,479                 --            7,047,891
         (6)              21,126,847             25,857            30,275                 --           21,182,979
</TABLE>

         As a result, Mr. Finnegan was re-elected to our board of directors.
Messrs. Oliva, Runyon and Baskin continued to serve on our board of directors
following the meeting. The selection of our independent registered public
accounting firm to audit the Company's consolidated financial statements for
2004 was ratified. The remaining four proposals did not receive sufficient
affirmative votes for approval. However, there was no effect on the status of
our amended and restated bylaws because ratification of the amendment and
restatement of the bylaws was not legally required.


                                       27

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES.

         Our common stock has been traded on the OTC Bulletin Board under the
symbol "EMRI" since September 15, 2004. Throughout 2003 and until September 14,
2004, our common stock traded on the OTC Bulletin Board under the symbol "MCTL."
The table below shows, for each fiscal quarter indicated, the high and low
closing bid prices for shares of our common stock. This information has been
obtained from the OTC Bulletin Board. The prices shown reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.

                                                                High       Low
                                                               ------     -----
Year Ended December 31, 2003
   First Quarter.............................................  $0.20      $0.15
   Second Quarter............................................   0.37       0.20
   Third Quarter.............................................   1.00       0.28
   Fourth Quarter............................................   1.37       0.85

Year Ended December 31, 2004
   First Quarter.............................................  $1.18      $0.87
   Second Quarter............................................   1.28       0.76
   Third Quarter.............................................   0.82       0.52
   Fourth Quarter............................................   1.68       0.60

         As of March 22, 2005, we had 37,384,708 shares of common stock
outstanding held of record by approximately 2,900 stockholders. These holders of
record include depositories that hold shares of stock for brokerage firms which,
in turn, hold shares of stock for numerous beneficial owners. On March 22, 2005,
the closing sale price of our common stock on the OTC Bulletin Board was $1.77
per share.

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

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

         In November 2004, we issued three-year warrants to purchase up to
100,000 shares of common stock to one entity as partial consideration for
investor relations services. The warrants vest and become exercisable in three
installments between November 3, 2004 and June 3, 2005 and have exercise prices
ranging from $0.85 to $1.15 per share.

         In December 2004, we issued 15,000 shares of common stock to one
individual upon exercise of a warrant with an aggregate exercise price of
$3,750.


                                       28

<PAGE>

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide. In each case,
appropriate investment representations were obtained, stock certificates were
issued with restricted stock legends, and stop transfer orders were placed with
our transfer agent.

ITEM 6.  SELECTED FINANCIAL DATA.

         The selected consolidated financial data presented below for each of
the five years in the period ended December 31, 2004 have been derived from
audited financial statements which for the most recent three years appear
elsewhere herein. The data presented below should be read in conjunction with
such financial statements, including the related notes thereto and the other
information included herein. The historical results are not necessarily
indicative of results to be expected for any future periods.

<TABLE>
                                                                              YEARS ENDED DECEMBER 31,
                                                    -----------------------------------------------------------------------------
                                                         2004            2003            2002           2001             2000
                                                    -------------   -------------   -------------   -------------   -------------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                 <C>             <C>             <C>             <C>             <C>
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:
Net sales .......................................   $     29,861    $     25,519    $     22,664    $     27,423    $     28,050
Cost of sales ...................................         16,146          14,835          14,147          15,456          15,529
                                                    -------------   -------------   -------------   -------------   -------------
Gross profit ....................................         13,715          10,684           8,517          11,967          12,521
Selling, general and administrative expenses ....         10,226           7,812           7,731          10,129           9,827
Engineering and product development expenses ....          1,521             951           1,015           1,076           1,167
                                                     ------------    ------------    ------------    ------------    ------------
Income (loss) from operations ...................          1,968           1,921            (229)            762           1,527
Total other income (expense) ....................           (439)           (474)           (361)           (414)            207
                                                    -------------   -------------   -------------   -------------   -------------
Income (loss) from continuing operations
   before income taxes ..........................          1,529           1,447            (590)            348           1,734
Income tax (benefit) expense ....................             49             286             (20)             77              31
                                                    -------------   -------------   -------------   -------------   -------------
Income (loss) from continuing operations ........          1,480           1,161            (570)            271           1,703
Discontinued operations:
   Loss from operations of
     discontinued segment .......................             --              --              --              56            (212)
   Gain (loss) on disposal of discontinued
    segment including provision for phase
    out period of $122 in 2000 ..................             --              --              --              --            (487)
                                                    -------------   -------------   -------------   -------------   -------------
Net income (loss) ...............................          1,480           1,161            (570)            327           1,004
Foreign currency translation adjustment .........            379             705             446            (312)           (505)
                                                    -------------   -------------   -------------   -------------   -------------
Total comprehensive income (loss) ...............          1,859    $      1,866    $       (124)   $         15    $        499
                                                    =============   =============   =============   =============   =============
Basic earnings (loss) per share from
   continuing operations ........................   $       0.06    $       0.05    $      (0.03)   $       0.01    $       0.09
                                                    =============   =============   =============   =============   =============
Diluted earnings (loss) per share from
   continuing operations ........................   $       0.06    $       0.05    $      (0.03)   $       0.01    $       0.07
                                                    =============   =============   =============   =============   =============
Basic earnings (loss) per share from
   discontinued operations ......................   $         --    $         --    $         --    $         --    $      (0.04)
                                                    =============   =============   =============   =============   =============
Diluted earnings (loss) per share from
   discontinued operations ......................   $         --    $         --    $         --    $         --    $      (0.03)
                                                    =============   =============   =============   =============   =============
Basic earnings (loss) per share .................   $       0.06    $       0.05    $      (0.03)   $       0.02    $       0.05
                                                    =============   =============   =============   =============   =============
Diluted earnings (loss) per share ...............   $       0.06    $       0.05    $      (0.03)   $       0.01    $       0.04
                                                    =============   =============   =============   =============   =============
Weighted average shares outstanding, basic ......         24,063          22,567          21,208          20,594          19,504
Weighted average shares outstanding, diluted ....         24,839          23,811          21,208          23,782          23,027


                                                               29
</TABLE>

<PAGE>

<TABLE>
                                                                            YEARS ENDED DECEMBER 31,
                                                     -----------------------------------------------------------------------
                                                        2004            2003          2002           2001           2000
                                                     -----------    -----------    -----------    -----------    -----------
                                                                                 (IN THOUSANDS)
<S>                                                  <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................     $    1,057     $    1,174     $      254     $      604     $      756
Working capital ................................          5,540          5,696          3,961          3,686          2,780
Total assets ...................................         25,086         17,169         16,786         17,688         19,484
Long-term debt, net of current portion .........            985            819            927            763            282
Stockholders' equity ...........................         10,909          7,916          5,732          5,862          5,807
Convertible redeemable preferred stock .........             --             --            282            270            259
</TABLE>

         No cash dividends on our common stock were declared during any of the
periods presented above. In October 2000, we decided to discontinue our circuits
segment's operations. Accordingly, all current and prior financial information
related to the circuits segment operations have been presented as discontinued
operations in historical financial data above. The year ended December 31, 2004
includes five months of Larus Corporation activity. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview."

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED AUDITED FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE ELECTRONIC COMPONENTS AND
COMMUNICATIONS EQUIPMENT INDUSTRIES AND OUR EXPECTATIONS REGARDING OUR FUTURE
PERFORMANCE, LIQUIDITY AND CAPITAL RESOURCES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
OF ANY NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
UNDER OTHER CAPTIONS CONTAINED ELSEWHERE IN THIS REPORT.

OVERVIEW

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

         o        Electronic Components

                  --       digital and rotary switches

                  --       electronic power supplies

                  --       RF components

                  --       subsystem assemblies

         o        Communications Equipment

                  --       network access and transmission products

                  --       communication timing and synchronization products

                  --       communications test instruments


                                       30

<PAGE>

         Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 51.1%,
63.4% and 59.1% of our total net sales during 2004, 2003 and 2002, respectively.
Sales of communications equipment and related services, primarily to private
customer premises and public carrier customers, were 48.9%, 36.6% and 40.9% of
our total net sales during 2004, 2003 and 2002, respectively.

         During 2004, we achieved a 56.1% sales increase in our communications
equipment segment as compared to 2003. Excluding sales of $3,424,000 from the
business previously conducted by Larus Corporation, which we acquired in July
2004, our communications equipment sales increased 19.5% in 2004 as compared to
2003. Sales of our electronic components segment during 2004 decreased 5.6% as
compared to 2003. As discussed below, our improved sales, cost reductions and
Asian outsourcing have reduced the breakeven point in our communications
equipment segment, which enabled us to produce an improved operating profit in
this segment despite the historically low sales volume that reflects a four-year
downturn in the telecommunications market. Of our subsidiaries, CXR Larus was
the most affected by the telecommunications downturn, because CXR Larus had the
greatest dependence on sales to RBOCs.

         In 2004, our communications equipment segment sales increased
significantly from 2003 due to improved sales of test instruments and our
acquisition of Larus Corporation as discussed below. We worked to improve the
growth and performance of our communications equipment business, particularly
customer premises network access and transmission products. These efforts
included our acquisition of Larus Corporation. We expect this acquisition to
enhance our performance based upon synergies described below that we achieved
through the merger of Larus Corporation with and into CXR Telcom Corporation in
December 2004. In connection with the merger, we changed the name of CXR Telcom
Corporation to CXR Larus Corporation.

         During 2003, CXR-AJ reduced costs by approximately $393,000 annually
through compensation reductions due to terminations of employees and a $155,000
reduction in employee benefits, both mainly due to the retirement of the
Managing Director of CXR-AJ and the elimination of $45,000 in travel expenses
that previously were incurred annually by the retired Managing Director of
CXR-AJ and others in connection with marketing activities that are now being
handled by other employees.

         We reduced costs at CXR Larus by reducing its work force and
increasing our sourcing of test equipment components from Asian manufacturers
that produce components for lower prices than we previously paid to our former
suppliers. We terminated four employees during 2002, which resulted in annual
savings of approximately $485,000, and an additional four employees in February
2003, which resulted in annual savings of approximately $306,000. Outsourcing of
manufacturing to Asia was a primary reason we were able to increase our gross
margin from 34% in 2002 to 67% in 2004 in our CXR Larus test equipment business,
which resulted in an annual cost reductions of approximately $1,372,470 during
2004. We also reduced costs elsewhere in our communications equipment segment
and lowered the breakeven point both in our United States and France operations
through various cost-cutting methods, such as using Asian contract
manufacturers, reducing facility rent expense by approximately $327,350 on an
annual basis, and downsizing our administrative office in Paris, France. These
cost-cutting efforts were a major factor in restoring our communications
equipment segment to profitability in 2003 and 2004. However, we cannot predict
if the recent improvement in telecommunications sales we are currently
experiencing indicates the end of the severe telecommunications market downturn
or the extent to which the downturn may continue to negatively affect our
ability to sell our products and services to customers in the telecommunications
industry.


                                       31

<PAGE>

         In July 2004, we acquired Larus Corporation. Larus Corporation was a
San Jose, California-based manufacturer and seller of telecommunications
products that had one wholly-owned subsidiary, Vista Labs, Incorporated, or
Vista, which provided engineering services to Larus Corporation. The basic
purchase terms of the acquisition are described below. We consolidated the
results of operations of Larus Corporation beginning from the date of
acquisition, July 13, 2004. We expect increased sales of our French subsidiary's
products in the United States market as a result of sales and marketing support
for the French products by CXR Larus' United States-based sales and marketing
staff. We have consolidated our CXR Larus subsidiary's operations into Larus
Corporation's facility, which has resulted in administrative and facilities cost
savings of approximately $20,000 during the period from October 1, 2004 to
December 31, 2004 and is expected to result in additional cost savings of
approximately $250,000 during 2005.

         We paid $6,539,500 to acquire the outstanding common stock of Larus
Corporation. As a result, we acquired assets that included intellectual
property, cash, accounts receivable and inventories owned by each of Larus
Corporation and Vista. The purchase price for the acquisition consisted of
$1,000,000 in cash, the issuance of 1,213,592 shares of our common stock with a
fair value of $1,000,000, $887,500 in the form of two short-term, zero interest
promissory notes that were repaid in 2004, $3,000,000 in the form of two
subordinated secured promissory notes, warrants to purchase up to an aggregate
of 150,000 shares of our common stock at $1.30 per share, and approximately
$580,000 of acquisition costs. The number of shares of our common stock issued
as part of the purchase price was calculated based on the $0.824 per share
average closing price of our common stock for the five trading days preceding
the transaction. The warrants to purchase 150,000 shares of common stock were
valued at $72,526 using a Black-Scholes formula that included a volatility of
107.19%, an interest rate of 3.25%, a life of three years and no assumed
dividend.

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

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

         On March 18, 2005, XCEL Corporation Ltd. purchased all of the
outstanding capital stock of Pascall Electronic (Holdings) Limited ("PEHL"), the
parent company of Pascall, using funds loaned to XCEL Corporation Ltd. by
Emrise. The initial purchase price was 3,100,000 British pounds sterling
(approximately U.S. $5,972,000 based on the exchange rate in effect on March 18,
2005). The purchase price was paid in cash and is subject to upward or downward
adjustment on a pound for pound basis to the extent that the value of the net
assets of Pascall as of the closing date is greater or less than 2,520,000
British pounds sterling. The calculation of the value of the net assets of
Pascall is to occur within six weeks after the closing, and Intelek Properties
Limited (which is a subsidiary of Intelek PLC, a London Stock Exchange public
limited company, and is the former parent of PEHL), will have 25 business days
after receipt of


                                       32

<PAGE>

the calculation to accept or dispute the calculation. Any payment relating to
the increase or reduction of the purchase price based on the value of the net
assets of Pascall will be due from XCEL Corporation Ltd. or Intelek Properties
Limited, as the case may be, within 14 days of the acceptance of the
calculation. A default rate of interest equal to 3% above the base lending rate
of Barclays Bank plc London will apply if the adjustment payment is not timely
made. The purchase price is also subject to downward adjustments for any
payments that may be made to XCEL Corporation Ltd. under indemnity, tax or
warranty provisions of the purchase agreement.

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

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

         Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, XCEL, Intelek PLC and
we entered into a Supplemental Agreement dated March 18, 2005. The Supplemental
Agreement provides, among other things, that an interest free bridge loan of
200,000 British pounds sterling (approximately U.S. $385,400 based on the
exchange rate in effect on March 17, 2005) that was made by Intelek Properties
Limited to Pascall on March 17, 2005 would be repaid by Pascall by March 31,
2005. XCEL agreed to ensure that Pascall has sufficient funds to repay the
bridge loan. A default rate of interest equal to 3% above the base lending rate
of Barclays Bank plc London will apply if the loan is not timely repaid.

CRITICAL ACCOUNTING POLICIES

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

     REVENUE RECOGNITION

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

         We recognize revenues from domestic sales of our electronic components
and communications equipment at the point of shipment of those products. Product
returns are infrequent and require prior authorization because our sales are
final and we quality test our products prior to shipment to ensure they meet the
specifications of the binding purchase orders under which they are shipped.


                                       33

<PAGE>

Normally, when a customer requests and receives authorization to return a
product, the request is accompanied by a purchase order for a replacement
product.

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

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

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

         Revenues from services such as repairs and modifications are recognized
when the service has been completed and invoiced. For repairs that involve
shipment of a repaired product, we recognize repair revenues when the product is
shipped back to the customer.  Service revenues represented 5.7%, 3.1% and 2.5%
of net sales in 2004, 2003 and 2002, respectively.

     INVENTORY VALUATION

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


                                       34

<PAGE>

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

     FOREIGN CURRENCY TRANSLATION

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

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

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

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

         Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries as each
subsidiary's local currency. Accordingly, we had a cumulative translation gain
of $487,000 that was included as part of accumulated other comprehensive income
within our balance sheet at December 31, 2004. During 2004, we included
translation adjustments of a gain of approximately $379,000 under accumulated
other comprehensive income and loss.

         If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our loss for 2004. The magnitude of these gains or losses depends upon
movements in the exchange rates of the foreign currencies in which we transact
business as compared to the value of the United States dollar. These currencies
include the euro, the British pounds sterling and the Japanese yen. Any future
translation gains or losses could be significantly higher or lower than those we
recorded for 2004.


                                       35

<PAGE>

     INTANGIBLES, INCLUDING GOODWILL

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

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

         In conjunction with our July 2004 acquisition of Larus Corporation, we
have commissioned a valuation firm to determine what portion of the purchase
price should be allocated to identifiable intangible assets. Although the
valuation analysis is still in progress, we have estimated that the Larus
tradename and trademark are valued at $2,800,000 and that the technology and
customer relationships are valued at $800,000. Goodwill associated with the
Larus Corporation acquisition totaled $3,363,000. The Larus tradename and
trademark were determined to have indefinite lives and therefore are not being
amortized but rather are being periodically tested for impairment. The
technology and customer relationships were both estimated to have ten-year lives
and, as a result, $40,000 of amortization expense was recorded and charged to
administrative expense in 2004. The valuation of the identified intangible
assets is expected to be completed in May 2005 and could result in changes to
the value of these identified intangible assets and corresponding changes to the
value of goodwill. However, we do not believe these changes will be material to
our financial position or results of operations.


                                       36

<PAGE>

RESULTS OF OPERATIONS

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

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

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

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

     YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

<TABLE>
                                                                                                            RESULTS AS A PERCENTAGE
                                                                                  DOLLAR      PERCENTAGE     OF NET SALES FOR THE
                                                          YEAR ENDED             VARIANCE      VARIANCE           YEAR ENDED
                                                         DECEMBER 31,          ------------- -------------       DECEMBER 31,
                                                 ---------------------------     FAVORABLE     FAVORABLE    -----------------------
                                                     2004           2003       (UNFAVORABLE) (UNFAVORABLE)     2004        2003
                                                     ----           ----       ------------- -------------     ----        ----
                                                                                  (IN THOUSANDS)
<S>                                              <C>            <C>             <C>              <C>          <C>          <C>
Net sales
    Electronic components ...................    $   15,262     $   16,168      $     (906)       (5.6)%       51.1%        63.4%
    Communications equipment ................    $   14,599     $    9,351      $    5,248        56.1%        48.9%        36.6%
                                                 ----------------------------------------------------------------------------------
    Total net sales .........................    $   29,861     $   25,519      $    4,342        17.0%       100.0%       100.0%
                                                 ----------------------------------------------------------------------------------
Cost of sales
    Electronic components ...................    $    9,024     $    9,530      $     (506)       (5.3)%       59.1%        58.9%
    Communications equipment ................    $    7,122     $    5,305      $    1,817        34.3%        48.8%        56.7%
                                                 ----------------------------------------------------------------------------------
    Total cost of sales .....................    $   16,146     $   14,835      $    1,311         8.8%        54.1%        58.1%
                                                 ----------------------------------------------------------------------------------
Gross profit
    Electronic components ...................    $    6,238     $    6,638      $     (400)       (6.0)%       40.9%        41.1%
    Communications equipment ................    $    7,477     $    4,046      $    3,431        84.8%        51.2%        43.3%
                                                 ----------------------------------------------------------------------------------
    Total gross profit ......................    $   13,715     $   10,684      $    3,031        28.4%        45.9%        41.9%
                                                 ----------------------------------------------------------------------------------
Selling, general and administrative
   expenses .................................    $   10,226     $    7,812      $   (2,414)      (30.9)%       34.1%        30.6%
Engineering and product development
   expenses .................................    $    1,521     $      951      $     (570)      (59.9)%        5.1%         3.7%
Operating income ............................    $    1,968     $    1,921      $       47         2.4%         6.7%         7.5%
Interest expense ............................    $      433     $      416      $      (17)       (4.1)%        1.5%         1.6%
Other expense ...............................    $       (6)    $      (58)     $       52        89.7%         0.0%         0.2%
Income before income tax expense ............    $    1,529     $    1,447      $       82         5.5%         5.3%         5.7%
Income tax expense ..........................    $       49     $      286      $      237        82.9%         0.3%         1.1%
                                                 ----------------------------------------------------------------------------------
Net income ..................................    $    1,480     $    1,161      $      319        27.5%         4.9%         4.5%
                                                 ==================================================================================
</TABLE>

         NET SALES. The $4,342,000 (17.0%) increase in total net sales for 2004
as compared to 2003 resulted from the combination of a $906,000 (5.6%) decrease
in net sales of our electronic components and a $5,248,000 (56.1%) increase in
net sales of our communications equipment products and services.


                                       37

<PAGE>

         ELECTRONIC COMPONENTS. The decrease in net sales of our electronic
components segment resulted from:

         o        a $2,012,000 (20.1%) decrease in net sales of power supplies
                  and subassemblies by XPS that we believe was primarily due to
                  deferral of orders; and

         o        a $67,000 (23.1%) decrease in sales of electronic subsystem
                  assemblies produced by Digitran that we believe was primarily
                  due to a delay in the United States government's transfer of a
                  contract from one prime contractor to another.

These decreases were only partially offset by the following:

         o        a $217,000 (4.1%) increase in net sales of switches
                  manufactured by Digitran, which was primarily a result of an
                  increase in the volume of orders for spare parts that we
                  believe was mainly due to increased military activities;

         o        an increase from $1,000 in 2003 to $28,000 in 2004 in net
                  sales of a new standard rotary switch and patent pending
                  VLP(TM) rotary switches that were introduced by Digitran in
                  2004 and that we expect will continue to be additive to switch
                  sales; and

         o        a $956,000 (164.3%) increase in net revenue from service and
                  miscellaneous other electronic component products primarily
                  due to increased service business volume at XPS.

         COMMUNICATIONS EQUIPMENT. The increase in net sales of our
communications equipment products and services resulted from:

         o        a $2,112,000 (34.4%) increase in net sales of network access
                  and transmission equipment, which primarily consisted of
                  $1,952,000 in sales made by CXR Larus as a direct result of
                  our acquisition of Larus Corporation in July 2004;

         o        $1,298,000 of net sales of communication timing and
                  synchronization products by CXR Larus from July through
                  December 2004, prior to which time we did not have a similar
                  product line; and

         o        a $1,677,000 (71.3%) increase in net sales of our CXR HALCYON
                  704 series field test equipment, which was primarily due to a
                  $1,800,000 order we received and delivered in the fourth
                  quarter of 2004 for a project that had been under development
                  since 2002 and was only recently funded by the customer.

These increases were partially offset by the curtailment during 2004 of orders
for CXR Larus test equipment by another large customer who shifted its focus to
fiber and HDSL services. We do not expect 2005 sales of test equipment to equal
our exceptionally good 2004 sales level.

         GROSS PROFIT. The four percentage point increase in gross profit as a
percentage of total net sales and the $3,031,000 (28.4%) increase in total gross
profit in 2004 as compared to 2003 resulted from gross profit decreases in our
electronic components segment that were more than offset by gross profit
increases in our communications equipment segment.

         ELECTRONIC COMPONENTS. The $400,000 (6.0%) decrease in gross profit for
our electronic components segment was primarily due to the large reduction in
sales of power supplies described above.


                                       38

<PAGE>

         COMMUNICATIONS EQUIPMENT. The $3,431,000 (84.8%) increase in gross
profit for our communications equipment segment and the 7.9 percentage point
increase in this segment's gross profit as a percentage of total net sales were
primarily the result of the addition of Larus Corporation's $1,782,000 gross
profit resulting from net sales of communication timing and synchronization
products for July through December 2004 and a $1,587,000 increase in gross
profit at CXR Larus as a result of a large increase in high gross margin sales
of CXR Halcyon communications test equipment. Excluding the addition of Larus
Corporation sales, gross profit for network access equipment increased
approximately $60,000 (2.1%).

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $2,414,000 (30.9%)
increase in selling, general and administrative expenses in 2004 as compared to
2003 resulted primarily from:

         o        $994,000 in selling, general and administrative expenses
                  generated by Larus Corporation following its acquisition in
                  July 2004;

         o        a $73,000 (12.0%) increase in sales expense at CXR Larus
                  mostly related to the large orders they obtained during 2004;

         o        a $110,000 (53.9%) increase in selling expense at Digitran
                  related to our new line of rotary switches;

         o        a $56,000 (19.6%) increase in selling expense at XPS to
                  improve marketing of power supplies;

         o        a $99,000 (110.0%) increase in corporate legal fees and
                  $67,000 (35.9%) increase in auditing fees partially due to
                  Sarbanes-Oxley requirements;

         o        a $126,000 (91.3%) increase in deferred compensation;

         o        a $68,000 (42.5%) increase in stockholder relations and
                  investor relations expenses;

         o        a $180,000 (18.3%) increase in corporate salaries, bonus and
                  expenses partially due to foreign currency exchange rate
                  fluctuation.

          Some of the reasons for higher administrative expenses were increased
acquisition activities, changing our name to Emrise Corporation, complying with
the requirements of the Sarbanes-Oxley Act of 2002 and related rules, and
increased investor relations activities.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. The $570,000 (59.9%) increase in these expenses resulted from:

         o        the inclusion of $200,000 of these expenses from Larus
                  Corporation;

         o        an $80,000 (65.6%) increase in these expenses at CXR Larus
                  relating to test instruments;

         o        a $53,000 (91.1%) increase in these expenses at CXR-AJ for
                  network access equipment; and

         o        a $237,000 (96.7%) increase in expenses at Digitran for the
                  new line of rotary switches.


                                       39

<PAGE>

         INTEREST EXPENSE. Although our bank interest expense declined $58,000
(13.9%) due to our new credit line with Wells Fargo Bank, N.A., this benefit was
more than offset by the $75,000 interest we paid on the notes we issued to
acquire Larus Corporation.

         INCOME TAX EXPENSE. Income tax expense for 2004 was $49,000 as compared
to $286,000 in 2003. The 2004 tax provision was composed of $177,000 net foreign
income taxes and $76,000 current federal and state taxes. These amounts were
offset with a $160,000 reduction of the valuation allowance applied against the
deferred tax asset. The release of the allowance was based on the Company's
recent and expected U.S. based earnings and the probability that a portion of
its tax net operating loss carryforwards may be utilized.

         NET INCOME. Net income increased by $319,000 (27.5%) to $1,480,000 in
2004 from $1,161,000 in 2003. Our 2004 net income was helped by the contribution
of $628,000 of operating earnings from Larus Corporation, a $1,414,000 increase
in operating earnings by CXR Larus due to improved test instrument sales and an
improvement of $319,000 in operating earnings at CXR-AJ due to increased network
access sales. These improvements were partially offset by lower operating
earnings at our electronics components segment due to higher operating expenses
at Digitran and lower gross margin at XPS due to a lower sales volume of power
supplies. These changes resulted in our net income before taxes in 2004 of
$1,529,000, $82,000 over 2003 net income before tax of $1,447,000. Our income
tax provision in 2004 was $49,000 as compared to $286,000 in 2003.

     YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

<TABLE>
                                                                                                            RESULTS AS A PERCENTAGE
                                                                                  DOLLAR      PERCENTAGE     OF NET SALES FOR THE
                                                          YEAR ENDED             VARIANCE      VARIANCE           YEAR ENDED
                                                         DECEMBER 31,          ------------- -------------       DECEMBER 31,
                                                 ---------------------------     FAVORABLE     FAVORABLE    -----------------------
                                                     2003           2002       (UNFAVORABLE) (UNFAVORABLE)     2003        2002
                                                     ----           ----       ------------- -------------     ----        ----
                                                                                  (IN THOUSANDS)
<S>                                              <C>            <C>             <C>             <C>            <C>         <C>
Net sales
    Electronic components ...................    $    16,168    $    13,390    $     2,778          20.7%      54.1%       52.5%
    Communications equipment ................    $     9,351    $     9,274    $        77           0.8%      31.3%       36.3%
                                                 ----------------------------------------------------------------------------------
    Total net sales .........................    $    25,519    $    22,664    $     2,855          12.6%      85.5%       88.8%
                                                 ----------------------------------------------------------------------------------
Cost of sales
    Electronic components ...................    $     9,530    $     8,187    $    (1,343)        (16.4)%     58.9%       61.1%
    Communications equipment ................    $     5,305    $     5,960    $       655          11.0%      56.7%       64.3%
                                                 ----------------------------------------------------------------------------------
    Total cost of sales .....................    $    14,835    $    14,147    $      (688)         (4.9)%     58.1%       62.4%
                                                 ----------------------------------------------------------------------------------
Gross profit
    Electronic components ...................    $     6,638    $     5,203    $     1,435          27.6%      41.1%       38.9%
    Communications equipment ................    $     4,046    $     3,314    $       732          22.1%      43.3%       35.7%
                                                 ----------------------------------------------------------------------------------
    Total gross profit ......................    $    10,684    $     8,517    $     2,167          25.4%      41.9%       37.6%
                                                 ----------------------------------------------------------------------------------
Selling, general and administrative
   expenses .................................    $     7,812    $     7,731    $       (81)         (1.0)%     26.2%       30.3%
Engineering and product development
   expenses .................................    $       951    $     1,015    $        64           6.3%       3.2%        4.0%
                                                 ----------------------------------------------------------------------------------
Operating income (loss) .....................    $     1,921    $      (229)   $     2,150         938.9%       6.4%        0.9%
Interest expense ............................    $      (416)   $      (441)   $        25           5.7%       1.4%        1.7%
Other (expense) income ......................    $       (58)   $        80    $      (138)       (172.5)%      0.2%        0.3%
                                                 ----------------------------------------------------------------------------------
Income before income tax expense ............    $     1,447    $      (590)   $     2,037         345.3%       4.8%        2.3%
Income tax expense (benefit) ................    $       286    $       (20)   $      (306)     (1,530.0)%      1.0%        0.1%
                                                 ----------------------------------------------------------------------------------
Net income (loss) ...........................    $     1,161    $      (570)   $     1,731         303.7%       3.9%        2.2%
                                                 ==================================================================================
</TABLE>

                                       40

<PAGE>

         NET SALES. The $2,855,000 (12.6%) increase in total net sales for 2003
resulted primarily from the significant growth in overall net sales of our
electronic components and the slight increase in overall net sales of our
communications equipment products and services.

         The $2,778,000 (20.7%) increase in net sales of our electronic
components included a $2,841,000 (39.7%) increase in net sales of power supplies
and related electronic subsystem assemblies due to an increase in the number of
products XPS shipped under long-term programs, and a $563,000 (11.9%) increase
in sales of digital switches manufactured by Digitran that primarily resulted
from an increase in orders for spare parts that we believe was mainly due to
increased military activities. These increases were partially offset by a
$835,000 (74.2%) reduction in subsystem assembly sales by Digitran due to the
completion of a major contract in 2002.

         The $77,000 (0.8%) increase in net sales of our communications
equipment products and services included a $740,000 (13.7%) increase in sales of
network access and transmission products, which was partially offset by a
$528,000 (18.3%) decline in sales of test equipment by CXR Larus and CXR-AJ. We
decided to terminate the resale of test equipment by CXR-AJ in November 2000 and
now have only residual sales of these products in Europe. Test equipment sales
decreased primarily due to a reduction in orders from telecommunications
customers in the United States, which we believe was primarily due to the weak
telecom market and the continuing effect of CXR-AJ's discontinuation of test
equipment resales.

         CXR-AJ produced all of our transmission products and network access
equipment before we acquired Larus Corporation in July 2004. Net sales by CXR-AJ
of such products, excluding test equipment, increased by $740,000 (13.7%) due to
increased sales volume.

         Net sales of our CXR HALCYON 704 series field test equipment increased
slightly by $37,000 (1.9%). We aggressively marketed to non-telecommunications
customers, such as government agencies, electric utilities and transportation
agencies, which resulted in improved sales of our CXR HALCYON products to
non-telecommunications customers. Nevertheless, CXR Telecom's major customers
are the large United States telecommunications companies, and their capital
budget expenditures for CXR HALCYON equipment were still low in terms of our
historical experience.

         We believe that many of the United States telecom customers that CXR
Larus serves built networks to handle an anticipated demand for voice and data
traffic that has not yet occurred. Consequently, many of these customers reduced
their purchasing budgets for 2002 and 2003, which had a negative impact on CXR
Larus' sales.

         GROSS PROFIT. Improvements in gross profit of both of our operating
segments contributed to the $2,167,000 (25.4%) total gross profit increase and
to the 4.3 percentage point increase in total gross profit to 41.9% of total net
sales.

         The gross profit increase for our electronic components segment
primarily resulted from increases in the profit margins of both digital switches
and power supplies due to changes in product mix for both switch and XPS's power
supply products. Also, increased volume helped increase gross margins of power
supplies by reducing per unit costs.

         The increase in gross profit as a percentage of net sales for our
communications equipment segment primarily was due to reduced costs. CXR Larus
and CXR-AJ increased their gross margins as a percent of sales to 45.0% and
42.6% from 34.1% and 36.7%, respectively, due to cost reductions and higher
sales at CXR-AJ.


                                       41

<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The 3.5 percentage point
decrease in selling, general and administrative expenses to 30.6% of total net
sales resulted from maintaining relatively level expenses in combination with
increased sales. Selling expenses remained static in 2003 as compared to 2002.
General and administrative expenses increased modestly by $77,000 (1.5%).

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment and Digitran. The $64,000
(6.3%) decrease primarily resulted from cost reductions in the communications
equipment segment.

         INTEREST EXPENSE. Interest expense decreased by $25,000 (5.7%)
generally due to lower average debt balances at XPS and CXR-AJ.

         OTHER (EXPENSE) INCOME. Other expense was $58,000 for 2003 as compared
to other income of $80,000 for 2002, primarily due to foreign currency losses.

         INCOME TAX EXPENSE (BENEFIT). The majority of the increase in income
tax expense related to the recording by XPS of a provision for United Kingdom
income tax that was required because XPS produced greater taxable income for
2003 than in 2002 and has consumed its net operating loss carryforwards.

         NET INCOME (LOSS). The $1,731,000 improvement in net income (loss)
resulted from a number of factors. The largest contributors to this positive
change were $1,099,000 and $856,000 increases in operating income of XPS and
CXR-AJ, respectively, due to increased sales at XPS and increased sales and
reduced costs at CXR-AJ. In addition, CXR Larus improved its operating income by
$486,000 by reducing costs. We continued to closely monitor costs throughout our
operations and reduced costs through staffing reductions in our communications
equipment operations in the United States and France and through various other
cost-cutting methods, such as using contract manufacturers and reducing facility
rent expense. These actions substantially reduced the sales volume required to
produce profitability at both CXR Larus and CXR-AJ.

LIQUIDITY AND CAPITAL RESOURCES

         During the year ended December 31, 2004, we funded our operations
primarily through revenue generated from our operations and through our existing
and previous lines of credit with Wells Fargo Bank, N.A., Wells Fargo Business
Credit, Inc. and various foreign banks. As of December 31, 2004, we had working
capital of $4,839,000, which represented a decrease of $901,000 (15.8%) from
working capital of $5,696,000 at December 31, 2003, primarily due to the
acquisition of Larus Corporation. Also, at December 31, 2004, we had an
accumulated deficit of $16,406,000, accumulated other comprehensive income of
$487,000, and cash and cash equivalents of $1,057,000. As of December 31, 2003,
we had an accumulated deficit of $17,886,000, accumulated other comprehensive
income of $108,000, and cash and cash equivalents of $1,174,000.

         Accounts receivable increased $403,000 (7.5%) to $5,796,000 as of
December 31, 2004 from $5,393,000 as of December 31, 2003. Sales attributable to
the Larus Corporation acquisition contributed $1,308,000 to the increase.
Without the acquisition of Larus Corporation, our receivables would have
decreased $1,025,000 to $4,368,000 at December 31, 2004, primarily due to a
$1,800,000 order for test instruments that we shipped, invoiced and collected in
the fourth quarter of 2004. Days sales outstanding, which is a measure of our
average accounts receivable collection period, improved during the 2004 from
72 to 69 days. Our customers include many Fortune 500 companies in the United
States and similarly large companies in Europe and Asia. Because of the
financial strength of our customer base, we have virtually eliminated our
bad debt reserves.


                                       42

<PAGE>

         Inventory balances decreased 2.9% during 2004, from $6,683,000 at
December 31, 2003 to $6,491,000 at December 31, 2004. Inventory represented
27.4% and 39.0% of our total assets as of December 31, 2004 and 2003,
respectively. Included in the December 31, 2004 inventory amount is the
$1,411,000 of inventory of Larus Corporation. We acquired Larus Corporation in
July 2004. Excluding the effect of this inclusion, inventory would have
decreased by $1,683,000 (24.0%) and would have represented 33.4% of total assets
(excluding the $8,454,000 of total assets related to Larus Corporation) at
December 31, 2004. Inventory turnover, which is a ratio that indicates how many
times our inventory is sold and replaced over a specified period, improved to
2.6 times for 2004 as compared to 2.4 times for 2003.

         We took various actions to reduce costs in 2004. These actions were
intended to reduce the cash outlays of our telecommunications equipment segment
to match its revenue rate. We also have contracted with Asian manufacturers for
production of test equipment components at lower prices than we previously paid
to our former suppliers and have received shipments of quality components from
these Asian suppliers.

         Cash provided by our operating activities totaled $3,884,000 for 2004,
an improvement of $2,737,000 as compared to cash provided by our operating
activities of $1,039,000 for 2003. This increase in cash provided by operations
during 2004 primarily resulted from improved net income, a reduction of our
inventory (excluding Larus Corporation inventory) due to outsourcing and
inventory management, and an increase in our trade payables balance..

         Cash used in our investing activities totaled $2,208,000 for 2004 as
compared to $38,000 used in our investing activities for 2003. Included in the
results for 2004 are net cash of $1,492,000 to acquire Larus Corporation and
$724,000 of property, plant and equipment purchases for production facility
upgrade, telecommunications, management information systems and computer
controlled production machinery for our new low profile rotary and digital
switches. The investments for 2003 were mostly property, plant and equipment
purchases.

         Cash used in our financing activities totaled $2,164,000 for 2004 as
compared to $687,000 of cash used in our financing activities for 2003, due to
larger repayments of bank debt in 2004 than in 2003.

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

         The new credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at December 31, 2004 was 5.0%.


                                       43

<PAGE>

         The previous credit facility bore interest at the prime rate plus 1.0%
and was subject to a $13,500 minimum monthly interest fee plus an unused
commitment fee equal to 0.25% per annum. The average amount outstanding on the
revolving portions of the previous and new credit facilities during 2004 was
$1,035,000. The prime rate averaged approximately 4.25% in 2004. Therefore, the
average annual interest cost on the new revolving line of credit was
approximately $49,162 while the average annual interest cost on the prior
revolving line of credit was approximately $162,000 due to the minimum interest
rate charge of $13,500 per month.

         The new credit facility also provides for a term loan of $150,000
secured by equipment, amortizable over 36 months at a variable rate equal to the
prime rate plus 1.5%. The term loan portion of the facility had a balance of
$126,000 at December 31, 2004.

         Wells Fargo Bank, N.A. has also provided us with $300,000 of credit
available for the purchase of new capital equipment when needed, of which a
balance of $58,000 was outstanding at December 31, 2004.

         At December 31, 2004, we had a balance owing under the revolving credit
line of $118,000, and we had $1,882,000 of availability on the non-formula based
portion of the credit line. The credit facility is subject to various financial
covenants. The minimum debt service coverage ratio of each of XET Corporation
and CXR Larus must be not less than 1.50:1.00 on a trailing four-quarter basis.
"Debt service coverage ratio" is defined as net income plus depreciation plus
amortization, minus non-financed capital expenditures, divided by current
portion of long-term debt measured quarterly. The current ratio of each of XET
Corporation and CXR Larus must be not less than 1.50:1.00, determined as of each
fiscal quarter end. "Current ratio" is defined as total current assets divided
by total current liabilities. Net income after taxes of each of XET Corporation
and CXR Larus must be not less than $1.00 on an annual basis, determined as of
the end of each quarter. Net profit after taxes of each of XET Corporation and
CXR Larus must be not less than $1.00 in each fiscal quarter immediately
following a fiscal quarter in which that entity incurred a net loss after taxes.
Total liabilities divided by tangible net worth of our domestic operations on a
consolidated basis must not at any time be greater than 2.00:1.00, determined as
of each fiscal quarter end. Tangible net worth of us and all of our subsidiaries
on a consolidated basis must not at any time be less than $5,200,000, measured
at the end of each quarter. "Total liabilities" is defined as current
liabilities plus non-current liabilities, minus subordinated debt. "Tangible net
worth" is defined as stockholders' equity plus subordinated debt, minus
intangible assets.

         At December 31, 2004, we were in compliance with the covenants other
than the debt-to-tangible net worth covenant for our domestic operations. We
obtained a waiver of non-compliance as of December 31, 2004. We are currently
engaged in discussions with Wells Fargo Bank, N.A. to amend the existing
financial covenants effective as of the next measurement date of April 30, 2005.
If we are unable to comply with the existing or revised covenants and are unable
to obtain a waver or amendment on reasonable terms, the amount outstanding on
the line of credit would become due and payable and a default interest rate of
prime plus 4.5% would apply. The facility expires in July 2005. At March 31,
2005, there was no balance outstanding under the revolving line of credit. We
currently intend to seek renewal of the facility and believe that the bank will
be amenable to renewing it. However, if we are unable to obtain a renewal of the
facility, we believe we will have sufficient funds available to timely repay any
additional amounts we may borrow under the facility prior to its expiration.

         On July 13, 2004, we issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that we repaid in 2004, in exchange for 100% of the capital
stock of Larus Corporation. These notes are subordinated to our bank debt and
are payable in 72 equal monthly payments of principal totaling $41,667 per month
plus interest at the 30-day London InterBank Offered Rate ("LIBOR") rate plus 5%
with a maximum interest rate of 7% during the first two years of the term of the
notes, 8% during the third and fourth years and 9% thereafter. During December
2004, the LIBOR rate was 2.42%. The total balance on these promissory notes as
of December 31, 2004 was $2,750,000.


                                       44

<PAGE>

         As of December 31, 2004, our foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Venture Finance PLC,
a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution,
in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National
de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in
Japan. As of December 31, 2004, the balances outstanding under our United
Kingdom, France and Japan credit facilities were $903,000, $634,000 and $56,000,
respectively.

         XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years, carries an annual
fixed interest rate of 3.25% and is secured by the assets of XJL. The balance of
the loan as of December 31, 2004 was $56,000 using the exchange rate in effect
at that date for conversion of Japanese yen into United States dollars. There
are no financial performance covenants applicable to this loan.

         XPS, one of our United Kingdom subsidiaries, obtained a credit facility
with Venture Finance PLC in November 2002. This credit facility expires on
November 15, 2005. Using the exchange rate in effect at December 31, 2004 for
the conversion of British pounds sterling into United States dollars, the
facility is for a maximum of $2,865,000 and includes a $669,000 unsecured cash
flow loan, a $153,000 term loan secured by fixed assets, and the remainder is a
loan secured by accounts receivable and inventory. The interest rate is the base
rate of Venture Finance PLC (4.75% at December 31, 2004) plus 2%, and is subject
to a minimum rate of 4% per annum. There are no financial performance covenants
applicable to this credit facility.

         In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,488,000,
based on the exchange rate in effect at December 31, 2004 for the conversion of
euros into United States dollars. CXR-AJ also had $62,000 of term loans with
several French banks outstanding as of December 31, 2004. The IFN Finance
facility is secured by accounts receivable and carries an annual interest rate
of 1.6% above the French "T4M" rate. The French T4M rate was 2.04% and had a
balance of $572,000 at December 31, 2004. This facility has no financial
performance covenants.

         Our backlog was $7,720,000 as of December 31, 2004 as compared to
$9,630,000 as of December 31, 2003. The reduction in backlog was primarily due
to substantial shipments under contracts by XPS in the United Kingdom. Our
backlog as of December 31, 2004 was 82.3% related to our electronic components
business, which business tends to provide us with long lead-times for our
manufacturing processes due to the custom nature of the products, and 17.7%
related to our communications equipment business, which business tends to
deliver standard products from stock as orders are received. The amount of
backlog orders represents revenue that we anticipate recognizing in the future,
as evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. However, there can be no assurance that we will
be successful in fulfilling such orders and commitments in a timely manner or
that we will ultimately recognize as revenue the amounts reflected as backlog.

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


                                       45

<PAGE>

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

         We agreed to register for resale the shares of common stock issued to
investors and the shares of common stock issuable upon exercise of the investor
warrants and placement warrants. The registration obligations require, among
other things, that a registration statement be declared effective no later than
the 150th day following the closing date. If we are unable to meet this
obligation or unable to maintain the effectiveness of the registration in
accordance with the requirements contained in the registration rights agreement
we entered into with the investors, then we will be required to pay to each
investor liquidated damages equal to 1% of the amount paid by the investor for
the common shares still owned by the investor on the date of the default and 2%
of the amount paid by the investor for the common shares still owned by the
investor on each monthly anniversary of the date of the default that occurs
prior to the cure of the default. The maximum aggregate liquidated damages
payable to any investor will be equal to 10% of the aggregate amount paid by the
investor for the shares of our common stock. Accordingly, the maximum aggregate
penalty that we would be required to pay under this provision is 10% of the
$18,005,000 initial purchase price of the common stock, which would be
$1,801,000. Although we anticipate that we will be able to meet our registration
obligations, we also anticipate that we will have sufficient cash available to
pay these penalties if required.

         We used a portion of the proceeds from the January 2005 financing to
fund the acquisition of Pascall described above under the heading "Overview." In
connection with the Pascall acquisition, we loaned to XCEL Corporation Ltd.
approximately $10,100,000 in cash that was used to acquire Pascall and to repay
Pascall's existing intercompany debt. As described above, the Pascall purchase
price is subject to upward or downward adjustment and we have guaranteed
obligations of XCEL Corporation Ltd. in connection with the Pascall acquisition
and have agreed to indemnify Pascall's former parent in connection with
obligations under Pascall's facilities lease.

         The following table outlines payments due from us or our subsidiaries
under our lines of credit and other significant contractual obligations over the
next five years, exclusive of interest. All dollars are in thousands. The symbol
"P" represents the prime rate, the symbol "B" represents the lender's base rate
and the symbol "L" represents the 30-day LIBOR rate.


                                       46

<PAGE>

<TABLE>
                                                                           PAYMENTS DUE BY PERIOD
                                                                           ----------------------
                                                                               (IN THOUSANDS)
              CONTRACTUAL
             OBLIGATIONS AT                                                                                 THERE-
            DECEMBER 31, 2004                   2005         2006        2007        2008        2009       AFTER       TOTAL
  ---------------------------------------    ---------    ---------   ---------   ---------   ---------   ---------   ---------
<S>                                          <C>          <C>         <C>         <C>         <C>         <C>         <C>
  Line of Credit (Domestic) .............    $    118     $     --    $     --    $     --    $     --    $     --    $    118

     Average Interest Rate ..............       P+0.5%

  Line of Credit (U.K.) .................    $    188     $     --    $     --    $     --    $     --    $     --    $    188

     Average Interest Rate ..............        B+2%

  Overdraft (France) ....................    $    572     $     --    $     --    $     --    $     --    $     --    $    572

     Average Interest Rate ..............        3.74%

  Term Loan From Stockholders
     (Domestic) .........................    $    500     $    500    $    500    $    500    $    500    $   250     $  2,750

                                                P+1.5%,
     Average Interest Rate ..............       L+5.0%

  Capital Equipment Loan (U.S.)..........    $     13     $     13    $     13    $     13    $      6    $     --    $     58

     Average Interest Rate ..............         L+4%

  Term Loans (U.S.)                          $     44     $     44    $     38    $     --    $     --    $     --    $    126

     Average Interest Rate ..............         P+1.5%

  Term Loan (U.K.) ......................    $     46     $    669    $     --    $     --    $     --    $     --    $    715

     Average Interest Rate ..............         B+2%

  Term Loans (France) ....................    $     23     $     23    $     16    $     --    $     --    $     --    $     62

     Average Interest Rate ..............    1.2%-5.6%

  Term Loan (Japan) .....................    $     19     $     19    $     18    $     --    $     --    $     --    $     56

     Average Interest Rate ..............        3.25%

  Capitalized Lease
    Obligations .........................    $     66     $     60    $     12    $     12    $     12    $     17    $    179

  Operating Leases ......................    $  1,040     $    713    $    725    $    527    $    420    $    486    $  3,911
                                             ---------    ---------   ---------   ---------   ---------   ---------   ---------
                                             $  2,629     $  2,041    $  1,322    $  1,032    $    938    $    753    $  8,735
</TABLE>

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

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

EFFECTS OF INFLATION

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


                                       47

<PAGE>

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," an amendment of SFAS No. 87, 88 and 106, and a
revision of SFAS No. 132. The statement is effective for fiscal years and
interim periods ending after December 15, 2003. This statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans required
by SFAS No. 87, 88 and 106. The new rules require additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The adoption of
this statement did not have a material effect on our financial condition or
results of operations.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," which addresses the accounting for employee stock
options. SFAS No. 123R eliminates the ability to account for shared-based
compensation transactions using APB Opinion No. 25 and generally would require
instead that such transactions be accounted for using a fair value-based method.
SFAS No. 123R also requires that tax benefits associated with these share-based
payments be classified as financing activities in the statement of cash flow
rather than operating activities as currently permitted. SFAS No. 123R becomes
effective for interim or annual periods beginning after June 15, 2005.
Accordingly, we are required to apply SFAS No. 123R beginning in the quarter
ending September 30, 2005. SFAS No. 123R offers alternative methods of adopting
this final rule. At the present time, we have not yet determined which
alternative method we will use.

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

RISK FACTORS

      OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT
OUR BUSINESS IF DEMAND IS REDUCED.

         During 2004, the sale of electronic components accounted for 51.1% of
our total net sales, and the sale of communications equipment and related
services accounted for 48.9% of our total net sales. In many cases we have
long-term contracts with our electronic components and communications equipment
customers that cover the general terms and conditions of our relationships with
them but that do not include long-term purchase orders or commitments. Rather,
our customers issue purchase orders requesting the quantities of communications
equipment they desire to purchase from us, and if we are able and willing to
fill those orders, then we fill them under the terms of the contracts.
Accordingly, we cannot rely on long-term purchase orders or commitments to
protect us from the negative financial effects of a reduced demand for our
products that could result from a general economic downturn, from changes in the
electronic components and communications equipment industries, including the
entry of new competitors into the market, from the introduction by others of new
or improved technology, from an unanticipated shift in the needs of our
customers, or from other causes.

      RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND REGULATIONS
      WILL INCREASE OUR COSTS.

         The Sarbanes-Oxley Act of 2002 has required changes in some of our
corporate governance, securities disclosure and compliance practices. As part of
the Act's requirements, the Securities and Exchange Commission has promulgated
new rules on a variety of subjects, in addition to other rule proposals. These
developments have increased and will continue to increase our accounting and
legal compliance costs, and could also expose us to additional liability. In
addition, these developments may make retention and recruitment of qualified
persons to serve on our board of directors or executive management more
difficult. We continue to evaluate and monitor regulatory and legislative
developments and cannot reliably estimate the timing or magnitude of all costs
we may incur as a result of the Act or other related legislation or regulation.

                                       48

<PAGE>

      MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO
      COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN
      ANTICIPATING AND RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC
      COMPONENTS AND COMMUNICATIONS EQUIPMENT INDUSTRIES.

         Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
electronic components and communications equipment markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could reduce our
competitiveness, revenues, profit margins or market share.

      WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
      ADVERSELY AFFECT OUR BUSINESS.

         Our success is highly dependent upon the continued services of key
members of our management, including Carmine T. Oliva, our Chairman of the
Board, President and Chief Executive Officer, Graham Jefferies, our Executive
Vice President and Chief Operating Officer, and Randolph Foote, our Senior Vice
President, Chief Financial Officer and Secretary. Mr. Oliva co-founded XET
Corporation and has developed personal contacts and other skills that we rely
upon in connection with our financing, acquisition and general business
strategies. Mr. Jefferies is a long-time employee of Emrise who we have relied
upon in connection with our United Kingdom acquisitions and who fulfills
significant operational responsibilities in connection with our foreign and
domestic operations. We rely upon Mr. Foote's skills in financial reporting,
accounting and tax matters in addition to his skills in the analysis of
potential acquisitions and general corporate administration. Consequently, the
loss of Mr. Oliva, Mr. Jefferies, Mr. Foote or one or more other key members of
management could adversely affect us. Although we have entered into employment
agreements with each of our executive officers, those agreements are of limited
duration and are subject to early termination by the officers under some
circumstances. We maintain key-man life insurance on Mr. Oliva and Mr.
Jefferies. However, we cannot assure you that we will be able to maintain this
insurance in effect or that the coverage will be sufficient to compensate us for
the loss of the services of Mr. Oliva or Mr. Jefferies.

      IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS,
      OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.

         Our business strategy includes growth through acquisitions that we
believe will improve our competitive capabilities or provide additional market
penetration or business opportunities in areas that are consistent with our
business plan. Identifying and pursuing strategic acquisitions and integrating
acquired products and businesses requires a significant amount of management
time and skill. Acquisitions may also require us to expend a substantial amount
of cash or other resources, not only as a result of the direct expenses involved
in the acquisition transaction, but also as a result of ongoing research and
development activities that may be required to maintain or enhance the long-term
competitiveness of acquired products, particularly those products marketed to
the rapidly evolving telecommunications industry. If we are unable to make
strategic acquisitions due to our inability to identify appropriate targets, or
to manage the difficulties or costs involved in the acquisitions, alliances or
arrangements, our long-term competitive positioning may suffer.


                                       49

<PAGE>

      IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING
      US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS
      OF OPERATIONS WILL SUFFER.

         As of December 31, 2004, we had $7,720,000 in backlog orders for our
products. Backlog orders represent revenue that we anticipate recognizing in the
future, as evidenced by purchase orders and other purchase commitments received
from customers, but on which work has not yet been initiated or with respect to
which work is currently in progress. Our backlog orders are due in large part to
the long lead-times associated with our electronic components products, which
products generally are custom built to order. We cannot assure you that we will
be successful in fulfilling orders and commitments in a timely manner or that we
will ultimately recognize as revenue the amounts reflected as backlog. Factors
that could affect our ability to fulfill backlog orders include difficulty we
may experience in obtaining components from suppliers, whether due to
obsolescence, production difficulties on the part of suppliers or other causes,
or customer-induced delays and product holds. Our anticipated results of
operations will suffer to the extent we are unable to fulfill backlog orders
within the timeframes we establish, particularly if delays in fulfilling backlog
orders cause our customers to reduce or cancel their orders.

      IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY
      STANDARDS AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our communications equipment products must
comply with various regulations defined by the United States Federal
Communications Commission, or FCC, and Underwriters Laboratories as well as
industry standards established by Telcordia Technologies, Inc., formerly
Bellcore, and the American National Standards Institute. Internationally, our
communications equipment products must comply with standards established by the
European Committee for Electrotechnical Standardization, the European Committee
for Standardization, the European Telecommunications Standards Institute,
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunications Union. The failure of
our products to comply, or delays in compliance, with the various existing and
evolving standards could negatively affect our ability to sell our products.

      OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR
PRODUCTS FROM OUTSIDE SUPPLIERS.

         The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications equipment products have been in short supply and are
frequently on allocation by semiconductor manufacturers. We have, from time to
time, experienced difficulty in obtaining some components. We do not have
guaranteed supply arrangements with any of our suppliers, and there can be no
assurance that our suppliers will continue to meet our requirements. Further,
disruption in transportation services as a result of enhanced security measures
in response to terrorism threats or attacks may cause some increases in costs
and timing for both our receipt of components and shipment of products to our
customers. If our existing suppliers are unable to meet our requirements, we
could be required to alter product designs to use alternative components or, if
alterations are not feasible, we could be required to eliminate products from
our product line.

         Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could adversely
affect our results of operations because our products compete on price and,
therefore, we may not be able to adjust product pricing to reflect the increases


                                       50

<PAGE>

in component costs. Also, an extended interruption in the supply of components
or a reduction in their quality or reliability would adversely affect our
financial condition and results of operations by impairing our ability to timely
deliver quality products to our customers. Delays in deliveries due to shortages
of components or other factors may result in cancellation by our customers of
all or part of their orders. Although customers who purchase from us products,
such as many of our digital switches and all of our custom power supplies, that
are not readily available from other sources would be less likely than other
customers of ours to cancel their orders due to production delays, we cannot
assure you that cancellations would not occur.

      FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE
      RELEVANT FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES
      DOLLARS FOR INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A
      RESULT, EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT OUR REPORTED
      RESULTS OF OPERATIONS.

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could affect our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. Sales of
our products and services to customers located outside of the United States
accounted for approximately 57.3% of our net sales for 2004. However, because
historically the majority of our currency exposure has related to financial
statement translation rather than to particular transactions, we do not intend
to enter into, nor have we historically entered into, forward currency contracts
or hedging arrangements in an effort to mitigate our currency exposure.

      BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
      MISAPPROPRIATION OF THESE RIGHTS COULD ADVERSELY AFFECT OUR FINANCIAL
      CONDITION.

         Our future success will be highly dependent on proprietary technology,
particularly in our communications equipment business. However, we do not hold
any patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology. Our financial condition would be adversely affected if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.

      OUR COMMON STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN
      SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND
      IN LITIGATION AGAINST US.

         The market prices of securities of technology-based companies currently
are highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during 2004, the high and low closing sale
prices of a share of our common stock were $1.68 and $0.52, respectively.
Between January 1, 2005 and March 22, 2005, the high and low closing sale prices
of a share of our common stock were $1.83 and $1.46, respectively. The market
price of our common stock may continue to fluctuate in response to the following
factors, many of which are beyond our control:


                                       51

<PAGE>

         o        changes in market valuations of similar companies and stock
                  market price and volume fluctuations generally;

         o        economic conditions specific to the electronic components or
                  communications equipment industries;

         o        announcements by us or our competitors of new or enhanced
                  products, technologies or services or significant contracts,
                  acquisitions, strategic relationships, joint ventures or
                  capital commitments;

         o        delays in our introduction of new products or technological
                  innovations or problems in the functioning of these new
                  products or innovations;

         o        third parties' infringement of our intellectual property
                  rights;

         o        changes in our pricing policies or the pricing policies of our
                  competitors;

         o        foreign currency translations gains or losses;

         o        regulatory developments;

         o        fluctuations in our quarterly or annual operating results;

         o        additions or departures of key personnel; and

         o        future sales of our common stock or other securities.

         The price at which you purchase shares of common stock may not be
indicative of the price of our stock that will prevail in the trading market.
You may be unable to sell your shares of common stock at or above your purchase
price, which may result in substantial losses to you. Moreover, in the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources.

      THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE
PRICE OF OUR COMMON STOCK TO FLUCTUATE OR DECLINE.

         Our quarterly operating results have varied significantly in the past
and will likely continue to do so in the future due to a variety of factors,
many of which are beyond our control. Fluctuations in our operating results may
result from a variety of factors. Our operating results from our communications
segment tend to be less stable and predictable than our operating results from
our electronic components segment.

         For example, the general decline in telecommunications market activity
and other changes affecting the telecommunications industry, including
consolidations and restructuring of United States and foreign telephone
companies, cause our sales to decrease or increase. Our sales may increase if we
obtain new customers as a result of the consolidations or restructurings.
However, our sales may decrease, either temporarily or permanently to the extent
our customers are acquired by or combined with companies that are and choose to
remain customers of our competitors.


                                       52

<PAGE>

         In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of Regional Bell Operating Companies, or RBOCs, has had
and will continue to have for the foreseeable future an effect on our quarterly
operating results. RBOCs generally obtain approval for their annual budgets
during the first quarter of each calendar year. If an RBOC's annual budget is
not approved early in the calendar year or is insufficient to cover its desired
purchases for the entire calendar year, we are unable to sell products to the
RBOC during the period of the delay or shortfall.

         Quarter to quarter fluctuations may also result from the uneven pace of
technological innovation, the development of products responding to these
technological innovations by us and our competitors, our customers' acceptance
of these products and innovations, the varied degree of price, product and
technological competition and our customers' and competitors' responses to these
changes.

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

      FUTURE SALES OF SHARES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD CAUSE
      OUR STOCK PRICE TO DECLINE.

         We cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of common stock for sale will
have on the market price prevailing from time to time. As of March 22, 2005, we
had outstanding 37,384,708 shares of common stock. An aggregate of 13,782,092 of
these shares were included for resale under a pending registration statement. As
of March 22, 2005, we also had outstanding options and warrants to purchase up
to 6,715,683 shares of common stock. Of these, 4,606,685 shares of common stock
underlying warrants were included for resale under the pending registration
statement and 1,458,998 shares underlying options were covered on existing
registration statements. Sales of shares of our common stock in the public
market after this registration statement is declared effective, or the
perception that those sales may occur, could cause the trading price of our
common stock to decrease or to be lower than it might be in the absence of those
shares or perceptions.

      BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING
      ACTIVITY IN OUR COMMON STOCK MAY BE REDUCED.

         Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 per share that trade on
the OTC Bulletin Board or the Pink Sheets. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell these securities to persons other than established
customers and "accredited investors" must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These requirements may have
the effect of reducing the level of trading activity in a penny stock, such as
our common stock, and investors in our common stock may find it difficult to
sell their shares.


                                       53

<PAGE>

      BECAUSE OUR COMMON STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE,
      YOU MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR
      COMMON STOCK.

         Our common stock trades under the symbol "EMRI" on the OTC Bulletin
Board. Because our common stock trades on the OTC Bulletin Board rather than on
a national securities exchange, you may find it difficult to either dispose of,
or to obtain quotations as to the price of, our common stock.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Exchange Rate Sensitivity
         -------------------------

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar affects our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure. For further information regarding our exchange rate sensitivity, see
Item 7 of this report under the heading "Critical Accounting Policies - Foreign
Currency Translation."

         Interest Rate Sensitivity
         -------------------------

         A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates.


                                       54

<PAGE>

         The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "P" represents the prime
rate, the symbol "B" represents the lender's base rate and the symbol "L"
represents the 30-day LIBOR rate. Balances are as of December 31, 2004.

<TABLE>
                                                                                                                             FAIR
                                                                                                       THERE-                VALUE
           LIABILITIES                2005         2006         2007         2008         2009         AFTER       TOTAL    12/31/04
           -----------                ----         ----         ----         ----         ----         -----       -----    --------
<S>                               <C>           <C>          <C>          <C>          <C>          <C>            <C>        <C>
  Line of Credit (Domestic)....   $     118     $      --    $      --    $      --    $      --    $      --      $ 118      $  118

    Average Interest Rate .....     P+ 0.5%

  Line of Credit (U.K.) .......   $     188     $      --    $      --    $      --    $      --    $      --      $ 188      $  188

    Average Interest Rate .....      B+2.0%

  Overdraft (France) ..........   $     572     $     562    $      --    $      --    $      --    $      --      $ 537      $  537

    Average Interest Rate .....       3.74%

  Term Loan From Stockholders
      (Domestic) ..............   $     500     $     500    $     500    $     500    $     500    $     250     $2,750      $2,750

    Average Interest Rate .....     P+1.52%,
                                     L+5.0%

  Term Loan (U.K.) ............   $      46     $     669    $      --    $      --    $      --    $      --      $ 715      $  715

    Average Interest Rate .....      B+2.0%

  Term Loans (France)..........   $      23     $      23    $      16    $      --    $      --    $      --      $  62      $   62

    Average Interest Rate .....    5.2%-5.6%

  Term Loan (Japan) ...........   $      19     $      19    $      18    $      --    $      --    $      --      $  56      $   56

    Average Interest Rate .....        3.25%

Capital Equipment Loan (U.S.)..   $     13      $     13     $     13     $     13     $      6     $     --       $  58      $   58

     Average Interest Rate ....         L+4%

  Term Loans (U.S.)               $     44      $     44     $     38     $     --     $     --     $     --       $ 126      $  126

     Average Interest Rate ....       P+1.5%

</TABLE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Reference is made to the financial statements included in this report,
which begin at page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

ITEM 9A. CONTROLS AND PROCEDURES.

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

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

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

         We considered these matters in connection with the preparation of the
December 31, 2004 consolidated financial statements included in this Form 10-K
and also determined that no prior period financial statements were materially
affected by such matters. In response to the observations made by Grant Thornton
LLP, we intend to implement during 2005 enhancements to our financial reporting
processes, including increased training of staff on Securities and Exchange
Commission financial reporting requirements and the acquisition of accounting
research tools. In addition, we recognize that the risk of an unauthorized
disbursement exists without proper segregation of duties between check-writing
and record keeping. However, every month we review the listing of checks
produced and research any check number that is missing or questionable. We
believe this type of detective control would identify unauthorized
disbursements. However, to improve the design effectiveness of our cash
disbursements cycle, we are evaluating how to better segregate these
incompatible duties. We believe these steps will address the matters raised by
Grant Thornton LLP.

         Our Chief Executive Officer and Acting Chief Financial Officer (our
principal executive officer and principal financial officer, respectively) have
concluded that the design and operation of our "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act")) were not effective as of December 31, 2004
with respect to the material weaknesses identified in the areas of financial
statement disclosures and segregation of duties in the cash disbursements cycle
as discussed above.

         During the quarter ended December 31, 2004, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

         None.


                                       55

<PAGE>

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

         The names, ages and positions held by our directors and executive
officers as of March 22, 2005 are as follows:

<TABLE>
NAME                                        AGE                             POSITIONS HELD
----                                        ---                             --------------
<S>                                          <C>     <C>
Carmine T. Oliva.......................      62      Chairman of the Board, President, Chief Executive Officer
                                                     and Director

Graham Jefferies.......................      47      Executive Vice President, Chief Operating Officer and
                                                     Managing Director of various subsidiaries

Randolph D. Foote......................      56      Senior Vice President, Chief Financial Officer and Secretary

Robert B. Runyon (1)(2)................      79      Director

Laurence P. Finnegan, Jr. (1)(3).......      67      Director

Otis W. Baskin (3).....................      59      Director
</TABLE>

-----------
(1) Member of the compensation committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.

         CARMINE T. OLIVA has been Chairman of the Board, President and Chief
Executive Officer and a Class III director of Emrise since March 26, 1997 and of
our subsidiary, XET Corporation, since he founded XET Corporation in 1983. Mr.
Oliva has been Chairman of the Board of XCEL Corporation, Ltd. since 1985, and
Chairman and Chief Executive Officer of CXR Larus since March 1997. In 2002, Mr.
Oliva obtained a French government working permit and assumed responsibility as
President of our CXR-AJ subsidiary. From January 1999 to January 2000, Mr. Oliva
served as a director of Digital Transmission Systems Inc. (DTSX), a publicly
held company based in Norcross, Georgia. From 1980 to 1983, Mr. Oliva was Senior
Vice President and General Manager, ITT Asia Pacific Inc. Prior to holding that
position, Mr. Oliva held a number of executive positions with ITT Corporation
and its subsidiaries over an eleven-year period. Mr. Oliva attained the rank of
Captain in the United States Army and is a veteran of the Vietnam War. Mr. Oliva
earned a B.A. degree in Social Studies/Business from Seton Hall University and
an M.B.A. degree in Business from The Ohio State University.

         GRAHAM JEFFERIES was appointed as Executive Vice President on October
21, 1999. Mr. Jefferies was also appointed as our Chief Operating Officer on
January 3, 2005, after having served as Chief Operating Officer of our
Telecommunications Group since October 21, 1999. Mr. Jefferies served as
Executive Vice President of Emrise from April 1999 through October 1999. Mr.
Jefferies has served CXR-AJ as a director since March 1997 and as General
Manager since July 2002, has served as Managing Director of Belix Power
Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since our
acquisition of those companies in April 2000, as Managing Director of XCEL Power
Systems, Ltd. since September 1996 and as Managing Director of XCEL Corporation,
Ltd. since March 1992. Prior to joining us in 1992, he was Sales and Marketing
Director of Jasmin Electronics PLC, a major United Kingdom software and systems
provider, from 1987 to 1992. Mr. Jefferies held a variety of project management
positions at GEC Marconi from 1978 to 1987. Mr. Jefferies earned a B.S. degree
in Engineering from Leicester University, and has experience in mergers and
acquisitions. Mr. Jefferies is a citizen and resident of the United Kingdom.


                                       56

<PAGE>

         RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief
Financial Officer on October 4, 1999 and as our Assistant Secretary on February
12, 2001. Mr. Foote has been our Secretary since September 2004 and the Vice
President and Chief Financial Officer of CXR Larus and XET Corporation since
March 2000. Mr. Foote was the Corporate Controller of Unit Instruments, Inc., a
publicly traded semiconductor equipment manufacturer, from October 1995 to May
1999. From March 1985 to October 1995, Mr. Foote was the Director of Tax and
Financial Reporting at Optical Radiation Corporation, a publicly traded company
that designed and manufactured products using advanced optical technology. Prior
to 1985, Mr. Foote held positions with Western Gear Corporation and Bucyrus Erie
Company, which were both publicly traded companies. Mr. Foote earned a B.S.
degree in Business Management from California State Polytechnic University,
Pomona and an M.B.A. degree in Tax/Business from Golden Gate University.

         ROBERT B. RUNYON has served as a Class III director since March 26,
1997 and also served as our Secretary from that date through August 2004. He has
been the owner and principal of Runyon and Associates, a human resources and
business advisory firm, since 1987. He has acted as Senior Vice President of Sub
Hydro Dynamics Inc., a privately held marine services company based in Hilton
Head, South Carolina, since September 1995. Prior to our merger with XET
Corporation, Mr. Runyon served XET Corporation both as a director since August
1983 and as a consultant in the areas of strategy development and business
planning, organization, human resources and administrative systems. He also
consults for companies in environmental products, marine propulsion systems and
architectural services sectors in these same areas. From 1970 to 1978, Mr.
Runyon held various executive positions with ITT Corporation, including Vice
President, Administration of ITT Grinnell, a manufacturing subsidiary of ITT.
From 1963 to 1970, Mr. Runyon held executive positions at BP Oil including Vice
President, Corporate Planning and Administration of BP Oil Corporation, and
Director, Organization and Personnel for its predecessor, Sinclair Oil
Corporation. Mr. Runyon was Executive Vice President, Human Resources at the
Great Atlantic & Pacific Tea Company from 1978 to 1980. Mr. Runyon earned a B.S.
degree in Economics/Industrial Management from University of Pennsylvania.

         LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of XET Corporation from 1985 to March
1997, Mr. Finnegan was XET Corporation's Chief Financial Officer from 1994 to
1997. Mr. Finnegan has held positions with ITT (1970-1974) as controller of
several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief
Financial Officer, Executive Vice President 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.
Since December 1996, Mr. Finnegan has been a director and the President of GA
Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. From
September 1997 to January 2001, Mr. Finnegan served as Vice President Finance
and Chief Financial Officer of QuestOne Decision Sciences, an efficiency
consulting firm based in Pennsylvania. Since August 2001, Mr. Finnegan has
served as a director and the Vice President and Chief Financial Officer of
VerdaSee Solutions, Inc., a consulting and software company based in
Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's
University.

         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 and also served as dean from 1995 to 2001. He has been a member of the
full-time faculty of the University of Houston - Clear Lake (1975-87) where he
served as Coordinator of the Management Faculty and Director of the Center for
Advanced Management Programs. He has also been Professor of Management at
Arizona State University, West Campus (1987-91) and The University of Memphis


                                       57

<PAGE>

(1991-95), in addition to serving as dean at both universities. Dr. Baskin
worked with AACSB International (Association for the Advancement of Collegiate
Schools of Business) as Special Advisor to the President and as Chief Executive
Officer from July 2002 to June 2004. He is an Associate with the Family Business
Consulting Group, where he advises family owned and closely held businesses. He
has served as an advisor to Exxon/Mobile Research and Engineering Corporation,
NASA and the United States Air Force. He earned a Ph.D. in Management, Public
Relations and Communication Theory from The University of Texas at Austin, an
M.A. degree in Speech Communication by the University of Houston, and a B.A.
degree in Religion from Oklahoma Christian University.

         Our business, property and affairs are managed under the direction of
our board. Directors are kept informed of our business through discussions with
our executive officers, by reviewing materials provided to them and by
participating in meetings of our board and its committees.

         Our bylaws provide that our board of directors shall consist of at
least 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 directors
is three years, with one class expiring each year at our annual meeting of
stockholders. We currently have four directors on our board, with no vacancies.
Our current board consists of one Class I director whose term expires at our
2006 annual meeting, one Class II director whose term expires at our 2007 annual
meeting, and two Class III directors whose term expires at our 2005 annual
meeting.

         Our officers are appointed by and serve at the discretion of our board
of directors. There are no family relationships among our executive officers and
directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission ("Commission"). These officers, directors and
stockholders are required by the Commission regulations to furnish us with
copies of all reports that they file.

         Based solely upon a review of copies of the reports furnished to us
during the year ended December 31, 2004 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during 2004, all Section 16(a) filing
requirements applicable to our reporting persons were met, except that Otis
Baskin filed a late Form 3 to report his becoming a reporting person.

CODE OF ETHICS

         Our board of directors has adopted a Code of Business Conduct and
Ethics that applies to all of our directors, officers and employees and an
additional Code of Business Ethics that applies to our Chief Executive Officer
and senior financial officers. We filed copies of these codes as exhibits to our
annual report on Form 10-K for the year ended December 31, 2003.

         We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K relating to amendments to or waivers from provision of these codes that
relate to one or more of the items set forth in Item 406(b) of Regulation S-K,
by describing on our Internet website, located at http://www.emrise.com, within
four business days following the date of 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 the waiver was granted.


                                       58

<PAGE>

         Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Commission.

ITEM 11.   EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

         The following table provides information concerning the annual and
long-term compensation for the years ended December 31, 2004, 2003 and 2002
earned for services in all capacities as an employee by our Chief Executive
Officer and each of our other executive officers who received an annual salary
and bonus of more than $100,000 for services rendered to us during 2004
(collectively, the "named executive officers"):

<TABLE>
                                                   SUMMARY COMPENSATION TABLE
                                                                                        LONG-TERM
                                                                                    COMPENSATION AWARD
                                                            ANNUAL COMPENSATION     ------------------
                                                           ----------------------       SECURITIES         ALL OTHER
       NAME AND PRINCIPAL POSITION               YEAR        SALARY       BONUS     UNDERLYING OPTIONS    COMPENSATION
       ---------------------------               ----        ------       -----     ------------------    ------------
<S>                                              <C>        <C>           <C>               <C>            <C>
Carmine T. Oliva ...........................     2004       $309,000      $94,000           26,000         $ 4,821(1)
  President and Chief Executive Officer          2003       $271,510      $70,000           53,000         $ 4,821(1)
                                                 2002       $257,010           --               --         $ 4,821(1)

Graham Jefferies ...........................     2004       $237,017      $71,000           40,000         $10,924(3)
  Executive Vice President and Chief             2003       $210,295      $55,000           54,000         $10,320(3)
  Operating Officer (2)                          2002       $156,923           --               --         $ 9,000(3)

Randolph D. Foote...........................     2004       $173,867      $40,000           25,000         $ 1,965(4)
  Senior Vice President, Chief Financial         2003       $157,230      $30,000           35,000         $ 1,886(4)
  Officer and Assistant Secretary(4)             2002       $151,368           --               --         $ 1,604(4)
</TABLE>
---------------
(1)  Represents the dollar value of insurance premiums we paid with respect to a
     $1,000,000 term life insurance policy for the benefit of Mr. Oliva's
     spouse.
(2)  Mr. Jefferies is based in the United Kingdom and receives his remuneration
     in British pounds sterling. The compensation amounts listed for Mr.
     Jefferies are shown in United States dollars, converted from British pounds
     sterling using the average conversion rates in effect during the time
     periods of compensation. Mr. Jefferies served as Chief Operating Officer of
     our Telecommunications Group until he was appointed Chief Operating Officer
     of Emrise in January 2005.
(3)  Represents company contributions to Mr. Jefferies' retirement account.
(4)  Represents company contributions to Mr. Foote's 401(k) retirement account.

                    RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS

         We match up to the lesser of $2,000 and 20% of Mr. Foote's
contributions to his 401(k) account. During 2004, our matching contribution
amounted to $1,965. This matching arrangement was generally made available to
all employees of Emrise and provides for the same method of allocation of
benefits between management and non-management participants.

         Also, XPS makes matching contributions of up to 6% of Mr. Jefferies'
salary to an executives' defined contribution plan. Other employees of XPS may
receive matching contributions to a defined contribution plan of up to 4% of
their salary. Amounts contributed to the defined contribution plans are intended
to used to purchase annuities upon retirement. During 2004, 2003 and 2002, Mr.
Jefferies received matching contributions of $10,924, $10,320 and $9,000,
respectively.


                                       59

<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides information regarding options granted in
the year ended December 31, 2004 to the executive officers named in the summary
compensation table. We did not grant any stock appreciation rights during 2004.
This information includes hypothetical potential gains from stock options
granted in 2004. These hypothetical gains are based entirely on assumed annual
growth rates of 5% and 10% in the value of our common stock price over the
ten-year life of the stock options granted in 2004. These assumed rates of
growth were selected by the Commission for illustrative purposes only and are
not intended to predict future stock prices, which will depend upon market
conditions and our future performance and prospects.

<TABLE>
                                                                                                       POTENTIAL
                                                                                                   REALIZABLE VALUE
                                                                                                   AT ASSUMED RATES
                                     NUMBER OF     PERCENTAGE OF                                    OF STOCK PRICE
                                     SECURITIES    TOTAL OPTIONS                                    APPRECIATION FOR
                                     UNDERLYING     GRANTED TO       EXERCISE                       OPTION TERM(3)
                           GRANT      OPTIONS      EMPLOYEES IN        PRICE      EXPIRATION   -----------------------
     NAMED OFFICER         DATE      GRANTED(1)    FISCAL YEAR(2)    PER SHARE       DATE           5%          10%
-----------------------  ---------  ------------  ----------------  -----------  ------------  -----------  ----------
<S>                       <C>          <C>              <C>            <C>          <C>          <C>         <C>
Carmine T. Oliva.......   2/24/04      26,000            8.3%          $1.00        2/24/14      $16,351     $41,437
Graham Jefferies.......   2/24/04      40,000           12.7%          $1.00        2/24/14      $25,156     $63,750
Randolph D. Foote......   2/24/04      25,000            7.9%          $1.00        2/24/14      $15,722     $39,844
</TABLE>

--------------------
(1) Options vest in two equal annual installments commencing February 24, 2005.
(2) Based on options to purchase 314,698 shares granted to our employees during
    2004.
(3) Calculated using the potential realizable value of each grant.

         AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
         OPTION VALUES

         The following table provides information regarding the value of
unexercised options held by the named executive officers as of December 31,
2004. None of the named executives officers acquired shares through the exercise
of options during 2004.

<TABLE>
                                                      NUMBER OF
                                                SECURITIES UNDERLYING                 VALUE ($) OF UNEXERCISED
                                               UNEXERCISED OPTIONS AT                 IN-THE-MONEY OPTIONS AT
                                                 DECEMBER 31, 2004                    DECEMBER 31, 2004 (1)
                                         ---------------------------------      ---------------------------------
            NAME                           EXERCISABLE      UNEXERCISABLE         EXERCISABLE      UNEXERCISABLE
-----------------------------------      ---------------   ---------------      ---------------   ---------------
<S>                                          <C>                <C>                 <C>                <C>
Carmine T. Oliva...................          283,663            26,000              179,360            16,120
Graham Jefferies...................          180,287            40,000              168,480            24,800
Randolph D. Foote..................           85,000            25,000              115,450            15,500
</TABLE>

-----------------
(1)  Based on the last reported sale price of our common stock of $1.62 on
     December 30, 2004 (the last trading day during 2004) as reported on the OTC
     Bulletin Board, less the exercise price of the options.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

     CARMINE T. OLIVA

         As of January 1, 2001, we entered into an employment agreement with
Carmine T. Oliva, our Chairman of the Board, President and Chief Executive
Officer. The agreement is subject to automatic renewal for two consecutive
two-year terms beginning on January 1, 2006, unless, during the required notice
periods (which run from September 1 to November 1 of the second year preceding
the year in which a two-year renewal period is to begin), either party gives
written notice of its desire not to renew. The agreement provides for an initial


                                       60

<PAGE>

base salary of $250,000 per year and states that Mr. Oliva is eligible to
receive merit or promotional increases and to participate in other benefit and
incentive programs we may offer. For 2004, Mr. Oliva's salary and car allowance
totaled $309,000, and his bonus was $94,000.

         If the board of directors makes a substantial addition to or reduction
of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Oliva
the value of three years of his annual salary or the value of his annual salary
that would have been due through January 1, 2006, whichever is greater.

         If we terminate Mr. Oliva for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Oliva without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. If the termination without cause occurs prior to
the expiration of the initial term of the agreement on December 31, 2005, Mr.
Oliva will be entitled to be paid his annual salary for three years following
the termination or until December 31, 2005, whichever is the longer period. If
the termination occurs during a renewal period, Mr. Oliva will be entitled to be
paid his annual salary through the expiration of the particular renewal period
or for two years, whichever is the longer period, and to be paid all other
amounts payable under the agreement.

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:

         o        if the termination occurs prior to the expiration of the
                  initial term of the agreement on December 31, 2005, Mr. Oliva
                  will be entitled to be paid his annual salary and all other
                  amounts payable under the agreement for three years following
                  the termination or until December 31, 2005, whichever is the
                  longer period, which amounts shall be payable at his election
                  in a lump sum within 30 days after the termination or in
                  installments;

         o        if the termination occurs during a renewal period, Mr. Oliva
                  will be entitled to be paid his annual salary through the
                  period ending two years after the expiration of the particular
                  renewal period, and to be paid all other amounts payable under
                  the agreement;

         o        Mr. Oliva will be entitled to receive the average of his
                  annual executive bonuses awarded to him in the three years
                  preceding his termination, over the same time span and under
                  the same conditions as his annual salary;

         o        Mr. Oliva will be entitled to receive any executive bonus
                  awarded but not yet paid;

         o        Mr. Oliva will be entitled to receive a gross up of all
                  compensatory payments listed above so that he receives those
                  payments substantially free of federal and state income taxes;
                  and

         o        Mr. Oliva will continue to receive coverage in all benefit
                  programs in which he was participating on the date of his
                  termination until the earlier of the end of the initial term
                  or renewal term in which the termination occurred and the date
                  he receives equivalent coverage and benefits under plans and
                  programs of a subsequent employer.


                                       61

<PAGE>

         If Mr. Oliva dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Oliva will continue to be
payable to Mr. Oliva's designee or legal representatives for two years following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability. However, we must continue to pay amounts payable under the
agreement to or for the benefit of Mr. Oliva for two years following the
effective date of the termination.

         If the agreement is terminated for any reason and unless otherwise
agreed to by Mr. Oliva and us, then in addition to any other severance payments
to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual
salary until:

         o        all obligations incurred by Mr. Oliva on our behalf, including
                  any lease obligations signed by Mr. Oliva related to the
                  performance of his duties under the agreement, have been
                  voided or fully assumed by us or our successor;

         o        all loan collateral pledged by Mr. Oliva has been returned to
                  Mr. Oliva; and

         o        all personal guarantees given by Mr. Oliva or his family on
                  our behalf are voided.

         The agreement provides that we will furnish a life insurance policy on
Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in
the event of his death during the term of the agreement and any renewals of the
agreement. This benefit is in return for, and is intended to protect Mr. Oliva's
estate from financial loss arising from any and all personal guarantees that Mr.
Oliva provided in favor of us, as required by various corporate lenders. This
benefit is also intended to enable Mr. Oliva's estate to exercise all warrants
and options to purchase shares of our common stock.

         The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for two
years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Oliva of our
confidential information and assign ownership to us of inventions created by Mr.
Oliva in connection with his employment.

     RANDOLPH D. FOOTE

         On July 2, 2001, we entered into an employment agreement with Randolph
D. Foote at an initial annual salary of $130,000 and with an initial term of
three years. For 2004, Mr. Foote's salary and car allowance totaled $174,000,
and his bonus was $40,000. The agreement automatically renewed for a one-year
term on July 2, 2004 and is scheduled to automatically renew for one additional
one-year term on July 2, 2005. Mr. Foote is to act as Senior Vice President and
Chief Financial Officer and is to perform additional services as may be approved
by our board of directors.

         If the board of directors makes a substantial addition to or reduction
of Mr. Foote's duties, Mr. Foote may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Foote
the value of one year of his annual salary within 30 days after the effective
date of the resignation.

         If we terminate Mr. Foote for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Foote without cause
(including by ceasing our operations due to bankruptcy or by our general


                                       62

<PAGE>

inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. Mr. Foote will be entitled to be paid his annual
salary through the expiration of the then current renewal period, and to be paid
all other amounts payable under the agreement.

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Foote is terminated
without cause within two years following a change of control, then:

         o        Mr. Foote will be entitled to be paid in installments or, at
                  his election in a lump sum within 30 days after termination,
                  his annual salary and other amounts payable under the
                  agreement through the expiration of the then current renewal
                  period plus one additional year;

         o        Mr. Foote will be entitled to receive the average of his
                  annual executive bonuses awarded to him in the three years
                  preceding his termination, over the same time span and under
                  the same conditions as his annual salary;

         o        Mr. Foote will be entitled to receive any executive bonus
                  awarded but not yet paid; and

         o        Mr. Foote will continue to receive coverage in all benefit
                  programs in which he was participating on the date of his
                  termination until the earlier of the end of the initial or
                  current renewal term and the date he receives equivalent
                  coverage and benefits under plans and programs of a subsequent
                  employer.

         If Mr. Foote dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Foote will continue to be
payable to Mr. Foote's designee or legal representatives for one year following
his death. If Mr. Foote is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Foote following the 180th
day of disability; provided, however, that we must continue to pay amounts
payable under the agreement to or for the benefit of Mr. Foote for one year
following the effective date of the termination.

         The agreement contains non-competition provisions that prohibit Mr.
Foote from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for one
year afterward. The agreement also contains provisions that restrict disclosure
by Mr. Foote of our confidential information and assign ownership to us of
inventions created by Mr. Foote in connection with his employment.

     GRAHAM JEFFERIES

         On July 2, 2001, we entered into an employment agreement with Graham
Jefferies at an initial annual salary of 100,000 British pounds sterling
(approximately $141,000 at the then current exchange rates) and with an initial
term of three years. For 2004, Mr. Jefferies' salary and car allowance totaled
approximately 130,000 British pounds sterling (approximately $237,000 at the
exchange rates applicable during 2004) and his bonus was 37,000 British pounds
sterling (approximately $71,000 at the exchange rate in effect at December 31,
2004). The agreement automatically renewed for a one-year term on July 2, 2004
and is scheduled to automatically renew for one additional one-year term on July
2, 2005. Mr. Jefferies is to act as Managing Director of XCEL Corporation, Ltd.
and as Executive Vice President and Chief Operating Officer of our Telecom Group
and is to perform additional services as may be approved by our board of
directors. He was appointed as Chief Operating Officer of Emrise in January
2005. This agreement replaced a substantially similar agreement that had been
effective since May 1, 1998.


                                       63

<PAGE>

         If the board of directors makes a substantial addition to or reduction
of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given
within 30 days of the change in duties. Within 30 days after the effective date
of a resignation under these circumstances, we will be obligated to pay to Mr.
Jefferies the value of one year of his annual salary within 30 days after the
effective date of the resignation.

         If we terminate Mr. Jefferies for cause, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of termination. If we terminate Mr. Jefferies
without cause (including by ceasing our operations due to bankruptcy or by our
general inability to meet our obligations as they become due), we must provide
him with 60 days' prior written notice. Mr. Jefferies will be entitled to be
paid his annual salary through the expiration of the then current renewal period
plus one additional year, and to be paid all other amounts payable under the
agreement.

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:

         o        Mr. Jefferies will be entitled to be paid in installments or,
                  at his election in a lump sum within 30 days after
                  termination, his annual salary and other amounts payable under
                  the agreement through the expiration of the current renewal
                  period plus one additional year;

         o        Mr. Jefferies will be entitled to receive the average of his
                  annual executive bonuses awarded to him in the three years
                  preceding his termination, over the same time span and under
                  the same conditions as his annual salary;

         o        Mr. Jefferies will be entitled to receive any executive bonus
                  awarded but not yet paid; and

         o        Mr. Jefferies will continue to receive coverage in all benefit
                  programs in which he was participating on the date of his
                  termination until the earlier of the end of the initial or
                  current renewal term and the date he receives equivalent
                  coverage and benefits under plans and programs of a subsequent
                  employer.

         If Mr. Jefferies dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Jefferies will continue to be
payable to Mr. Jefferies' designee or legal representatives for one year
following his death. If Mr. Jefferies is unable to substantially perform his
duties under the agreement for an aggregate of 180 days in any 18-month period,
we may terminate the agreement by ten days' prior written notice to Mr.
Jefferies following the 180th day of disability; provided, however, that we must
continue to pay amounts payable under the agreement to or for the benefit of Mr.
Jefferies for one year following the effective date of the termination.

         The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customers or employees during the initial term and any renewal terms and for
two years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Jefferies of our
confidential information and assign ownership to us of inventions created by Mr.
Jefferies in connection with his employment.

                                       64

<PAGE>

BOARD COMMITTEES

         Our board of directors currently has an audit committee, a compensation
committee and a nominating committee. Our board of directors has determined that
Robert Runyon, Otis Baskin and Laurence Finnegan, each of whom is a member of
one or more of these committees, are "independent" as defined in NASD
Marketplace Rule 4200(a)(15) and that Messrs. Finnegan and Baskin meet the other
criteria contained in NASD Marketplace Rule 4350 relating to audit committee
members.

         The audit committee selects our independent auditors, reviews the
results and scope of the audit and other services provided by our independent
auditors, and reviews our financial statements for each interim period and for
our year end. From June 26, 1999 to March 21, 2004, this committee consisted of
Laurence Finnegan. Since March 22, 2004, this committee has consisted of Mr.
Finnegan, who serves as chairman, and Otis Baskin. The audit committee operates
pursuant to a charter approved by our board of directors and audit committee.
Our board of directors has determined that Mr. Finnegan is an "audit committee
financial expert."

         The compensation committee is responsible for establishing and
administering our policies involving the compensation of all of our executive
officers and establishing and recommending to our board of directors the terms
and conditions of all employee and consultant compensation and benefit plans.
Our entire board of directors also may perform these functions with respect to
our employee stock option plans. Since June 26, 1999, this committee has
consisted of Messrs. Runyon and Finnegan. The compensation committee operates
pursuant to a charter approved by our board of directors and compensation
committee.

         The nominating committee selects nominees for the board of directors.
Beginning in and since 2000, the nominating committee has consisted of Mr.
Runyon. There is one vacancy on the nominating committee. The nominating
committee utilizes a variety of methods for identifying and evaluating nominees
for director, including candidates that may be referred by stockholders.
Stockholders that desire to recommend candidates for the board for evaluation
may do so by contacting Emrise in writing, identifying the potential candidate
and providing background information. Candidates may also come to the attention
of the nominating committee through current board members, professional search
firms and other persons. The nominating committee operates pursuant to a charter
approved by our board of directors and Nominating Committee.

COMPENSATION OF DIRECTORS

         During 2004, each non-employee director was entitled to receive $1,000
per month as compensation for his services. In addition, since November 1, 2002,
each board member chairing a standing committee has been entitled to receive
$500 per month as compensation for his services. We reimburse all directors for
out-of-pocket expenses incurred in connection with attendance at board and
committee meetings. We may periodically award options or warrants to our
directors under our existing option and incentive plans. On February 24, 2004,
we granted to each of Messrs. Runyon and Finnegan an option to purchase up to
30,000 shares of our common stock at an exercise price of $1.00 per share. The
options vest in two equal installments on February 24, 2005 and February 24,
2006. In addition, we granted to Mr. Baskin, our newly-appointed non-employee
director, an option to purchase up to 50,000 shares of our common stock upon the
same terms as the options granted to the other two non-employee directors.


                                       65

<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity. During 2004, Mr. Oliva made salary recommendations to our
compensation committee regarding salary increases for key executives.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

BENEFICIAL OWNERSHIP TABLE

         The following table sets forth information with respect to the
beneficial ownership of our common stock as of March 22, 2005, the date of the
table, by:

         o        each person known by us to beneficially own more than 5% of
                  the outstanding shares of our common stock;

         o        each of our directors;

         o        each of the executive officers named in the summary
                  compensation table contained in the "Management" section of
                  this report; and

         o        all of our directors and executive officers as a group.

         Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table below
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Except as indicated in the discussion of
contractual beneficial ownership limitations below and except as indicated in
the footnotes to the principal stockholders table below, shares of common stock
underlying derivative securities, if any, that currently are exercisable or
convertible or are scheduled to become exercisable or convertible for or into
shares of common stock within 60 days after the date of the table are deemed to
be outstanding in calculating the percentage ownership of each listed person or
group but are not deemed to be outstanding as to any other person or group.
Percentage of beneficial ownership is based on 37,384,708 shares of common stock
outstanding as of the date of the table.

         The investor warrants beneficially owned by The Pinnacle Fund, L.P.,
JLF Asset Management, LLC, Jefrrey L. Feinberg and JLF Offshore Fund, Ltd.
contain provisions limiting the exercise of the warrants to the extent necessary
to insure that following the exercise, the total number of shares of common
stock then beneficially owned by the warrant holder and its affiliates and
others whose beneficial ownership would be aggregated with the holder's for
purposes of Section 13(d) of the Exchange Act does not exceed 9.999% of the
total number of then issued and outstanding shares of our common stock
(including for such purpose the shares of common stock issuable upon such
exercise or call). The 9.999% beneficial ownership limitation may not be waived.
However, the beneficial ownership limitation does not preclude a holder from
exercising a warrant and selling the shares underlying the warrant in stages
over time where each stage does not cause the holder and its affiliates to
beneficially own shares in excess of the limitation amount. As a result of the
beneficial ownership limitations, the numbers of shares shown in the table as
beneficially owned by certain of the named beneficial owners may have been
reduced as described in the footnotes to the table.


                                       66

<PAGE>

         The address of each of the following stockholders, unless otherwise
indicated in the footnotes to the table, is c/o Emrise Corporation, 9485 Haven
Avenue, Suite 100, Rancho Cucamonga, California 91730. Messrs. Oliva, Runyon,
Finnegan and Baskin are directors of Emrise. Messrs. Oliva, Jefferies and Foote
are executive officers of Emrise.

<TABLE>
                                                                                AMOUNT AND NATURE           PERCENT
NAME OF BENEFICIAL OWNER                                   TITLE OF CLASS     OF BENEFICIAL OWNERSHIP       OF CLASS
------------------------------------------------------   -----------------   -------------------------   -------------
<S>                                                            <C>                   <C>                      <C>
Carmine T. Oliva......................................         Common                1,320,305(1)             3.52%
Robert B. Runyon......................................         Common                  346,146(2)                *
Laurence P. Finnegan, Jr..............................         Common                  210,171(2)                *
Otis W. Baskin........................................         Common                   25,000(3)                *
Graham T. Jefferies...................................         Common                  167,276(4)                *
Randolph D. Foote.....................................         Common                  102,500(5)                *
The Pinnacle Fund, L.P................................         Common                3,125,000(6)             8.22%
JLF Asset Management, LLC and Jeffrey L. Feinberg.....         Common                3,779,136(7)             9.999%
JLF Offshore Fund, Ltd................................         Common                2,120,409(8)             5.62%
Marathon Capital Management, LLC                               Common                2,057,100(9)             5.50%
All executive officers and directors as a group
  (6 persons).........................................         Common                2,171,398(10)            5.69%
</TABLE>

-------------------
*     Less than 1.00%
(1)   Includes 81,889 shares held individually by Mr. Oliva's spouse, and
      166,000 shares underlying options.
(2)   Includes 166,000 shares underlying options.
(3)   Represents shares underlying options.
(4)   Includes 164,000 shares underlying options.
(5)   Includes 97,500 shares underlying options.
(6)   Includes 625,000 shares underlying a warrant. Power to vote or dispose of
      the shares is held by Barry M. Kitt, as sole member of Pinnacle Fund
      Management, LLC, which entity is the general partner of Pinnacle Advisers,
      L.P., which entity is the general partner of The Pinnacle Fund, L.P. The
      address for Mr. Kitt is c/o The Pinnacle Fund, L.P., 4965 Preston Park,
      Blvd., Suite 240, Plano, TX 75093.
(7)   Includes an aggregate of 3,368,700 outstanding shares held by JLF Offshore
      Fund, Ltd., JLF Partners I, L.P., Guggenheim Portfolio Company XXVIII, and
      JLF Partners II, L.P., and an aggregate of 410,436 shares underlying
      warrants held by those four entities. Due to a contractual 9.999%
      beneficial ownership limitation that cannot be waived, excludes 289,564
      shares underlying warrants held by those four entities. If the beneficial
      ownership limitation were disregarded, JLF Asset Management, LLC and Mr.
      Feinberg would have beneficially owned 10.68% of the shares of our common
      stock outstanding as of the date of the table. Power to vote or dispose of
      the shares is held by Jeffrey L. Feinberg, as managing member of JLF Asset
      Management, LLC, which entity is investment manager of the four entities
      named in the preceding sentence. The address for Mr. Feinberg is c/o JLF
      Asset Management, LLC, 2775 Via de la Valle, Suite 204, Del Mar, CA 92014.
(8)   Includes 364,750 shares underlying a warrant. Power to vote or dispose of
      the shares is held by Jeffrey L. Feinberg, as managing member of JLF Asset
      Management, LLC, which entity is investment manager of JLF Offshore Fund,
      Ltd. See footnote (7) above for information regarding JLF Asset
      Management, LLC.
(9)   Based on information included by Marathon Capital Management, LLC
      ("Marathon") in a Schedule 13G for January 13, 2005. Marathon reported
      that it holds sole voting power over 125,000 shares and sole disposal
      power over 2,057,100 shares. The Schedule 13G was executed by James G.
      Kennedy, as President of Marathon. The address for Marathon is P.O. Box
      771, Hunt Valley, MD 21030.
(10)  Includes 784,500 shares underlying options and 81,889 outstanding shares
      held individually by Mr. Oliva's wife.


                                       67

<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

         The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2004.

<TABLE>
                                                                                              NUMBER OF SECURITIES
                                                                                             REMAINING AVAILABLE FOR
                                                                                              FUTURE ISSUANCE UNDER
                                       NUMBER OF SECURITIES TO       WEIGHTED-AVERAGE          EQUITY COMPENSATION
                                       BE ISSUED UPON EXERCISE       EXERCISE PRICE OF          PLANS (EXCLUDING
                                       OF OUTSTANDING OPTIONS,     OUTSTANDING OPTIONS,      SECURITIES REFLECTED IN
PLAN CATEGORY                            WARRANTS AND RIGHTS        WARRANTS AND RIGHTS            COLUMN (a))
------------------------------------   -----------------------   ------------------------   -------------------------
                                                 (a)                        (b)                        (c)
<S>                                          <C>                          <C>                       <C>
Equity compensation plans approved
   by security holders                       2,133,256(1)                 $0.97                     1,131,302(2)
Equity compensation plans not
   approved by security holders                805,500(3)                 $0.87                            --
                                          ----------------          -----------------            ----------------
     Total                                   2,938,756                                              1,131,302
</TABLE>
---------------
(1)    Represents shares of common stock underlying options that are
       outstanding under our 1993 Stock Option Plan, our Employee Stock and
       Stock Option Plan, our 1997 Stock Incentive Plan and our Amended and
       Restated 2000 Stock Option Plan. The material features of these plans are
       described in Note 8 to our consolidated financial statements for the
       years ended December 31, 2003, 2002 and 2001.
(2)    Represents shares of common stock available for issuance under options
       that may be issued under our Amended and Restated 2000 Stock Option
       Plan.
(3)    Represents shares of common stock underlying warrants that are described
       in note 8 to our consolidated financial statements for the years ended
       December 31, 2004, 2003 and 2002.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         We are or have been a party to employment and compensation arrangements
with related parties, as more particularly described above under the headings
"Compensation of Executive Officers," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Compensation of Directors."

         We have entered into an indemnification agreement with each of our
directors and executive officers. The indemnification agreements and our
certificate of incorporation and bylaws require us to indemnify our directors
and officers to the fullest extent permitted by Delaware law.

         On January 5, 2005, we issued to 17 accredited record holders in a
private offering an aggregate of 12,503,500 shares of our common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share. Each of The Pinnacle Fund, L.P., JLF Offshore Fund, Ltd., JLF
Asset Management, LLC (which entity is investment manager of four of the
investors, including JLF Offshore Fund, Ltd.) and Jeffrey L. Feinberg (the
managing member of JLF Asset Management, LLC), became a beneficial owner of more
than 5% of our outstanding common stock at the closing of the offering.


                                       68

<PAGE>

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         The following table sets forth the aggregate fees billed to us by Grant
Thornton LLP for professional services rendered for the years ended December 31,
2004 and 2003:

                    Fee Category                    2004              2003
                    ------------                    ----              ----

        Audit Fees                                 $449,000          $232,000
        Audit-Related Fees                            4,000                --
        Tax Fees                                    106,000            57,000
        All Other Fees                                   --             5,000
                                                ------------      ------------

                 Total                             $559,000          $294,000

         AUDIT FEES. Consists of fees billed for professional services rendered
for the audit of our consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by Grant Thornton LLP in connection with statutory
and regulatory filings or engagements. Audit fees increased due to the audit
work required to provide assurance on the Larus Corporation financial
statements, to expand audit work required on internal controls, and the higher
value of the British pounds sterling and the euro when those expenses are
converted to United States dollars for this report in 2004 as compared to 2003.

         AUDIT-RELATED FEES. Audit-related fees during 2004 relate to due
diligence procedures in connection with the Larus Corporation acquisition.
There were no audit-related fees during 2003.

         TAX FEES. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense,
customs and duties, mergers and acquisitions, and international tax planning.

         ALL OTHER FEES. Consists of fees for products and services other than
the services reported above. In fiscal 2004, no such other fees were incurred.
In fiscal 2003, these services include assistance regarding the change in the
name of CXR, S.A. to CXR-AJ and other miscellaneous services.

         Our audit committee pre-approves all services provided by Grant
Thornton LLP.

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1), (a)(2) and (d)    Financial Statements and Financial Statement Schedules
                          ------------------------------------------------------

         Reference is made to the financial statements and financial statement
schedule listed on and attached following the Index to Financial Statements and
Financial Statement Schedule contained at page F-1 of this report.

(a)(3) and (c)    Exhibits
                  --------

         Reference is made to the exhibits listed on the Index to Exhibits that
follows the financial statements and financial statement schedule.


                                       69

<PAGE>

<TABLE>
                                        EMRISE CORPORATION AND SUBSIDIARIES

                           INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE


                                                                                                               Page
                                                                                                               ----
<S>                                                                                                           <C>
Financial Statements
--------------------

Report of Independent Registered Public Accounting Firm.....................................................    F-2

Consolidated Balance Sheets as of December 31, 2004 and 2003................................................    F-3

Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002..................    F-4

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2004,
    2003 and 2002...........................................................................................    F-5

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004,
    2003 and 2002...........................................................................................    F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003
    and 2002................................................................................................    F-7

Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2003
    and 2002................................................................................................    F-9

Financial Statement Schedule
----------------------------

Consolidated Schedule II Valuation and Qualifying Accounts for the Years Ended
    December 31, 2004, 2003 and 2002........................................................................   F-37


                                                        F-1
</TABLE>

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
and Stockholders of Emrise Corporation

We have audited the accompanying consolidated balance sheets of Emrise
Corporation, a Delaware corporation, as of December 31, 2004 and 2003, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emrise Corporation
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.

Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated Schedule II
for the years ended December 31, 2004, 2003 and 2002 is presented for purposes
of additional analysis and is not a required part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.


/S/ GRANT THORNTON LLP

Los Angeles, California
March 11, 2005, except for Note 17,
  as to which the date is March 18, 2005


                                      F-2

<PAGE>

<TABLE>
                                    EMRISE CORPORATION AND SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS
                                        DECEMBER 31, 2004 AND 2003
                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


                                                                                 2004             2003
                                                                             ------------     ------------
<S>                                                                          <C>              <C>
ASSETS (Notes 5 and 6)
Current assets:
   Cash and cash equivalents                                                 $     1,057      $     1,174
   Accounts receivable, net of allowance for doubtful accounts
     of $153 and $161, respectively                                                5,796            5,393
   Inventories (Note 2)                                                            6,491            6,683
   Deferred tax assets (Note 9)                                                      352              146
   Prepaid and other current assets                                                  417              409
                                                                             ------------     ------------
Total current assets                                                              14,113           13,805
Property, plant and equipment, net (Note 3)                                          909              322
Goodwill, net of accumulated amortization of $1,084 and $1,070 in 2004
   and 2003, respectively (Notes 4 and 15)                                         5,881            2,447
Intangible assets other than goodwill, net of accumulated amortization
   of $40                                                                          3,560               --
Other assets                                                                         623              595
                                                                             ------------     ------------
                                                                             $    25,086      $    17,169
                                                                             ============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Borrowings under lines of credit (Note 5)                                 $       878      $     2,882
   Current portion of long-term debt (Note 6)                                        211              316
   Notes payable to stockholders, current portion (Note 16)                          500               --
   Accounts payable                                                                3,398            1,637
   Income taxes payable                                                              572              413
   Accrued expenses (Note 7)                                                       3,014            2,861
                                                                             ------------     ------------
Total current liabilities                                                          8,573            8,109
Long-term debt, less current portion (Note 6)                                        985              819
Notes payable to stockholders, less current portion (Note 16)                      2,250               --
Deferred income taxes                                                              1,400               --
Other liabilities                                                                    969              325
                                                                             ------------     ------------
Total liabilities                                                            $    14,177      $     9,253

Commitments and contingencies (Notes 11 and 17)

Stockholders' equity (Note 8):
   Preferred stock, authorized 10,000,000 shares;
     Convertible Series B Preferred Stock, $0.01 par value, issued and
       outstanding zero shares and 1,000 shares at December 31, 2004 and
       2003, respectively (aggregate liquidation preference of $0 and $4
       at December 31, 2004 and 2003, respectively)                                   --                4
   Common stock, $0.0033 par value. Authorized 50,000,000 shares; issued
     and outstanding 24,777,000 shares and 23,476,000 shares in 2004 and
     2003, respectively                                                               82               77
   Additional paid-in capital                                                     26,746           25,613
   Accumulated deficit                                                           (16,406)         (17,886)
   Accumulated other comprehensive income                                            487              108
                                                                             ------------     ------------
Total stockholders' equity                                                        10,909            7,916
                                                                             ------------     ------------
                                                                             $    25,086      $    17,169
                                                                             ============     ============


                              See accompanying notes to financial statements.

                                                   F-3
</TABLE>

<PAGE>

<TABLE>
                                    EMRISE CORPORATION AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                               YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                2004              2003              2002
                                           -------------     -------------     -------------
<S>                                        <C>               <C>               <C>
Net sales (Note 12)                        $     29,861      $     25,519      $     22,664
Cost of sales                                    16,146            14,835            14,147
                                           -------------     -------------     -------------
Gross profit                                     13,715            10,684             8,517
Operating expenses:
   Selling, general and administrative           10,226             7,812             7,731
   Engineering and product development            1,521               951             1,015
                                           -------------     -------------     -------------
Income (loss) from operations                     1,968             1,921              (229)
Other income (expense):
   Interest expense                                (433)             (416)             (441)
   Other income (expense), net                       (6)              (58)               80
                                           -------------     -------------     -------------
Income (loss) before income taxes                 1,529             1,447              (590)
Income tax expense (benefit) (Note 9)                49               286               (20)
                                           -------------     -------------     -------------
Net income (loss)                          $      1,480      $      1,161      $       (570)
                                           =============     =============     =============

Basic earnings (loss) per share            $       0.06      $       0.05      $      (0.03)
                                           =============     =============     =============
Diluted earnings (loss) per share
                                           $       0.06      $       0.05      $      (0.03)
                                           =============     =============     =============


                              See accompanying notes to financial statements.

                                                   F-4
</TABLE>

<PAGE>

<TABLE>
                           EMRISE CORPORATION AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                       YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                                      (IN THOUSANDS)


                                                  2004            2003            2002
                                               -----------    -----------     -----------
<S>                                            <C>            <C>             <C>
Net income (loss)                              $    1,480     $    1,161      $     (570)
Other comprehensive income:
   Foreign currency translation adjustment            379            705             446
                                               -----------    -----------     -----------
Comprehensive Income (loss)                    $    1,859     $    1,866      $     (124)
                                               ===========    ===========     ===========


                     See accompanying notes to financial statements.

                                           F-5
</TABLE>

<PAGE>

<TABLE>
                                                 EMRISE CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                                                           (IN THOUSANDS)


                                                 Series B
                                                Convertible                                                Accumulated
                                              Preferred Stock      Common Stock    Additional                Other
                                              ---------------      ------------     Paid-in   Accumulated  Comprehensive
                                             Shares     Amount    Shares   Amount   Capital     Deficit    Income (Loss)    Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>    <C>         <C>      <C>       <C>       <C>         <C>            <C>
Balance at December 31, 2001                   150    $    938    20,671   $    68   $24,358   $(18,459)   $    (1,043)   $   5,862
Preferred Series B conversions                 (86)       (538)      864         3       535         --             --           --
Accretion of redeemable preferred stock         --          --        --        --        --        (13)            --          (13)
Warrants issued for services                    --          --        --        --         6         --             --            6
Common stock issued for services                --          --        --        --         1         --             --            1
Foreign currency translation adjustment         --          --        --        --        --         --            446          446
Net loss                                        --          --        --        --        --       (570)            --         (570)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                    64         400    21,535        71    24,900    (19,042)          (597)       5,732
Preferred Series A conversions                  --          --     1,263         4       283         --             --          287
Preferred Series B conversions                 (63)       (396)      635         2       395         (1)            --           --
Foreign currency translation adjustment         --          --        --        --        --         --            705          705
Accretion of redeemable preferred stock         --          --        --        --        --         (4)            --           (4)
Warrants issued for services                    --          --        --        --        19         --             --           19
Exercise of warrants and options                --          --        43        --        16         --             --           16
Net income                                      --          --        --        --        --      1,161             --        1,161
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                     1           4    23,476        77    25,613    (17,886)           108        7,916
Preferred Series B conversions                  (1)         (3)        3        --         3         --             --           --
Preferred Series B redemption                   --          (1)       --        --        --         --             --           (1)
Stock options exercised                         --          --        19        --         5         --             --            5
Foreign currency translation adjustment         --          --        --        --        --         --            379          379
Stock issued for Larus acquisition              --          --     1,214         4       996         --             --        1,000
Warrants exercised                              --          --        65         1        19         --             --           20
Warrants issued for services                    --          --        --        --        38         --             --           38
Value of warrants issued to acquire Larus       --          --        --        --        72         --             --           72
Net income                                      --          --        --        --        --      1,480             --        1,480
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004                    --          --    24,777   $    82   $26,746   $(16,406)   $       487    $  10,909
====================================================================================================================================

                                           See accompanying notes to financial statements.

                                                                F-6
</TABLE>

<PAGE>

<TABLE>
                                              EMRISE CORPORATION AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                                                         (IN THOUSANDS)


                                                                                    2004              2003             2002
                                                                                ------------     ------------      ------------
<S>                                                                             <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                               $     1,480      $     1,161       $      (570)
   Adjustments to reconcile net income (loss) to cash provided by (used in)
     operating activities:
       Depreciation and amortization                                                    287              249               349
       Deferred taxes                                                                  (206)             146                --
       Provision for doubtful accounts                                                   --               61               118
       Provision for inventory obsolescence                                           1,116              924               438
       Gain on sale of property, plant and equipment                                     --                1                (9)
       Stock and warrants issued for services                                            38               19                 7
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                                                289             (106)               22
     Inventories                                                                       (394)            (113)             (657)
     Prepaid and other assets                                                            23             (487)              219
     Accounts payable                                                                 1,414             (802)              114
     Accrued expenses and other liabilities                                            (163)             (14)             (688)
                                                                                -----------------------------------------------
Cash provided by (used in) operating activities                                       3,884            1,039              (657)
                                                                                -----------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                                      (724)             (63)             (193)
   Cash received from sale of property, plant and equipment                               8               13                --
   Cash collected on notes receivable                                                    --               12                17
   Cash paid for acquisition of Larus net of cash acquired                           (1,492)              --                --
                                                                                -----------------------------------------------
Cash used in investing activities                                                    (2,208)             (38)             (176)
                                                                                -----------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net repayments of current notes payable                                           (2,004)            (593)             (138)
   Repayments of long-term debt                                                        (250)            (110)              (68)
   Proceeds from long-term debt                                                          65               --                --
   Cash from warrant/option exercise                                                     25               16                --
                                                                                -----------------------------------------------
Cash used in financing activities                                                    (2,164)            (687)             (206)
                                                                                -----------------------------------------------

Effect of exchange rate changes on cash                                                 371              606               689
Net increase (decrease) in cash and cash equivalents                                   (117)             920              (350)
Cash and cash equivalents at beginning of year                                        1,174              254               604
                                                                                -----------------------------------------------
Cash and cash equivalents at end of year                                        $     1,057      $     1,174       $       254
                                                                                ===============================================


                                        See accompanying notes to financial statements.

                                                              F-7
</TABLE>

<PAGE>

<TABLE>
                                        EMRISE CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                                                  (IN THOUSANDS)


                                                                             2004           2003          2002
                                                                         -----------    -----------    -----------
<S>                                                                      <C>            <C>            <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for:
     Interest                                                            $      367     $      382     $      361
                                                                         =========================================
     Income taxes                                                        $      428     $       81     $       95
                                                                         =========================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
   Issuance of subordinated notes for Larus acquisition                  $    3,000     $       --     $       --
                                                                         =========================================
   Equipment acquired under capitalized lease                            $       --     $       --     $      143
                                                                         =========================================
   Common stock issued upon conversion of redeemable preferred stock     $        3     $      287     $       --
                                                                         =========================================
   Accretion of redeemable preferred stock                               $       --     $        4     $       13
                                                                         =========================================
   Common stock issued to acquire Larus                                  $    1,000     $       --     $       --
                                                                         =========================================


                                  See accompanying notes to financial statements.

                                                        F-8
</TABLE>

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

         Emrise Corporation (the "Company"), operates through three wholly-owned
subsidiaries: XET Corporation ("XET"), CXR Larus Corporation ("CXR Larus"), and
CXR Anderson Jacobson, formerly CXR, S.A. ("CXR-AJ"). XET Corporation and its
subsidiaries design, develop, manufacture and market electronic components for
defense, aerospace and industrial markets. CXR Larus and CXR-AJ design, develop,
manufacture and market network access and transmission products and
communications test equipment. CXR Larus also engages in the manufacture and
sale of communication timing and synchronization products. The Company conducts
its operations out of various facilities in the United States, France, the
United Kingdom and Japan and organizes itself in two product line segments:
electronic components and communications equipment.

BASIS OF PRESENTATION

         The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and each of its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

REVENUE RECOGNITION

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

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

         Revenue recognition for products and services provided by the Company's
United Kingdom subsidiaries depends upon the type of contract involved.
Engineering/design services contracts generally entail design and production of
a prototype over a term of up to several years, with all revenue deferred until
all services under the contracts have been completed. Engineering/design
services were not significant in 2004, 2003 and 2002. Production contracts
provide for a specific quantity of products to be produced over a specific
period of time. Customers issue binding purchase orders for each suborder to be
produced. At the time each suborder is shipped to the customer, the Company
recognizes revenue relating to the products included in that suborder. Returns
are infrequent and permitted only with prior authorization because these
products are custom made to order based on binding purchase orders and are
quality tested prior to shipment. Generally, these products carry a one-year
limited parts and labor warranty. The Company does not offer customer discounts,
rebates or price protection on these products.


                                      F-9

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


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

         Generally, the Company's electronic components, network access and
transmission products and communication timing and synchronization products
carry a one-year limited parts and labor warranty and our communications test
instruments and the Company's European network access and transmission products
carry a two-year limited parts and labor warranty. Products returned under
warranty are tested and repaired or replaced at the Company's option.
Historically, warranty repairs have not been material. The Company does not
offer customer discounts, rebates or price protection on these products.

         Revenues from services such as repairs and modifications are recognized
when the service has been completed and invoiced. For repairs that involve
shipment of a repaired product, the Company recognizes repair revenues when the
product is shipped back to the customer.  Service revenues represented 5.7%,
3.1% and 2.5% of net sales in 2004, 2003 and 2002, respectively.

         Shipping and handling fees billed to customers totaled $18,000 for
domestic operations for the year ended December 31, 2004. Such amounts were not
significant for the years ended December 31, 2003 and 2002. Shipping and
handling fees billed to international customers are included in net sales and
totaled less than 1.0% of net sales for the years ended December 31, 2004, 2003
and 2002. Depending on the operating division, shipping and handling costs are
included in cost of sales or selling, general and administrative expenses.
Shipping costs included in selling, general and administrative expenses
approximated $100,000 in each of the years ended December 31, 2004, 2003 and
2002.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist of all highly liquid investments with
an original maturity of three months or less when purchased. As of December 31,
2004 and 2003, cash in foreign accounts was $1,035,000 and $535,000,
respectively.

INVENTORIES

         The Company's finished goods electronic components inventories
generally are built to order. The Company's communications equipment inventories
generally are built to forecast, which requires us to produce a larger amount of
finished goods in our communications equipment business so that the Company's
customers can promptly be served. The Company's products consist of numerous
electronic and other parts, which necessitates that we exercise detailed
inventory management. The Company values its inventory at the lower of the
actual cost to purchase or manufacture the inventory (first-in, first-out) or
the current estimated market value of the inventory (net realizable value). The
Company performs physical inventories at least once a year. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on its estimated forecast of
product demand and production requirements for the next twelve months.
Additionally, to determine inventory write-down provisions, the Company reviews
product line inventory levels and individual items as necessary and periodically
review assumptions about forecasted demand and market conditions. Any parts or
finished goods that we determine are obsolete, either in connection with the
physical


                                      F-10

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


count or at other times of observation, are reserved for and subsequently
discarded and written-off. Demand for the Company's products can fluctuate
significantly. A significant increase in the demand for the Company's products
could result in a short-term increase in the cost of inventory purchases, while
a significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand.

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

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the 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 are expensed as incurred, while renewals and
betterments are capitalized.  Research and development costs are expensed
as incurred.

LONG-LIVED ASSETS

         The Company reviews the carrying amount of its long-lived assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

PRODUCT WARRANTY LIABILITIES

         Generally, the Company's electronic components, network access and
transmission products and communication timing and synchronization products
carry a one-year limited parts and labor warranty and the Company's
communications test instruments and European network access and transmission


                                      F-11

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


products carry a two-year limited parts and labor warranty. Products returned
under warranty typically are tested and repaired or replaced at the Company's
option. Historically, the Company has not experienced significant warranty costs
or returns.

         The Company records in accrued expenses a liability for estimated
costs that it expects to incur under its basic limited warranties when product
revenue is recognized. Factors affecting the Company's warranty liability
include the number of units sold, historical and anticipated rates of claim, and
costs per claim. The Company periodically assesses the adequacy of its warranty
liability accrual based on changes in these factors.

         The changes in the Company's product warranty liability during 2004 and
2003 were as follows:

<TABLE>
                                                                       Year Ended December 31,
                                                                  -------------------------------
                                                                      2004              2003
                                                                  -------------------------------
<S>                                                               <C>               <C>
Liability, beginning of year                                      $     79,000      $     32,000
Expense for new warranties issued                                       64,000            79,000
Expense related to accrual revision for prior year warranties               --                --
Warranty claims                                                        (79,000)          (32,000)
                                                                  -------------------------------
Liability, end of year                                            $     64,000      $     79,000
                                                                  ===============================
</TABLE>

INCOME TAXES

         The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred income taxes are recognized based on the
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the year and the
change during the year in deferred tax assets and liabilities.

STOCK-BASED COMPENSATION

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


                                      F-12

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


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

<TABLE>
                                                                 2004               2003              2002
                                                            --------------     --------------    -------------
<S>                                                         <C>                <C>               <C>
Net income (loss):
   As reported                                              $   1,480,000      $   1,161,000     $   (570,000)
   Add: Stock-based compensation expense included in
     reported net income, net of related tax effect                    --                 --               --
   Deduct: Stock-based compensation expense determined
     under the fair value-based method                           (127,000)           (45,000)         (20,000)
                                                            --------------     --------------    -------------
   Pro forma                                                $   1,353,000      $   1,116,000     $   (590,000)
                                                            ==============     ==============    =============

Basic earnings (loss) per share:
   As reported                                              $        0.06      $        0.05     $      (0.03)
   Add: Stock-based compensation expense included in
     reported net income, net of related tax effect                    --                 --               --
   Deduct: Stock-based compensation expense determined
     under the fair value-based method                                 --                 --               --
                                                            --------------     --------------    -------------
   Pro forma                                                $        0.06      $        0.05     $      (0.03)
                                                            ==============     ==============    =============

Diluted earnings (loss) per share:
   As reported                                              $        0.06      $        0.05     $      (0.03)

   Add: Stock-based compensation expense included in
     reported net income, net of related tax effect                    --                 --               --
   Deduct: Stock-based compensation expensed determined
     under the fair value-based method                              (0.01)                --               --
                                                            --------------     --------------    -------------
   Pro forma                                                $        0.05      $        0.05     $      (0.03)
                                                            ==============     ==============    =============
</TABLE>

         The above calculations include the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income or loss in future periods. The calculations were based on
a Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 92% to 107%; risk-free interest rate of 3%-4.25%;
expected lives of 7 years.

EARNINGS (LOSS) PER SHARE

         Earnings (loss) per share is calculated according to SFAS No. 128,
"Earnings Per Share." Basic earnings (loss) per share includes no dilution and
is computed by dividing net income (loss) available to common stockholders by
the weighted average number of shares outstanding during the year. Diluted
earnings (loss) per share reflects the potential dilution of securities that
could share in the earnings of the Company.


                                      F-13

<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. This statement defines fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
2004 and 2003, the fair value of all financial instruments approximated carrying
value.

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

USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CONCENTRATION OF CREDIT RISK

         Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and accounts receivable.
The Company places its cash with high quality financial institutions. At times,
cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.

         The Company's accounts receivable result from sales to a broad customer
base. The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. Accounts receivable are generally due within 30 days in the
Company's U.S. operations and are stated net of allowance for doubtful accounts.
Accounts outstanding for longer than the contractual payment terms are
considered past due. Provisions for uncollectible accounts are made based on the
Company's specific assessment of the collectibility of all past due accounts.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations. Sales to various BAE Systems companies in
the U.S. and Europe represented approximately 15%, 13% and 14% of the Company's
total net revenues during 2004, 2003 and 2002, respectively.

FOREIGN CURRENCY TRANSLATION

         The accounts of foreign subsidiaries have been translated using the
local currency as the functional currency. Accordingly, foreign currency
denominated assets and liabilities have been translated to U.S. dollars at the
current rate of exchange on the balance sheet date. The effects of translation
are recorded as a separate component of stockholders' equity in accumulated
other comprehensive income (loss). Exchange gains and losses arising from


                                      F-14

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


transactions denominated in foreign currencies are translated at average
exchange rates and included in operations. Such amounts are not material to the
accompanying consolidated financial statements.

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior years' financial
statements to be consistent with the 2004 presentation.

(2)      INVENTORIES

         Inventories are summarized as follows as of December 31:

                                                   2004                 2003
                                               ------------         ------------

Raw materials                                  $ 3,222,000          $ 3,230,000
Work-in-process                                  1,280,000            1,963,000
Finished goods                                   1,989,000            1,490,000
                                               ------------         ------------
                                               $ 6,491,000          $ 6,683,000
                                               ============         ============

         Included in the amounts above are allowances for inventory obsolescence
of $2,251,000 and $1,692,000 at December 31, 2004 and 2003, respectively.
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically reserve
for obsolete inventory that the Company intends to dispose of. The inventory
items identified for disposal at each year end are generally discarded during
the following year.

(3)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following as of December
31:

                                                     2004               2003
                                                 ------------       ------------

Land and buildings                               $   390,000        $   365,000
Machinery, equipment and fixtures                  3,999,000          3,591,000
Leasehold improvements                               482,000            435,000
                                                 ------------       ------------
                                                   4,871,000          4,391,000
Accumulated depreciation                          (3,962,000)        (4,069,000)
                                                 ------------       ------------
                                                 $   909,000        $   322,000
                                                 ============       ============

(4)      GOODWILL AMORTIZATION AND IMPAIRMENT TESTING

         The Company initially applied SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002. SFAS No. 142 disallows the amortization
of goodwill and provides for impairment testing of goodwill carrying values on
an annual basis or more frequently if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. In applying SFAS No. 142, the Company performed the
transitional reassessment and impairment tests required as of January 1, 2002.
At the time of adoption, the Company had $1,084,000 of accumulated amortization
of goodwill. The Company performed its annual required tests of impairment as of
December 31, 2004 for goodwill in the XCEL Corporation Ltd. and CXR Telcom
division reporting units and as of June 30, 2004 for the goodwill within the
Larus division reporting unit.  No events or changes in circumstances occurred
between annual tests that would have required an interim goodwill impairment
test.

                                      F-15

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


(5)      LINES OF CREDIT

         A summary of notes payable is as follows as of December 31:

                                                        2004             2003
                                                     -----------     -----------

Line of credit with a U.S. commercial lender         $  118,000      $1,077,000
Lines of credit with foreign banks                      760,000       1,805,000
                                                     -----------     -----------
                                                     $  878,000      $2,882,000
                                                     ===========     ===========

         The Company had a credit facility with Wells Fargo Business Credit,
Inc. through June 2004. The facility provided for a revolving loan of up to
$3,000,000 secured by the Company's inventory and accounts receivable and a term
loan in the amount of $687,000 secured by the Company's machinery and equipment.
On December 31, 2003, the interest rate was the prime rate (then 4.0%) plus 1%
subject to a minimum interest charge of $13,500 per month. Due to the minimum
interest charge, the effective interest rate the Company paid for this credit
facility during 2003 was 20.3%. The balance outstanding at December 31, 2003 was
$1,077,000 on the revolving loan and $114,000 on the term loan, and $238,000 of
additional borrowings were available under the revolving loan. The credit
facility contained restrictive financial covenants that were set by mutual
agreement each year.

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

         The new credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at December 31, 2004 was 5.0%.

         The previous credit facility bore interest at the prime rate plus 1.0%
and was subject to a $13,500 minimum monthly interest fee plus an unused
commitment fee equal to 0.25% per annum. The average amount outstanding on the
revolving portions of the previous and new credit facilities during 2004 was
$1,035,000. The prime rate averaged approximately 4.25% in 2004. Therefore, the
average annual interest cost on the new revolving line of credit was
approximately $49,162 while the average annual interest cost on the prior
revolving line of credit was approximately $162,000 due to the minimum interest
rate charge of $13,500 per month.


                                      F-16

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         At December 31, 2004, the Company had a balance owing under the
revolving credit line of $118,000, and had $1,882,000 of availability on the
non-formula based portion of the credit line. The credit facility is subject to
various financial covenants. Minimum debt service coverage ratio of each of XET
and CXR Larus must be not less than 1.50:1.00 on a trailing four-quarter basis.
"Debt service coverage ratio" equals net income plus depreciation plus
amortization, minus non-financed capital expenditures, divided by current
portion of long-term debt measured quarterly. Current ratio of each of XET and
CXR Larus must be not less than 1.50:1.00, determined as of each fiscal quarter
end. "Current ratio" is equal to total current assets divided by total current
liabilities. Net income after taxes of each of XET and CXR Larus must be not
less than $1.00 on an annual basis, determined as of the end of each quarter.
Net profit after taxes of each of XET and CXR Larus must be not less than $1.00
in each fiscal quarter immediately following a fiscal quarter in which that
entity incurred a net loss after taxes. Total liabilities divided by tangible
net worth of the Company's domestic operations on a consolidated basis must not
at any time be greater than 2.00:1.00, determined as of each fiscal quarter end.
Tangible net worth of the Company and all of its subsidiaries on a consolidated
basis must not at any time be less than $5,200,000, measured quarterly. "Total
liabilities" equals current liabilities plus non-current liabilities, minus
subordinated debt. "Tangible net worth" equals stockholders' equity plus
subordinated debt, minus intangible assets.

         At December 31, 2004, the Company was in compliance with the covenants
other than the debt-to-tangible net worth covenant for its domestic operations.
The Company obtained a waiver of non-compliance as of December 31, 2004. The
Company is currently engaged in discussions with Wells Fargo Bank, N.A. to amend
the existing financial covenants effective as of the next measurement date of
April 30, 2005. If the Company is unable to comply with the existing or revised
covenants and is unable to obtain a waiver or amendment on reasonable terms, the
amount outstanding on the line of credit would become due and payable and a
default interest rate of prime plus 4.5% would apply. The facility expires in
July 2005. The Company currently intends to seek renewal of the facility and
believes that the bank will be amenable to renewing it. However, the Company
believes it has sufficient funds available to repay the facility if it is unable
to obtain a renewal of the facility.

         XPS, one of the Company's United Kingdom subsidiaries, has a credit
facility with Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO
Holdings, N.V., that expires on November 12, 2005. Using the exchange rate in
effect at December 31, 2004 for the conversion of British pounds sterling into
United States dollars, the new facility is for a maximum of $2,865,000 and
includes a $669,000 unsecured cash flow loan, a $153,000 term loan secured by
XPS' fixed assets and the remainder of the loan is secured by XPS' accounts
receivable and inventory. The interest rate is the base rate of Venture Finance
PLC (4.75% at December 31, 2004) plus 2%, and is subject to a minimum rate of 4%
per annum. There are no financial performance covenants applicable to this
credit facility. At December 31, 2004 and 2003, the Company had balances owing
under the United Kingdom revolving credit facility of $188,000 and $1,227,000,
respectively.


                                      F-17

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO Holdings N.V. The credit line is for a maximum of
$1,488,000, based on the exchange rate in effect at December 31, 2004 for the
conversion of euros into United States dollars. The IFN Finance facility
replaced several smaller credit lines. The IFN Finance facility is secured by
CXR-AJ's accounts receivable and carries an annual interest rate of 1.6
percentage points above the French "T4M" rate. The French T4M rate was 2.04% as
of December 31, 2004. Funds that become available under the new IFN Finance
credit line as new accounts receivables develop have been used to retire the
prior existing CXR-AJ credit facilities. At December 31, 2004 and 2003, the
balances outstanding under the French credit line were $572,000 and $578,000,
respectively. There are no financial performance covenants applicable to this
credit facility.

(6)      LONG-TERM DEBT

         A summary of long-term debt follows as of December 31:

<TABLE>
                                                                           2004             2003
                                                                       ------------     ------------
<S>                                                                    <C>              <C>
Term notes payable to commercial lender (a)                            $   184,000      $   114,000
Term notes payable to foreign banks (b)                                    833,000          871,000
Capitalized lease obligations (c)                                          179,000          150,000
                                                                       ------------     ------------
                                                                         1,196,000        1,135,000
Current portion                                                           (211,000)        (316,000)
                                                                       ------------     ------------
                                                                       $   985,000      $   819,000
                                                                       ============     ============
</TABLE>

---------------
         (a)      The Company's domestic credit facility with Wells Fargo Bank,
                  N.A. provides for a term loan of $150,000 secured by
                  equipment, amortizable over 36 months at a variable rate equal
                  to the prime rate plus 1.5%. The term loan portion of the
                  facility had a balance of $126,000 at December 31, 2004. Wells
                  Fargo Bank, N.A. has also provided $300,000 of credit for the
                  purchase of new capital equipment when needed, of which a
                  balance of $58,000 was outstanding at December 31, 2004. The
                  capital equipment loans are amortized over five years and bear
                  interest at the bank's 30-day LIBOR rate plus 4%. As of
                  December 31, 2003, the term notes totaling $114,000 were with
                  the bank's financing subsidiary at the prime rate plus 1%,
                  subject to a minimum interest charge of $13,500 included with
                  the revolving loan.

         (b)      The Company has agreements with several foreign banks that
                  include term borrowings that mature at various dates through
                  2007. Interest rates on the borrowings bear interest at rates
                  ranging from 3.25% to 6.75% and are payable in monthly
                  installments. The balances by country of origination at
                  December 31, 2004 were: United Kingdom - $715,000; France -
                  $62,000; and Japan - $56,000. At December 31, 2003, the
                  balances by country of origination were: United Kingdom -
                  $719,000; France - $79,000; and Japan - $73,000.


                                      F-18

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


                  The United Kingdom term loan requires payments of $13,440 per
                  quarter, is due and payable in total in 2006, carries an
                  interest rate equal to the lender's base rate (4.75% at
                  December 31, 2004 plus 2% (subject to a minimum rate of 4% per
                  annum), is secured by $316,000 of fixed assets of XCEL Power
                  Systems, Ltd. and is not subject to financial performance
                  covenants.

                  The term loans in France had aggregate balances of $62,000 and
                  $79,000 at December 31, 2004 and 2003, respectively, and are
                  composed of several small loans payable over 36 to 60 months
                  that are secured by the assets of the local subsidiary, bear
                  annual interest rates ranging from 5.2% to 7.0% and are not
                  subject to financial performance covenants.

                  The term loan in Japan is a five-year amortizable loan that
                  commenced in November 2002 and had balances of $56,000 and
                  $73,000 as of December 31, 2004 and 2003, respectively,
                  carries an annual fixed interest rate of 3.25%, is secured by
                  the Japanese subsidiary's assets and is not subject to
                  financial performance covenants.

         (c)      Capitalized lease obligations are calculated using interest
                  rates appropriate at the inception of the lease and range from
                  6% to 18%. Leases are amortized over the lease term using the
                  effective interest method. The leases all contain bargain
                  purchase options and expire at various dates through December
                  31, 2017.

         Principal maturities related to long-term debt as of December 31, 2004
are as follows:

                      Year Ending December 31,                       Amount
                      ------------------------                       ------
                                2005                              $   211,000
                                2006                                  828,000
                                2007                                   97,000
                                2008                                   25,000
                                2009                                   18,000
                        2010 and thereafter                            17,000
                                                                  ------------
                               Total                              $ 1,196,000
                                                                  ============

         CXR-AJ has term loans with Banc National de Paris and Sogelease with
aggregate balances that totaled $62,000 and $128,000 as of December 31, 2004 and
2003, respectively.

                                      F-19

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


(7)      ACCRUED EXPENSES

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

                                                 2004         2003
                                               ---------   ---------

         Accrued salaries                      $    805    $    593
         Accrued payroll taxes and benefits         491         388
         Advance payments from customers             77         656
         Other accrued expenses                   1,641       1,224
                                               ---------   ---------
         Total accrued expenses                $  3,014    $  2,861
                                               =========   =========

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

(8)      STOCKHOLDERS' EQUITY

STOCK OPTIONS AND WARRANTS

         The Company has four stock option plans:

         o        Employee Stock and Stock Option Plan, effective July 1, 1994,
                  providing for non-qualified stock options as well as
                  restricted and non-restricted stock awards to both employees
                  and outside consultants. Up to 520,000 shares were authorized
                  for issuance under this plan. Terms of related grants under
                  the plan are at the discretion of the board of directors. The
                  board of directors does not intend to issue any additional
                  options or make any additional stock grants under this plan.

         o        1993 Stock Option Plan, providing for the grant of up to
                  300,000 incentive and non-qualified stock options to purchase
                  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 10 years after date of grant. The board of
                  directors does not intend to issue any additional options
                  under this plan.

         o        The MicroTel International Inc. 1997 Stock Incentive Plan (the
                  "1997 Plan") provides that options granted may be either
                  qualified or nonqualified stock options and are required to be
                  granted at fair market value on the date of grant. Subject to
                  termination of employment, options may expire up to ten years
                  from the date of grant and are nontransferable other than in
                  the event of death, disability or certain other transfers that
                  the committee of the board of directors administering the 1997
                  Plan may permit. Up to 1,600,000 stock options were authorized
                  to be granted under the 1997 Plan. All outstanding options of
                  former optionholders under the XET 1987 Employee Stock Option
                  Plan were converted to options under the 1997 Plan as of the
                  date of the merger between the Company and XET at the exchange
                  rate of 1.451478. The board of directors does not intend to
                  issue any additional options under this plan.

         o        The 2000 Stock Option Plan was adopted by the board of
                  directors in November 2000 and approved by the stockholders on
                  January 16, 2001. The board of directors adopted the Amended
                  and Restated 2000 Stock Option Plan ("2000 Plan") effective as
                  of August 3, 2001. Under the 2000 Plan, options granted may be
                  either incentive or nonqualified options. Incentive options
                  must have an exercise price of not less than the fair market
                  value of a share of common stock on the date of grant.
                  Nonqualified options must have an exercise price of not less
                  than 85% of the fair market value of a share of common stock
                  on the date of grant. Up to 2,000,000 options may be granted
                  under the 2000 Plan. No option may be exercised more than ten
                  years after the date of grant.


                                      F-20

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for these
plans and arrangements for current employees whose grants provide for exercise
prices at or above the market price on the date of grant. Compensation or other
expense is recorded based on intrinsic value (excess of market price over
exercise price on date of grant) for employees, and fair value of the option
awards for others.

         The following table shows activity in the outstanding options for the
years ended December 31, 2004, 2003 and 2002:

<TABLE>
                                              2004                      2003                       2002
                                    ------------------------  -------------------------  --------------------------
                                                   Weighted                  Weighted                     Weighted
                                                   Average                   Average                      Average
                                        2004       Exercise       2003       Exercise        2002         Exercise
                                       Shares       Price        Shares       Price         Shares         Price
                                    -----------  -----------  -----------  ------------  ------------  ------------
<S>                                  <C>             <C>       <C>             <C>         <C>              <C>
Outstanding at beginning of year     1,729,000       $0.96     1,432,000       $1.11       1,718,000        $1.34
Granted                                424,000       $0.96       344,000       $0.35          50,000        $0.32
Exercised                              (19,000)      $0.33       (28,000)      $0.24              --           --
Forfeited                               (1,000)      $3.44       (19,000)      $2.21        (336,000)       $1.37
--------------------------------    -----------               -----------                 -----------   -----------
Outstanding at end of year           2,133,000       $0.97     1,729,000       $0.96       1,432,000        $1.11
                                    ===========               ===========                 ===========   ===========
</TABLE>

         The following table summarizes information with respect to stock
options at December 31, 2004:

<TABLE>
                                    Options                                              Options Exercisable
                     ---------------------------------------                       -------------------------------
                          Number           Weighted Average          Weighted           Number           Weighted
   Range of            Outstanding            Remaining              Average          Exercisable        Average
   Exercise            December 31,        Contractual Life          Exercise         December 31,       Exercise
    Price                 2004                 (Years)                Price              2004             Price
------------------   ---------------   ---------------------   -----------------   ----------------   ------------
<S>                      <C>                     <C>                   <C>              <C>                <C>
$0.20 to $1.00           1,441,000               7.11                  $0.54            1,017,000          $0.36
$1.01 to $2.00             676,000               0.42                   1.83              676,000           1.83
$3.01 to $4.00              16,000               1.40                   3.22               16,000           3.22
                     ---------------   ---------------------   -----------------   ----------------   ------------
                         2,133,000               4.95                  $0.97            1,709,000          $0.97
                     ===============   =====================   =================   ================   ============
</TABLE>

         The fair value of options granted during 2004 was $337,000, at a
weighted average value of $0.97 per share. The fair value of options granted
during 2003 was $42,000, at a weighted average value of $0.12 per share. The
fair values of options granted during 2002 was $13,000 at a weighted average
value of $0.26 respectively.

         If the Company had instead elected the fair value method of accounting
for stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair value
at date of grant for options granted in 2004, 2003 and 2002 has been estimated
based on a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 92% to 107% in 2004, 92% in 2003 and 92%
in 2002; risk-free interest rate of 3.0% to 4.25%; and average expected lives of
seven years.


                                      F-21

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         The board of directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key employees
and other parties as follows:

<TABLE>
                                                                                            Warrant Price
                                                                     Number        ---------------------------------
                                                                    of Shares          Per Share          Total
                                                                 ----------------- ---------------- ----------------
<S>                                                                <C>             <C>                <C>
Balance outstanding at December 31, 2001                            1,972,000      $0.25 to $2.50     $ 1,374,000
Warrants issued                                                       120,000           $0.50              60,000
Warrants expired/forfeited                                         (1,688,000)     $0.25 to $1.73      (1,161,000)
                                                                 ---------------------------------------------------
Balance outstanding at December 31, 2002                              404,000      $0.25 to $2.50         273,000
Warrants issued                                                       401,000       $.75 to $1.00         325,000
Warrants expired/forfeited                                           (138,000)          $0.66             (91,000)
Warrants exercised                                                    (14,000)          $0.66              (9,000)
                                                                 ---------------------------------------------------
Balance outstanding at December 31, 2003                              653,000      $0.25 to $2.50         498,000
                                                                 ---------------------------------------------------
Warrants issued                                                       250,000      $0.85 to $1.30         299,000
Warrants expired/forfeited                                            (32,000)          $2.50             (80,000)
Warrants exercised                                                    (65,000)     $0.25 to $0.31         (17,000)
                                                                 ---------------------------------------------------
Balance outstanding at December 31, 2004                              806,000      $0.31 to $1.30     $   698,000
                                                                 ===================================================
</TABLE>

         During 2004, the Company issued warrants to purchase up to 250,000
shares of common stock at exercise prices ranging from of $0.85 to $1.30 per
share in consideration for services rendered or to be rendered and in connection
with the acquisition of Larus Corporation. The estimated value of the warrants
issued for services rendered was $38,000 and was calculated using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 2.5% to 3.25%, expected life of 3 years, no dividend yield, and an
expected volatility of 107%. The estimated value of the warrants issued in
connection with the acquisition of Larus Corporation was $72,526 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 3.25%, expected life of three years, no dividend
yield, and an expected volatility of 107.19%.

         During 2003, the Company issued warrants to purchase up to 300,000
shares of common stock at the exercise price of $0.75 and 101,000 shares at the
exercise price of $1.00. The Company issued the warrants for services rendered
or to be rendered. The estimated value of the warrants was $19,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 1.6%, expected lives of 3 years, no dividend yield
and an expected volatility of 84.8%.

         During 2002, the Company issued warrants to purchase up to 120,000
shares of common stock at an exercise price of $0.50 per share. The Company
issued the warrants to a former executive of the Company as compensation for
services rendered. The estimated value of the warrants was $6,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 92%; a risk-free interest rate of
3.75%; and a contractual life of 3 years. Also, during 2002 the Company issued
5,000 shares of common stock in consideration for services rendered. The stock
was valued at $1,000 on the date of issuance and, accordingly, the Company
recorded a $1,000 expense.

         As of December 31, 2004, the Company was authorized to issue 50,000,000
shares of common stock. As of that date, the Company had 24,777,000 shares of
common stock outstanding and 2,938,756 shares of common stock that could become
issuable pursuant to the exercise of outstanding stock options and warrants.


                                      F-22

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         As described in Note 17, the Company issued shares of common stock and
warrants to purchase shares of common stock in a private offering on January 5,
2005.

DIVIDENDS

         No dividends on the Company's common stock have been paid to date. The
Company's line of credit with Wells Fargo Bank, N.A. prohibits the payment of
cash dividends on the Company's common stock. The Company currently intends to
retain future earnings to fund the development and growth of its business and,
therefore, does not anticipate paying cash dividends on its common stock within
the foreseeable future. Any future payment of dividends on the Company's common
stock will be determined by the Company's board of directors and will depend on
the Company's financial condition, results of operations, contractual
obligations and other factors deemed relevant by the Company's board of
directors.

(9)      INCOME TAXES

         The Company files a consolidated U.S. federal income tax return. This
return includes all domestic companies 80% or more owned by the Company. State
tax returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to the Company and its domestic subsidiaries.

         Income (loss) from continuing operations before income taxes was taxed
under the following jurisdictions:

<TABLE>
                                                              2004                  2003                 2002
                                                              ----                  ----                 ----
<S>                                                       <C>                   <C>                  <C>
Domestic                                                  $1,858,000            $   961,000         $   497,000
Foreign                                                     (329,000)               486,000          (1,087,000)
                                                          ------------------------------------------------------
Total                                                     $1,529,000            $ 1,447,000         $  (590,000)
                                                          ======================================================

         Income tax expense (benefit) consists of the following:

                                                              2004                  2003                 2002
                                                              ----                  ----                 ----
Current
   Federal                                                $   34,000            $    26,000          $       --
   State                                                      41,000                 55,000              18,000
   Foreign                                                   180,000                351,000             (38,000)
                                                          ------------------------------------------------------
Total Current                                             $  255,000            $   432,000          $  (20,000)
                                                          ======================================================

Deferred
   Federal                                                $ (193,000)           $  (132,000)         $       --
   State                                                     (11,000)               (14,000)                 --
   Foreign                                                    (2,000)                    --                  --
                                                          ------------------------------------------------------
Total Deferred                                            $ (206,000)           $  (146,000)         $       --
                                                          ======================================================

Total
   Federal                                                $ (159,000)           $  (106,000)         $       --
   State                                                      30,000                 41,000              18,000
   Foreign                                                   178,000                351,000             (38,000)
                                                          ------------------------------------------------------
Total                                                     $   49,000            $   286,000           $ (20,000)
                                                          ======================================================
</TABLE>

                                                         F-23

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         Income tax expense (benefit) differs from the amount obtained by
applying the statutory federal income tax rate of 34% to income (loss) from
continuing operations before income taxes as follows:

<TABLE>
                                                              2004                  2003                 2002
                                                              ----                  ----                 ----
<S>                                                       <C>                     <C>                 <C>
Tax (tax benefit) at U.S. federal statutory rate          $  520,000              $ 492,000           $(200,000)
State taxes, net of federal income tax benefit                41,000                 43,000             (34,000)
Foreign income taxes                                         248,000                (63,000)            (38,000)
Change in valuation allowances                              (179,000)              (182,000)            258,000
Permanent differences                                         (6,000)                12,000              11,000
Utilization of net operating losses                         (575,000)                    --                  --
Other                                                             --                (16,000)            (17,000)
                                                          ------------------------------------------------------
                                                          $   49,000              $ 286,000           $ (20,000)
                                                          ======================================================
</TABLE>

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:

<TABLE>
                                                                       2004                 2003
                                                                       ----                 ----
<S>                                                              <C>                 <C>
Deferred tax assets:
    Fixed assets depreciation                                    $      282,000      $       269,000
    Allowance for doubtful accounts                                      12,000               10,000
    Inventory reserves and uniform capitalization                       393,000              206,000
    Other accrued liabilities                                           179,000              112,000
    Deferred compensation                                               122,000              110,000
    Alternative minimum tax credit carryforwards                        142,000              142,000
    Capital loss carryforwards                                          136,000              136,000
    Net operating loss carryforwards                                 11,740,000           12,315,000
                                                                 ------------------------------------
Total deferred tax assets                                            13,006,000           13,300,000
Valuation allowance for deferred tax assets                         (12,654,000)         (13,154,000)
                                                                 ------------------------------------
Net deferred tax assets                                          $      352,000       $      146,000
                                                                 ====================================

Deferred tax liability:
    Intangible assets other than goodwill                        $    1,400,000       $            --
                                                                 ====================================

</TABLE>

         As of December 31, 2004, the Company had recorded $352,000 of net
deferred tax assets and $1,400,000 of deferred tax liabilities. The Company had
federal and state net operating loss carryforwards of approximately $36,056,000
and $3,400,000 as of December 31, 2004 and 2003, respectively, that expire at
various dates through 2022. As of December 31, 2004 and 2003, the Company
recorded a valuation allowance on the net deferred tax asset. Management
considers projected future taxable income and tax planning strategies in making
this assessment. For the year ended December 31, 2004, management recorded a
reduction in its valuation allowance of $179,000 based on the domestic income in
2004 and projections for future taxable income over periods that the deferred
assets are deductible. Management believes that it is more likely than not that
the Company will realize the benefits of these deductible differences. The
amount of the deferred tax assets considered realizable, however, could
materially change in the near future if estimates of future taxable income
during the carryforward period are changed.


                                      F-24

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         As a result of the merger in 1997 of the privately held XET with a
wholly-owned, newly formed subsidiary of the Company, with XET as the surviving
subsidiary, the Company experienced a more than 50% ownership change for federal
income tax purposes. As a result, an annual limitation will be placed upon the
Company's ability to realize the benefit of most of its federal net operating
loss and credit carryforwards. The amount of this annual limitation, as well as
the impact of the application of other possible limitations under the
consolidated return regulations, has not been definitively determined at this
time. However, management believes approximately 80% of the federal and
California net operating losses will not be available to offset future taxable
income as a result of the limitations. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset items
and that a valuation allowance is required.

(10)     EARNINGS (LOSS) PER SHARE

         The following table illustrates the computation of basic and diluted
earnings (loss) per share:

<TABLE>
                                                                        2004              2003              2002
                                                                        ----              ----              ----
<S>                                                                <C>               <C>             <C>
NUMERATOR:
Net income (loss)                                                  $  1,480,000      $  1,161,000    $    (570,000)
     Less: accretion of the excess of the redemption value
     over the carrying value of redeemable preferred stock                   --            (4,000)         (13,000)
Income (loss) attributable to common stockholders                  $  1,480,000      $  1,157,000    $    (583,000)

DENOMINATOR:
Weighted average number of common shares outstanding during the
   period - basic                                                    24,063,000        22,567,000       21,208,000
Incremental shares from assumed conversions of warrants,
   options and preferred stock                                          776,000         1,244,000               --
Adjusted weighted average shares - diluted                           24,839,000        23,811,000       21,208,000
Basic earnings (loss) per share                                    $       0.06      $       0.05    $       (0.03)
Diluted earnings (loss) per share                                  $       0.06      $       0.05    $       (0.03)
</TABLE>

         The following table shows the common stock equivalents that were
outstanding as of December 31, 2004 and 2003 but were not included in the
computation of diluted earnings (loss) per share because the options' or
warrants' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be anti-dilutive:

<TABLE>
                                                            Number              Exercise Price
                                                          of Shares               Per Share
                                                         -----------            --------------
<S>                                                       <C>                   <C>
Anti-dilutive common stock options:
    As of December 31, 2004                               1,027,000             $1.00 to $3.44
    As of December 31, 2003                                 693,000             $1.13 to $3.44
Anti-dilutive common stock warrants:
    As of December 31, 2004                                 326,000             $1.00 to $1.30
    As of December 31, 2003                                  32,000                 $2.50
</TABLE>

         The computation of diluted loss per share for 2002 excludes the effect
of incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was anti-dilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 8.


                                      F-25

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


(11)     COMMITMENTS AND CONTINGENCIES

LEASES

         The Company conducts most of its operations from leased facilities
under operating leases that expire at various dates through 2013. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2004, 2003 and 2002 was approximately $1,070,000, $909,000
and $1,097,000, respectively.

         The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
(including the related party lease discussed in Note 16) are as follows:

                        Year Ending December 31,                   Amount
                        ------------------------                   ------
                                  2005                          $ 1,040,000
                                  2006                              713,000
                                  2007                              725,000
                                  2008                              527,000
                                  2009                              420,000
                           2010 and thereafter                      486,000
                                                                ------------
                                  Total                         $ 3,911,000
                                                                ============

LITIGATION

         The Company is not currently a party to any material legal proceedings.
However, the Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.

EMPLOYEE BENEFIT PLANS

         Effective October 1, 1998, the Company instituted a defined
contribution plan ("401(k) Plan") covering the majority of its U.S. domestic
employees. Participants may make voluntary pretax contributions to such plans up
to the limit as permitted by law. Annual contributions to any plan by the
Company is discretionary. The Company made contributions of $25,000, $20,000 and
$22,000 to the 401(k) Plan for the years ended December 31, 2004, 2003 and 2002,
respectively.

         The Company's subsidiary in France has a defined benefit pension plan.
The plan is an unfunded plan. As of the December 31, 2004 measurement date, the
status of the defined benefit pension plan was as follows:

         Projected benefit obligation                    $178,000
         Fair value of plan assets                       $ 12,000
         Unfunded accumulated benefit                    $166,000
         Accumulated benefit obligation                  $122,000
         Employer contributions                          $ 19,000
         Participant contributions                       $     --
         Benefits paid                                   $ 19,000

         Contributions to be paid to the plan during the year ended
December 31, 2005 are estimated to be $20,000.

         Weighted average assumptions used to determine pension benefit
obligations at December 31, 2004 were as follows:

         Discount rate                                       4.5%
         Expected return on plan assets                       --%
         Rate of compensation increase                       4.5%

         The components of the net periodic pension costs for the year
ended December 31, 2004 were as follows:

         Service cost                                    $ 11,000
         Interest cost                                      7,000
         Expected return on plan assets                        --
         Amortization of transition asset, change
           in the prior service cost and actuarial
           loss                                                --
                                                         ---------
         Net periodic benefit cost                       $ 18,000
                                                         =========

                                      F-26

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         The following table sets forth the changes in benefit obligation
for the year ended December 31, 2004:

         Change in benefit obligations:
         Benefit obligation at beginning of year          $ 96,000
         Service cost                                       11,000
         Interest cost                                       7,000
         Benefits paid                                     (19,000)
         Contributions                                      19,000
         Effect of foreign currency translation              8,000
                                                          --------
         Benefit obligation at end of year                $122,000
                                                          ========

EXECUTIVE MANAGEMENT

         Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into a new employment agreement that provides for an
annual base salary of $250,000, with annual merit increases, an initial term of
five years, two renewal periods of two years each, and severance pay of at least
three years' salary during the initial period or at least two years' salary
during a renewal period.

         Effective July 2, 2001, the Company and Randolph D. Foote, its Senior
Vice President and Chief Financial Officer, entered into an employment agreement
that provides for an initial annual salary of $130,000, an initial term of three
years, two renewal periods of one year each, and severance pay of at least one
years' salary.

         Effective July 2, 2001, the Company and Graham Jefferies, Managing
Director of XCEL Corporation Ltd. and Executive Vice President and Chief
Operating Officer of the Company's Telecommunications Group, entered into an
employment agreement that provides for an initial annual salary of 100,000
British pounds sterling (approximately $141,000 at the then current exchange
rates), an initial term of three years, two renewal periods of one year each,
and severance pay of at least one years' salary.

(12)     SEGMENT AND MAJOR CUSTOMER INFORMATION

         The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
U.S., European and Asian markets and designs, manufactures and markets digital
switches and power supplies. The communications equipment segment operates
principally in the U.S. and European markets and designs, manufactures and
distributes voice and data transmission and networking equipment and
communications test instruments.

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


                                      F-27

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


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

         Each segment has business units or components as described in paragraph
30 of SFAS No. 142. Each component has discrete financial information and a
management structure. Following is a description of the Company's segment and
component structure as of December 31, 2004:

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

    o    XET Corporation - Rancho Cucamonga, California: Digitran Division-
         digital and rotary switches, and electronic subsystem assemblies for
         defense and aerospace applications and keypads

    o    XET Corporation - Monrovia, California: XCEL Circuits Division -
         printed circuit boards mostly for intercompany sales

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

    o    XCEL Corporation Ltd. - Ashford, Kent, England: Power supplies and
         conversion for defense and aerospace applications; this reporting unit
         also includes XCEL Power Systems, Ltd., Belix Power Conversions Ltd.,
         Belix Wound Components Ltd., and The Belix Company Ltd.

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

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

    o    Larus division of CXR Larus Corporation - San Jose, California:
         Telecommunications synchronous timing devices and network access
         equipment

    o    CXR-Anderson Jacobson - Abondant, France: network access and modem
         equipment

         As described in Note 17, the Company acquired PEHL and Pascall in March
2005. These two entities are being included in XCEL Corporation Ltd. reporting
unit of the electronic components segment.

         Selected financial data for each of the Company's operating segments is
shown below.

<TABLE>
                                             2004                  2003                  2002
                                             ----                  ----                  ----
<S>                                     <C>                   <C>                   <C>
SALES TO EXTERNAL CUSTOMERS:
     Electronic Components              $ 15,262,000          $ 16,168,000          $ 13,390,000
     Communications Equipment             14,599,000             9,351,000             9,274,000
                                       ----------------------------------------------------------
                                        $ 29,861,000          $ 25,519,000          $ 22,664,000

INTEREST EXPENSE:
     Electronic Components              $    180,000          $    247,000          $    259,000
     Communications Equipment                250,000               162,000               168,000
                                       ----------------------------------------------------------
                                        $    430,000          $    409,000          $    427,000

DEPRECIATION AND AMORTIZATION:
     Electronic Components              $     91,000          $     72,000          $     93,000
     Communications Equipment                126,000                65,000               177,000
                                       ----------------------------------------------------------
                                        $    217,000          $    137,000          $    270,000

SEGMENT PROFITS (LOSSES):
     Electronic Components              $  2,612,000          $  3,590,000          $  2,452,000
     Communications Equipment              1,733,000                74,000            (1,257,000)
                                       ----------------------------------------------------------
                                        $  4,345,000          $  3,664,000          $  1,195,000

SEGMENT ASSETS:
     Electronic Components              $  8,435,000          $  9,466,000          $  9,445,000
     Communications Equipment             16,313,000             6,969,000             6,773,000
                                       ----------------------------------------------------------
                                        $ 24,748,000          $ 16,435,000          $ 16,218,000
</TABLE>

                                                       F-28



<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


GOODWILL AND OTHER INTANGIBLE ASSETS BY SEGMENT

<TABLE>
                                                          Trademarks          Technology             Customer
                                   Goodwill --        and Tradenames --       Acquired --         Relationships --
                                Not Amortizable        Not Amortizable        10-Year Life         10-Year Life
Gross cost                        Since 2002             Since 2002           Amortizable          Amortizable
----------                      ----------------------------------------------------------------------------------
<S>                             <C>                   <C>                   <C>                    <C>
Electronic components           $    1,297,000        $           --        $           --         $           --
Communications equipment             5,668,000              2,800,000               500,000               300,000
                                ----------------------------------------------------------------------------------
Total                           $    6,965,000         $    2,800,000        $      500,000        $      300,000
                                ==================================================================================

Accumulated amortization
------------------------
Electronic components           $      212,000         $           --        $           --        $           --
Communications equipment               872,000                     --                25,000                15,000
                                ----------------------------------------------------------------------------------
Total                           $    1,084,000         $           --        $       25,000        $       15,000
                                ==================================================================================

Carrying value
--------------
Electronic components           $    1,085,000         $           --        $           --        $           --
Communications equipment             4,796,000              2,800,000               475,000               285,000
                                ----------------------------------------------------------------------------------
Total                           $    5,881,000         $    2,800,000        $      475,000        $      285,000
                                ==================================================================================
</TABLE>

<TABLE>
CHANGES IN GOODWILL BY SEGMENT

                                     Electronic        Communications
                                     Components           Equipment           Total
                                ------------------------------------------------------
<S>                            <C>                  <C>                <C>
Balance at January 1, 2002     $       957,000      $      1,432,000   $    2,389,000
Goodwill acquired                           --                    --               --
Impairment                                  --                    --               --
Foreign currency translation           (43,000)                   --          (43,000)
                               -------------------------------------------------------
Balance December 31, 2002      $       914,000      $      1,432,000   $    2,346,000
                               =======================================================

Balance at January 1, 2003     $       914,000      $      1,432,000   $    2,346,000
Goodwill acquired                           --                    --               --
Impairment                                  --                    --               --
Foreign currency translation           101,000                    --          101,000
                               -------------------------------------------------------
Balance December 31, 2003      $     1,015,000      $      1,432,000   $    2,447,000
                               =======================================================

Balance at January 1, 2004     $     1,015,000      $      1,432,000   $    2,447,000
Goodwill acquired                           --             3,363,000        3,363,000
Impairment                                  --                    --               --
Foreign currency translation            70,000                 1,000           71,000
                               -------------------------------------------------------
Balance December 31, 2004      $     1,085,000      $      4,796,000   $    5,881,000
                               =======================================================
</TABLE>

         The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.

<TABLE>
                                                              2004              2003               2002
                                                          -------------     -------------     -------------
<S>                                                       <C>               <C>               <C>
Net sales
---------
   Total sales for reportable segments                    $ 29,861,000      $ 25,519,000      $ 22,664,000
   Elimination of intersegment sales                                --                --                --
                                                          -------------     -------------     -------------
Total consolidated net sales                              $ 29,861,000      $ 25,519,000      $ 22,664,000
                                                          =============     =============     =============
Profit (loss) from continuing operations
----------------------------------------
   before income taxes
   -------------------
     Total profit (loss) for reportable segments          $  4,345,000      $  3,656,000      $  1,195,000
     Unallocated amounts:
       General corporate expenses                           (2,816,000)       (2,209,000)       (1,785,000)
                                                          -------------     -------------     -------------
Consolidated income (loss) from continuing operations
   before income taxes                                    $  1,529,000      $  1,447,000      $   (590,000)
                                                          =============     =============     =============

Assets
------
   Total assets for reportable segments                   $ 24,748,000      $ 16,437,000      $ 16,218,000
   Other assets                                                338,000           732,000           568,000
                                                          -------------     -------------     -------------
Total consolidated assets                                 $ 25,086,000      $ 17,169,000      $ 16,786,000
                                                          =============     =============     =============

Interest expense
----------------
   Interest expense for reportable segments               $    430,000      $    409,000      $    427,000
   Other interest expense                                        3,000             7,000            14,000
                                                          -------------     -------------     -------------
Total interest expense                                    $    433,000      $    416,000      $    441,000
                                                          =============     =============     =============

Depreciation and amortization
-----------------------------
Depreciation and amortization expense
   for reportable segments                                $    217,000      $    185,000      $    270,000
   Other depreciation and amortization expense                  70,000            64,000            79,000
                                                          -------------     -------------     -------------
Total depreciation and amortization                       $    287,000      $    249,000      $    349,000
                                                          =============     =============     =============
</TABLE>

                                                   F-29

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         A summary of the Company's net sales and identifiable assets by
geographical area follows:

<TABLE>
                                    2004              2003              2002
                                -----------       -----------       -----------
<S>                             <C>               <C>               <C>
Net sales:
----------
    United States               $12,745,000       $ 7,971,000       $ 8,598,000
    Japan                           935,000           838,000           768,000
    France                        7,016,000         6,627,000         5,854,000
    United Kingdom                9,165,000        10,083,000         7,444,000
                                ------------------------------------------------
                                $29,861,000       $25,519,000       $22,664,000
                                ================================================
Long-lived assets:
------------------
    United States               $   440,000       $   117,000       $   399,000
    Japan                            11,000            16,000            15,000
    France                          142,000           107,000           177,000
    United Kingdom                  316,000            82,000            97,000
                                ------------------------------------------------
                                $   909,000       $   322,000       $   688,000
                                ================================================
</TABLE>

         Sales and purchases between geographic areas have been accounted for on
the basis of prices set between the geographic areas, generally at cost plus 5%.
Identifiable assets by geographic area are those assets that are used in the
Company's operations in each location. Net sales by geographic area have been
determined based upon the country from which the product was shipped.

         One customer in the electronic components segment accounted for 10% or
more of net sales during 2004, 2003 and 2002.

(13)     NEW ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," an amendment of SFAS No. 87, 88 and 106, and a
revision of SFAS No. 132. The statement is effective for fiscal years and
interim periods ending after December 15, 2003. This Statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans required
by SFAS No. 87, 88 and 106. The new rules require additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The adoption of
this statement did not have a material effect on the Company's financial
condition or results of operations.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," which addresses the accounting for employee stock
options. SFAS No. 123R eliminates the ability to account for shared-based
compensation transactions using APB Opinion No. 25 and generally would require
instead that such transactions be accounted for using a fair value-based method.
SFAS No. 123R also requires that tax benefits associated with these share-based
payments be classified as financing activities in the statement of cash flow
rather than operating activities as currently permitted. SFAS No. 123R becomes
effective for interim or annual periods beginning after June 15, 2005.
Accordingly, we are required to apply SFAS No. 123R beginning in the quarter
ending September 30, 2005. SFAS No. 123R offers alternative methods of adopting
this final rule. The Company has not yet determined which alternative method it
will use.


                                      F-30

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


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

(14)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of the quarterly operations for the years
ended December 31, 2004 and 2003 (in thousands, except for per share data).

<TABLE>
                    2004                         Mar. 31      June 30      Sept. 30      Dec. 31
                    ----                         -------      -------      --------      -------
<S>                                              <C>          <C>          <C>           <C>
Net sales                                        $  6,192     $   6,432    $  7,469      $  9,768
Gross profit                                     $  2,747     $   2,899    $  3,230      $  4,839
Net income                                       $     70     $     369    $    158      $    883
Income available to common stockholder           $     70     $     369    $    158      $    883
Earnings per share:
     Basic                                       $     --     $    0.02    $   0.01      $   0.04
                                                 ========     =========    ========      ========
     Diluted                                     $     --     $    0.02    $   0.01      $   0.03
                                                 ========     =========    ========      ========

                    2003                         Mar. 31      June 30      Sept. 30      Dec. 31
                    ----                         -------      -------      --------      -------
Net sales                                        $  5,668    $   6,834    $  6,420      $  6,597
Gross profit                                     $  2,141    $   2,829    $  2,715      $  2,999
Net income                                       $     44    $     359    $    504      $    254
Income available to common stockholder           $     42    $     357    $    504      $    254
Earnings per share:
     Basic                                       $     --    $    0.02    $   0.02      $   0.01
                                                 ========    =========    ========      ========
     Diluted                                     $     --    $    0.02    $   0.02      $   0.01
                                                 ========     =========    ========      ========
</TABLE>

(15)     LARUS CORPORATION ACQUISITION

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

         The purchase price for the acquisition totaled $6,539,500 and consisted
of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common
stock with a fair value of $1,000,000, $887,500 in the form of two short-term,
zero interest promissory notes that were repaid in 2004, $3,000,000 in the form
of two subordinated secured promissory notes, warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share,
and approximately $580,000 of acquisition costs. The number of shares of our
common stock issued as part of the purchase price was calculated based on the
$0.824 per share average closing price of our common stock for the five trading
days preceding the


                                      F-31

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


transaction. The warrants to purchase 150,000 shares of common stock were valued
at $72,000 using a Black-Scholes formula that included a volatility of 107.19%,
an interest rate of 3.25%, a life of three years and no assumed dividend.

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

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

         In conjunction with the Company's July 2004 acquisition of Larus
Corporation, the Company has commissioned a valuation firm to determine what
portion of the purchase price should be allocated to identifiable intangible
assets. Although the valuation analysis is still in progress, the Company has
estimated that the Larus tradename and trademark are valued at $2,800,000 and
that the technology and customer relationships are valued at $800,000. Goodwill
associated with the Larus Corporation acquisition totaled $3,363,000 and is not
deductible for tax purposes. The Larus tradename and trademark were determined
to have indefinite lives and therefore are not being amortized but rather are
being periodically tested for impairment. The technology and customer
relationships were both estimated to have ten-year lives and, as a result,
$40,000 of amortization expense was recorded and charged to administrative
expense in 2004. The valuation of the identified intangible assets is expected
to be completed in May 2005 and could result in changes to the value of these
identified intangible assets and corresponding changes to the value of goodwill.
However, the Company does not believe these changes will be material to its
financial position or results of operations.

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

                                                              Amount
                                                           in Thousands
                                                           ------------

        Current assets                                      $  2,460
        Property, plant and equipment                             90
        Intangible assets other than goodwill                  3,600
        Goodwill                                               3,363
                                                            ---------
        Total assets acquired                                  9,513
        Current liabilities                                     (685)
        Deferred income taxes                                 (1,400)
        Unfavorable lease obligation and
           other liabilities                                    (888)
                                                            ---------
        Total liabilities assumed                             (2,973)
                                                            ---------
        Net assets acquired                                 $  6,540
                                                            =========

         The intangible assets other than goodwill consist of non-amortizable
tradenames with a carrying value of $2,800,000, and technology and customer
relationships with carrying values of $500,000 and $300,000, respectively, that
are amortizable over ten years.


                                      F-32

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         Amortization for the intangibles subject to amortization as of December
31, 2004 is anticipated to be approximately $80,000 per year for each of the
next five years.

         The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Larus Corporation, as though
the acquisition occurred as of January 1, 2003. The pro forma amounts give
effect to appropriate adjustments for interest expense and income taxes. The pro
forma amounts presented are not necessarily indicative of future operating
results (in thousands, except per share amounts):

                                                            Year Ended
                                                           December 31,
                                                   ---------------------------
                                                      2004              2003
                                                   ---------         ---------
Revenues                                           $ 32,486          $ 31,376
Net income                                            1,720             1,264
Earnings per share of common stock:
     Basic                                         $   0.07          $   0.06
                                                   =========         =========
     Diluted                                       $   0.07          $   0.05
                                                   =========         =========

(16)     RELATED PARTY TRANSACTIONS

         On July 13, 2004, the Company issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that were repaid in 2004, in exchange for 100% of the common
stock of Larus Corporation (see Note 15). These notes are subordinated to the
Company's bank debt and are payable in 72 equal monthly payments of principal
totaling $41,667 per month plus interest at the 30-day LIBOR rate plus 5% with a
maximum interest rate of 7% during the first two years of the term of the notes,
8% during the third and fourth years, and 9% thereafter. During December 2004,
the 30-day LIBOR rate was 2.42%.

         Future maturities of the notes payable to stockholders are as follows:

         Year Ending December 31,
         -----------------------
                2005                     $  500,000
                2006                     $  500,000
                2007                     $  500,000
                2008                     $  500,000
                2009                     $  500,000
               Therafter                 $  250,000
                                         ----------
                                         $2,750,000
                                         ==========

         Total interest paid on these notes in 2004 was $75,000.

         The Company entered into an above-market real property lease with the
sellers. This lease represents an obligation that exceeds the fair market value
by approximately $756,000. The lease term is for 7 years and expires on June 30,
2011. It is renewable for a 5-year term priced under market conditions. The base
rent is based on a minimum rent of $.90 per square foot per month, which is
$27,000 monthly or $324,000 per year, subject to monthly adjustments of the
interest rate based on the Federal Reserve Discount Rate that match the lessor's
variable interest rate mortgage payments on the building. The maximum increase
in any year is 1.5%, with a cumulative maximum increase of 8% over the life of
the lease. The increases apply to that portion of the rent that corresponds to
the interest portion of the lessor's mortgage. Lease payments paid to the
related parties during 2004 totaled $171,000. Future minimum lease payments
under the operating lease payable to the stockholders are included in Note 11.

         There are no guarantees by officers or fees paid to officers or
loans to or from officers. In 2004, the Company paid $10,000 to Jason Oliva,
the son of Carmine T. Oliva, for specific financial analysis services. In 2003,
the Company issued to Jason Oliva three-year warrants to purchase up to 100,000
shares of common stock at a per share exercise price of $0.75 and up to 100,500
shares of common stock at a per share exercise price of $1.00 in consideration
for financial advisory services rendered.

                                      F-33

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


(17)     SUBSEQUENT EVENTS

JANUARY 2005 FINANCING

         On January 5, 2005, the Company issued to 17 accredited record holders
in a private offering an aggregate of 12,503,500 shares of common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share, for total proceeds of approximately $18,005,000. The Company
paid cash placement agent fees and expenses of approximately $961,000, and
issued five-year placement warrants to purchase up to an aggregate of 650,310
shares of common stock at an exercise price of $1.73 per share in connection
with the offering. The total warrants issued, representing 3,775,875 shares of
the Company's common stock, have an estimated value of $4,400,000. Additional
costs related to the financing include legal, accounting and consulting fees
that continue to be incurred in connection with the resale registration
described below. The Company used a portion of the proceeds from this financing
to fund the acquisition of Pascall described below. The Company intends to use
the remaining proceeds from this financing for additional acquisitions and for
investments in new products and enhancements to existing products.

         The Company agreed to register for resale the shares of common stock
issued to investors and the shares of common stock issuable upon exercise of the
investor warrants and placement warrants. The registration obligations require,
among other things, that a registration statement be declared effective no later
than the 150th day following the closing date. If the Company is unable to meet
this obligation or unable to maintain the effectiveness of the registration in
accordance with the requirements contained in the registration rights agreement
the Company entered into with the investors, then the Company will be required
to pay to each investor liquidated damages equal to 1% of the amount paid by the
investor for the common shares still owned by the investor on the date of the
default and 2% of the amount paid by the investor for the common shares still
owned by the investor on each monthly anniversary of the date of the default
that occurs prior to the cure of the default. The maximum aggregate liquidated
damages payable to any investor will be equal to 10% of the aggregate amount
paid by the investor for the shares of the Company's common stock. Accordingly,
the maximum aggregate penalty that the Company would be required to pay under
this provision is 10% of the $18,005,000 initial purchase price of the common
stock, which would be approximately $1,801,000. Although the Company anticipates
that it will be able to meet its registration obligations, it also anticipates
that it will have sufficient cash available to pay these penalties if required.

PASCALL ACQUISITION

         On March 1, 2005, the Company and XCEL Corporation Limited, a second-
tier wholly-owned subsidiary of the Company ("XCEL"), entered into an agreement
("Purchase Agreement") relating to the acquisition of Pascall Electronic
(Holdings) Limited ("PEHL") by XCEL. The closing of the purchase occurred on
March 18, 2005. The Company loaned to XCEL the funds that XCEL used to purchase
PEHL.

         PEHL was a wholly-owned subsidiary of Intelek Properties Limited,
which itself is an operating subsidiary of Intelek PLC, a London Stock
Exchange public limited company. PEHL and its subsidiary, Pascall
Electronics Limited ("Pascall"), produce, design, develop, manufacture and sell
power supplies and radio frequency products for a broad range of applications,
including in-flight entertainment systems and military programs.


                                      F-34

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         Under the Purchase Agreement, XCEL purchased all of the outstanding
capital stock of PEHL. The initial purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The purchase price was paid in cash and is subject to upward or
downward adjustment on a pound for pound basis to the extent that the value of
the net assets of Pascall as of the closing date is greater or less than
2,520,000 British pounds sterling. The calculation of the value of the net
assets of Pascall is to occur within six weeks after the closing, and Intelek
Properties Limited will have 25 business days after receipt of the calculation
to accept or dispute the calculation. Any payment relating to the increase or
reduction of the purchase price based on the value of the net assets of Pascall
will be due from XCEL or Intelek Properties Limited, as the case may be, within
14 days of the acceptance of the calculation. A default rate of interest equal
to 3% above the base lending rate of Barclays Bank plc London will apply if the
adjustment payment is not timely made. The purchase price is also subject to
downward adjustments for any payments that may be made to XCEL under indemnity,
tax or warranty provisions of the Purchase Agreement.

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

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

         Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, XCEL, Intelek PLC and
the Company entered into a Supplemental Agreement dated March 18, 2005. The
Supplemental Agreement provides, among other things, that an interest free
bridge loan of 200,000 British pounds sterling (approximately U.S. $385,000
based on the exchange rate in effect on March 17, 2005) that was made by Intelek
Properties Limited to Pascall on March 17, 2005 would be repaid by Pascall by
March 31, 2005. XCEL agreed to ensure that Pascall has sufficient funds to repay
the bridge loan. A default rate of interest equal to 3% above the base lending
rate of Barclays Bank plc London will apply if the loan is not timely repaid.


                                      F-35

<PAGE>

                       EMRISE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)


         The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, based on Pascall's
balance sheet data at February 28, 2005:

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

            Current assets ........................     $    5,543
            Property, plant and equipment .........          1,398
            Intangibles, including goodwill .......          3,577
            Other assets ..........................            152
                                                        -----------
            Total assets acquired .................         10,669
            Current liabilities ...................          1,528
            Other liabilities .....................            117
                                                        -----------
            Total liabilities assumed .............          1,645
                                                        -----------
            Net assets acquired ...................     $    9,024
                                                        ===========

         The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Pascall, as though the Pascall
acquisition occurred as of January 1, 2003. The pro forma amounts give effect
to appropriate adjustments for interest expense and income taxes. The pro forma
amounts presented are not necessarily indicative of future operating results (in
thousands, except per share amounts).

                                                         Year Ended
                                                        December 31,
                                                 --------------------------
                                                    2004            2003
                                                 -----------    -----------
         Revenues ..........................     $   41,697     $   38,540
         Net income ........................          1,655          1,308
         Earnings per share of common stock:
              Basic ........................     $     0.07     $     0.06
                                                 ===========    ===========
              Diluted ......................     $     0.07     $     0.05
                                                 ===========    ===========


                                      F-36

<PAGE>

<TABLE>
                                   EMRISE CORPORATION AND SUBSIDIARIES
                                        CONSOLIDATED SCHEDULE II
                                    VALUATION AND QUALIFYING ACCOUNTS
                              YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


                                                                Additions                      Reserve
                                                Balance at      Charged to    Deductions      Acquired
                                               Beginning of     Costs and    Write-offs of      with           Balance at
            Description                            Year         Expenses       Accounts      Acquisition       End of Year
            -----------                        ------------     ----------   -------------   -----------       -----------
<S>                                              <C>            <C>           <C>            <C>               <C>
Allowance for doubtful accounts:
     Year ended December 31, 2004                $  161,000     $       --    $  (32,000)    $    24,000       $   153,000
     Year ended December 31, 2003                $  130,000     $   61,000    $  (30,000)    $        --       $   161,000
     Year ended December 31, 2002                $  226,000     $  118,000    $ (214,000)    $        --       $   130,000

Allowance for inventory obsolescence:
     Year ended December 31, 2004                $1,692,000     $1,116,000    $ (557,000)    $        --       $ 2,251,000
     Year ended December 31, 2003                $1,497,000     $  924,000    $ (729,000)    $        --       $ 1,692,000
     Year ended December 31, 2002                $1,152,000     $  438,000    $  (93,000)    $        --       $ 1,497,000


                                                  F-37
</TABLE>

<PAGE>

                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                                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 (17)

  2.3       Supplemental Agreement dated March 18, 2005 among Intelek Properties
            Limited, XCEL Corporation Limited, Intelek PLC and Emrise
            Corporation (17)

  3.1       Restated Certificate of Incorporation of Emrise Corporation filed
            with the Secretary of State of Delaware on December 8, 2004 (2)

  3.2       Amended and Restated Bylaws adopted by the Board of Directors of the
            Corporation on September 1, 2004 (3)

 10.1       1993 Stock Option Plan (#) (6)

 10.2       Employee Stock and Stock Option Plan (#) (7)

 10.3       1997 Stock Incentive Plan (#) (8)

 10.4       Amended and Restated 2000 Stock Option Plan (#) (9)

 10.5       Form of Executive Officer and Director Indemnification Agreement
            entered into between the Registrant and each of Carmine T. Oliva,
            Robert B. Runyon, Laurence P. Finnegan, Jr., Otis W. Baskin,
            Randolph D. Foote and Graham Jefferies (2)

 10.6       Description of Retirement Account Matching Contributions (#) *

 10.7       Credit Facility Letter Agreement dated June 1, 2004 between Wells
            Fargo Bank, N.A., XET Corporation and CXR Telcom Corporation (10)

 10.8       Revolving Line of Credit Note dated June 1, 2004 in the principal
            amount of up to $3,000,000 made by XET Corporation and CXR Telcom
            Corporation in favor of Wells Fargo Bank, N.A. (10)

 10.9       Term Note dated June 1, 2004 in the principal amount of $150,000
            made by XET Corporation and CXR Telcom Corporation in favor of Wells
            Fargo Bank, N.A. (10)

 10.10      Continuing Guaranty made by XET Corporation and CXR Telcom
            Corporation in favor of Wells Fargo Bank, N.A. (10)

 10.11      Security Agreement Equipment made by XET Corporation in favor of
            Wells Fargo Bank, N.A. (10)

 10.12      Security Agreement Equipment made by CXR Telcom Corporation in favor
            of Wells Fargo Bank, N.A. (10)


                                       70

<PAGE>

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

 10.13      Continuing Security Agreement Rights to Payment and Inventory made
            by XET Corporation in favor of Wells Fargo Bank, N.A. (10)

 10.14      Continuing Security Agreement Rights to Payment and Inventory made
            by CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. (10)

 10.15      Deed of Guarantee and Indemnity dated November 12, 2002 made by
            MicroTel International Inc., XCEL Corporation Limited, Belix Power
            Conversion Limited and Belix Wound Components Limited in favor of
            Venture Finance PLC (11)

 10.16      Advantage Facility dated November 12, 2002 between XCEL Power
            Systems, Ltd. Limited and Venture Finance PLC (11)

 10.17      Cashflow Loan Agreement dated November 12, 2002 between XCEL Power
            Systems Limited and Venture Finance PLC (11)

 10.18      Term Loan Agreement dated November 12, 2002 between XCEL Power
            Systems, Ltd. and Venture Finance PLC (11)

 10.19      Deed of Subordination dated November 12, 2002 between Venture
            Finance PLC, MicroTel International Inc. and XCEL Corporation
            Limited (11)

 10.20      Agreement for the Purchase of Debts dated November 12, 2002 between
            XCEL Power Systems, Ltd. and Venture Finance PLC (11)

 10.21      Letter Agreement dated October 23, 2002 between XCEL Power Systems,
            Ltd. and Venture Finance PLC regarding Amendments to Agreement
            for the Purchase of Debts (11)

 10.22      Credit Facility Agreement dated April 8, 2003, between IFN Finance
            and CXR, S.A.S. (11)

 10.23      English Summary of Credit Facility Agreement dated April 8, 2003
            between IFN Finance and CXR, S.A.S. (12)

 10.24      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 (10)

 10.25      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 (10)

 10.26      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 (10)

 10.27      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 (10)

 10.28      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 (10)


                                       71

<PAGE>

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

 10.29      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 (10)

 10.30      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
            (10)

 10.31      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 (10)

 10.32      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 (10)

 10.33      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
            (10)

 10.34      Lease agreement between the Registrant and Property Reserve Inc.
            dated September 16, 1999 (13)

 10.35      Lease agreement between XET, Inc. and Rancho Cucamonga Development
            dated August 30, 1999 (13)

 10.36      Commercial Lease dated July 13, 2004 between MicroTel International
            Inc., as Tenant, and Noel C. McDermott and Warren P. Yost, as
            Landlord, for the premises located at 894 Faulstich Court, San Jose,
            California (10)

 10.37      Employment Agreement dated as of January 1, 2001 between the
            Registrant and Carmine T. Oliva (#) (14)

 10.38      Employment Agreement dated as of July 2, 2001 between the Registrant
            and Randolph D. Foote (#) (9)

 10.39      Employment Agreement dated as of January 1, 2001 between the
            Registrant and Graham Jefferies (#) (9)

 10.40      Securities Purchase Agreement dated December 29, 2004 among Emrise
            Corporation and the investors listed on an attachment thereto (4)

 10.41      Registration Rights Agreement dated December 29, 2004 among Emrise
            Corporation and the investors who are parties to the Securities
            Purchase Agreement dated December 29, 2004 (4)


                                       72

<PAGE>

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

 10.42      Form of Investor Warrant issued by Emrise Corporation to the
            investors who are parties to the Securities Purchase Agreement dated
            December 29, 2004 (4)

 10.43      Loan Agreement dated March 18, 2005 among XCEL Corporation Limited,
            Pascall Electronics Limited and Pascall Electronic (Holdings)
            Limited (17)

 14.1       Code of Business Conduct and Ethics (5)

 14.2       Code of Ethics for CEO and Senior Financial Officers (5)

 21         Subsidiaries of the Registrant *

 23         Consent of Grant Thornton LLP, Independent Registered Public
            Accounting Firm *

 31         Certifications Required by Rule 13a-14(a) of the Securities Exchange
            Act of 1934, as amended, as Adopted Pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002 *

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

---------------
*      Filed herewith.

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

(1)    Filed as an exhibit to the Registrant's current report on Form 8-K for
       July 13, 2004 and incorporated herein by reference.

(2)    Filed as an exhibit to the Registrant's current report on Form 8-K for
       December 8, 2004 and incorporated herein by reference.

(3)    Filed as Appendix G to the Registrant's definitive proxy statement for
       the Registrant's 2004 annual meeting of stockholders and incorporated
       herein by reference.

(4)    Filed as an exhibit to the Registrant's Form 8-K for December 29, 2004
       and incorporated herein by reference.

(5)    Filed as an exhibit to the Registrant's annual report on Form 10-K for
       the year ended December 31, 2003 and incorporated herein by reference.

(6)    Filed as an exhibit to the Registrant's annual report on Form 10-K for
       the year ended December 31, 2000 and incorporated herein by reference.

(7)    Filed as an exhibit to the Registrant's definitive proxy statement for
       the Registrant's annual meeting of stockholders held June 11, 1998 and
       incorporated herein by reference.

(8)    Filed as an exhibit to the Registrant's definitive proxy statement for
       the special meeting of stockholders held January 16, 2001 and
       incorporated herein by reference.


                                       73

<PAGE>

(9)    Filed as an exhibit to the Registrant's quarterly report on Form 10-Q for
       September 30, 2001 and incorporated herein by reference.

(10)   Filed as an exhibit to the Registrant's quarterly report on Form 10-Q for
       June 30, 2004 and incorporated herein by reference.

(11)   Filed as an exhibit to the Registrant's quarterly report on Form 10-Q for
       June 30, 2003 and incorporated herein by reference.

(12)   Filed as an exhibit to Amendment No. 1 to the Registrant's quarterly
       report on Form 10-Q for June 30, 2003 and incorporated herein by
       reference.

(15)   Filed as an exhibit to the Registrant's registration statement on Form
       S-8 (Registration Statement No. 333-29925) and incorporated herein by
       reference.

(16)   Filed as an exhibit to the initial filing of the Registrant's
       registration statement on Form S-1 (Registration Statement No. 333-63024)
       and incorporated herein by reference.

(17)   Filed as an exhibit to the Registrant's current report on Form 8-K for
       March 19, 2005 and incorporated herein by reference.


                                       74

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 5th day of
April, 2005.

                                           EMRISE CORPORATION

                                           By:  /s/ Carmine T. Oliva
                                                --------------------------------
                                                Carmine T. Oliva
                                                Chairman of the Board, President
                                                and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

<TABLE>
SIGNATURE                                      CAPACITY                                          DATE
---------                                      --------                                          ----
<S>                                            <C>                                           <C>

/s/ Carmine T. Oliva                           Chairman of the Board, President,             April 5, 2005
------------------------------------           Chief Executive Officer (principal
Carmine T. Oliva                               executive officer) and Director


/s/ Carmine T. Oliva                           Acting Chief Financial Officer               April 5, 2005
------------------------------------           (principal accounting and
Carmine T. Oliva                               financial officer)


/s/ Robert B. Runyon                           Director                                      April 5, 2005
------------------------------------
Robert B. Runyon


/s/ Laurence P. Finnegan, Jr.                  Director                                      April 5, 2005
------------------------------------
Laurence P. Finnegan, Jr.


/s/ Otis W. Baskin                             Director                                      April 5, 2005
------------------------------------
Otis W. Baskin


                                                    75
</TABLE>

<PAGE>

                        EXHIBITS ATTACHED TO THIS REPORT

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


 10.6       Description of Retirement Account Matching Contributions

 21         Subsidiaries of the Registrant

 23         Consent of Grant Thornton LLP, Independent Registered Public
            Accounting Firm

 31         Certifications required by Rule 13a-14(a) of the Securities Exchange
            Act of 1934, as amended, as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

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


                                       76