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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

                                  ANNUAL REPORT
                     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, 2006.

                                       OR

| |   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from ____________ to _____________

                         Commission file number: 1-10346

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

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

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

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

           Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                    Name of Each Exchange on Which Registered
-------------------                    -----------------------------------------
COMMON STOCK, $0.0033 PAR VALUE        NYSE ARCA

           Securities registered pursuant to Section 12(g) of the Act:
                                      NONE
                                (Title of class)

      Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes _____ No __X__

      Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _____ No __X__

      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 a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.

Large Accelerated Filer ___   Accelerated Filer ___   Non-Accelerated Filer _X_

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes _____ No __X__

      The aggregate market value of the voting common equity held by
nonaffiliates of the registrant, computed by reference to the $1.03 closing sale
price of such stock on June 30, 2006, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $35,000,000.
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 16, 2006 was 38,136,750.

      DOCUMENTS INCORPORATED BY REFERENCE: None.

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                                TABLE OF CONTENTS
                                -----------------
                                                                            Page
                                                                            ----

                                     PART I

ITEM 1.    BUSINESS............................................................1

ITEM 1A.   RISK FACTORS.   ...................................................16

ITEM 1B.   UNRESOLVED STAFF COMMENTS..........................................21

ITEM 2.    PROPERTIES.........................................................21

ITEM 3.    LEGAL PROCEEDINGS..................................................22

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

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
           MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES..................22

ITEM 6.    SELECTED FINANCIAL DATA............................................24

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS..............................................25

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........46

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................47

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE...............................................47

ITEM 9A.   CONTROLS AND PROCEDURES............................................49

ITEM 9B.   OTHER INFORMATION..................................................49

                                    PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.............52

ITEM 11.   EXECUTIVE COMPENSATION.............................................55

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           AND RELATED STOCKHOLDER MATTERS....................................65

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
           INDEPENDENCE.......................................................67

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................69

                                     PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.........................70

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE...............F-1

SIGNATURES....................................................................78

EXHIBITS ATTACHED TO THIS REPORT..............................................79


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                              CAUTIONARY STATEMENT

      ALL STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT
ON FORM 10-K, OTHER THAN STATEMENTS OR CHARACTERIZATIONS OF HISTORICAL FACT, ARE
FORWARD-LOOKING STATEMENTS. EXAMPLES OF FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, STATEMENTS CONCERNING PROJECTED NET SALES, COSTS AND
EXPENSES AND GROSS MARGINS; OUR ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGMENTS;
OUR SUCCESS IN PENDING LITIGATION; THE DEMAND FOR OUR PRODUCTS; THE COMPETITIVE
NATURE OF AND ANTICIPATED GROWTH IN OUR INDUSTRIES; OUR ABILITY TO IDENTIFY AND
CONSUMMATE ACQUISITIONS AND INTEGRATE THEIR OPERATIONS SUCCESSFULLY; AND OUR
PROSPECTIVE NEEDS FOR ADDITIONAL CAPITAL. THESE FORWARD-LOOKING STATEMENTS ARE
BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES, APPROXIMATIONS AND PROJECTIONS
ABOUT OUR INDUSTRIES AND BUSINESS, MANAGEMENT'S BELIEFS, AND CERTAIN ASSUMPTIONS
MADE BY US, ALL OF WHICH ARE SUBJECT TO CHANGE. FORWARD-LOOKING STATEMENTS CAN
OFTEN BE IDENTIFIED BY WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS," "PREDICTS," "BELIEVES," "SEEKS," "ESTIMATES," "MAY," "WILL," "SHOULD,"
"WOULD," "COULD," "POTENTIAL," "CONTINUE," "ONGOING," SIMILAR EXPRESSIONS, AND
VARIATIONS OR NEGATIVES OF THESE WORDS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT
ARE DIFFICULT TO PREDICT. THEREFORE, OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
AND ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS, SOME OF WHICH ARE LISTED UNDER "RISK FACTORS" IN ITEM 1A OF
THIS REPORT. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS
REPORT. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENT FOR ANY REASON, EXCEPT AS OTHERWISE REQUIRED BY LAW.

                                     PART I

ITEM 1.  BUSINESS.

OVERVIEW

      We are a leading supplier of communication timing and synchronization
systems, communication access devices, rotary and digital switches, electronic
power supplies and radio frequency, or RF, and microwave devices. We sell our
products to communications service providers, defense and aerospace contractors
and industrial customers. We are a multinational company operating out of
facilities located in the United States, United Kingdom, France and Japan. As of
March 16, 2007, we had approximately 302 employees.

      We are a Delaware corporation that was formed July 14, 1989. We have three
wholly-owned operating subsidiaries, EMRISE Electronics Corporation, a New
Jersey corporation that was formed in 1983 ("EMRISE Electronics"), 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").

      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, EMRISE Electronics Ltd. ("EEL"), a United Kingdom-based
subsidiary of EMRISE Electronics, acquired Pascall Electronic (Holdings) Limited
("PEHL") and its wholly-owned subsidiary, Pascall Electronics Limited
("Pascall"). Pascall is based in the United Kingdom and manufactures a range of
custom proprietary power systems and RF devices.

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      In August 2005, EMRISE Electronics acquired all of the outstanding common
stock of RO Associates Incorporated ("RO"), a manufacturer of standard power
supplies located in Sunnyvale, California.

      Through our operating subsidiaries, CXR Larus, CXR-AJ and EMRISE
Electronics, 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 Devices

            --    electronic power supplies

            --    digital and rotary switches

            --    RF and microwave devices

      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 devices segment, primarily to defense and aerospace
customers, defense contractors and industrial customers were approximately
70.5%, 62.6% and 51.1% of our total net sales during 2006, 2005 and 2004,
respectively. Sales of communications equipment and related services, primarily
to private customer premises and public carrier customers, were approximately
29.5%, 37.4% and 48.9% of our total net sales during 2006, 2005 and 2004,
respectively.

      Our objective in our electronic devices business is to become the supplier
of choice for harsh environment, high reliability digital and rotary switches,
custom and standard power supplies and RF and microwave products and subsystems.
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 DEVICES

      The electronic devices industry comprises three basic segments, which are
active devices, passive devices and electromechanical devices. 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 devices.

      We are active only in the industry segments that are characterized by
harsh environment, high reliability, 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 and RF and microwave devices, we believe that our electronic
devices 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.

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

      The Digitran division of EMRISE Electronics ("Digitran"), which EMRISE
Electronics acquired from Becton Dickinson in 1985, has been manufacturing
digital switches since the 1960s. XCEL Power Systems, Ltd. ("XPS"), a
second-tier subsidiary of EMRISE Electronics, 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 significant growth and have become a critical
part of the global business and economic infrastructure that has been driven by
the following:

      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

      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.

      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 test 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 and transmission devices and advanced field and central or
branch office testing and monitoring solutions.

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OUR SOLUTION

      We develop, manufacture and market a range of electronic devices,
including custom and standard electronic power supplies, digital and rotary
switches, and RF and microwave devices, used primarily by aerospace, defense and
industrial customers.

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

      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 select range of test
instruments used by operators of telecommunications networks for the
installation, maintenance and optimization of communications networks.

      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
devices, enable us to provide the following features and benefits to our
customers:

      DEVELOPMENT OF SWITCH TECHNOLOGY. We have complemented our
long-established range of digital switch products with a new range of
space-saving rotary switches we refer to as VLP(R), 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, heavier switches offered by our competitors.
We have secured one patent and a number of other patents are pending relating to
this technology.

      PROVISION OF RF AND MICROWAVE DEVICES. We have developed and we
manufacture and market a range of RF devices and microwave devices that meet the
requirements of defense, aerospace and industrial applications.

      DEVELOPMENT AND PROVISION 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 telephone company market in addition to private networks.

      PROVISION OF MORE EFFICIENT AND COST-EFFECTIVE POWER SYSTEMS. We have
developed and we provide custom and standard 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 grade network
access and transmission products 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 meet specific requirements
such as 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.

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      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, RF and
microwave devices 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 as for retrofit into existing equipment. Our engineers
continually interact with our customers during the design process to ensure that
our electronic devices are the best available solution for them. For example,
based on specifications from 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 devices business currently enjoys a
preferred supplier status with many key accounts, which means that we work in
close association with the customer to develop custom products specifically
addressing their needs. Our electronic devices also are considered qualified
products with many key accounts, which means that our products are designed into
equipment specifications of many of our customers for the duration of their
production of their equipment.

      LONG-TERM RELATIONSHIPS. Market procurement methods encourage long-term
relationships between electronic devices 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' and Digitran's 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, RF devices and microwave devices, and custom and standard power
supplies in the aerospace, defense and industrial markets, in addition to being
a leading provider of network access and transmission products and timing and
synchronization systems 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 DEVICES BUSINESS. We plan to continue to grow our
electronic devices business by marketing our electronic devices in their
established market niches and identifying opportunities to broaden our customer
base. The primary growth driver and focus for this business segment is the
in-flight multimedia and communications market for commercial airlines.

      EXPAND OUR COMMUNICATION TIMING AND SYNCHRONIZATION PRODUCTS. We plan to
build upon our existing strong base businesses in the communications equipment
market by introducing additional new products, specifically new communication
timing and synchronization products, including the recently released TiemPo(TM)
6400 product, which will be the base product in a new product range that forms
the primary growth driver for this business segment.

      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.

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      LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase network access and transmission products,
communication timing and synchronization 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 their already
deployed equipment and generating follow-on sales opportunities as we develop
new capabilities in the future. We plan to continue to approach our existing
digital switch customers to determine whether they need our proprietary and
patented rotary switches that we do not currently manufacture for them.

      EMPLOY COMPETITIVE WORLD-CLASS MANUFACTURING FOR OUR PRODUCTS. We have
reviewed and continue to review the manufacturing methods we use to ensure that
we employ world class techniques and are competitive in the world market. We
located and negotiated an agreement and currently use a Tier 1 manufacturer in
the United States for our communication timing products, which provides a highly
competitive and technically advanced solution to our manufacturing needs.

      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 network access and transmission
products.

      DEVELOP AND ExPAND STRATEGIC RELATIONSHIPS. We plan to continue to develop
our strategic relationships with network access and transmission 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.

      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.

      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 manage increasingly larger and more complex networks.

      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 further
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 Devices

            --    electronic power supplies


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            --    digital and rotary switches

            --    RF and microwave devices

      o     Communications Equipment

            --    network access and transmission products

            --    communication timing and synchronization products

            --    communications test instruments

      During 2006, 2005 and 2004, our total net sales were approximately
$46,384,000, $41,270,000 and $29,637,000, respectively, and the percentages of
total net sales contributed by each product group within our two main business
segments were as follows:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                    ------------------------------
  Segment and Product Type                                            2006       2005       2004
  ------------------------                                          --------   --------   --------
<S>                                                                   <C>        <C>        <C>
  Electronic Devices
    Electronic Power Supplies.................................        45.3%      34.1%      26.9%
    Digital and Rotary Switches...............................        14.1%      15.9%      18.6%
    RF and Microwave Devices..................................         8.0%       7.5%        --
    Subsystem Assemblies......................................          --         --        0.8%
    Other Products and Services...............................         3.1%       4.7%       5.2%
                                                                    --------   --------   --------
                                                                      70.5%      62.2%      51.5%
  Communications Equipment
    Network Access and Transmission Products..................        17.8%      21.4%      27.9%
    Communication Timing and Synchronization Products.........         5.9%       6.4%       4.4%
    Communications Test Instruments...........................         3.3%       7.2%      12.8%
    Other Products and Services...............................         2.5%       2.8%       3.4%
                                                                    --------   --------   --------
                                                                      29.5%      37.8%      48.5%

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

BACKLOG

      Our business is generally not seasonal, with the exception that purchases
of our communications equipment by public telecommunications carriers 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, 2006 and 2005, our backlog of firm, unshipped orders was
approximately $25,784,000 and $22,150,000, respectively. At December 31, 2006,
our backlog was related approximately 96% to our electronic devices business,
which tends to provide us with long lead-times for our manufacturing processes
due to the custom nature of the products, and approximately 4% to our
communications equipment business, the majority of which portion relates to our
network access and transmission and communications timing and synchronization
and test equipment products. Of these backlog orders, we anticipate fulfilling
approximately 70% of our electronic devices 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.

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WARRANTIES

      Generally, our electronic devices, 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 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 devices
or other materials or workmanship will not arise in the future.

                         OUR ELECTRONIC DEVICES BUSINESS

      Our electronic devices segment includes digital and rotary switches,
electronic power supplies, and RF and microwave devices. During the years ended
December 31, 2006, 2005 and 2004, this segment accounted for approximately
70.5%, 62.2% and 51.5%, respectively, of our total net sales.

ELECTRONIC POWER SUPPLIES

      XPS and Pascall, based in England, and RO based in the U.S., manufacture a
range of high and low voltage, high specification, high reliability custom and
standard power conversion products designed for hostile environments and
supplied to an international customer base, predominantly in the military and
commercial aerospace, industrial and telecommunications markets.

      Power conversion units supplied by XPS and Pascall range from 10VA to 1.3
KVA power ratings, low voltage (1V) to high voltage (20KV+), and convert
alternating current, or AC, to direct current, or DC, and convert DC to AC.
Units can be manufactured to satisfy input requirements determined by military,
commercial 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.

DIGITAL AND ROTARY SWITCHES

      The Digitran division of EMRISE Electronics 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 variety of custom keypads.

      Our switches may be ordered with different combinations of a variety of
features and options, including night vision compatibility, harsh environment
sealing, RF shielding, various mounting methods, various electrical interfaces,
and various packaging and presentation to suit each application.

RF AND MICROWAVE DEVICES

      Pascall designs, develops, manufactures and markets a range of RF and
microwave amplifiers, oscillators, multiplexers, devices, subsystems and systems
for applications such as defense, aerospace, communications, air traffic control
and radar.

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                      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, 2006, 2005
and 2004, the sale of communications equipment products and related services
accounted for approximately 29.5%, 37.8% and 48.5%, respectively, of our total
net sales. These products 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.

NETWORK ACCESS AND TRANSMISSION PRODUCTS

      CXR Larus and CXR-AJ design, develop, manufacture and market a broad range
of network access and transmission products, including multiplexers, for fiber,
copper and microwave infrastructure, which combine to provide users with a
complete solution for voice and data transmission. Typical applications include
secure encryption for point-of-sale and videoconferencing extension of local
area networks, the consolidation of voice or data sources into a single carrier,
modular routers, interface converters and voice and data transmission.

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.

      Our range of communication timing and synchronization products include the
new StarClock TiemPo 6400(TM) range; StarSyncs(TM) 5850, a GPS timing source;
the StarSyncs(TM) 5800, an economical timing system designed for small
installations; and the StarClock(TM) 200, specifically designed for central
office applications.

      The TiemPo(TM) 6400 is a fully-integrated, modular and scalable system for
timing and synchronization of current and next generation packet networks. It
provides flexible and cost-effective solutions for timing and synchronization of
telecommunications equipment and meets or exceeds all relevant North American
and European telecommunications standards. The TiemPo(TM) 6400 incorporates a
new, proprietary, scalable architecture, providing many advanced features that
address the needs of a broad range of customers and markets, including all
telecommunications providers as well as numerous enterprise and military
applications. The TiemPo(TM) 6400 features CXR Larus' new Element Management
System, StarLink(TM), for remote network monitoring and management, and will
also provide an interface to other industry leading element and network
management systems. For smaller standalone applications, a new simple to use
graphical user interface, CXRView(TM), is provided.

COMMUNICATIONS TEST INSTRUMENTS

      CXR Larus manufactures the 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

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companies and private network operators to pre-qualify facilities for services,
verify proper operation of newly installed services and diagnose problems. The
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.

CUSTOMERS

   ELECTRONIC DEVICES

      We sell our electronic devices primarily to original equipment
manufacturers, or OEMs, in the electronics industry, including manufacturers of
aerospace and defense systems and industrial instruments. During 2006, our top
five electronic devices customers in terms of revenues were Rockwell Collins,
Inc., Selex Airborne Systems, BAE Systems, EMS Technologies, AB Pharos Systems
Company and Raytheon Systems Company. Sales to Rockwell Collins represented
approximately 9% of our total net sales during 2006 and 10% during 2005. No
other customer represented 10% or more of our total net sales during those
periods.

   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 these
products and services include telephone companies, 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 2006, 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 Power & Telephone, Harris Corporation, ITT, Graybar and ARINC, Inc.
None of our communications equipment customers represented 10% or more of our
revenues during 2006.

      Because we currently derive some of our revenues from sales to telephone
companies 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 telephone companies.
Telephone companies generally obtain approval for their annual budgets during
the first quarter of each calendar year. If a telephone company'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 telephone company during the period of the delay or shortfall.

SALES, MARKETING AND CUSTOMER SUPPORT

   ELECTRONIC DEVICES

      We market and sell our electronic devices through Digitran, XPS, Pascall,
RO and XCEL Japan, Ltd., a wholly-owned subsidiary of EMRISE Electronics 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.

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      We sell our electronic devices primarily to OEMs and system integrators in
the aerospace and electronics industries, including manufacturers of aerospace
and military systems and industrial instruments. Our electronic devices business
typically has long-term relationships with its customer base, with projects and
programs that are multi-year and with military programs in excess of ten years.

      XCEL Japan, Ltd. resells Digitran's digital and rotary switches and keypad
products and some third-party-sourced devices primarily into Japan and also into
other highly industrialized Asian countries. Marketing of our electronic devices
is primarily through referrals from our existing customers, with sales either
direct or via a small number of selected independent sales 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. Each of our devices businesses has an
extensive installed base: Digitran's history spans over 40 years in the
electronic devices industry, XPS, 50 years and RO 40 years. Major OEMs have
designed many of our switches, power supplies and RF and microwave devices into
their established 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 long-standing 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, the familiarity of members of our sales force 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.

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      Delays associated with potential customers' internal approval and
contracting procedures, procurement practices, testing and acceptance processes
are common and may cause potential sales of our communications products and 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
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 DEVICES

      The market for our devices is highly fragmented and composed of a diverse
group of OEMs, including Power One, Interpoint/Grenson, Martek and Celab Ltd.
for power supplies; Esterline (Janco), Greyhill, Inc., Omron Electronics,
Transico Inc. and C&K Components Inc. for digital and rotary switches; and
Elisera, AML and American Microwave Corporation for RF and microwave devices. We
believe that the principal competitive factors affecting our devices 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 devices industry and the fact that major 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 we
are 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;

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      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, Frequency Electronics and Oscilloquartz for communication timing
and synchronization products; RAD, Zhone/Paradyne and Patton Electronics
Corporation for network access and transmission products; and TTC Corporation (a
subsidiary of JDS Uniphase), Ameritec Corporation, Fluke, Sunrise Telecom, Inc.
and Electrodata, Inc. for communications test instruments.

      The design of many of our network access and transmission products enables
us to offer numerous 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
telephone companies. We believe we derive a competitive advantage from efforts
we expended to establish many of our communications equipment products as
customer-approved products for telephone companies and for other key customers
in the United States and abroad. 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 we
are 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 subassemblies, with final assembly, configuration and
quality testing performed in house.

      Manufacturing of our electronic devices, including injection molding,
fabrication, machining, printed circuit board 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 devices incorporate standard designs
and specifications, products are nevertheless built to customer order. This
approach, which avoids the need to maintain a large finished goods inventory, is
possible because of the custom nature of the products. Typically, our electronic
devices 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.

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      We operate seven manufacturing and assembly facilities worldwide. All of
these facilities except the RO Associates facility, which is being submitted for
accreditation, are certified as ISO 9001- or 9002-compliant. We manufacture our
network access and transmission products at CXR-AJ's facilities in France and at
CXR Larus' facility in San Jose, California. We manufacture RF and microwave
devices and custom power supplies at Pascall's facility in Ryde, Isle of Wight,
England. We manufacture standard power supplies at RO's facility in Sunnyvale,
California. 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 EMRISE Electronics Corporation's Rancho
Cucamonga, California facility. We manufacture our custom electronic power
supplies in Ashford, Kent, England and Ryde, Isle of Wight, 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 components and 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.

      For the years ended December 31, 2006, 2005 and 2004, our engineering and
product development costs were approximately $3,085,000, $2,621,000 and
$1,521,000, respectively.

      Our product development costs during the past three years were related to
development of new communication timing and synchronization products,
communication network access products, development of a new line of rotary
switches at our Digitran facility and the development of RF and microwave
devices at Pascall. 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 the expansion of our range of network access and transmission products
and the development and expansion of our range of 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 devices with their own products.

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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 secured a U.S. and foreign patent for a rotary
switch product and we filed patent applications, and intend to file additional
patent applications in the future, for various other products with the U.S.
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 network
access, transmission and communication timing and synchronization 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.

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 effect
on our business or financial condition.

EMPLOYEES

      As of March 16, 2007, we employed approximately 305 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.

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ITEM 1A.   RISK FACTORS.

RISK FACTORS

      THE FOLLOWING SUMMARIZES MATERIAL RISKS THAT INVESTORS SHOULD CAREFULLY
CONSIDER BEFORE DECIDING TO BUY OR MAINTAIN AN INVESTMENT IN OUR COMMON STOCK.
ANY OF THE FOLLOWING RISKS, IF THEY ACTUALLY OCCUR, WOULD LIKELY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. AS A RESULT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND INVESTORS COULD LOSE THE
MONEY THEY PAID TO BUY OUR COMMON STOCK.

      WE INCURRED A NET LOSS IN 2006 AND MAY INCUR LOSSES IN THE FUTURE. IF WE
      CONTINUE TO INCUR LOSSES, WE WILL EXPERIENCE NEGATIVE CASH FLOW, WHICH MAY
      HAMPER OUR OPERATIONS, MAY PREVENT US FROM EXPANDING OUR BUSINESS AND MAY
      CAUSE OUR STOCK PRICE TO DECLINE.

      We incurred a $3,938,000 net loss for 2006. We expect to rely on cash on
hand, cash generated from our operations and existing and future financing
activities to fund the cash requirements of our business. If our net losses
continue, we will experience negative cash flow, which may hamper current
operations and may prevent us from expanding our business. We may be unable to
attain, sustain or increase profitability on a quarterly or annual basis in the
future. If we do not achieve, sustain or increase profitability, our stock price
may decline.

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

      During 2006, the sale of electronic devices accounted for approximately
70.5% of our total net sales, and the sale of communications equipment and
related services accounted for approximately 29.5% of our total net sales. In
many cases we have long-term contracts with our electronic devices 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 reduced demand
for our products that could result from a general economic downturn, from
changes in the electronic devices 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.

      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. Our operating results from our communications
segment tend to be less stable and predictable than our operating results from
our electronic devices segment.

      The cyclical nature of the telecommunications business due to the
budgetary cycle of telephone companies has had and will continue to have for the
foreseeable future an effect on our quarterly operating results. Telephone
companies generally obtain approval for their annual budgets during the first
quarter of each calendar year. If a telephone company'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
telephone company during the period of the delay or shortfall.

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      Our electronic devices sales are often made in conjunction with military
contracts. The timing of required deliveries under these contracts can be
delayed based on issues related to the overall military contract, which can
cause delays in our shipment schedules and revenue recognition.

      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.

      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
      DEVICES 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 devices 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, Acting Chief Financial Officer and
Secretary, and Graham Jefferies, our Executive Vice President and Chief
Operating Officer. Mr. Oliva co-founded EMRISE Electronics 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. The
loss of Mr. Oliva, Mr. Jefferies, 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

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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, our long-term
competitive positioning may suffer.

      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, 2006, we had $25,784,000 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 devices 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 devices 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 FCC and Underwriters Laboratories
as well as industry standards established by Telcordia Technologies, Inc. and
the American National Standards Institute, among others. 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, among others. 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.

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<Page>

      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
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 in the United
Kingdom, France and Japan 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 50.2% and 49.7%
of our net sales for 2006 and 2005, respectively. We use derivatives to manage
foreign currency rate risk for certain sales shipped from the United Kingdom.
Our ultimate realized gain or loss with respect to currency fluctuations will
depend on the currency exchange rates and other factors in effect as the
contracts mature. Net foreign exchange translation gains and losses included in
other income and expense in our consolidated statements of operations totaled a
$343,000 loss for 2006 and a $123,000 gain for 2005.

      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.

                                       19



<Page>

      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. During 2006, the high and low closing sale prices of
a share of our common stock were $1.55 and $0.66, respectively. Between January
1, 2007 and March 16, 2007, the high and low closing sale prices of a share of
our common stock were $1.55 and $1.05, 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:

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

      o     economic conditions specific to the electronic devices 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.

      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 16, 2007, we had

                                       20



<Page>

outstanding 38,136,750 shares of common stock and options and warrants to
purchase an aggregate of 6,071,633 shares of common stock. A substantial number
of these shares are eligible for public resale. Sales of shares of our common
stock in the public market, 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 sales or perceptions.

ITEM 1B.   UNRESOLVED STAFF COMMENTS.

      Not applicable.

ITEM 2.    PROPERTIES.

      As of March 16, 2007, we leased or owned approximately 173,000 square feet
of administrative, engineering, production, storage and shipping space. All of
this space was leased other than the Abondant, France facility, which is owned.

<TABLE>
<CAPTION>
                                                                                               FUNCTION /
               BUSINESS UNIT                                LOCATION                     LEASE EXPIRATION DATE
-------------------------------------------  -------------------------------------  --------------------------------
<S>                                          <C>                                    <C>
EMRISE Corporation                           Rancho Cucamonga, California           Administration;
(corporate headquarters)                                                            Expires October 2009

EMRISE Electronics                           Rancho Cucamonga, California           Administration, Engineering and
Corporation/Digitran                                                                Manufacturing;
(electronic devices)                                                                Expires November 2007

XCEL Power Systems, Ltd. and EEL             Monrovia, California                   Expires February 2009
(electronic devices)                         Ashford, Kent, England                 Administration, Engineering and
                                                                                    Manufacturing; Expires March
                                                                                    2013

XCEL Japan, Ltd.                             Tokyo, Japan                           Sales;
(electronic devices)                                                                Expires December 2007

RO                                           Sunnyvale, California                  Administrative, Engineering,
(power supplies)                                                                    Manufacturing;
                                                                                    Month-to-month until the lease
                                                                                    was terminated March 31, 2007

Pascall Electronics Limited                  Ryde, Isle of Wight, England           Administration, Engineering,
(RF and microwave devices and                                                       Manufacturing;
custom power supplies)                                                              Expires May 2016

                                       21



<Page>
                                                                                               FUNCTION /
               BUSINESS UNIT                                LOCATION                     LEASE EXPIRATION DATE
-------------------------------------------  -------------------------------------  --------------------------------

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

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

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

      We believe the listed facilities are adequate for our current business
operations. We recently consolidated our RO operations into our CXR Larus
facility in San Jose, California and terminated our lease for RO's Sunnyvale,
California premises effective March 31, 2007. Also, CXR-AJ recently moved to a
new facility and entered into a new lease to replace the Paris, France lease
that was to expire in April 2007.

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.

      No matters were submitted to a vote of security holders during the quarter
ended December 31, 2006.

                                     PART II

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

MARKET PRICE AND HOLDERS

      Our common stock has traded on NYSE Arca since March 8, 2006, under the
symbol "ERI." For the period from August 10, 2005 through March 7, 2006, our
common stock traded on the Archipelago Exchange(SM) (ArcaEx(R)), a facility of
the Pacific Exchange(R), under the symbol "ERI." Prior to that, our common stock
traded on the OTC Bulletin Board under the symbol "EMRI." The table below shows,
for each fiscal quarter indicated, the high and low sales prices on NYSE Arca
and the Pacific Exchange and the high and low closing bid prices on the OTC
Bulletin Board, as the case may be, for shares of our common stock. 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, 2005
   First Quarter............................................  $1.82       $1.46
   Second Quarter...........................................   1.51        1.08
   Third Quarter............................................   1.98        0.91
   Fourth Quarter...........................................   2.34        1.14

Year Ended December 31, 2006
   First Quarter............................................  $1.55       $0.94
   Second Quarter...........................................   1.14        0.74
   Third Quarter............................................   1.15        0.66
   Fourth Quarter...........................................   1.10        0.89

                                       22



<Page>

      As of March 16, 2007, we had outstanding 38,136,750 shares of common stock
outstanding held of record by approximately 3,000 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 16, 2007,
the closing sale price of our common stock on NYSE Arca was $1.12 per share.

DIVIDENDS

      We have not declared or paid any cash dividends on our capital stock in
the past, and we do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future.

      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.

PERFORMANCE GRAPH

      Set forth below is a line graph comparing the cumulative total stockholder
return on our common stock, based on its market price, with the cumulative total
return on companies on the Nasdaq Stock Market (U.S.) and the Nasdaq Electronic
Components Index, assuming reinvestment of dividends for the period beginning
December 31, 2001 and ending December 31, 2006. This graph assumes that the
value of the investment in our common stock and each of the comparison groups
was $100 on December 31, 2001.




                               [PERFORMANCE GRAPH]


<TABLE>
<CAPTION>
                                                                     Cumulative Total Return ($)
                                                 ------------------------------------------------------------------
                                                    12/01      12/02      12/03       12/04      12/05      12/06
                                                 ------------------------------------------------------------------
<S>                                                <C>         <C>        <C>         <C>        <C>        <C>
EMRISE CORPORATION                                 100.00      64.52      362.90      545.16     432.26     341.94
NASDAQ STOCK MARKET (U.S.)                         100.00      71.97      107.18      117.07     120.50     137.02
NASDAQ ELECTRONIC COMPONENTS                       100.00      64.40       92.31      100.78     113.36     115.84
</TABLE>

                                       23



<Page>

ITEM 6.   SELECTED FINANCIAL DATA.

      The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 2006 have been derived from audited
financial statements that 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>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS AND        --------------------------------------------------------------
COMPREHENSIVE INCOME DATA:                          2006         2005         2004         2003         2002
                                                 ----------   ----------   ----------   ----------   ----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>          <C>          <C>          <C>          <C>
Net sales......................................  $   46,384   $   41,270   $   29,637   $   25,519   $   22,664
Cost of sales..................................      29,413       23,714       16,089       14,835       14,147
                                                 ----------   ----------   ----------   ----------   ----------
Gross profit...................................      16,971       17,556       13,548       10,684        8,517
Selling, general and administrative expenses...      16,117       13,707       10,212        7,812        7,731
Engineering and product development expenses..        3,085        2,621        1,521          951        1,015
                                                 ----------   ----------   ----------   ----------   ----------
(Loss) income from operations..................      (2,231)       1,228        1,815        1,921         (229)
Total other expense............................        (765)         (54)        (439)        (474)        (361)
                                                 ----------   ----------   ----------   ----------   ----------
(Loss) income from continuing operations
   before income taxes.........................      (2,996)       1,174        1,376        1,447         (590)
Income tax (benefit) expense...................         619         (267)          49          286          (20)
                                                 ----------   ----------   ----------   ----------   ----------
Net (loss) income..............................      (3,615)       1,441        1,327        1,161         (570)
Foreign currency translation adjustment........       1,568       (1,357)         379          705          446
                                                 ----------   ----------   ----------   ----------   ----------
Total comprehensive income (loss)..............  $   (2,047)  $       84   $    1,706   $    1,866   $     (124)
                                                 ==========   ==========   ==========   ==========   ==========
Basic (loss) earnings per share ...............  $    (0.10)  $     0.04   $     0.06   $     0.05   $    (0.03)
                                                 ==========   ==========   ==========   ==========   ==========
Diluted (loss) earnings per share .............  $    (0.10)  $     0.04   $     0.05   $     0.05   $    (0.03)
                                                 ==========   ==========   ==========   ==========   ==========
Weighted average shares outstanding, basic.....      37,981       37,253        24,063      22,567       21,208
Weighted average shares outstanding, diluted...      37,981       38,386        24,839      23,811       21,208


                                                                       YEARS ENDED DECEMBER 31,
                                                 --------------------------------------------------------------
                                                    2006         2005         2004         2003         2002
                                                 ----------   ----------   ----------   ----------   ----------
BALANCE SHEET DATA:                                                      (IN THOUSANDS)
Cash and cash equivalents......................  $    3,802   $    4,371   $    1,057   $    1,174   $      254
Working capital................................       9,611       12,958        5,357        5,696        3,961
Total assets...................................      44,785       44,461       25,144       17,169       16,786
Long-term debt, net of current portion.........       1,783        2,492        3,208          819          927
Stockholders' equity...........................      25,173       27,013       10,757        7,916        5,732
Convertible redeemable preferred stock.........          --           --           --           --          282
</TABLE>

                                       24



<Page>

      No cash dividends on our common stock were declared during any of the
periods presented above. Various factors materially affect the comparability of
the information presented in the above table. These factors relate primarily to
the acquisition of Larus Corporation in July 2004, the acquisition of Pascall in
March 2005, the acquisition of RO in August 2005, and changes in foreign
currency conversion rates that may affect the consistency of the generally
accepted accounting principles that we use. The year ended December 31, 2004
includes five months of Larus Corporation activity. The year ended December 31,
2005 includes nine and one-half months of Pascall activity and four months of RO
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 FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS REPORT. THIS REPORT AND THE FOLLOWING
DISCUSSION CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE ELECTRONIC DEVICES
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

   GENERAL

      Through our three wholly-owned operating subsidiaries, EMRISE Electronics,
CXR Larus 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 Devices

            --    electronic power supplies

            --    digital and rotary switches

            --    RF and microwave devices

      o     Communications Equipment

            --    network access and transmission products

            --    communication timing and synchronization products

            --    communications test instruments

      Sales to customers in the electronic devices segment, primarily to
aerospace customers, defense contractors and industrial customers, were
approximately 70.5%, 62.2% and 51.5% of our total net sales during 2006, 2005
and 2004, respectively. Sales of communications equipment and related services,
primarily to private customer premises and public carrier customers, were
approximately 29.5%, 37.8% and 48.5% of our total net sales during 2006, 2005
and 2004, respectively.

                                       25



<Page>

   LARUS CORPORATION ACQUISITION

      On July 13, 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. We paid
$6,539,500 to acquire the outstanding common stock of Larus Corporation, which
included a significant premium over the $1,800,000 recorded net worth of 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,
which were valued at $72,526, and approximately $580,000 of acquisition costs.
In addition, we assumed $245,000 in accounts payable and accrued expenses and
entered into an above-market real property lease with the sellers. The lease
represented an obligation that exceeded 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 prior credit
facility with Wells Fargo Bank, N.A. and cash on-hand.

   PASCALL ACQUISITION

      On March 18, 2005, our subsidiary, EEL, purchased all of the outstanding
capital stock of PEHL, the parent holding company of Pascall, using funds loaned
to EEL by EMRISE. The purchase price for the acquisition totaled $9,905,000,
subject to adjustments as described in the purchase agreement, and included cash
payments totaling $6,208,000 to Intelek Properties Limited (PEHL's former
parent, which was a subsidiary of Intelek PLC, a London Stock Exchange public
limited company), a $3,082,000 loan used by PEHL and Pascall to immediately
repay intercompany debt owed to Intelek Properties Limited, and approximately
$615,000 in acquisition costs.

      We and Intelek PLC agreed to guarantee payment when due of all amounts
payable by EEL and Intelek Properties Limited, respectively, under the purchase
agreement. We and EEL agreed to underwrite the guaranty that Intelek Properties
Limited has given to Pascall's landlord with a guaranty by us, and EEL 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, noninterference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, Intelek PLC, EEL, 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 $385,000 based on the exchange
rate in effect on March 17, 2005) that was made by the seller to Pascall on
March 17, 2005 and was repaid in full by Pascall on the March 31, 2005 due date.

      The purchase price represented a significant premium over the recorded net
worth of Pascall's assets. In conjunction with the acquisition of Pascall, the
Company commissioned a valuation firm to determine what portion of the purchase
price should be allocated to identifiable intangible assets. The Company
considered whether the acquisition included various types of identifiable
intangible assets, including trade names, trademarks, patents, covenants not to
compete, customers, workforce, technology and software. The Company has recorded
the value of the trade name and trademark at $500,000, covenants not to compete
that were obtained from Pascall's former affiliates at $200,000, amortizable
over three years and backlog at $200,000 amortizable over two years.

                                       26



<Page>

   RO ACQUISITION

      On September 2, 2005, EMRISE Electronics acquired all of the issued and
outstanding shares of common stock of RO under the terms of a stock purchase
agreement dated effective as of August 31, 2005 and amended as of September 28,
2005. The purchase price consisted of $2,400,000 in cash paid at closing and an
additional $600,000 in cash paid in two equal installments in October 2005 and
October 2006, which amounts were partially offset by $35,000 received from the
former RO shareholders to compensate for balance sheet adjustments.. The
acquisition purchase price was funded with cash on-hand. In addition,
concurrently with the closing of the acquisition of RO, EMRISE Electronics paid
in full all then existing credit facilities of RO in the aggregate amount of
$1,602,000.

      In determining the purchase price for RO, EMRISE Electronics considered
the historical and expected earnings and cash flow of RO, as well as the value
of companies of a size and in an industry similar to RO, comparable transactions
and the market for such companies generally. The purchase price represented a
premium of approximately $2,275,000 over the $2,340,000 recorded net worth of
the assets of RO. In determining this premium, EMRISE Electronics considered the
synergistic and strategic advantages provided by having a United States-based
power conversion manufacturer and the value of the goodwill, customer
relationships and technology of RO. Goodwill associated with the RO acquisition
totaled approximately $1,376,000. We commissioned a valuation firm to determine
what portion of the purchase price should be allocated to identifiable
intangible assets. The valuation study of RO's intangibles was completed in June
2006. We initially estimated the intangibles to be valued as follows:
technology, $484,000, trademarks, $300,000 and customer relationships, $200,000.
The valuation study resulted in the following valuations: technology, $500,000,
trademarks, $350,000 and customer relationships, $350,000. The intangibles were
adjusted to the appraised values in the second quarter of 2006. The technology
and customer relationships are being amortized over 10 years on their appraise
values and the trademarks are not being amortized due to the inability to
determine an estimated life.

      In connection with the execution of the stock purchase agreement, EMRISE
Electronics executed a lease agreement with Caspian Associates for the lease of
25,700 square feet of a 30,700 square feet building located at 246 Caspian
Drive, Sunnyvale, California. The lease provided for a two-year term commencing
on September 1, 2005 and ending on August 31, 2007, at a base rent of $9,210 per
month. Additionally, the lease provided for an extension of the lease term for
an additional three years, to August 31, 2010, and a rent increase if RO
achieves certain net sales and cumulative gross profit targets. However, the
targets were eliminated from the lease when the property was sold on November 1,
2006. Also, on March 1, 2007, the lease converted into a month-to-month tenancy
where either party may provide the other with 30 days' notice to terminate the
lease. We terminated the lease on March 31, 2007. Prior to termination, the
lease obligation was $12,280 per month, which was more than the original $9,210
because a sublessee terminated its sublease in May 2006.

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 those 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.

                                       27



<Page>

   REVENUE RECOGNITION

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

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

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

      Generally, our electronic devices, 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.
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 approximately 4.0%,
2.6% and 5.7% of net sales during 2006, 2005 and 2004, respectively.


                                       28



<Page>

   INVENTORY VALUATION

      Our finished goods electronic devices 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.

      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. 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 approximately
63.5% of our net revenues, 56.4% of our assets and 56.9% of our total
liabilities as of and for the year ended December 31, 2006. 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
included either within our statement of operations or as a separate part of our
net equity under the caption "accumulated other comprehensive income (loss)."

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

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

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

      Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries as each
subsidiary's local currency. Accordingly, we had cumulative translation gains of
$698,000 and losses of $870,000 that were included as part of accumulated other
comprehensive income (loss) within our balance sheets at December 31, 2006 and
2005, respectively. During the years ended December 31, 2006 and 2005, we
included translation adjustment gains of approximately $1,568,000 and losses of
approximately $1,357,000, respectively, under accumulated other comprehensive
income (loss).

                                       29



<Page>

      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 gain or loss for 2006 and 2005. The magnitude of these gains or losses
depends upon movements in the exchange rates of the foreign currencies in which
we transact business as compared to the value of the United States dollar. These
currencies include the euro, the British pound sterling and the Japanese yen.
Any future translation gains or losses could be significantly higher or lower
than those we recorded for these periods.

      A $6,730,000 loan payable from EEL to EMRISE was outstanding as of
December 31, 2006. The majority of this loan is expected to be outstanding
indefinitely. Therefore, exchange rate losses and gains on this loan are
recorded in cumulative translation gains or losses in the equity section of the
balance sheet.

   INTANGIBLES, INCLUDING GOODWILL

      We periodically evaluate our intangibles, including goodwill, for
potential impairment. Our judgments regarding the existence of 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, 2006,
the reported goodwill totaled $12,995,000. During 2006, 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
commissioned a valuation firm to determine what portion of the purchase price
should be allocated to identifiable intangible assets. The intangible values are
as follows: Larus trade name and trademark are valued at $750,000, and the
technology and customer relationships are valued at $1,350,000. Goodwill
associated with the Larus Corporation acquisition totaled $4,043,000. The Larus
trade name and trademark were determined to have indefinite lives and therefore
are not being amortized but rather are being periodically tested for impairment.
The technology and customer relationships were both estimated to have ten-year
lives.

      In conjunction with our March 2005 acquisition of Pascall, we commissioned
a valuation firm to determine what portion of the purchase price should be
allocated to identifiable intangible assets. The Pascall trade name and
trademark are valued at $500,000. The covenants not to compete that were
obtained from Pascall's former affiliates are valued at $200,000. The backlog
was valued at $200,000. Total amortization expense of $393,000 and $310,000 was
charged to administrative expense in 2006 and 2005, respectively. The Pascall
trade name and trademark were determined to have indefinite lives and therefore
are not being amortized but rather are being periodically tested for impairment.
The covenants not to compete and backlog are being amortized over their
respective three-year and two-year durations. We estimated that the goodwill
associated with the Pascall acquisition totaled $4,634,000.

                                       30



<Page>

      In conjunction with our acquisition of RO, we commissioned a valuation
firm to determine what portion of the purchase price should be allocated to
identifiable intangible assets. The valuation study of RO's intangibles was
completed in June 2006. We initially estimated the intangibles to be valued as
follows: technology, $484,000, trademarks, $300,000 and customer relationships,
$200,000. The valuation study resulted in the following valuations: technology,
$500,000, trademarks, $350,000 and customer relationships, $350,000. The
intangibles were adjusted to the appraised values in the second quarter of 2006.
The technology and customer relationships are being amortized over 10 years on
their appraised values, and the trademarks are not being amortized due to the
inability to determine an estimated life.

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.

                                       31



<Page>

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                                             RESULTS AS A PERCENTAGE
                                                                                              OF NET SALES FOR THE
                                            YEAR ENDED             DOLLAR      PERCENTAGE          YEAR ENDED
                                           DECEMBER 31,           VARIANCE      VARIANCE          DECEMBER 31,
                                      -----------------------    FAVORABLE      FAVORABLE    -----------------------
                                         2006         2005     (UNFAVORABLE)  (UNFAVORABLE)     2006         2005
                                      ----------   ----------  -------------  -------------  ----------   ----------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>         <C>                    <C>         <C>          <C>
Net sales
   Electronic devices...............  $   32,702   $   25,687  $       7,015          27.3%       70.5%        62.2%
   Communications equipment.........      13,682       15,583         (1,901)        (12.2%)      29.5%        37.8%
                                      ----------   ----------  -------------  -------------  ----------   ----------
Total net sales.....................  $   46,384   $   41,270  $       5,114          12.4%      100.0%       100.0%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Cost of sales
   Electronic devices...............  $   20,955   $   15,527  $      (5,428)        (35.0%)      45.2%        37.6%
   Communications equipment.........       8,458        8,187           (271)         (3.3%)      18.2%        19.8%
                                      ----------   ----------  -------------  -------------  ----------   ----------
   Total cost of sales..............  $   29,413   $   23,714  $      (5,699)        (24.0%)      63.4%        57.5%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Gross profit
   Electronic devices...............  $   11,747   $   10,160  $       1,587          15.6%       25.3%        24.6%
   Communications equipment.........       5,224        7,396         (2,172)        (29.4%)      11.3%        17.9%
                                      ----------   ----------  -------------  -------------  ----------   ----------
   Total gross profit...............  $   16,971   $   17,556  $        (585)         (3.3%)      36.6%        42.5%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Selling, general and administrative
   expenses.........................  $   16,117   $   13,707  $      (2,410)        (17.6%)      34.7%        33.2%
Engineering and product development.       3,085        2,621           (464)        (17.7%)       6.7%         6.4%
Operating (loss) income.............      (2,231)       1,228         (3,459)       (281.7%)      (4.8%)        3.0%
Interest expense....................        (490)        (455)           (35)         (7.7%)      (1.1%)       (1.1%)
Interest income.....................          89          153            (64)        (41.8%)       0.2%         0.4%
Other income and expense, net.......        (364)         248           (612)       (246.8%)      (0.8%)        0.6%
(Loss) income before income taxes...      (2,996)       1,174         (4,170)       (355.2%)      (6.5%)        2.8%
Income tax expense (benefit)........         619         (267)          (886)       (331.8%)       1.3%        (0.6%)
                                      ----------   ----------  -------------  -------------  ----------   ----------
Net (loss) income...................  $   (3,615)  $    1,441  $      (5,056)       (350.9%)      (7.8%)        3.5%
                                      ==========   ==========  =============  =============  ==========   ==========
</TABLE>

      NET SALES. The $5,114,000 (12.4%) increase in total net sales for 2006 as
compared to 2005 resulted from the combination of a $7,015,000 (27.3%) increase
in net sales of our electronic devices and a $1,901,000 (12.2%) decrease in net
sales of our communications equipment products and services.

      ELECTRONIC DEVICES. The increase in net sales within our electronic
devices segment was primarily due to a $6,894,000 (48.8%) increase in sales of
power supplies to $21,026,000 in 2006 from $14,132,000 in 2005. Contributing to
this increase was a $3,307,000 (240.5%) increase in RO's sales of power supplies
due to inclusion of a full year of RO's sales in 2006 as compared to only four
months of RO's sales included in 2005 because we acquired RO on August 31, 2005.
Pascall increased its sales of power supplies by $1,853,000 (23.0%) to
$9,927,000 in 2006. However, we acquired Pascall on March 18, 2005, so only nine
and one-half months of sales for Pascall were included in our 2005 sales. The
remainder of the $1,753,000 increase in sales of power supplies was due to an
increase in sales volume for XPS. Sales of RF devices by Pascall increased by
$614,000 (19.9%) to $3,697,000 in 2006 as compared to $3,083,000 in 2005 due to
increased sales volume. Sales of switches were $6,580,000, which approximated
sales of switches in the prior year. Sales of power supplies are expected to
increase in 2007 due to our in-flight-entertainment contracts received or
expected and our Eurofighter Typhoon aircraft contracts. We also expect future
growth in sales for our new VLP(R) rotary switch.

                                       32



<Page>

      COMMUNICATIONS EQUIPMENT. The majority of the decrease in sales within our
communications equipment segment was due to a $1,446,000 (48.6%) decrease in
sales of test equipment to $1,530,000 as compared to $2,976,000. This decrease
was mainly due to a lower volume of sales caused by the erosion of the
communications industry customer base for our test instruments due to our
decision to not invest further in this product line, leaving us mainly selling
to customers providing upgrades for a Federal Aviation Administration
modernization project. Sales of our network access and transmission products
decreased $561,000 (6.4%) to $8,269,000 in 2006 as compared to $8,830,000 in
2005. This decrease resulted from a $972,000 decrease in our CXR Larus
U.S.-based sales primarily due to decreased sales volume due to competition,
offset by a $411,000 increase in our CXR-AJ French-based sales due to increased
sales volume. Partially offsetting these decreases was a modest increase in the
sales of our timing systems by CXR Larus of $94,000 (3.6%) to $2,728,000. We
expect that sales for CXR-AJ network access products will improve in 2007 while
test instrument sales will remain at low levels or decline further. With the
introduction of the new TiemPo(TM) 6400 communication timing and synchronization
product from CXR Larus, we anticipate an improvement in sales of timing products
in 2007.

      GROSS PROFIT. Gross profit as a percentage of total net sales decreased to
36.6% from 42.5% for the prior year period due to a decrease in communications
equipment sales. In dollar terms, gross profit decreased by $585,000 (3.3%) to
$16,971,000 for 2006 as compared to $17,556,000 for 2005 due to a $2,172,000
reduction in gross profit within our communications equipment segment that more
than offset a $1,587,000 increase in gross profit within our electronic devices
segment.

      ELECTRONIC DEVICES. The $1,587,000 (15.6%) increase in gross profit within
this segment was primarily due to a $1,318,000 (32.6%) increase to $6,931,000
for our U.K. power supply operations. Of this increase, Pascall provided
$868,000 due to an increase in sales volume and inclusion of a full year of
operations in 2006, and XPS contributed $450,000 due to increased sales volume.
Also contributing to the increase in gross profit was the addition of a full
year of gross profit of $292,000 for RO. Gross profit for switches produced by
Digitran remained constant at $2,901,000.

      COMMUNICATIONS EQUIPMENT. The $2,172,000 reduction in gross profit within
this segment was primarily due to a decrease of $1,151,000 in test equipment
gross profit due to decreased sales volume. In addition, gross profit for our
CXR Larus communication timing and network access products declined $926,000 due
to a $707,000 decrease in revenues due to a decrease in sales volume and a
decrease in inventory carrying values for certain items deemed to be slow
moving. The gross profit at our CXR-AJ French operation declined $107,000 due to
a $463,000 decrease in revenues due to a decrease in sales volume and a change
in accounting policy necessitating an increase in inventory write-off.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased in dollar terms and increased as a percentage
of net sales to 34.7% in 2006 from 33.2% in 2005. The $2,410,000 (17.6%)
increase in selling, general and administrative expenses for 2006 as compared to
2005 resulted from:

      o     $1,542,000 of administrative expenses related to the restatement of
            our 2005 and 2006 financial statements and the reaudit of our 2003,
            2004 and 2005 financial statements. The restatement was necessary
            because sales of $224,000 were recorded in 2004 instead of
            appropriately being recorded in 2005. The $1,542,000 of
            administrative expenses included $1,282,000 of audit expense (as
            compared to $668,000 in 2005) and $261,000 of legal expense;

                                       33



<Page>

      o     an increase in administrative expenses primarily due to the increase
            and inclusion of $325,000 and $356,000 of administrative costs for
            Pascall and RO, respectively; and

      o     a $522,000 expense related to increasing employee
            compensation-related reserves.

      We anticipate that selling, general and administrative expenses for 2007
will decrease from the level experienced in 2006 due the completion of our
reaudit and restatement.

      ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of new product development engineering
activities. The $464,000 (19.6%) increase in these expenses resulted primarily
from the increase of $418,000 of expenses attributable to our decision to
accelerate the introduction of TiemPo(TM) 6400, a new substantially improved
timing system product, and a $243,000 increase in engineering expenses
attributable to RO. The increase in engineering expense for the TiemPo(TM) 6400
was mainly due to $585,000 of contract engineering expenses we incurred in 2006
to accelerate product development of our new synchronization timing product.
These increases were partially offset by a $177,000 reduction of engineering
expenses for switches and power supplies. Overall engineering and product
development expenses in 2007 are anticipated to be at level similar to the
overall level in 2006.

      INTEREST EXPENSE AND INCOME. The $35,000 increase in interest expense in
2006 was due to larger loan balances. We recorded $153,000 of interest income in
2005, which we earned on the proceeds of the January 2005 private placement.

      OTHER INCOME AND EXPENSE, NET. Other expense in 2006 of $364,000 was
primarily due to currency exchange loss. Other income of $248,000 in 2005
primarily resulted from a $100,000 gain due to the sale of our T-Com product
line and a $123,000 net currency exchange gain. The T-Com technology and
tangible assets had no carrying value.

      INCOME TAX EXPENSE (BENEFIT). The $619,000 income tax expense in 2006
includes $474,000 of foreign taxes and $36,000 of state taxes. We recorded a
$109,000 provision for federal tax in 2006 to reduce our deferred tax assets for
federal purposes and to reduce the amount of operating loss carryforwards
recognized. An income tax benefit of $267,000 was recorded in 2005 primarily
because we reduced our tax asset valuation allowance by $555,000 and recorded a
federal tax benefit of $150,000 that was offset by a foreign tax provision of
$408,000 and a state tax provision of $30,000.

      NET (LOSS) INCOME. Net loss for 2006 was $3,615,000 as compared to net
income of $1,441,000 for 2005. Major contributors to this $5,056,000 difference
were as follows:

      o     $1,542,000 of expenses related to the restatement and reaudit of our
            financial statements;

      o     a $2,172,000 lower gross profit of our communications equipment
            segment primarily due to decreased sales volumes;

      o     an $886,000 increase in tax provision primarily due to the $555,000
            reduction in our tax asset valuation allowance in 2005 and increases
            in foreign and state taxes in 2006;

      o     a $612,000 decrease in other income and loss primarily due to
            currency exchange losses in 2006 as compared to a $123,000 net
            currency exchange gain in 2005; and

                                       34



<Page>

      o     a $522,000 expense related to increasing employee
            compensation-related reserves.

      These negative amounts were partially offset with a $1,587,000 increase in
gross profit for our electronic devices segment primarily due to a $7,015,000
increase in net sales in this segment.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                                             RESULTS AS A PERCENTAGE
                                                                                              OF NET SALES FOR THE
                                            YEAR ENDED             DOLLAR      PERCENTAGE          YEAR ENDED
                                           DECEMBER 31,           VARIANCE      VARIANCE          DECEMBER 31,
                                      -----------------------    FAVORABLE      FAVORABLE    -----------------------
                                         2005         2004     (UNFAVORABLE)  (UNFAVORABLE)     2005         2004
                                      ----------   ----------  -------------  -------------  ----------   ----------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>         <C>                    <C>         <C>          <C>
Net sales
   Electronic devices...............  $   25,687   $   15,262  $      10,425          68.3%       62.6%        51.5%
   Communications equipment.........      15,583       14,375          1,208           8.4%       37.8%        48.5%
                                      ----------   ----------  -------------  -------------  ----------   ----------
Total net sales.....................  $   41,270   $   29,637         11,633          39.3%      100.0%       100.0%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Cost of sales
   Electronic devices...............  $   15,527   $    9,024         (6,503)       (72.1)%       37.6%        30.4%
   Communications equipment.........       8,187        7,065         (1,122)       (15.9)%       19.8%        23.8%
                                      ----------   ----------  -------------  -------------  ----------   ----------
   Total cost of sales..............  $   23,714   $   16,089         (7,625)       (47.4)%       57.5%        54.3%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Gross profit
   Electronic devices...............  $   10,160   $    6,238          3,922          62.9%       24.6%        21.0%
   Communications equipment.........       7,396        7,310             86           1.2%       17.9%        24.7%
                                      ----------   ----------  -------------  -------------  ----------   ----------
   Total gross profit...............  $   17,556   $   13,548          4,008          29.6%       42.5%        45.7%
                                      ----------   ----------  -------------  -------------  ----------   ----------

Selling, general and administrative
   expenses.........................  $   13,707   $   10,212         (3,495)         34.2%       33.2%        34.6%
Engineering and product development.       2,621        1,521         (1,100)       (72.3)%        6.4%         5.1%
Operating income....................       1,228        1,815           (587)       (32.3)%        3.0%         6.1%
Interest expense....................        (455)        (433)           (22)        (5.1)%      (1.1)%       (1.5)%
Interest income.....................         153           --            153            --         0.4%         0.0%
Other income (expense), net.........         248           (6)           254       4,233.3%        0.6%         0.0%
Income before income taxes..........       1,174        1,376           (202)       (14.7)%        2.8%         4.6%
Income tax (benefit) expense .......        (267)          49            316         644.9%      (0.6)%         0.2%
                                      ----------   ----------  -------------  -------------  ----------   ----------
Net income..........................  $    1,441   $    1,327  $         114           8.6%        3.5%         4.5%
                                      ==========   ==========  =============  =============  ==========   ==========
</TABLE>

      NET SALES. The $11,633,000 (39.3%) increase in total net sales for 2005 as
compared to 2004 resulted from the combination of a $10,425,000 (68.3%) increase
in net sales of our electronic devices and a $1,208,000 (8.4%) increase in net
sales of our communications equipment products and services.

      ELECTRONIC DEVICES. The increase in net sales within our electronic
devices segment resulted primarily from the inclusion in our 2005 results of
Pascall's $11,157,000 sales of power supplies and RF devices and RO's $1,925,000
sales of power conversion products and licensing. This increase occurred despite
a $2,939,000 (32.0%) decrease in sales at XPS primarily related to reduced sales
of power supplies due to the delay of deliveries for the Eurofighter Typhoon
aircraft. Sales of switches manufactured by Digitran increased $1,021,000
(18.5%) to $6,545,000 for 2005 from $5,524,000 for the prior year period due to
sales of new rotary switches and other new programs for our digital switches.

                                       35



<Page>

      We first reported sales of RF devices during the three months ended March
31, 2005 as a result of our acquisition of Pascall. We acquired RO on August 31,
2005. If we excluded sales by Pascall from March 18, 2005 through December 31,
2005 and sales by RO for September 1, 2005 through December 31, 2005, our
electronic devices segment sales would have declined by $2,657,000 or (17.4%)
for 2005.

      COMMUNICATIONS EQUIPMENT. The $1,208,000 increase in net sales within our
communications equipment segment resulted primarily from the inclusion in our
2005 results of the full year of $5,974,000 of net sales of communication timing
and synchronization products attributable to our acquisition of Larus
Corporation that occurred on July 13, 2004 as compared to sales of $3,424,000
for the period from July 13, 2004 to December 31, 2004. This increase occurred
despite a $869,000 (24.6%) decline in net sales of test instruments primarily
due to delays and reductions in expected orders from large carriers. Sales of
network access equipment produced by CXR-AJ decreased by $380,000 (6.2%) to
$5,759,000 in 2005 as compared to $6,139,000 in 2004 due to lower sales volume
in military markets.

      GROSS PROFIT. Gross profit as a percentage of total net sales decreased to
42.5% from 45.7% for the prior year period due to a lower gross margin for our
communications equipment segment. In dollar terms, gross profit increased by
$4,008,000 (29.6%) to $17,556,000 for 2005 as compared to $13,548,000 for 2004
primarily as a result of the addition of gross profit from Pascall and RO.

      ELECTRONIC DEVICES. The $3,922,000 (62.9%) increase in gross profit for
our electronic devices segment was primarily due to the inclusion in our results
for 2005 of $3,484,000 of gross profit from Pascall and $788,000 of gross profit
from RO. Partially offsetting these increases was a $244,000 reduction in gross
profit from switches primarily due to product mix and a $399,000 decrease in
gross profit on power supplies produced by XPS as a direct result of reduced
sales volume due to contract delivery delays for the Eurofighter Typhoon
aircraft. XCEL Japan Ltd. increased its gross profit by $346,000 (62.0%) to
$904,000 from $558,000 in the prior year due to increased sales of higher margin
military switches.

      COMMUNICATIONS EQUIPMENT. This segment had a slight $86,000 decrease in
gross profit. CXR Larus contributed $2,755,000 of gross profit for 2005 relating
to net sales of network access and communication timing and synchronization
products as compared to $1,782,000 for the period from July 13, 2004 to December
31, 2004. Gross profit for test instruments decreased $805,000 (30.4%) to
$1,845,000 in 2005 as compared to $2,650,000 in 2004 due to lower volume. Due to
reduced overhead costs, CXR-AJ recorded a relatively low $84,000 decrease in
gross profit despite a $359,000 decline in sales, resulting in a gross margin
for CXR-AJ of 42.0% in 2005 as compared to a gross margin for CXR-AJ of 41.0% in
2004.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased in dollar terms but decreased as a percentage
of net sales to 33.2% in 2005 from 34.5% in 2004. The $3,495,000 (34.2%)
increase in selling, general and administrative expenses for 2005 as compared to
2004 resulted from:

      o     a $359,000 (54.8%) increase in sales commissions due to the increase
            or inclusion of $85,000, $243,000 and $73,000 of sales commission
            expenses of CXR Larus, Pascall and RO, respectively, partially
            offset by reductions in commission expenses of $22,000 for test
            instruments and $22,000 for our French-produced network access
            products;

      o     a $1,505,000 (48.5%) increase in other selling and marketing
            expenses primarily due to an increase of $694,000 and the inclusion
            of $924,000 and $71,000 of selling expenses of our Larus division,
            Pascall and RO, respectively, attendance at tradeshows and increased
            advertising and marketing of our electronic devices. These increases
            were partially offset by decreases in these expenses of $71,000 for
            test instruments and $118,000 at CXR-AJ;

                                       36



<Page>

      o     a $1,622,000 (25.1%) increase in administrative expenses primarily
            due to the increase or inclusion of $337,000 and $775,000 of
            administrative costs for our Larus division and Pascall,
            respectively;

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

      o     a $55,000 expense we recorded for a repair provision for the
            building in Wales that we vacated to combine our coil winding
            business with XPS's operations in Ashford, England; and

      o     a $144,000 increase in our domestic legal expenses and a $282,000
            increase in our domestic accounting and auditing expenses plus an
            increase of $227,000 in consulting fees relating to internal control
            documentation in response to the Sarbanes-Oxley Act of 2002.

      ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of new product development engineering
activities. The $1,100,000 (72.3%) increase in these expenses resulted primarily
from the increase of $443,000 of expenses attributable to our Larus division and
a $513,000 increase in engineering expenses attributable to Pascall. Also,
expenses related to development of our new low profile rotary switches increased
$58,000 (12.0%) to $540,000 for 2005 as compared to $482,000 for 2004. During
2005, we eliminated one of our two engineering directors at CXR Larus, which is
helping to offset approximately $75,000 of our increased engineering expenses on
an annual basis.

      INTEREST EXPENSE AND INCOME. Interest expense increased by $22,000 (5.1%)
to $455,000 for 2005 as compared to $433,000 for 2004. In addition, we recorded
$153,000 of interest income in 2005, which we earned on the proceeds of the
January 5, 2005 private placement. We did not have interest income during 2004.

      OTHER INCOME AND EXPENSE, NET. Other income of $248,000 for 2005 primarily
resulted from a $100,000 gain due to the sale of our T-Com product line and
$123,000 of a net currency exchange gain. The T-Com technology and tangible
assets had no carrying value.

      INCOME TAX (BENEFIT) EXPENSE. Income tax benefit for 2005 was $267,000,
compared to an expense of $49,000 for 2004 primarily because we reduced our tax
asset valuation allowance by $555,000 and recorded a federal tax benefit of
$150,000 that was offset by our foreign tax provision of $408,000 and a state
tax provision of $30,000.

      NET INCOME. Net income for 2005 increased by $114,000 to $1,441,000 as
compared to $1,327,000 for 2004. The increase was primarily due to an increase
in gross profit in our electronic devices segment resulting from our
acquisitions of Pascall and RO. We continue to closely monitor costs throughout
our operations and have reduced costs through staffing reductions in our
communications equipment operations in the United States and France as indicated
above.

LIQUIDITY AND CAPITAL RESOURCES

      During 2006, we funded our operations primarily through revenue generated
from our operations and through our previous line of credit with Wells Fargo
Bank, N.A. ("Bank credit facility"), a new credit facility ("WFBC credit
facility") with Wells Fargo Bank acting through its Wells Fargo Business Credit
operating division ("WFBC"), and facilities with various foreign banks. As of
December 31, 2006, we had working capital of $9,611,000, which represented a
$3,347,000 (25.8%) decrease from working capital of $12,958,000 at December 31,
2005, primarily due to the $1,542,000 of expenses we incurred in 2006 related to
the restatement and reaudit of our financial statements and increased accrued
expenses. At December 31, 2006 and 2005, we had accumulated deficits of
$18,733,000 and $15,118,000, respectively, and cash and cash equivalents of
$3,802,000 and $4,371,000, respectively.

                                       37



<Page>

      Accounts receivable decreased $193,000 (2.1%) during 2006, from $9,413,000
as of December 31, 2005 to $9,220,000 as of December 31, 2006. Days sales
outstanding, which is a measure of our average accounts receivable collection
period, decreased from 67 days for 2005 to 63 days for 2006. Our customers
include many Fortune 100 companies in the United States and similarly large
companies in Europe and Asia. Because of the financial strength of our customer
base, we incur few bad debts.

      Inventory balances increased $298,000 (2.9%) during 2006, from $10,277,000
at December 31, 2005 to $10,575,000 at December 31, 2006. Inventory represented
23.6% and 23.1% of our total assets as of December 31, 2006 and December 31,
2005, respectively. Inventory turnover, which is a ratio that indicates how many
times our inventory is sold and replaced over a specified period, was 2.8 times
for 2006 as well as for 2005.

      We took various actions to reduce costs in 2004 and 2005. These actions
were intended to reduce the cash outlays of our communications equipment segment
to match its revenue rate, which was negatively impacted by the
telecommunications downturn of 2002 and 2003. We merged Larus Corporation with
and into CXR Telcom Corporation at the end of 2004 and integrated their
operations. In 2005, we contracted with a contract manufacturer, Hitachi, for
production of communication timing and synchronization products at lower prices
than our previous cost for in-house manufacturing for production that began in
the second quarter of 2006.

      Cash used in our operating activities totaled $1,113,000 for 2006 as
compared to cash provided by operating activities of $1,140,000 for 2005. This
$2,253,000 decrease in operating cash flows primarily resulted from the
$3,615,000 net loss and a $579,000 increase in inventory that were partially
offset by depreciation, amortization and accrued expenses.

      Cash used in our investing activities totaled $785,000 for 2006 as
compared to $15,044,000 for 2005. The 2006 amount consists of net increases to
property, plant and equipment. Included in the results for 2005 are net cash
amounts of $10,154,000 and $4,623,000 used to acquire Pascall and RO,
respectively. Also in 2005, we acquired $287,000 of property, plant and
equipment purchases for production equipment and computer equipment. We have
guaranteed obligations of EMRISE Electronics in connection with the Pascall
acquisition and have agreed to indemnify Pascall's former parent in connection
with obligations under Pascall's facilities lease.

      Cash provided by our financing activities totaled $391,000 for 2006 as
compared to $18,050,000 for 2005. The change is primarily due to the net
proceeds in 2005 of $16,060,000 from the issuance of common stock in our January
2005 private placement 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. 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.

                                       38



<Page>

      At December 31, 2005, we had $3,283,000 of outstanding borrowings under
lines of credit with foreign banks. At December 31, 2006, outstanding borrowings
and availability under our revolving lines of credit were as follows:

<TABLE>
<CAPTION>
                                                        Maximum                           Actual
                                                      Contractual      Outstanding       Remaining
                                                      Availability      Borrowings      Availability
                                                     --------------   --------------   --------------
<S>                                                  <C>              <C>              <C>
      Line of credit with a U.S. commercial lender   $    2,080,000   $    1,978,000   $      102,000
      Lines of credit with foreign banks                  5,687,000        2,332,000        3,355,000
                                                     --------------   --------------   --------------
                                                     $    7,767,000   $    4,310,000   $    3,457,000
                                                     --------------   --------------   --------------
</TABLE>

      Actual remaining availability represents the additional amount we were
eligible to borrow as of December 31, 2006. Maximum contractual availability
represents the maximum amount of availability provided under the contract as of
that date and includes the actual remaining availability.

      In addition to the revolving lines of credit, at December 31, 2006, we had
long-term loans and capitalized lease and equipment loan obligations totaling
$1,049,000, the current portion of which loans and obligations totaled $516,000.
At December 31, 2005, our long-term loans and capitalized lease and equipment
loan obligation totaled $1,246,000, the current portion of which loans and
obligation totaled $504,000.

      Below are descriptions of key terms of our various domestic and foreign
credit facilities and debt obligations.

      On August 25, 2005, we and two of our subsidiaries, CXR Larus and EMRISE
Electronics, acting as guarantors, obtained the Bank credit facility for our
United States operations. The Bank credit facility provided a $9,000,000
revolving line of credit secured by accounts receivable, other rights to payment
and general intangibles, inventories and equipment, with an interest rate
adjusted monthly based on the prime rate.

      The Bank credit facility also provided 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%. In addition, Wells Fargo Bank provided us with credit for the
purchase of new capital equipment when needed, with an interest rate equal to
the 90-day London InterBank Offered Rate ("LIBOR") (5.36% at December 31, 2006)
plus 3.75% per annum. Amounts borrowed under this arrangement are being
amortized over 60 months from the respective dates of borrowing and secured by
the purchased equipment.

      We and Wells Fargo Bank amended the credit facility in November 2005 and
March 2006 to revise various covenants and other provisions. On September 19,
2006, we entered into a Third Amendment to Credit Agreement effective as of
September 1, 2006 with Wells Fargo Bank. The amendment provided for the waiver
by Wells Fargo Bank of certain violations of financial covenants. The amendment
also provided for the reduction in the amount of the Bank credit facility from
$9,000,000 to $1,500,000 and limited borrowings to 80% of eligible accounts
receivable. In connection with the amendment, we executed a Revolving Line of
Credit Note dated September 1, 2006 in the amount of $1,500,000. On October 9,
2006, we executed a letter agreement dated effective October 1, 2006 with Wells
Fargo Bank extending the maturity date of the $1,500,000 note to October 20,
2006.

      On November 13, 2006, Wells Fargo Bank issued a notice of default and
demand for payoff with respect to the $1,500,000 note. All obligations under the
note were due and payable on November 20, 2006. On November 24, 2006, we entered
into a Forbearance Agreement with Wells Fargo Bank, dated effective as of
November 20, 2006, whereby Wells Fargo Bank agreed to forbear from exercising
its rights under the Bank credit facility as described in the notice of default
and demand for payoff through December 1, 2006. On December 1, 2006, EMRISE
Corporation, EMRISE Electronics, CXR Larus, RO and WFBC entered into a Credit
and Security Agreement ("WFBC credit facility") providing for a revolving line
of credit and term loan. On December 5, 2006, we paid off the $1,500,000 Bank
credit facility in full.

                                       39



<Page>

      The WFBC credit facility provides for a $5,000,000 revolving line of
credit that expires on December 1, 2009 and is secured by accounts receivable,
other rights to payment and general intangibles, inventories and equipment. The
line of credit is formula-based and generally provides that the outstanding
borrowings under the line of credit may not exceed an aggregate of 85% of
eligible accounts receivable plus 10% of the value of eligible finished goods
inventory. Interest is payable monthly. The interest rate is variable and is
adjusted monthly based on the prime rate plus 1%. The prime rate at December 1,
2006 was 8.25%.

      The WFBC credit facility is subject to an unused line fee equal to 0.25%
per annum, payable monthly based on the average daily unused amount of the line
of credit. The WFBC credit facility is also subject to a minimum monthly
interest charge of $8,500 with respect to the revolving line of credit.

      The WFBC credit facility is subject to various financial covenants on a
consolidated basis as follows. The minimum debt service coverage ratio must be
greater than 1.20:1.00 on a trailing quarterly basis. "Debt service coverage
ratio" is defined as net income after taxes, plus depreciation, plus
amortization, plus or minus changes in deferred taxes, minus capital
expenditures and minus any dividends or distributions, divided by the current
maturities of long-term debt paid or scheduled to be paid plus any payments on
subordinated debt. The WFBC credit facility also requires that we maintain a
minimum book net worth, determined at the end of each calendar month, in an
amount not less than $26,900,000 for the months ended December 31, 2006, January
31, 2007 and February 28, 2007 and of not less than that amount plus 80% of our
net income for each calendar quarter ending on or after March 31, 2007 and for
each calendar month ending on or after March 31, 2007. We were not permitted to
incur a net loss of greater than $1,150,000 for 2006, and for each quarterly
period occurring after December 31, 2006, our net income must not be less than
$0.

      If WFBC terminates the WFBC credit facility during a default period, or if
we terminate or reduce the WFBC credit facility prior to the maturity date, or
if we prepay the term loan portion of the facility, we will be subject to
penalties as follows: if the termination or prepayment occurs during the one
year period after the initial funding date, the penalty is equal to 3% of the
maximum line amount and/or prepayment amount; if the termination or prepayment
occurs during second year after the initial funding date, the penalty is equal
to 2% of the maximum line amount and/or prepayment amount; and if the
termination or prepayment occurs at any time after the second anniversary of the
initial funding date and prior to the maturity date, the penalty is equal to 1%
of the maximum line amount and/or prepayment amount.

      In the event of a default and continuation of a default, Wells Fargo may
accelerate the payment of the principal balance, requiring us to pay the entire
indebtedness outstanding on that date. From and after the maturity date of the
WFBC credit facility, or any earlier date that all principal owing under the
WFBC credit facility becomes due and payable by acceleration or otherwise, the
outstanding principal balance will bear interest until paid in full at an
increased rate per annum equal to 3% above the rate of interest in effect from
time to time under the WFBC credit facility.

      The WFBC credit facility also provides for a term loan of $200,000 secured
by accounts receivable, other rights to payment, and general intangibles,
inventories and equipment, amortizable over 36 months at a variable rate equal
to the prime rate plus 1%.

                                       40



<Page>

      As of December 31, 2006, we had balances of $1,978,000 outstanding on the
revolving line of credit and $200,000 outstanding on the term loan. Availability
on the WFBC revolving line of credit was $102,000. As of December 31, 2006, we
were not in compliance with the loan's financial covenants for net worth and net
losses. However, we have obtained a waiver from WFBC for those covenant
violations. WFBC is modifying the financial covenants for 2007.

      As of December 31, 2006, our foreign subsidiaries had credit facilities,
including lines of credit and term loans, with Lloyds TSB Bank PLC ("Lloyds
TSB") and Lloyds TSB Commercial Finance Limited ("Lloyds") in England, IFN
Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris,
Societe Generale in France, and Sogelease and Johnan Shinkin Bank in Japan. At
December 31, 2006, the balances outstanding under our United Kingdom, France and
Japan credit facilities were $1,762,000, $1,156,000 and $15,000, respectively.

      On July 8, 2005, XPS and Pascall obtained a credit facility with Lloyds.
At the same time, the credit facility of Venture Finance PLC, a subsidiary of
ABN AMRO Holdings, N.V., was terminated, and all debt to Venture Finance PLC was
paid off. The Lloyds facility provides a revolving loan secured by receivables,
with a maximum availability of 2,100,000 British pounds sterling (approximately
$4,114,000 based on the exchange rate in effect on December 31, 2006). The
annual interest rate on the revolving loan is 1.5% above the Lloyds TSB base
rate. The Lloyds TSB base rate was 5.0% at December 31, 2006. The financial
covenants include a 50% cap on combined export gross sales of XPS and Pascall
and days sales outstanding of less than 65 days, and the funding balance is
capped at 125% of XPS and Pascall combined gross sales. Based on our long-term
relationship with Lloyds Bank, we anticipate but can give no assurance that we
will be able to renew or obtain a new credit facility from Lloyds Bank when this
existing facility expires July 31, 2007.

      On August 26, 2005, XPS entered into an agreement with Lloyds for an
unsecured cashflow loan of 300,000 British pounds sterling (approximately
$587,000 based on the exchange rate in effect on December 31, 2006), payable
over 12 months. The loan is structured as an overadvance on the previously
negotiated 2,100,000 British pounds sterling revolving loan with Lloyds,
bringing the maximum aggregate commitment on the revolving loan to 2,400,000
British pounds sterling (approximately $4,700,000 based on the exchange rate in
effect on December 31, 2006). The interest rate is variable and is adjusted
monthly based on the base rate of Lloyds TSB plus 1.9%. Lloyds TSB has sole
discretion to switch the details on this overadvance account if Lloyds
determines that we will have difficulty in meeting the specific reductions in
the overadvance account. The balance on the XPS and Pascall revolving loans at
December 31, 2006 was $1,204,000. Availability on the XPS and Pascall revolving
loans was $3,015,000 as of December 31, 2006.

      On August 26, 2005, EEL, a United Kingdom-based subsidiary of ours,
entered into an agreement with Lloyds TSB for an unsecured term loan of 500,000
British pounds sterling (approximately $979,000 based on the exchange rate in
effect on December 31, 2006). This loan is repayable in 36 consecutive monthly
installments, representing principal and interest. The interest rate is variable
and is adjusted daily based on the Lloyds TSB base rate plus 2.5%. The loan also
includes financial covenants. EEL must maintain profit before taxation and
interest paid and payable of no less than 150% of interest paid and payable.

      In the event of a default, Lloyds may make the loans, including any
outstanding principal and interest that has accrued, repayable on demand. If any
amount payable is not paid when due, EEL must pay an increased interest rate per
annum equal to 3% above the rate of interest in effect from time to time under
the note.

                                       41



<Page>

      In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,583,000
based on the exchange rate in effect at December 31, 2006 for the conversion of
euros into United States dollars. CXR-AJ also had $28,000 of term loans with
another French bank outstanding as of December 31, 2006. The IFN Finance
facility is secured by accounts receivable and carries an annual interest rate
of 1.6% above the French "T4M" rate. At December 31, 2006, the French T4M rate
was 3.52%, and this facility had a balance of $1,128,000. This facility has no
financial performance covenants. Availability on the IFN Finance credit line was
$188,000 as of December 31, 2006, in addition to $152,000 availability with
several other banks.

      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 balances
of the loan as of December 31, 2006 and 2005 were $15,000 and $32,000,
respectively, using the exchange rates in effect at those dates for conversion
of Japanese yen into United States dollars. There are no financial performance
covenants applicable to this loan.

      Our backlog was $25,784,000 as of December 31, 2006 as compared to
$22,150,000 as of December 31, 2005. The increase in backlog was primarily due
to an increase of $3,282,000 in power supply backlog at our U.K. subsidiaries,
XPS and Pascall. In addition, CXR-AJ increased its backlog of network access
products by $449,000. Our backlog as of December 31, 2006 was approximately 96%
related to our electronic devices business, which business tends to provide us
with long lead-times for our manufacturing processes due to the custom nature of
the products, and approximately 4% 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.

                                       42



<Page>

      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.

<TABLE>
<CAPTION>
                                                       PAYMENTS DUE BY PERIOD
        CONTRACTUAL                                        (IN THOUSANDS)
      OBLIGATIONS AT                                                                            THERE-
     DECEMBER 31, 2006          2007         2008         2009         2010         2011        AFTER        TOTAL
---------------------------  ----------   ----------   ----------   ----------   ----------   ----------   ---------
<S>                          <C>          <C>          <C>          <C>          <C>           <C>         <C>
Line of Credit (Domestic)    $    1,978   $       --   $       --   $       --   $       --    $      --   $   1,978
   Average Interest Rate         P+0.5%
Line of Credit (U.K.)...     $    1,204   $       --   $       --   $       --   $       --    $      --   $   1,204
   Average Interest Rate           B+2%
Overdraft (France)......     $    1,128   $       --   $       --   $       --   $       --    $      --   $   1,128
   Average Interest Rate              %
Term Loan From
Stockholders (Domestic).     $      500   $      500   $      500   $      250   $             $           $   1,750
   Average Interest Rate        P+1.5%,
                                 L+5.0%
Capital Equipment Loan
   (U.S.)...............     $       25   $       36   $       36   $       --   $             $      --   $      97
   Average Interest Rate           L+4%
Term Loans (U.S.).......     $       67   $       67   $       66   $       --   $       --    $      --   $     200
   Average Interest Rate         P+1.5%
Term Loan (U.K.)........     $      331   $      227   $       --   $       --   $       --    $      --   $     558
   Average Interest Rate           B+2%
Term Loans (France).....     $       11   $       17   $        5   $       --   $       --    $      --   $      28
   Average Interest Rate      1.2%-5.6%
Term Loan (Japan).......     $       15   $       --   $       --   $       --   $       --    $      --   $      15
   Average Interest Rate          3.25%
Capitalized Lease
  Obligations...........     $       69   $       41   $       20   $       14   $        7    $      --   $     151
Operating Leases........     $    1,016   $      877   $      623   $      264   $        9    $           $   2,799
                             ----------   ----------   ----------   ----------   ----------   ----------   ---------
                             $    6,344   $    1,775   $    1,245   $      528   $       16    $           $   9,908
</TABLE>

      We intend to grow our business through both internal growth and 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 notes.

      We believe that current and future available capital resources, revenues
generated from operations, and other existing sources of liquidity, including
the credit facility we have with WFBC, will be adequate to meet our anticipated
working capital and capital expenditure requirements for at least the next
twelve months. If, however, we are unable to renew or replace the XPS and
Pascall credit facility with Lloyds Bank that expires July 31, 2007, or if our
capital requirements or cash flow vary materially from our current projections
or other 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.

                                       43



<Page>

EFFECTS OF INFLATION

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

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

      On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of
SFAS No. 123. SFAS No. 123R superseded Accounting Principles Board ("APB")
Opinion No. 25, and amended SFAS No. 95, STATEMENT OF CASH FLOWS. Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS 123.
However, SFAS 123R generally requires share-based payments to employees,
including grants of employee stock options and purchases under employee stock
purchase plans, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure of fair value recognition is no longer an
alternative. We adopted this new standard on January 1, 2006 using the modified
prospective method under which compensation cost is recognized beginning with
the effective date of adoption (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date of adoption and
(b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of adoption that remain unvested on the
date of adoption.

      SFAS No. 123R also requires the benefits of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow, rather
than as an operating cash flow as prescribed under earlier accounting rules.
This requirement reduces net operating cash flows and increases net financing
cash flows in periods after adoption. Total cash flow remains unchanged from
what would have been reported under prior accounting rules. In 2006, we recorded
expenses of $131,000 relating to currently outstanding stock options. We
estimate that in 2007 we will record $30,000 of additional expenses relating to
currently outstanding stock options.

      The actual effects of adopting SFAS No. 123R will depend on numerous
factors, including the amounts of share-based payments granted in the future,
the valuation model we use to value future share-based payments to employees and
estimated forfeiture rates.

      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 became effective for 2006. Adoption
did not have a material effect on our financial position, results of operations
or cash flows.

      On December 16, 2004, the FASB issued SFAS No. 153, EXCHANGES OF
NONMONETARY ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR
NONMONETARY TRANSACTIONS. SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets and redefines the scope of transactions that should be
measured based on the fair value of the assets exchanged. SFAS No. 153 became
effective for nonmonetary asset exchanges beginning in the second quarter of
2006. Our adoption of SFAS No. 153 has not had a material effect on our
consolidated financial position, results of operations or cash flows.

      On June 7, 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20, ACCOUNTING CHANGES, and
SFAS No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS. SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition of a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 became effective for accounting changes made in fiscal
years beginning after December 15, 2005. However, SFAS No. 154 does not change
the transition provisions of any existing accounting pronouncements. Our
adoption of SFAS No. 154 has not had a material effect on our consolidated
financial position, results of operations or cash flows.

                                       44



<Page>

      In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS, which amends SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES and SFAS No. 140, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Specifically, SFAS No. 155
amends SFAS No. 133 to permit fair value remeasurement for any hybrid financial
instrument with an embedded derivative that otherwise would require bifurcation,
provided the whole instrument is accounted for on a fair value basis.
Additionally, SFAS No. 155 amends SFAS No. 140 to allow a qualifying special
purpose entity to hold a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 applies to all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006, with
early application allowed. We do not expect that the adoption of SFAS No. 155
will have a material effect on our results of operations or financial position.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS.
This new statement provides a single definition of fair value, together with a
framework for measuring it, and requires additional disclosure about the use of
fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy with the highest priority being quoted
prices in active markets. The required effective date of SFAS No. 157 is the
first quarter of 2008. We currently are evaluating the effect this statement may
have on our consolidated financial statements.

      In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. SFAS No. 159 permits an entity to
irrevocably elect fair value on a contract-by-contract basis as the initial and
subsequent measurement attribute for many financial assets and liabilities and
certain other items including insurance contracts. Entities electing the fair
value option would be required to recognize changes in fair value in earnings
and to expense up front cost and fees associated with the item for which the
fair value option is elected. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of SFAS No. 157, FAIR VALUE
MEASUREMENTS. We currently are evaluating the effect that adoption of SFAS No.
159 would have on our financial condition or results of operations.

      In June 2006, the FASB issued Financial Interpretation No. 48, ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109.
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement. The interpretation also provides
guidance on derecognition, classification, interest and penalties, and other
matters. These provisions are effective for us beginning in the first quarter of
2007. We currently are assessing the effect of this statement and currently do
not believe that adoption will have a material effect on our consolidated
financial statements.

                                       45



<Page>

      On June 29, 2005, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 05-06, DETERMINING THE AMORTIZATION PERIOD FOR LEASEHOLD IMPROVEMENTS.
Issue No. 05-06 provides that the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception
of a lease shall be the shorter of (a) the useful life of the assets or (b) a
term that includes required lease periods and renewals that are reasonably
assured upon the acquisition or the purchase. The provisions of EITF Issue No.
05-06 became effective on a prospective basis for leasehold improvements
purchased or acquired beginning in the second quarter of 2006. The adoption of
EITF Issue No. 05-06 has not had a material effect on our consolidated financial
position, results of operations or cash flows.

      In September 2006, the Securities and Exchange Commission ("Commission")
issued Staff Accounting Bulletin ("SAB") No. 108, Topic 1N, FINANCIAL STATEMENTS
- CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN THE CURRENT YEAR FINANCIAL STATEMENTS. SAB No. 108 addresses
how to quantify the effect of an error on the financial statements and requires
a dual approach to compute the materiality of the misstatement. Specifically,
the amount of the misstatement is to be computed using both the "rollover" (that
is, the current year income statement perspective) and the "iron curtain" (that
is, the year-end balance sheet perspective). SAB No. 108 is effective for all
fiscal years ending after November 15, 2006. Accordingly, we adopted SAB No. 108
in the fourth quarter of 2006. The adoption of SAB No. 108 did not have a
material effect on our financial condition or results of operations.

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 affect our consolidated financial statements. Our
exposure to fluctuations in currency exchange rates has increased as a result of
the growth or acquisition of our international subsidiaries. However, because
historically the majority of our currency exposure has related to financial
statement translation rather than to particular transactions, prior to 2005 we
had not 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.

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

                                       46



<Page>

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

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

      Our ultimate realized gain or loss with respect to currency fluctuations
will depend on the currency exchange rates and other factors in effect as the
contracts mature. Net foreign exchange translation gains and losses included in
other income and expense in the accompanying consolidated statements of
operations totaled a $343,000 loss for 2006 and a $123,000 gain for 2005.

      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.

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.

      On April 13, 2006, we notified Grant Thornton LLP ("GT"), the independent
registered public accounting firm that was engaged as our principal accountant
to audit our consolidated financial statements, that we intended to engage new
certifying accountants and thereby were terminating our relationship with GT.
Our decision to change accountants was approved by our audit committee and board
of directors. The reason for the change was to allow us to engage an alternative
firm that we believed had adequate resources and experience to provide us with
the auditing and tax services we require, on a more cost-effective basis.

      The audit reports of GT on our consolidated financial statements and
consolidated financial statement schedules as of and for the years ended
December 31, 2005 and 2004 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. During the years ended December 31, 2005 and 2004 and the
subsequent interim period through April 13, 2006, there were no disagreements
with GT on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements, if not resolved
to GT's satisfaction, would have caused GT to make reference to the subject
matter of the disagreement in connection with its opinion.

      During the years ended December 31, 2005 and 2004 and the subsequent
interim period through April 13, 2006, there were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of
1933, as amended, except as described below.

                                       47



<Page>

      o     On April 5, 2005, in connection with its audit of our consolidated
            financial statements for the year ended December 31, 2004, GT
            advised our audit committee and management of two matters that GT
            considered to be "material weaknesses" as that term is defined under
            standards established by the Public Company Accounting Oversight
            Board (United States), or PCAOB. A material weakness is a control
            deficiency or combination of control deficiencies that results in
            more than a remote likelihood that a material misstatement of the
            annual or interim financial statements will not be prevented or
            detected. 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, Pascall and RO
            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 had access to initiate the payment of
            invoices and print electronically signed checks. Both individuals
            had 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 - represented 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 and also determined that no prior period financial
            statements were materially affected by such matters. In response to
            the observations made by GT, on April 7, 2005, we engaged financial
            consultants who are certified public accountants with the requisite
            background and experience to prepare required disclosures in the
            notes to our financial statements and to provide greater internal
            resources for researching and evaluating the appropriateness of
            complex accounting principles and for evaluating the effects that
            new accounting pronouncements may have on us. In addition, we
            recognize that the risk of an unauthorized disbursement exists
            without proper segregation of duties between check-writing and
            record keeping. However, every month we review the listing of checks
            produced and research any check number that is missing or
            questionable. We believe this type of detective control would
            identify unauthorized disbursements. Additionally, on May 6, 2005,
            we limited the system access for those individuals performing this
            review such that there are appropriate mitigating controls over the
            incompatible duties with regard to our disbursements. We believe
            these steps addressed the matters GT raised.

      o     On August 15, 2005, in connection with its review of our condensed
            consolidated financial statements for the quarter ended June 30,
            2005, GT advised our management of a matter that GT considered to be
            a material weakness. GT noted that we recorded revenue in our
            Pascall division for certain items previously recorded as "bill and
            hold" inventory. We had shipped the items to the customer on June
            30, 2005, and the customer took title to the items and paid for the
            items. However, the customer requested that Pascall modify the items
            and returned the items to Pascall on July 7, 2005 under a separate
            contract. The return of the items by the customer subsequent to June
            30, 2005 resulted in the transaction not meeting the revenue
            recognition criteria under SAB No. 104. The recording of these items
            as sales in the quarter ended June 30, 2005 resulted in an adjusting
            journal entry to reduce revenue by $841,000 and to reduce net income
            by $314,000 ($0.01 per share). GT met with our audit committee on
            August 18, 2005 and recommended that we review the control
            procedures over bill and hold arrangements to determine adherence to
            SAB No. 104. Our audit committee and management have undertaken an
            extensive review of SAB No. 104. We have sought and plan to continue
            to seek guidance from our financial consultants, who are certified
            public accountants with the requisite background and experience, to
            assist us in our future compliance with SAB No. 104 as it relates to
            control procedures over bill and hold matters and believe we have
            therefore remediated the material weakness. o On March 28, 2006, in
            connection with its audit of our consolidated financial statements
            for the year ended December 31, 2005, GT advised our management and
            audit committee of two matters that GT considered material
            weaknesses. GT indicated that in the area of accounting and
            financial reporting, it believed we had insufficient accounting
            resources to enable us to identify and evaluate complex accounting
            and reporting matters. In addition, GT recommended that we establish
            procedures to ensure that our Chief Financial Officer can more
            closely monitor information submitted to our corporate headquarters
            by our subsidiary controllers and oversee accounting for reserves
            and other areas that involving significant judgment at all company
            locations. GT also recommended that we establish procedures to
            ensure that personnel familiar with accounting principles generally
            accepted in the United States and with Commission disclosure
            requirements thoroughly evaluate activities and transactions at all
            company locations in order to determine that we are timely making
            all required disclosures.

                                       48



<Page>

      On April 17, 2006, we engaged Hein & Associates LLP as our new certifying
accountants. We had not consulted with Hein in the past regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on our financial statements or as to any
disagreement or reportable event as described in Item 304(a)(1)(iv) and Item
304(a)(1)(v) of Regulation S-K.

ITEM 9A.   CONTROLS AND PROCEDURES.

   EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      We conducted an evaluation, with the participation of our Chief Executive
Officer, who is also our Acting Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. The term
"disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures also include, without
limitation, controls and procedures designated to ensure that information
required to be disclosed by a company in the reports filed or submitted by it
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Acting Chief Financial Officer has concluded as of
December 31, 2006 that our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weaknesses described
below.

      A material weakness is internal control over financial reporting is
defined by the Public Company Accounting Oversight Board's Audit Standard No. 2
as being a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of
the financial statements would not be prevented or detected. A significant
deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects the company's ability to initiate, authorize, record, process,
or report external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected.

      In connection with its audit of our consolidated financial statements for
the year ended December 31, 2006, Hein, our independent registered public
accounting firm, advised management and our audit committee of the following two
matters that Hein considered to be material weaknesses in the area of accounting
and financial reporting:

                                       49



<Page>

      1.    We did not have a sufficient complement of personnel with
appropriate training and experience in generally accepted accounting principles
in the United States and with Commission disclosure requirements.

      2.    We lacked procedures to ensure that our principal accounting and
financial officer can closely monitor information submitted to our corporate
headquarters by our subsidiaries and oversee accounting for reserves and other
areas that involve significant judgment at all of our locations. We also lacked
procedures to ensure that personnel familiar with accounting principles
generally accepted in the United States and with Commission disclosure
requirements can thoroughly evaluate activities and transactions at all of our
locations in order to make all required disclosures in a timely manner.

      To initially address these material weaknesses, management performed
additional analyses and other procedures to ensure that the financial statements
included herein fairly present, in all material respects, our financial
position, results of operations and cash flows for the periods presented.

   INHERENT LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

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

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

   REMEDIATION OF MATERIAL WEAKNESSES

      To remediate the material weaknesses in our disclosure controls and
procedures identified above, we have done or intend to do the following, in the
periods specified below:

      Our former Chief Financial Officer functioned in that position through
August 18, 2006, the date of his resignation from employment with EMRISE
Corporation. Upon his resignation, overall responsibility for the accounting
functions and reporting was delegated to our Chief Executive Officer who
currently is filling the role of Acting Chief Financial Officer. Management and
our audit committee launched a recruitment effort in September 2006, and
currently have identified a qualified candidate for the position of Vice
President of Finance and Administration (our principal financial and accounting
officer) and a qualified candidate for the position of Controller for our
United States operations, each with expertise in public company financial
reporting compliance. We expect to complete the hiring of these two
candidates during the second quarter of 2007.

                                       50



<Page>

      Once a Vice President of Finance and Administration and a new Controller
for our United States operations begin employment with us, we intend that these
individuals will develop policies and procedures, including an adequate
supervisory structure, necessary to ensure that our principal accounting and
financial officer can closely monitor financial information throughout our
company and oversee all accounting that involves significant judgment on the
part of personnel located at our operating subsidiaries within the United
States, Europe and Asia. In addition, we intend that our Vice President of
Finance and Administration and new Controller for our United States operations
will establish policies and procedures necessary to ensure that personnel
familiar with accounting principles generally accepted in the United States and
with Commission disclosure requirements are capable of evaluating activities and
transactions at all of our operating subsidiaries in order to make all required
disclosures in a timely manner. We anticipate that our Vice President of Finance
and Administration and our new Controller for our United States operations will
work closely with our Director of Financial Controls for Europe, whom we hired
in late 2005 to oversee our three European Controllers and who will report to
our Vice President of Finance and Administration, on these matters.

      Management is unsure, at the time of the filing of this report, when the
actions described above will remediate the material weaknesses also described
above. Until we hire a Vice President of Finance and Administration and a new
Controller for our United States operations, as planned, management may continue
to hire outside consultants to assist us in satisfying our financial reporting
obligations.

      Management believes that a Vice President of Finance and Administration
will have an annual base salary of approximately $225,000 and a new Controller
for our United States operations will have an annual base salary of
approximately $110,000, not including benefits and other costs of employment.
Management is unable, however, to estimate our expenditures related to the
hiring of outside consultants to assist us in satisfying our financial reporting
obligations.

   CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      There were no changes during the quarter ended December 31, 2006 that have
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.

ITEM 9B.   OTHER INFORMATION.

      None.


                                       51



<Page>

                                    PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

DIRECTORS AND EXECUTIVE OFFICERS

      The names, ages and positions held by our directors, director nominee and
executive officers as of March 16, 2007 and their business experience are as
follows:

<TABLE>
<CAPTION>

        NAME                               AGE                                  TITLES
        ----                               ---                                  ------
<S>                                         <C>         <C>
Carmine T. Oliva                            64          Chairman of the Board, President, Chief Executive Officer,
                                                        Acting Chief Financial Officer, Secretary and Director

Graham Jefferies                            49          Executive Vice President, Chief Operating Officer and
                                                        Managing Director of EMRISE Electronics Ltd.

Laurence P. Finnegan, Jr. (1)(2)(3)         69          Director

Otis W. Baskin (1)(2)(3)                    61          Director

Richard E. Mahmarian (2)(3)                 70          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, EMRISE Electronics Corporation, since he founded EMRISE
Electronics Corporation in 1983. Mr. Oliva has been Acting Chief Financial
Officer and Secretary of EMRISE since August 18, 2006 and served as Acting Chief
Financial Officer from April to July 2005. Mr. Oliva has been Chairman of the
Board of EMRISE Electronics 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 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 EMRISE
Electronics 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.

                                       52



<Page>

      LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of EMRISE Electronics from 1985 to
March 1997, Mr. Finnegan was EMRISE Electronics' part-time 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 (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 from the University of Houston, and a B.A.
degree in Religion from Oklahoma Christian University.

      RICHARD E. MAHMARIAN was appointed as a Class III director on March 1,
2006. He has served as a principal and Chairman, President and Chief Executive
Officer of Control Solutions, Inc., a company that specializes in providing
business systems including hardware, software, consumable products and services
to major United States corporations, since December 2003. Mr. Mahmarian also has
served as managing member and Chairman and Chief Executive Officer of REM
Associates, LLC, a private investment and consulting company, since 1997. Mr.
Mahmarian also owns R&R Palos Verdes Enterprises, Inc., a home construction
company in the south bay area of Los Angeles, California, which was started in
1997. From 1998 until 2001, Mr. Mahmarian was the owner of Alpha Microsystems,
LLC, a company that manufactured and sold mini-computer systems, personal
computers and servers, provided network services and support, and information
technology hardware and software services throughout North America through 50
field offices. He served in the U.S. Navy and was honorably discharged. While in
the Navy, he received extensive training in advanced electronic technologies.
Mr. Mahmarian earned a B.A. degree in Accounting from Upsala College and an
M.B.A. in Marketing and Economics from Seton Hall University.

BOARD OF DIRECTORS

      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.

                                       53



<Page>

      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 2009 annual
meeting, one Class II director whose term expires at our 2007 annual meeting,
and two Class III directors whose term expires at our 2008 annual meeting.

APPOINTMENT OF OFFICERS; NO FAMILY RELATIONSHIPS

      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 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 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, 2006 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 2006, all Section 16(a) filing requirements applicable
to our reporting persons were met, except that Austin W. Marxe and David M.
Greenhouse filed three late Form 4s to report three transactions.

CODE OF ETHICS

      Our board of directors has adopted an Amended and Restated 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 the initial filing of our annual report on Form 10-K for the year
ended December 31, 2005.

      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. 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.

AUDIT COMMITTEE MATTERS

      Messrs. Finnegan and Baskin served on our audit committee throughout and
since 2006, with Mr. Finnegan serving as chairman. Mr. Mahmarian was appointed
as the third member of the audit committee when he joined our board on March 1,
2006. Our board of directors has determined that Messrs. Finnegan and Mahmarian
are audit committee financial experts and qualify as independent under Rule
5.3(k) of the NYSE Arca Equities Rules and Rule 10A-3(b)(1) of the Commission.

                                       54



<Page>

PROCEDURES FOR NOMINATIONS BY SECURITY HOLDERS

      Since last disclosed by us, no material changes have been implemented to
the procedures by which security holders may recommend nominees to our board.

ITEM 11.  EXECUTIVE COMPENSATION.

COMPENSATION DISCUSSION AND ANALYSIS

   COMPENSATION PHILOSOPHY AND COMPONENTS

      This section discusses the principles underlying our executive
compensation policies and decisions and the most important factors relevant to
an analysis of these policies and decisions. It provides qualitative information
regarding the manner and context in which compensation is awarded to and earned
by our executive officers and places in perspective the data presented in the
tables and narrative that follow.

      Our compensation committee is responsible for reviewing and approving base
salaries, bonuses and incentive awards for all executive officers, reviewing and
establishing the base salary, bonuses and incentive awards for the chief
executive officer, and reviewing, approving and recommending to the board of
directors the content, terms and conditions of all employee compensation and
benefit plans, or changes to those plans.

      Our compensation philosophy is based upon four central objectives:

      o     To provide an executive compensation structure and system that is
            both competitive in the outside industrial marketplace and also
            internally equitable based upon the weight and level of
            responsibilities in the respective executive positions;

      o     To attract, retain and motivate qualified executives within this
            structure, and reward them for outstanding performance-to-objectives
            and business results through financial and other appropriate
            management incentives;

      o     To align our financial results and the compensation paid to our
            executive officers with the enhancement of stockholder value; and

      o     To structure our compensation policy so that executive officers'
            compensation is dependent, in one part, on the achievement of its
            current year business plan objectives, and in another part, on the
            long-term increase in company net worth and the resultant
            improvement in stockholder value, and to maintain an appropriate
            balance between short- and long-range performance objectives over
            time.

      Our executive officers' compensation currently has three primary
components -- base compensation or salary, annual discretionary cash bonuses,
and stock option awards granted pursuant to our Amended and Restated 2000 Stock
Option Plan. In addition, we provide our executive officers a variety of
benefits that generally are available to all salaried employees in the
geographical location where they are based.

      We view the various components of compensation as related but distinct.
Although our compensation committee does review total compensation, we do not
believe that significant compensation derived from one component of compensation
should negate or reduce compensation from other components. We determine the
appropriate level for each compensation component based in part, but not
exclusively, on our view of internal equity and consistency, and other
considerations we deem relevant, such as rewarding extraordinary performance.
Our compensation committee has not adopted any formal or informal policies or
guidelines for allocating compensation between long-term and currently paid out
compensation, between cash and non-cash compensation, or among different forms
of non-cash compensation.

                                       55



<Page>

   BASE COMPENSATION

      Base compensation is targeted to recognize each executive officer's unique
value and historical contributions to our success in light of salary norms in
our industries and the general marketplace. The criteria for measurement include
data available from objective, professionally-conducted market studies,
integrated with additional competitive intelligence secured from a range of
industry and general market sources. Our compensation committee reviews the base
compensation of the chief executive officer, and with the chief executive
officer, the base compensation of all other executive officers, periodically to
assure that a competitive position is maintained.

   EQUITY COMPENSATION

      We use stock options to reward long-term performance. Our compensation
committee and/or our board of directors act as the manager of our option plans
and perform functions that include selecting option recipients, determining the
timing of option grants and whether options are incentive or non-qualified, and
assigning the number of shares subject to each option, fixing the time and
manner in which options are exercisable, setting option exercise prices and
vesting and expiration dates, and from time to time adopting rules and
regulations for carrying out the purposes of our plans. For compensation
decisions regarding the grant of equity compensation to executive officers, our
compensation committee typically considers recommendations from our chief
executive officer.

      We do not have any program, plan or obligation that requires us to grant
equity compensation on specified dates. We have not made equity grants in
connection with the release or withholding of material non-public information.
Historically, options granted to our directors and executive officers have
generally had exercise prices above the then trading price of our common stock.
Information about outstanding options held by our named executive officers and
directors is contained in the "Outstanding Equity Awards at December 31, 2006"
and "Director Compensation" tables.

   CASH BONUSES

      Executive bonuses are used to focus our management on achieving key
corporate financial objectives, to motivate certain desired individual behaviors
and to reward substantial achievement of these company financial objectives and
individual goals. We use cash bonuses to reward performance achievements
generally only as to years in which we are substantially profitable, and we use
salary as the base amount necessary to match our competitors for executive
talent.

      Bonuses, if any, are determined and paid on an annual basis after
completion of the bonus year. We did not pay any bonuses to our named executive
officers for 2005 and do not anticipate paying any such bonuses for 2006.

      In the past, our compensation committee has based bonuses for our named
executive officers on net income and revenue growth because it believes that as
a growth company, we should reward growth in net income and revenue, but only if
the revenue growth is achieved cost-effectively. Likewise, our compensation
committee believes a profitable company with little or no growth is not
acceptable. Our compensation committee considers the chosen metrics of net
income and growth in revenue to be the best indicators of our financial success
and creation of stockholder value.

                                       56



<Page>

      Individual performance objectives are determined by the executive officer
to whom the potential bonus recipient reports or, in the case of our chief
executive officer, by our compensation committee. For example, the basis for Mr.
Oliva's bonus might include such objectives as developing bank and equity
financing, successfully concluding and integrating acquisitions, developing
strategic opportunities or developing our executive team.

      Our compensation committee has not considered whether it would attempt to
recover bonuses paid based on our financial performance where our financial
statements are restated in a downward direction sufficient to reduce the amount
of bonus that should have been paid under applicable bonus criteria.

   ACCOUNTING AND TAX TREATMENT

      We account for equity compensation paid to our employees under the rules
of SFAS No. 123R, which requires us to estimate and record an expense over the
service period of the award. Accounting rules also require us to record cash
compensation as an expense at the time the obligation is accrued. Unless and
until we achieve sustained profitability, the availability to us of a tax
deduction for compensation expense will not be material to our financial
position. We structure cash bonus compensation so that it is taxable to our
executives at the time it becomes available to them. We currently intend that
all cash compensation paid will be tax deductible for us. However, with respect
to equity compensation awards, while any gain recognized by employees from
nonqualified options should be deductible, to the extent that an option
constitutes an incentive stock option, gain recognized by the optionee will not
be deductible if there is no disqualifying disposition by the optionee. In
addition, if we grant restricted stock or restricted stock unit awards that are
not subject to performance vesting, they may not be fully deductible by us at
the time the award is otherwise taxable to the employee.

   OTHER BENEFITS

      We also maintain other executive benefits that we consider necessary in
order to offer fully competitive opportunities to its executive officers. These
include, without limitation, 401(k) retirement savings plans, car allowances and
employment agreements. The compensation committee continues to monitor and
evaluate our executive compensation system and its application throughout our
organization to assure that it continues to reflect our compensation philosophy
and objectives.

      Executive officers are eligible to participate in all of our employee
benefit plans, such as medical, dental, group life, disability, and accidental
death and dismemberment insurance, in each case on the same basis as other
employees. Our officers and employees in Europe generally have somewhat
different employee benefit plans than those we offer domestically, typically
based on the requirements of their respective countries of domicile.

      During 2006, we matched $1,532, which was the lesser of $2,000 and 20% of
Mr. Foote's contributions to his 401(k) account. This matching arrangement was
generally made available to all employees of EMRISE Corporation and provides for
the same method of allocation of benefits between management and non-management
participants. Also, one of our subsidiaries, 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 be used to purchase annuities upon
retirement. During 2006, Mr. Jefferies received a matching contribution of
$17,131, which was 6% of his salary.

                                       57



<Page>

SUMMARY COMPENSATION TABLE - 2006

      The following table provides information concerning the compensation for
the year ended December 31, 2006 for our principal executive officer, our
principal financial officer and our chief operating officer, who was the only
other person who served as an executive officer during 2006 (collectively, the
"named executive officers"). In August 2006, Mr. Foote resigned his positions
with us, Mr. Oliva assumed the position of Acting Chief Financial Officer and,
as described under the heading "Potential Payments on Termination of Employment
or Change-in-Control," Mr. Foote assumed temporary employment with us.

<TABLE>
<CAPTION>
                                                                    ALL OTHER
              NAME AND                             SALARY         COMPENSATION        TOTAL
         PRINCIPAL POSITION              YEAR        ($)              ($)              ($)
-------------------------------------  --------   ----------      ------------     ------------
<S>                                      <C>         <C>                <C>             <C>
Carmine T. Oliva                         2006        350,000            13,821(1)       363,821
   Chief Executive Officer

Graham Jefferies (2)                     2006        279,165            27,216(3)       306,381
   Chief Operating Officer

Randolph D. Foote                        2006        183,750(4)          8,732(5)       192,482
   Former Chief Financial Officer
</TABLE>
---------------
(1) Represents $4,821 of insurance premiums we paid with respect to a $1,000,000
    term life insurance policy for the benefit of Mr. Oliva's spouse and a
    $9,000 cash car allowance.
(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 monthly conversion rates in effect during 2006.
(3) Represents $17,131 in company contributions to Mr. Jefferies' retirement
    account and a $10,085 cash car allowance.
(4) Includes $13,461 of vacation accrual that was paid to Mr. Foote in
    connection with his resignation.
(5) Represents $1,532 in company contributions to Mr. Foote's 401(k) retirement
    account and a $7,200 cash car allowance.

   EMPLOYMENT AGREEMENTS

      CARMINE T. OLIVA

      On February 24, 2006, we executed a five-year employment agreement with
Carmine T. Oliva, our Chairman of the Board, President and Chief Executive
Officer. The agreement became effective as of January 1, 2006 and replaced his
previous employment agreement that was scheduled to automatically renew on that
date. The agreement provided for an initial base salary of $350,000 during the
first twelve months the agreement was in effect. Mr. Oliva is eligible to
receive increases and bonuses at the discretion of our compensation committee
and to participate in benefit and incentive programs we may offer.

      The agreement contains non-competition provisions that prohibit Mr. Oliva
from engaging or participating in a competitive business or soliciting our
customer or employees during his employment with us and for two years afterward.
The agreement also contains provisions that restrict disclosure by Mr. Oliva of
our confidential information and assign ownership to us of inventions created by
him in connection with his employment. In addition, the agreement contains
termination and change-in-control provisions as described under "Potential
Payments on Termination of Employment or Change-in-Control."

                                       58



<Page>

      GRAHAM JEFFERIES

      On February 24, 2006, we entered into a three-year employment agreement
with Graham Jefferies, our Executive Vice President and Chief Operating Officer.
The agreement became effective as of January 1, 2006 and replaced his previous
employment agreement that was scheduled to expire in July 2006. The agreement
provides for an initial base salary of 152,800 British pounds sterling per year
(approximately $263,350 as of January 1, 2006) during the first twelve months
that the agreement is in effect, which amount is to be paid by our subsidiary,
EMRISE Electronics Ltd. Mr. Jefferies is eligible to receive increases and
bonuses at the discretion of our compensation committee and to participate in
other benefit and incentive programs we may offer.

      The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customer or employees during his employment with us and for two years
afterward. 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. In
addition, the agreement contains termination and change-in-control provisions as
described under "Potential Payments on Termination of Employment or Change-in-
Control."

      RANDOLPH D. FOOTE

      On February 24, 2006, we entered into a two-year employment agreement with
Randolph D. Foote, our then Senior Vice President, Chief Financial Officer and
Secretary. The agreement was effective as of January 1, 2006 and replaced his
existing employment agreement that was scheduled to expire in July 2006. The
agreement provided for an initial base salary of $175,000 during the first
twelve months the agreement was to be in effect. Mr. Foote was eligible to
receive increases and bonuses at the discretion of our compensation committee
and to participate in other benefit and incentive programs we may offer. As
described under "Termination of Employment and Change in Control Arrangements,"
Mr. Foote's employment agreement was terminated in August 2006.

GRANTS OF PLAN-BASED AWARDS

      No plan-based awards were granted to the named executive officers during
2006.

                                       59



<Page>

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006

      The following table sets forth information about outstanding equity awards
held by our named executive officers as of December 31, 2006.

                                            OPTION AWARDS
                           ------------------------------------------------
                            NUMBER OF
                            SECURITIES
                            UNDERLYING
                            UNEXERCISED         OPTION
                              OPTIONS          EXERCISE           OPTION
                                (#)             PRICE           EXPIRATION
          NAME              EXERCISABLE          ($)               DATE
-----------------------    -------------    -------------      ------------
Carmine T. Oliva              100,000            0.50           01/31/2011
                               53,000            0.35           01/22/2013
                               26,000            1.00           02/24/2014
                               50,000            2.00           12/29/2015

Graham Jefferies               60,000            0.20           11/15/2009
                               30,000            1.13           05/01/2008
                               54,000            0.35           01/22/2013
                               40,000            1.00           02/24/2014
                               50,000            2.00           12/29/2015

Randolph D. Foote              50,000            0.20           11/15/2009 (1)
                               35,000            0.35           01/22/2013 (1)
                               25,000            1.00           02/24/2014 (1)
                               50,000            2.00           12/29/2015 (1)
-------------------

(1) Mr. Foote's options are scheduled to expire three months after the
    termination of his temporary employment with us. His temporary employment
    with us is expected to terminate no later than April 30, 2007.

OPTION EXERCISES AND STOCK VESTED

      No option awards were exercised by any of the named executive officers
during the year ended December 31, 2006. No stock awards were held by any of the
named executive during the year ended December 31, 2006.

POTENTIAL PAYMENTS ON TERMINATION OF EMPLOYMENT OR CHANGE-IN-CONTROL

      The following discussions and tables describe and illustrate potential
payments to Messrs. Oliva and Jefferies under existing contracts, agreements,
plans or arrangements, whether written or unwritten, for various scenarios
involving a change-in-control or termination of employment, assuming a December
31, 2006 termination date.

      The tables do not include any prorated incentive bonus that would be
payable upon termination for death, incapacity, good reason or without due cause
because no bonuses were payable for 2006. Mr. Jefferies is based in
the United Kingdom and receives his remuneration in British pounds sterling. The
amounts listed for Mr. Jefferies are shown in United States dollars, converted
from British pounds sterling using the exchange rate of $1.958 per British pound
sterling in effect on December 31, 2006.

                                       60



<Page>

      CARMINE T. OLIVA

      As described under the heading "Summary Compensation Table - Employment
Agreements," we are a party to a employment agreement with Carmine T. Oliva, our
Chairman of the Board, President and Chief Executive Officer. If we terminate
Mr. Oliva's employment for due cause or due to Mr. Oliva's breach of his
employment agreement by refusing to continue his employment, our obligation to
pay any further compensation, severance allowance, or other amounts payable
under the agreement terminates on the date of termination, other than benefits
under retirement and benefit plans and programs that are earned and vested by
the date of termination, pro rata annual salary through the date of termination,
any stock options that have vested as of the date of termination, and accrued
vacation as required by California law. "Due cause" includes any intentional
misapplication of our funds or other material assets, or any other act of
dishonesty injurious to us, or conviction of a felony or a crime involving moral
turpitude. "Due cause" also includes abuse of controlled substances or alcohol
and breach, nonperformance or nonobservance of any of the terms of the
agreement, provided that Mr. Oliva fails to satisfactorily remedy the
performance problem following 90 days' written notice.

      We may terminate Mr. Oliva's employment immediately upon written notice to
him. Mr. Oliva may terminate the agreement at any time for good reason within 30
days after he learns of the event or condition constituting good reason. "Good
reason" includes: changes in Mr. Oliva's position, duties, responsibilities,
titles or status; a reduction in his base salary to an amount less than the
greater of $350,000 or 10% below the base salary in effect at the time of the
reduction; our failure to continue in effect benefits required under the
agreement, to obtain the assumption of the agreement by any successor or assign,
or to timely cure any material breach after Mr. Oliva gives us written notice; a
material reduction in support services, staff, office space and accouterments
which reduction is not generally effective for all officers; or if we avail
ourselves of or are subjected by any third party to any other proceeding
involving insolvency or the protection of or from creditors and the proceeding
is not discharged or terminated within 90 days.

      If Mr. Oliva's service terminates without due cause or for good reason
prior to the expiration of the agreement on January 1, 2011, Mr. Oliva will be
entitled to his salary through the end of the month in which termination occurs
plus credit for accrued vacation, a severance payment equal to three times his
then current annual salary, net of taxes, a prorated incentive bonus, if any,
for the fiscal year during which termination occurs, and all medical and life
insurance benefits to which he was entitled immediately prior to the date of
termination (or at the election of Mr. Oliva in the event of a
change-in-control, immediately prior to the date of the change-in-control) for a
period of three years or the date or dates that Mr. Oliva's continued
participation in our medical and/or life insurance plans is not possible under
the plans, whichever is earlier. If our medical and/or life insurance plans do
not allow Mr. Oliva's continued participation, then we are required to pay to
Mr. Oliva, in monthly installments, the monthly premium or premiums that had
been payable by us covering the three-year period.

      A "change-in-control" includes: a consolidation or merger in which we are
not the surviving corporation or pursuant to which all or substantially all of
our common stock would be converted into cash, securities or other property,
other than a merger in which the holders of our common stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; a sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of our assets; stockholder approval of any plan or
proposal for liquidation or dissolution; any person other than persons who were
stockholders on January 1, 2006, becomes the beneficial owner of 50% or more of
our outstanding common stock; during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire board
cease to constitute a majority of the board unless the election, or the
nomination for election by our stockholders, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or there is any change of control of a
nature required to be reported in response to Item 6 (e) of Schedule 14A under
the Exchange Act.

                                       61



<Page>

      If Mr. Oliva becomes mentally or physically incapable of performing the
services required under the agreement for a period of 240 consecutive days, and
the incapacity is confirmed by the written opinion of two practicing medical
doctors, we may terminate Mr. Oliva's employment under the agreement upon 30
days' prior written notice. Upon Mr. Oliva's death, the agreement will terminate
immediately. If Mr. Oliva's employment is terminated due to his incapacity or
death, Mr. Oliva or his estate or legal representative will be entitled to
receive benefits under our retirement and benefits plans and programs that are
earned and vested at the date of termination, a prorated incentive bonus for the
fiscal year in which incapacity or death occurs, and Mr. Oliva's annual salary
then in effect for one year following the date of termination, offset, however,
by any payments received by Mr. Oliva as a result of any disability insurance
maintained by us for Mr. Oliva's benefit.

<TABLE>
<CAPTION>
                                                                                     CONTINUATION OF
                                                                      TOTAL CASH      GROUP MEDICAL        TOTAL
                                   CASH SEVERANCE                      SEVERANCE         AND LIFE       TERMINATION
       CARMINE T. OLIVA              PAYMENT(S)      TAX GROSS UP     PAYMENT(S)        INSURANCE         BENEFITS
-----------------------------   -------------------  ------------    ------------    ---------------   -------------
<S>                                      <C>              <C>             <C>               <C>              <C>
Due Cause, Retirement or                 $0               $0              $0                $0               $0
Voluntary Termination

Death or Incapacity                  $350,000,            $0           $350,000             $0            $350,000
                                  representing one
                                    times annual
                                  salary, payable
                                  in semi-monthly
                                 installments over
                                      one year

Good Reason or Without Due          $1,050,000,        $710,563,      $1,789,730        $36,387,        $1,826,117
Cause                               representing       assuming                         represents
                                    three times         40.36%                           premiums
                                   annual salary,      effective                      payable for up
                                  payable in lump      tax rate                       to three years
                                        sum

                                  $29,167 payable
                                  in lump sum for
                                  accrued vacation
</TABLE>

      GRAHAM JEFFERIES

      As described under the heading "Summary Compensation Table - Employment
Agreements," we are a party to a employment agreement with Graham Jefferies, our
Executive Vice President and Chief Operating Officer. If Mr. Jefferies'
employment terminates for due cause or due to Mr. Jefferies' breach of the
agreement by refusing to continue his employment, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of termination, other than benefits under
retirement and benefit plans and programs that are earned and vested by the date
of termination, Mr. Jefferies' pro rata annual salary through the date of
termination, any stock options that have vested as of the date of termination,
and accrued vacation as required by applicable law.

                                       62



<Page>

      We may terminate Mr. Jefferies' employment immediately upon written
notice. Mr. Jefferies may terminate the agreement at any time for good reason
within 30 days after Mr. Jefferies learns of the event or condition constituting
good reason. If termination without due cause by us or for good reason by Mr.
Jefferies occurs prior to the expiration of the agreement on January 1, 2009,
Mr. Jefferies will be entitled to his salary through the end of the month during
which the termination occurs plus credit for accrued vacation, a severance
payment in an amount equal to two times his then current annual salary, net of
applicable taxes, a prorated incentive bonus, if any, for the fiscal year during
which termination occurs, and all medical and life insurance benefits to which
Mr. Jefferies was entitled immediately prior to the date of termination (or at
the election of Mr. Jefferies in the event of a change-in-control, immediately
prior to the date of the change-in-control) for a period of two years or the
date or dates that Mr. Jefferies' continued participation in our medical and/or
life insurance plans is not possible under the plans, whichever is earlier. If
our medical and/or life insurance plans do not allow Mr. Jefferies' continued
participation, then we will be obligated to pay to Mr. Jefferies, in monthly
installments, the monthly premium or premiums that had been payable by us
covering the two-year period.

      If Mr. Jefferies becomes mentally or physically incapable of performing
the services required under the agreement for a period of 180 consecutive days,
the agreement will terminate; provided, however, that Mr. Jefferies will remain
an employee of EMRISE Electronics Ltd. and will be entitled to remuneration in
an amount equal to the amount paid under EMRISE Electronics Ltd.'s permanent
health scheme, subject to the paragraph immediately below. Upon Mr. Jefferies'
death, the agreement will terminate immediately.

      If Mr. Jefferies' employment is terminated due to his incapacity or death,
Mr. Jefferies or his estate or legal representative will be entitled to receive
benefits under retirement and benefits plans and programs that are earned and
vested at the date of termination, a prorated incentive bonus for the fiscal
year in which incapacity or death occurs, and Mr. Jefferies' annual salary then
in effect for one year following the date of termination, offset by any payments
received by Mr. Jefferies as a result of any permanent insurance scheme
maintained by us for Mr. Jefferies' benefit.

      The terms "due cause," "good reason" and "change-in-control" have the same
meanings as in Mr. Oliva's employment agreement described above.

<TABLE>
<CAPTION>
                                                                                     CONTINUATION OF
                                                                      TOTAL CASH      GROUP MEDICAL        TOTAL
                                   CASH SEVERANCE                      SEVERANCE         AND LIFE       TERMINATION
       GRAHAM JEFFERIES              PAYMENT(S)      TAX GROSS UP     PAYMENT(S)        INSURANCE         BENEFITS
-----------------------------   -------------------  ------------    ------------    ---------------   -------------
<S>                                      <C>              <C>             <C>               <C>              <C>
Due Cause, Retirement or                 $0               $0              $0                $0               $0
Voluntary Termination

Death or Incapacity                  $299,182,            $0           $299,182         $1,566,        $300,748
                                  representing one                                     represents
                                    times annual                                       estimated
                                  salary, payable                                      permanent
                                  in semi-monthly                                    health scheme
                                 installments over                                   premiums for
                                      one year                                          one year

Good Reason or Without Due           $598,364,         $398,909,       $997,273         $9,334,         $1,006,607
Cause                             representing two     assuming                         represents
                                    times annual         40.0%                           premiums
                                  salary, payable      effective                      payable for up
                                    in lump sum        tax rate                        to two years
</TABLE>

                                       63



<Page>

      RANDOLPH D. FOOTE

      As described under the heading "Summary Compensation Table - Employment
Agreements," we were a party to an employment agreement with Randolph D. Foote,
our former Senior Vice President, Chief Financial Officer and Secretary. On
August 18, 2006, Mr. Foote resigned from all positions with us and our
subsidiaries. We entered into a resignation and separation agreement with him,
which became effective on August 25, 2006. Under the agreement, Mr. Foote
resigned all of his positions with us, and we and Mr. Foote jointly terminated
his employment agreement dated effective as of January 1, 2006. The resignation
and separation agreement provided that effective as of August 21, 2006, Mr.
Foote would be assigned to temporary employment with us, which we and Mr. Foote
anticipated would terminate by approximately December 31, 2006. On December 31,
2006, we and Mr. Foote amended the separation agreement to extend Mr. Foote's
temporary employment to no later than March 30, 2007. We and Mr. Foote intend to
amend the separation agreement to extend Mr. Foote's temporary employment to no
later than April 30, 2007. During the time of his temporary employment, Mr.
Foote has been assisting us in, among other things, the preparation of our
restated financial statements and our filings with the Commission and has
continued to receive his base salary and employment benefits (other than paid
vacation benefits, bonus or incentive compensation). Mr. Foote's stock options
are scheduled to terminate three months after termination of his temporary
employment. For twelve months following termination of his temporary employment,
Mr. Foote has agreed to continue to provide reasonable cooperation and
assistance to us as needed, and subject to Mr. Foote's performance of his
obligations under the separation agreement, we have agreed to pay to Mr. Foote
in installments on our regular pay dates during that period the total gross
amount of $182,200 and to reimburse Mr. Foote for health plan benefit premiums
at the same benefit level he had as of his resignation date.

DIRECTOR COMPENSATION

      Each non-employee director is entitled to receive $1,000 per month as
compensation for his services. In addition, each board member chairing a
standing committee is 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 April 16, 2006, we granted to Mr. Mahmarian an option to
purchase 50,000 shares of our common stock at an exercise price of $1.00 per
share. The option vests in two equal installments of 25,000 shares on October
17, 2006 and April 17, 2007.

      The following table provides information concerning the compensation of
our directors for the year ended December 31, 2006.

<TABLE>
<CAPTION>
                                    FEES EARNED
                                  OR PAID IN CASH         OPTION AWARDS              TOTAL
            NAME                        ($)                    ($)                    ($)
----------------------------     -----------------      -----------------       -----------------
<S>                                   <C>                       <C>                 <C>
Laurence P. Finnegan, Jr.             18,000                   -(1)                 18,000
Otis W. Baskin                        18,000                   -(2)                 18,000
Richard E. Mahmarian                  14,400                 39,000(3)              53,400
</TABLE>
-------------------
(1) At December 31, 2006, Mr. Finnegan held options to purchase an aggregate of
    216,000 shares of common stock.
(2) At December 31, 2006, Mr. Baskin held options to purchase an aggregate of
    85,000 shares of common stock.
(3) The dollar amount reflected in the table is the compensation cost we
    recognized for financial statement reporting purposes during 2006 under SFAS
    123R for the grant made to Mr. Mahmarian in 2006, estimated on the date of
    grant using the Black-Scholes option-pricing model with the following
    weighted-average assumptions: dividend yield of 0%; expected volatility of
    87%; risk-free interest rate of 4.75%; expected option life of 7 years; and
    weighted-average fair value per share of $0.79. At December 31, 2006, Mr.
    Mahmarian held options to purchase an aggregate of 50,000 shares of common
    stock, all of which were granted during 2006.

                                       64



<Page>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      Throughout and since 2006, the compensation committee has consisted of
Messrs. Finnegan and Mr. Baskin. No member of the board of directors has a
relationship that would constitute an interlocking relationship with executive
officers and directors of another entity.

COMPENSATION COMMITTEE REPORT

      Our compensation committee reviewed and discussed with our management the
"Compensation Discussion and Analysis" contained in this proxy statement. Based
on that review and discussions, our compensation committee recommended to our
board of directors that the "Compensation Discussion and Analysis" be included
in this proxy statement.

                                               Compensation Committee
                                               EMRISE Corporation
                                               Otis W. Baskin, Chairman
                                               Laurence P. Finnegan, Jr., Member

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

BENEFICIAL OWNERSHIP TABLE

      Except as otherwise indicated in the related footnotes, the following
table sets forth information with respect to the beneficial ownership of our
common stock as of March 16, 2007, 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 "named executive officers" named in the "Summary
            Compensation Table -- 2006" 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 38,136,750 shares of common stock
outstanding as of the date of the table.

                                       65



<Page>

      The warrants described in the footnotes to the table 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.

      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, Finnegan,
Baskin, and Mahmarian are directors of EMRISE Corporation. Messrs. Oliva and
Jefferies are named executive officers and current executive officers of EMRISE
Corporation. Mr. Foote is a named executive officer who is no longer an
executive officer of EMRISE Corporation.

<TABLE>
<CAPTION>
                                                                        AMOUNT AND NATURE          PERCENT
NAME OF BENEFICIAL OWNER                                             OF BENEFICIAL OWNERSHIP       OF CLASS
-------------------------------------------------------------------  -----------------------     ------------
<S>                                                                            <C>                  <C>
Carmine T. Oliva.................................................              1,398,305(1)         3.64%
Laurence P. Finnegan, Jr.........................................                260,171(2)           *
Otis W. Baskin...................................................                120,000(3)           *
Richard E. Mahmarian.............................................                 60,000(4)           *
Graham Jefferies.................................................                237,276(5)           *
Randolph D. Foote................................................                170,000(6)           *
Austin W. Marxe and David M. Greenhouse..........................              4,516,560(7)         11.84%
Gruber and McBaine Capital Management, LLC, Jon D. Gruber, J.
   Patterson McBaine and Eric B. Swergold........................              2,421,600(8)         6.29%
All executive officers and directors as a group (4 persons)......              1,985,752(9)         5.11%
</TABLE>
-------------------
 *  Less than 1.00%
(1) Includes 81,889 shares held individually by Mr. Oliva's spouse, and 229,000
    shares underlying options.
(2) Includes 216,000 shares underlying options.
(3) Includes 85,000 shares underlying options.
(4) Includes 50,000 shares underlying options.
(5) Includes 234,000 shares underlying options.
(6) Includes 160,000 shares underlying options.
(7) Based on share beneficial ownership information contained in a Form 4 filed
    February 2007 , in which Austin W. Marxe and David M. Greenhouse, the
    controlling principals of AWM Investment Company, Inc. ("AWM"). AWM serves
    as the general partner of MGP Advisers Limited Partnership, the general
    partner of and investment advisor to Special Situations Fund III QP, L.P.
    Messrs. Marxe and Greenhouse share voting and investment power over
    4,156,438 shares of common stock owned by Special Situations Fund III QP,
    L.P.  The address for Messrs. Marxe and Greenhouse is 527 Madison Avenue,
    Suite 2600, New York, New York 10022.
(8) Based in part on share beneficial ownership information contained in a
    Schedule 13G filed January 26, 2007, in which Gruber and McBaine Capital
    Management, LLC ("GMCM"), Jon D. Gruber, J. Patterson McBaine and Eric B.
    Swergold indicated that they constitute a group, each of whom shares voting
    and dispositive power over 1,691,200 outstanding shares. Also, Mr. Gruber
    and Mr. McBaine have sole voting and dispositive power over an additional
    284,650 and 108,250 shares of our common stock, respectively. In addition,
    warrants to purchase shares of our common stock are beneficially owned as
    follows: Gruber and McBaine International - 50,000; Mr. Gruber - 41,250; Mr.
    McBaine - 21,250; and Lagunitas Partners LP, an investment limited
    partnership of which GMCM is the general partner - 225,000. GMCM is a
    registered investment advisor whose clients have the right to receive or the
    power to direct the receipt of dividends from, or the proceeds from the sale
    of shares of our common stock. Messrs. Gruber and McBaine are the managers,
    controlling persons and portfolio managers of GMCM. No individual client's
    holdings of our common stock are more than 5.0% of our outstanding common
    stock. The address for these beneficial owners is 50 Osgood Place,
    Penthouse, San Francisco, California 94133.
(9) Includes 754,000 shares underlying options and 81,889 outstanding shares
    held individually by Mr. Oliva's wife.

                                       66



<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, 2006.

<TABLE>
<CAPTION>
                                                                                               NUMBER OF SECURITIES
                                                                                             REMAINING AVAILABLE FOR
                                                                                              FUTURE ISSUANCE UNDER
                                       NUMBER OF SECURITIES TO BE      WEIGHTED-AVERAGE        EQUITY COMPENSATION
                                         ISSUED UPON EXERCISE OF       EXERCISE PRICE OF         PLANS (EXCLUDING
                                          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.............              1,965,448(1)                $1.08                  365,052(2)
Equity compensation plans not
   approved by security holders....              4,161,185(3)                $1.70                       --
                                            -----------------             -----------             ------------
     Total.........................              6,126,633                                          365,052
</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, 2006,
    2005 and 2004.
(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, 2006, 2005 and 2004.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
          INDEPENDENCE.

DIRECTOR INDEPENDENCE

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

      Under the NYSE Arca Equities Rules, the non-management members of our
board of directors must meet at regularly scheduled executive sessions without
management, with a non-management director presiding over each executive
session. A presiding director for each session is selected by the board members
in attendance at the session based upon the topics to be discussed at the
session. The non-management directors can be contacted by calling the chairman
of the audit committee. Further, if the non-management directors include
directors who are not independent, then we should at least once a year schedule
an executive session including only independent directors. Under the NYSE Arca
Equities Rules, we must disclose if any member of our nominating committee or
compensation committee is not independent.

                                       67



<Page>

TRANSACTIONS WITH RELATED PERSONS

      We are party to indemnification agreements 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.

REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS

      In January 2007, our board of directors and nominating committee adopted
written policies and procedures relating to approval or ratification of
"interested transactions" with "related parties." Under the policies and
procedures, our nominating committee is to review the material facts of all
interested transactions that require the committee's approval and either approve
or disapprove of the entry into the interested transactions, subject to certain
exceptions, by taking into account, among other factors it deems appropriate,
whether the interested transaction is on terms no less favorable than terms
generally available to an unaffiliated third-party under the same or similar
circumstances and the extent of the related person's interest in the
transaction. No director may participate in any discussion or approval of an
interested transaction for which he or she is a related party. If an interested
transaction will be ongoing, the committee may establish guidelines for our
management to follow in its ongoing dealings with the related party and then at
least annually must review and assess ongoing relationships with the related
party.

      Under the policies and procedures, an "interested transaction" is any
transaction, arrangement or relationship or series of similar transactions,
arrangements or relationships (including any indebtedness or guarantee of
indebtedness) in which the aggregate amount involved will or may be expected to
exceed $100,000 in any calendar year, we are a participant, and any related
party has or will have a direct or indirect interest (other than solely as a
result of being a director or a less than 10% beneficial owner of another
entity). A "related party" is any person who is or was since the beginning of
the last fiscal year for which we have filed a Form 10-K and proxy statement,
even if they do not presently serve in that role an executive officer, director
or nominee for election as a director, any greater than 5% beneficial owner of
our common stock, or any immediate family member of any of the foregoing.
Immediate family member includes a person's spouse, parents, stepparents,
children, stepchildren, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law and anyone residing in such
person's home (other than a tenant or employee).

      The committee has reviewed and pre-approved certain types of interested
transactions described below. In addition, our board of directors has delegated
to the chair of the committee the authority to pre-approve or ratify (as
applicable) any interested transaction with a related party in which the
aggregate amount involved is expected to be less than $120,000. Pre-approved
interested transactions include:

      o     Employment of executive officers either if the related compensation
            is required to be reported in our proxy statement or if the
            executive officer is not an immediate family member of another
            executive officer or a director of our company and the related
            compensation would be reported in our proxy statement if the
            executive officer was a "named executive officer" and our
            compensation committee approved (or recommended that the board
            approve) such compensation.

                                       68



<Page>

      o     Any compensation paid to a director if the compensation is required
            to be reported in our proxy statement.

      o     Any transaction with another company at which a related person's
            only relationship is as an employee (other than an executive
            officer), director or beneficial owner of less than 10% of that
            company's shares, if the aggregate amount involved does not exceed
            the greater of $120,000 or 2% of that company's total annual
            revenues.

      o     Any transaction where the related person's interest arises solely
            from the ownership of our common stock and all holders of our common
            stock received the same benefit on a pro rata basis (e.g.,
            dividends).

      o     Any transaction involving a related party where the rates or charges
            involved are determined by competitive bids.

      o     Any transaction with a related party involving the rendering of
            services as a common or contract carrier, or public utility, at
            rates or charges fixed in conformity with law or governmental
            authority.

      o     Any transaction with a related party involving services as a bank
            depositary of funds, transfer agent, registrar, trustee under a
            trust indenture, or similar services.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

FEES AND SERVICES FOR 2006 AND 2005

      We dismissed Grant Thornton LLP as our principal accountant on April 13,
2006 and retained Hein & Associates LLP as our principal accountant on April 17,
2006. We had no relationship with Hein & Associates LLP prior to their retention
as our principal accountant. On June 28, 2006, we engaged Hein & Associates LLP
to reaudit our consolidated financial statements for the years ended December
31, 2005, 2004 and 2003.

      The following table sets forth the aggregate fees billed to us by Hein &
Associates LLP, our principal accountant, for professional services rendered in
the audit of our consolidated financial statements for the year ended December
31, 2006 and the reaudit of our consolidated financial statements for the years
ended December 31, 2005, 2004 and 2003.

      FEE CATEGORY                             2006         2005
      ------------                          ----------   ----------

      Audit Fees........................    $  320,000   $  957,000
      Audit-Related Fees................            --           --
      Tax Fees..........................        53,000           --
      All Other Fees....................            --           --
                                            ----------   ----------
               Total....................    $  373,000   $  957,000
                                            ==========   ==========

      AUDIT FEES. Audit fees in the 2006 column of the above table consist of
fees billed for professional services for audit of our 2006 consolidated
financial statements and review of the interim consolidated financial statements
included in our 2006 quarterly reports and services that are normally provided
by an independent registered public accounting firm in connection with statutory
and regulatory filings or engagements.

                                       69



<Page>

      Due to the impracticality of segregating reaudit fees relating solely to
2005, the audit fees shown in the 2005 column of the above table consist of an
aggregate of $957,000 of fees billed with respect to the simultaneous reaudit of
our consolidated financial statements for 2005, 2004 and 2003 and review of the
interim consolidated financial statements included in our quarterly reports for
2005 and services that are normally provided by an independent registered public
accounting firm in connection with statutory and regulatory filings or
engagements.

      AUDIT-RELATED FEES. No audit-related fees were incurred for 2006 or 2005.

      TAX FEES. Tax fees for 2006 consisted 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. No tax fees were incurred for 2005.

      ALL OTHER FEES. No other fees were incurred for 2006 or 2005.

PRE-APPROVAL POLICIES AND PROCEDURES

      Our audit committee pre-approves all services provided by our principal
accountant. Our audit committee also considers in advance whether or not to
approve any non-audit services to be performed by the independent accounting
firm required to be approved by the audit committee pursuant to any applicable
rules and regulations.

                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1), (a)(2) and (c) 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 (b) EXHIBITS

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


                                       70



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                                                                            Page
                                                                            ----

FINANCIAL STATEMENTS

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

Consolidated Balance Sheets as of December 31, 2006 and 2005.............    F-3

Consolidated Statements of Operations for the Years Ended
    December 31, 2006, 2005 and 2004.....................................    F-4

Consolidated Statements of Comprehensive Income (Loss) for the Years
    Ended December 31, 2006, 2005 and 2004...............................    F-5

Consolidated Statements of Stockholders' Equity for the Years Ended
    December 31, 2006, 2005 and 2004.....................................    F-6

Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2006, 2005 and 2004.....................................    F-7

Notes to Consolidated Financial Statements for the Years Ended
    December 31, 2006, 2005 and 2004.....................................    F-8

FINANCIAL STATEMENT SCHEDULE

Consolidated Schedule II Valuation and Qualifying Accounts for the
    Years Ended December 31, 2006, 2005 and 2004.........................   F-45




                                       F-1



<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 and subsidiaries, a Delaware corporation, as of December 31, 2006
and 2005, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2006. 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
and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 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, 2006, 2005 and 2004 is presented for purposes
of complying with the Securities and Exchange Commission's rules 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.

As discussed in note 8 to the accompanying consolidated financial statements,
effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), SHARE-BASED PAYMENT.

/s/ HEIN & ASSOCIATES LLP

Irvine, California
March 30, 2007


                                       F-2



<Page>
<TABLE>
<CAPTION>

                                         EMRISE CORPORATION AND SUBSIDIARIES
                                             CONSOLIDATED BALANCE SHEETS
                                             DECEMBER 31, 2006 AND 2005
                                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


ASSETS                                                                                 2006               2005
                                                                                  --------------     --------------
<S>                                                                               <C>                <C>
Current assets:
   Cash and cash equivalents                                                      $       3,802      $       4,371
   Accounts receivable, net of allowance for doubtful accounts
     of $391 and $379, respectively                                                       9,220              9,413
   Inventories, net of allowances for inventory obsolescence
     of $5,657 and $4,053, respectively                                                  10,575             10,277
   Deferred income taxes                                                                    726              1,386
   Prepaid and other current assets                                                       1,082                536
                                                                                  --------------     --------------
Total current assets                                                                     25,405             25,983
Property, plant and equipment, net                                                        2,245              2,073
Goodwill                                                                                 12,995             12,066
Intangible assets other than goodwill, net of accumulated amortization of
   $743 in 2006 and $350 in 2005                                                          3,546              3,709
Other assets                                                                                594                630
                                                                                  --------------     --------------
                                                                                  $      44,785      $      44,461
                                                                                  ==============     ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Borrowings under lines of credit                                               $       4,310      $       3,283
   Current portion of long-term debt                                                        516                504
   Notes payable to stockholders, current portion                                           500                500
   Accounts payable                                                                       4,640              4,949
   Income taxes payable                                                                     519                218
   Accrued expenses                                                                       5,309              3,571
                                                                                  --------------     --------------
Total current liabilities                                                                15,794             13,025
Long-term debt, less current portion                                                        533                742
Notes payable to stockholders, less current portion                                       1,250              1,750
Deferred income taxes                                                                     1,053              1,108
Other liabilities                                                                           982                823
                                                                                  --------------     --------------
Total liabilities                                                                        19,612             17,448

Commitments and contingencies (Notes 2, 5, 6 and 12)

Stockholders' equity:
   Preferred stock, $0.01 par value. Authorized 10,000,000 shares; zero issued
     and outstanding                                                                          --                  --
   Common stock, $0.0033 par value. Authorized 150,000,000 shares; issued and
     outstanding 38,082,000 shares and 37,550,000 shares in 2006 and 2005,
     respectively                                                                           125                124
   Additional paid-in capital                                                            43,083             42,877
   Accumulated deficit                                                                  (18,733)           (15,118)
   Accumulated other comprehensive income (loss)                                            698               (870)
                                                                                  --------------     --------------
Total stockholders' equity                                                               25,173             27,013
                                                                                  --------------     --------------
                                                                                  $      44,785      $      44,461
                                                                                  ==============     ==============


               The accompanying notes are an integral part of these consolidated financial statements.

                                                         F-3



<Page>

                                           EMRISE CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                                        2006               2005               2004
                                                                   --------------     --------------     --------------
Net sales                                                          $      46,384      $      41,270      $      29,637
Cost of sales                                                             29,413             23,714             16,089
                                                                   --------------     --------------     --------------
Gross profit                                                              16,971             17,556             13,548
Operating expenses:
   Selling, general and administrative                                    16,117             13,707             10,212
   Engineering and product development                                     3,085              2,621              1,521
                                                                   --------------     --------------     --------------
(Loss) income from operations                                             (2,231)             1,228              1,815
Other (expense) income:
   Interest expense                                                         (490)              (455)              (433)
   Interest income                                                            89                153                 --
   Other (expense) income, net                                              (364)               248                 (6)
                                                                   --------------     --------------     --------------
(Loss) income before income taxes                                         (2,996)             1,174              1,376
Income tax expense (benefit)                                                 619               (267)                49
                                                                   --------------     --------------     --------------
Net (loss) income                                                  $      (3,615)       $     1,441      $       1,327
                                                                   ==============     ==============     ==============
Basic (loss) earnings per share                                    $       (0.10)       $      0.04      $        0.06
                                                                   ==============     ==============     ==============
Diluted (loss) earnings per share                                  $       (0.10)       $      0.04      $        0.05
                                                                   ==============     ==============     ==============

Outstanding shares:
   Basic                                                                  37,981             37,256             24,063
   Diluted                                                                37,981             38,448             24,839


                 The accompanying notes are an integral part of these consolidated financial statements.

                                                           F-4



<Page>

                                           EMRISE CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                     (IN THOUSANDS)


                                                                        2006               2005               2004
                                                                   --------------     --------------     --------------
Net (loss) income                                                  $       (3,615)    $        1,441     $        1,327
Other comprehensive (loss) income:
   Foreign currency translation adjustment                                  1,568             (1,357)               379
                                                                   --------------     --------------     --------------
Comprehensive (loss) income                                        $       (2,047)    $           84     $        1,706
                                                                   ==============     ==============     ==============


                 The accompanying notes are an integral part of these consolidated financial statements.

                                                           F-5



<Page>

                                                 EMRISE CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                           (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
------------------------------------------------------------------------------------------------------------------------------------
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
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
Comprehensive income                 --             --        --         --          --          1,327              379       1,706
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004         --             --    24,777         82      26,747        (16,559)             487      10,757
Stock options exercised              --             --       106         --          39             --               --          39
Warrants exercised                   --             --       163         --          50             --               --          50
Issuance of common stock and
  warrants, net of issuance
  costs                              --             --    12,504         42      16,018             --               --      16,060
Warrants issued for services         --             --        --         --          23             --               --          23
Comprehensive income                 --             --        --         --          --          1,441           (1,357)         84
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005         --             --    37,550        124      42,877        (15,118)            (870)     27,013
Stock options exercised              --             --       181         --          97             --               --          97
Warrants exercised                   --             --       351          1         286             --               --         287
Cost of issuing common stock         --             --        --         --        (323)            --               --        (323)
Stock option issuance expense        --             --        --         --         131             --               --         131
Warrants issued for services         --             --        --         --          15             --               --          15
Comprehensive loss                   --             --        --         --          --         (3,615)           1,568      (2,047)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006         --     $       --    38,082  $     125  $   43,083   $    (18,733)  $          698   $  25,173
====================================================================================================================================


                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-6



<Page>

                                           EMRISE CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                     (IN THOUSANDS)


                                                                        2006               2005               2004
                                                                   --------------     --------------     --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $      (3,615)     $       1,441      $       1,327
   Adjustments to reconcile net (loss) income to cash (used in)
     provided by operating activities:
     Depreciation and amortization                                         1,190                964                287
     Deferred income taxes                                                    35               (802)              (279)
     Provision for doubtful accounts                                          69                151                 --
     Provision for warranty reserve                                          158                 86                 64
     Provision for inventory obsolescence                                  1,771              1,403              1,116
     Stock options and warrants issued for services                          146                 23                 38
   Changes in operating assets and liabilities net of businesses
acquired:
     Accounts receivable                                                      99                374                289
     Inventories                                                          (2,350)              (469)              (452)
     Prepaid and other assets                                               (419)               (23)                23
     Accounts payable                                                       (309)            (1,064)             1,637
     Accrued expenses and other liabilities                                2,112               (944)              (166)
                                                                   --------------     --------------     --------------
Cash (used in) provided by operating activities                           (1,113)             1,140              3,884
                                                                   --------------     --------------     --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                           (884)              (287)              (724)
   Cash received from sale of property, plant and equipment                   99                 20                  8
   Net cash paid for the acquisition of Pascall                               --            (10,154)                --
   Net cash paid for the acquisition of RO Associates                         --             (4,623)                --
   Net cash paid for acquisition of Larus, net of cash acquired               --                 --             (1,492)
                                                                   --------------     --------------     --------------
Cash used in investing activities                                           (785)           (15,044)            (2,208)
                                                                   --------------     --------------     --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds (repayments) of current notes payable                      1,027              2,405             (2,004)
   Repayments of long-term debt                                             (697)            (1,602)              (250)
   Proceeds from long-term debt                                               --              1,097                 65
   Cash from warrant/option exercise                                         384                 90                 25
   Net proceeds from issuance of common stock                               (323)            16,060                 --
                                                                   --------------     --------------     --------------
Cash provided by (used in) financing activities                              391             18,050             (2,164)
                                                                   --------------     --------------     --------------
Effect of exchange rate changes on cash                                      938               (832)               371
Net increase (decrease) in cash and cash equivalents                        (569)             3,314               (117)
Cash and cash equivalents at beginning of year                             4,371              1,057              1,174
                                                                   --------------     --------------     --------------
Cash and cash equivalents at end of year                           $       3,802      $       4,371      $       1,057
                                                                   ==============     ==============     ==============


                 The accompanying notes are an integral part of these consolidated financial statements.

                                                           F-7



<Page>

                                           EMRISE CORPORATION AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                     (IN THOUSANDS)


                                                                        2006               2005               2004
                                                                   --------------     --------------     --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for:
     Interest                                                      $         560      $         439      $         367
                                                                   ==============     ==============     ==============
     Income taxes                                                             82      $         341      $         428
                                                                   ==============     ==============     ==============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
   Issuance of subordinated notes for Larus acquisition            $          --      $          --      $       3,000
                                                                   ==============     ==============     ==============
   Common stock issued upon conversion of redeemable preferred
     stock                                                         $          --      $          --      $           3
                                                                   ==============     ==============     ==============
   Common stock issued to acquire Larus                            $          --      $          --      $       1,000
                                                                   ==============     ==============     ==============


                 The accompanying notes are an integral part of these consolidated financial statements.

                                                           F-8
</TABLE>




<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

      EMRISE Corporation (the "Company"), operates through three wholly-owned
subsidiaries: EMRISE Electronics Corporation ("EMRISE Electronics"), CXR Larus
Corporation ("CXR Larus"), and CXR Anderson Jacobson ("CXR-AJ"). EMRISE
Electronics and its subsidiaries design, develop, manufacture and market
electronic devices 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 devices 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 devices 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 shipment 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 its electronic
devices 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. When a distributor requests and receives
authorization to return a product, the request must be accompanied by a purchase
order for a replacement product. When an end-user requests to return a product,
the Company either repairs or replaces the product.

      Revenue recognition for products and services provided by the Company's
United Kingdom subsidiaries, which include EMRISE Electronics Ltd. ("EEL"), XCEL
Power Systems, Ltd. ("XPS") and Pascall Electronics Ltd. ("Pascall"), 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 2006,
2005 and 2004. 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's U.K.
subsidiaries do not offer customer discounts, rebates or price protection on
these products.

                                      F-9



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 devices, network access and
transmission products and communication timing and synchronization products
carry a one-year limited parts and labor warranty. The Company's 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 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 4.0%, 2.6%
and 5.7% of net sales in 2006, 2005 and 2004, respectively.

      RO Associates Incorporated ("RO") generates a portion of its revenue from
royalties. Royalty income is recognized when the technology rights have
transferred to the licensee. For agreements that provide the licensees the right
to manufacture and sell our proprietary products, the Company recognizes initial
license fee revenue upon delivery of the product technology. The Company
recognizes guaranteed minimum license royalties as revenue as they become due.
Per unit royalties that exceed the guaranteed minimum are recognized as earned
when reported.

      Shipping and handling fees billed to customers totaled $163,000 and
$261,000 for the years ended December 31, 2006 and 2005, respectively, and were
charged to cost of sales. Such amounts were not significant for the year ended
December 31, 2004. 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, 2006, 2005 and 2004. Depending on the operating division,
shipping and handling costs are included in cost of sales or selling, general
and administrative expenses. Freight is charged to cost of sales and the charge
is reversed when the customer is invoiced for the freight.

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,
2006, 2005 and 2004, cash in foreign accounts was $3,232,000, $2,447,000 and
$1,035,000, respectively.

INVENTORIES

      The Company's finished goods electronic devices inventories generally are
built to order. The Company's communications equipment inventories generally are
built to forecast, which requires the Company to produce a larger amount of
finished goods in its 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 it exercise detailed
inventory management. The Company values its inventory at the lower of the

                                      F-10



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
reviews assumptions about forecasted demand and market conditions. Any parts or
finished goods that are determined to be obsolete, either in connection with the
physical count or at other times of observation, are reserved for and
subsequently discarded and written-off.

      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.

                                      F-11



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRODUCT WARRANTY LIABILITIES

      Generally, the Company's electronic devices, 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
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 2006 and
2005 were as follows:

                                              Year Ended December 31,
                                        ---------------------------------
                                             2006               2005
                                        --------------     --------------
Liability, beginning of year            $     150,000      $      64,000
Expense for new warranties issued             158,000             86,000
Warranty claims                               (20,000)                --
                                        --------------     --------------
Liability, end of year                  $     288,000      $     150,000
                                        ==============     ==============

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

      On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT, which is a revision of
SFAS No. 123. SFAS No. 123R superseded Accounting Principles Board ("APB")
Opinion No. 25, and amended SFAS No. 95, STATEMENT OF CASH FLOWS. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123R generally requires share-based payments to employees,
including grants of employee stock options and purchases under employee stock
purchase plans, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure of fair value recognition is no longer an
alternative. The Company adopted this new standard on January 1, 2006 using the
modified prospective method under which compensation cost is recognized
beginning with the effective date of adoption (a) based on the requirements of
SFAS No. 123R for all share-based payments granted after the effective date of
adoption and (b) based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of adoption that remain
unvested on the date of adoption.

                                      F-12



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      SFAS No. 123R also requires the benefits of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow, rather
than as an operating cash flow as prescribed under earlier accounting rules.
This requirement reduces net operating cash flows and increases net financing
cash flows in periods after adoption. Total cash flow remains unchanged from
what would have been reported under prior accounting rules.

      The actual effects of adopting SFAS No. 123R will depend on numerous
factors, including the amounts of share-based payments granted in the future,
the valuation model the Company uses to value future share-based payments to
employees and estimated forfeiture rates. In 2006, the Company recorded expenses
of $131,000 relating to currently outstanding stock options.

EARNINGS PER SHARE

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

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,
2006 and 2005, 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 materially 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.

                                      F-13



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 United States, France and U.K. operations and are stated net of an
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 Rockwell Collins represented approximately 9% of the
Company's total net sales during 2006 and 10% during 2005. No other customer
represented 10% or more of the Company's total net sales during those periods.

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 United States dollars at the
current rate of exchange on the balance sheet date and at the average for the
period reported for the statement of operations. 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 transactions
denominated in foreign currencies are translated at the exchange rates
applicable on the dates of the transactions and are included in operations.

GOODWILL AND OTHER INTANGIBLE ASSETS

      SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, 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. The Company performed its annual
required tests of impairment as of December 31, 2006, 2005 and 2004 for goodwill
in the electronic devices segment and the communications equipment segment
reporting units. No events or changes in circumstances occurred between annual
tests that would have required an interim goodwill impairment test. Intangible
assets with identifiable useful lives are amortized using the straight-line
method over their useful lives.

(2)   ACQUISITIONS

LARUS CORPORATION ACQUISITION

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

      The purchase price for the acquisition totaled $6,539,500 and consisted of
$1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common
stock with a fair value of $1,000,000, $887,500 in the form of two short-term,
zero interest promissory notes that were repaid in 2004, $3,000,000 in the form
of two subordinated secured promissory notes, warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share,
which warrants were valued at $72,000, and approximately $580,000 of acquisition
costs. 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.

                                      F-14



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The lease represented an obligation that exceeded 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 prior 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 conjunction with the Company's July 2004 acquisition of Larus
Corporation, the Company commissioned a valuation firm to determine what portion
of the purchase price should be allocated to identifiable intangible assets. The
results of the study were as follows: Larus trade name and trademark were valued
at $750,000, and the technology and customer relationships were valued at
$1,350,000. Goodwill associated with the Larus Corporation acquisition totaled
$4,321,000. The Larus trade name and trademark were determined to have
indefinite lives and therefore are not being amortized but rather are being
periodically tested for impairment. The technology and customer relationships
were both estimated to have ten-year lives.

      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........            2,100
         Goodwill.....................................            4,321
                                                         ---------------
         Total assets acquired........................            8,971
         Current liabilities..........................             (450)
         Deferred income taxes........................           (1,093)
         Unfavorable lease obligation and other
           liabilities................................             (888)
                                                         ---------------
         Total liabilities assumed....................           (2,431)
                                                         ---------------
         Net assets acquired..........................   $        6,540
                                                         ===============

      The intangible assets other than goodwill consist of non-amortizable trade
names with a carrying value of $750,000, and technology and customer
relationships with carrying values of $1,150,000 and $200,000, respectively,
that are amortizable over ten years.

PASCALL ACQUISITION

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

                                      F-15



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Under the Purchase Agreement, EEL purchased all of the outstanding capital
stock of PEHL, using funds loaned to EEL by the Company. The purchase price for
the acquisition totaled $9,905,000, subject to adjustments as described in the
Purchase Agreement, and included cash payments totaling $6,208,000 to PEHL's
former parent, a $3,082,000 loan to PEHL and Pascall and approximately $615,000
in acquisition costs.

      The Company and Intelek PLC have agreed to guarantee payment when due of
all amounts payable by EEL and Intelek Properties Limited, respectively, under
the Purchase Agreement. The Company and EEL agreed to underwrite the guaranty
that Intelek Properties Limited has given to Pascall's landlord with a guaranty
by the Company, and EEL 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, noninterference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, Intelek PLC, EEL, 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 $385,000 based on
the exchange rate in effect on March 17, 2005) that was made by the seller to
Pascall on March 17, 2005 would be repaid by Pascall by March 31, 2005. EEL
agreed to ensure that Pascall had sufficient funds to repay the bridge loan. The
bridge loan was repaid in full by Pascall on the March 31, 2005 due date.

      The purchase price represented a significant premium over the recorded net
worth of Pascall's assets. In conjunction with the acquisition of Pascall, the
Company commissioned a valuation firm to determine what portion of the purchase
price should be allocated to identifiable intangible assets. The Company
considered whether the acquisition included various types of identifiable
intangible assets, including trade names, trademarks, patents, covenants not to
compete, customers, workforce, technology and software. The Company has recorded
the value of the trade name and trademark at $500,000, covenants not to compete
that were obtained from Pascall's former affiliates at $200,000, amortizable
over three years and backlog at $200,000 amortizable over two years.

                                      F-16



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                            Dollars
                                                          in Thousands
                                                         --------------
      Current assets...................................  $       6,196
      Property, plant and equipment....................          1,367
      Intangibles, including goodwill..................          5,534
      Total assets acquired............................         13,097
      Current liabilities..............................         (2,863)
      Other liabilities................................            (80)
                                                         --------------
      Total liabilities assumed........................         (2,943)
                                                         --------------
      Net assets acquired..............................  $      10,154
                                                         ==============

RO ACQUISITION

      On September 2, 2005, the Company's wholly-owned subsidiary, EMRISE
Electronics, entered into a stock purchase agreement dated effective as of
August 31, 2005 to acquire RO, a California corporation. Effective September 28,
2005, EMRISE Electronics entered into an amendment to the stock purchase
agreement.

      Pursuant to the terms of the stock purchase agreement, as amended, EMRISE
Electronics acquired all of the issued and outstanding shares of common stock of
RO. Prior to the acquisition, all of the common stock of RO was owned by Robert
H. Okada as Trustee of the Robert H. Okada Trust Agreement dated February 11,
1992, and Sharon Vavro.

      The purchase price consisted of $2,400,000 in cash paid at closing and an
additional $600,000 in cash payable in two equal installments on October 6, 2005
and March 31, 2006. The acquisition purchase price was funded with cash on-hand.
The purchase price is subject to adjustment based on the value of the
stockholders' equity, accounts receivable, accounts payable, cash on hand and
net inventory of RO, as determined by the consolidated, unaudited balance sheet
as of August 31, 2005, prepared in accordance with accounting principles
generally accepted in the United States of America. In addition, concurrently
with the closing of the acquisition of RO, EMRISE Electronics paid in full all
then existing credit facilities of RO in the aggregate amount of $1,602,000.

      In determining the purchase price for RO, EMRISE Electronics considered
the historical and expected earnings and cash flow of RO, as well as the value
of companies of a size and in an industry similar to RO, comparable transactions
and the market for such companies generally. The purchase price represented a
premium of approximately $2,275,000 over the $2,340,000 recorded net worth of
the assets of RO. In determining this premium, EMRISE Electronics considered the
synergistic and strategic advantages provided by having a United States-based
power conversion manufacturer and the value of the goodwill, customer
relationships and technology of RO. Goodwill associated with the RO acquisition
totaled approximately $1,376,000. The Company commissioned a valuation firm to
determine what portion of the purchase price should be allocated to identifiable
intangible assets. The valuation study of RO's intangible was completed in June
2006. The Company initially estimated the intangibles to be valued as follows:
technology, $484,000, trademarks, $300,000 and customer relationships, $200,000.
The valuation study resulted in the following valuations: technology, $500,000,
trademarks, $350,000 and customer relationships, $350,000. The intangibles were
adjusted to the appraised values in the second quarter of 2006. The technology
and customer relationships are being amortized over 10 years on their appraise
values and the trademarks are not being amortized due to the inability to
determine an estimated life.

                                      F-17



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      In connection with the execution of the stock purchase agreement, EMRISE
Electronics executed a lease agreement with Caspian Associates for the lease of
25,700 square feet of a 30,700 square feet building located at 246 Caspian
Drive, Sunnyvale, California (see Note 15).

      The following table summarizes the unaudited assets and liabilities
assumed in connection with this acquisition, including $65,000 in acquisition
costs:

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

      Current assets...................................  $       3,213
      Property, plant and equipment....................            329
      Intangibles, including goodwill..................          2,489
      Other assets.....................................             66
                                                         --------------
      Total assets acquired............................          6,097
      Current liabilities..............................           (943)
      Other liabilities................................           (522)
                                                         --------------
      Total liabilities assumed........................         (1,465)
                                                         --------------
      Net assets acquired..............................  $       4,632
                                                         ==============

PRO FORMA RESULTS OF OPERATIONS

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

                                                          Year Ended
                                                         December 31,
                                               ---------------------------------
                                                    2005               2004
                                               --------------     --------------
       Revenues..............................  $      47,933      $      52,767
       Net income............................  $       1,324      $       2,072
       Earnings per share of common stock:
            Basic............................  $        0.04      $        0.06
                                               ==============     ==============
            Diluted..........................  $        0.03      $        0.06
                                               ==============     ==============

                                      F-18



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)   INVENTORIES, NET

      Inventories are summarized as follows as of December 31:

                                                    2006               2005
                                               --------------     --------------
      Raw materials                            $   4,689,000      $   4,668,000
      Work-in-process                              3,247,000          2,716,000
      Finished goods                               2,639,000          2,893,000
                                               --------------     --------------
                                               $  10,575,000      $  10,277,000
                                               ==============     ==============

      Included in the amounts above are allowances for inventory obsolescence of
$5,657,000 and $4,053,000 at December 31, 2006 and 2005, 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.

(4)   PROPERTY, PLANT AND EQUIPMENT

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

                                                    2006               2005
                                               --------------     --------------
      Land and buildings                       $     379,000      $     343,000
      Machinery, equipment and fixtures            4,533,000          4,002,000
      Leasehold improvements                         729,000            663,000
                                               --------------     --------------
                                                   5,641,000          5,008,000
      Accumulated depreciation and
        amortization                              (3,396,000)        (2,935,000)
                                               --------------     --------------
                                               $   2,245,000      $   2,073,000
                                               ==============     ==============

      Depreciation and amortization expense recorded for property, plant and
equipment was $798,000, $654,000 and $247,000 for the years ended December 31,
2006, 2005 and 2004, respectively.

(5)   LINES OF CREDIT

      Outstanding borrowings under the Company's revolving lines of credit
described below were as follows as of December 31:

                                                    2006               2005
                                               --------------     --------------
      Line of credit with a U.S. commercial
        lender                                 $   1,978,000      $          --
      Lines of credit with foreign banks           2,332,000          3,283,000
                                               --------------     --------------
                                               $   4,310,000      $   3,283,000
                                               ==============     ==============

      On August 25, 2005, the Company, together with two subsidiaries, CXR Larus
and EMRISE Electronics, acting as guarantors, obtained a credit facility from
Wells Fargo Bank, N.A. (the "Bank credit facility") for the Company's United
States operations. The Bank credit facility provided a $9,000,000 revolving line
of credit secured by accounts receivable, other rights to payment and general
intangibles, inventories and equipment, with an interest rate adjusted monthly
based on the prime rate.

                                      F-19



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Bank credit facility also provided 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% (see Note 6). In addition, Wells Fargo Bank provided the Company
with credit for the purchase of new capital equipment when needed, with an
interest rate equal to the 90-day London InterBank Offered Rate ("LIBOR") (5.36%
at December 31, 2006) plus 3.75% per annum. Amounts borrowed under this
arrangement are being amortized over 60 months from the respective dates of
borrowing and secured by the purchased equipment (see Note 6).

      The Company and Wells Fargo Bank amended the credit facility in November
2005 and March 2006 to revise various covenants and other provisions. On
September 19, 2006, the Company entered into a Third Amendment to Credit
Agreement effective as of September 1, 2006 with Wells Fargo Bank. The amendment
provided for the waiver by Wells Fargo Bank of certain violations of financial
covenants. The amendment also provided for the reduction in the amount of the
Bank credit facility from $9,000,000 to $1,500,000 and limited borrowings to 80%
of eligible accounts receivable. In connection with the amendment, the Company
executed a Revolving Line of Credit Note dated September 1, 2006 in the amount
of $1,500,000. On October 9, 2006, the Company executed a letter agreement dated
effective October 1, 2006 with Wells Fargo Bank extending the maturity date of
the $1,500,000 note to October 20, 2006.

      On November 13, 2006, Wells Fargo Bank issued a notice of default and
demand for payoff with respect to the $1,500,000 note. All obligations under the
note were due and payable on November 20, 2006. On November 24, 2006, the
Company entered into a Forbearance Agreement with Wells Fargo Bank, dated
effective as of November 20, 2006, whereby Wells Fargo Bank agreed to forbear
from exercising its rights under the Bank credit facility as described in the
notice of default and demand for payoff through December 1, 2006. On December 1,
2006, EMRISE Corporation, EMRISE Electronics, CXR Larus, RO and Wells Fargo Bank
acting through its Wells Fargo Business Credit operating division ("WFBC")
entered into a Credit and Security Agreement ("WFBC credit facility") providing
for a revolving line of credit and term loan. On December 5, 2006, the Company
paid off the $1,500,000 Bank credit facility in full.

      The WFBC credit facility provides for a $5,000,000 revolving line of
credit that expires on December 1, 2009 and is secured by accounts receivable,
other rights to payment and general intangibles, inventories and equipment. The
line of credit is formula-based and generally provides that the outstanding
borrowings under the line of credit may not exceed an aggregate of 85% of
eligible accounts receivable plus 10% of the value of eligible finished goods
inventory. Interest is payable monthly. The interest rate is variable and is
adjusted monthly based on the prime rate plus 1%. The prime rate at December 1,
2006 was 8.25%.

      The WFBC credit facility is subject to an unused line fee equal to 0.25%
per annum, payable monthly based on the average daily unused amount of the line
of credit. The WFBC credit facility is also subject to a minimum monthly
interest charge of $8,500 with respect to the revolving line of credit.

      The WFBC credit facility is subject to various financial covenants on a
consolidated basis as follows. The minimum debt service coverage ratio must be
greater than 1.20:1.00 on a trailing quarterly basis. "Debt service coverage
ratio" is defined as net income after taxes, plus depreciation, plus
amortization, plus or minus changes in deferred taxes, minus capital
expenditures and minus any dividends or distributions, divided by the current
maturities of long-term debt paid or scheduled to be paid plus any payments on
subordinated debt. The WFBC credit facility also requires that the Company
maintain a minimum book net worth, determined at the end of each calendar month,

                                      F-20



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in an amount not less than $26,900,000 for the months ended December 31, 2006,
January 31, 2007 and February 28, 2007 and of not less than that amount plus 80%
of the Company's net income for each calendar quarter ending on or after March
31, 2007 and for each calendar month ending on or after March 31, 2007. The
Company was not permitted to incur a net loss of greater than $1,150,000 for
2006, and for each quarterly period occurring after December 31, 2006, the
Company's net income must not be less than $0.

      If WFBC terminates the WFBC credit facility during a default period, or if
the Company terminates or reduces the WFBC credit facility prior to the maturity
date, or if the Company prepays the term loan portion of the facility, the
Company will be subject to penalties as follows: if the termination or
prepayment occurs during the one year period after the initial funding date, the
penalty is equal to 3% of the maximum line amount and/or prepayment amount; if
the termination or prepayment occurs during second year after the initial
funding date, the penalty is equal to 2% of the maximum line amount and/or
prepayment amount; and if the termination or prepayment occurs at any time after
the second anniversary of the initial funding date and prior to the maturity
date, the penalty is equal to 1% of the maximum line amount and/or prepayment
amount.

      In the event of a default and continuation of a default, Wells Fargo may
accelerate the payment of the principal balance, requiring the Company to pay
the entire indebtedness outstanding on that date. From and after the maturity
date of the WFBC credit facility, or any earlier date that all principal owing
under the WFBC credit facility becomes due and payable by acceleration or
otherwise, the outstanding principal balance will bear interest until paid in
full at an increased rate per annum equal to 3% above the rate of interest in
effect from time to time under the WFBC credit facility.

      The WFBC credit facility also provides for a term loan of $200,000 secured
by accounts receivable, other rights to payment and general intangibles,
inventories and equipment, amortizable over 36 months at a variable rate equal
to the prime rate plus 1% (see Note 6).

      As of December 31, 2006, the Company had balances of $1,978,000
outstanding on the WFBC revolving line of credit and $200,000 outstanding on the
term loan. Availability on the WFBC revolving line of credit was $102,000. As of
December 31, 2006, the Company was not in compliance with the loan's financial
covenants for net worth and net losses. The Company obtained a waiver from WFBC
for those covenant violations. WFBC is currently in the process of resetting the
covenants for 2007.

      As of December 31, 2006, the Company's foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Lloyds TSB Bank PLC
("Lloyds TSB") and Lloyds TSB Commercial Finance Limited ("Lloyds") in England,
IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris,
Societe Generale in France, and Sogelease and Johnan Shinkin Bank in Japan. At
December 31, 2006, the balances outstanding under the Company's United Kingdom,
France and Japan credit facilities were $1,762,000, $1,156,000 and $15,000,
respectively.

      On July 8, 2005, XPS and Pascall obtained a credit facility with Lloyds.
At the same time, the credit facility of Venture Finance PLC, a subsidiary of
ABN AMRO Holdings, N.V., was terminated, and all debt to Venture Finance PLC was
paid off. The Lloyds facility provides a revolving loan secured by receivables,
with a maximum availability of 2,100,000 British pounds sterling (approximately
$4,114,000 based on the exchange rate in effect on December 31, 2006). The
annual interest rate on the revolving loan is 1.5% above the Lloyds TSB base
rate. The Lloyds TSB base rate was 5.0% at December 31, 2006. The financial
covenants include a 50% cap on combined export gross sales of XPS and Pascall
and days sales outstanding of less than 65 days, and the funding balance is
capped at 125% of XPS and Pascall combined gross sales. Based on the Company's
long-term relationship with Lloyds Bank, the Company anticipates but can give no
assurance that it will be able to renew or obtain a new credit facility from
Lloyds Bank when this existing facility expires July 31, 2007.

                                      F-21



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On August 26, 2005, XPS entered into an agreement with Lloyds for an
unsecured cashflow loan of 300,000 British pounds sterling (approximately
$587,000 based on the exchange rate in effect on December 31, 2006), payable
over 12 months. The loan is structured as an overadvance on the previously
negotiated 2,100,000 British pounds sterling revolving loan with Lloyds,
bringing the maximum aggregate commitment on the revolving loan to 2,400,000
British pounds sterling (approximately $4,700,000 based on the exchange rate in
effect on December 31, 2006). The interest rate is variable and is adjusted
monthly based on the base rate of Lloyds TSB plus 1.9%. Lloyds TSB has sole
discretion to switch the details on this overadvance account if Lloyds
determines that the Company will have difficulty in meeting the specific
reductions in the overadvance account. The balance on the XPS and Pascall
revolving loans at December 31, 2006 was $1,204,000. Availability on the XPS and
Pascall revolving loans was $3,015,000 as of December 31, 2006.

      On August 26, 2005, EEL, a United Kingdom-based subsidiary of the Company,
entered into an agreement with Lloyds TSB for an unsecured term loan of 500,000
British pounds sterling (approximately $979,000 based on the exchange rate in
effect on December 31, 2006). This loan is repayable in 36 consecutive monthly
installments, representing principal and interest. The interest rate is variable
and is adjusted daily based on the Lloyds TSB base rate plus 2.5%. The loan also
includes financial covenants. EEL must maintain profit before taxation and
interest paid and payable of no less than 150% of interest paid and payable
(see Note 6).

      In the event of a default, Lloyds may make the loans, including any
outstanding principal and interest that has accrued, repayable on demand. If any
amount payable is not paid when due, EEL must pay an increased interest rate per
annum equal to 3% above the rate of interest in effect from time to time under
the note.

      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 $1,583,000
based on the exchange rate in effect at December 31, 2006 for the conversion of
euros into United States dollars. CXR-AJ also had $28,000 of term loans with
another French bank outstanding as of December 31, 2006 (see Note 6). The IFN
Finance facility is secured by accounts receivable and carries an annual
interest rate of 1.6% above the French "T4M" rate. At December 31, 2006, the
French T4M rate was 3.52%, and this facility had a balance of $1,128,000. This
facility has no financial performance covenants. Availability on the IFN Finance
credit line was $188,000 as of December 31, 2006, in addition to $152,000
availability with several other banks.

      XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank (see Note 6). 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
balances of the loan as of December 31, 2006 and 2005 were $15,000 and $32,000,
respectively, using the exchange rates in effect at those dates for conversion
of Japanese yen into United States dollars. There are no financial performance
covenants applicable to this loan.

                                      F-22



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6)   LONG-TERM DEBT

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

                                                    2006               2005
                                               --------------     --------------
      Term notes payable to U.S. commercial
        lender (a)                             $     200,000      $      75,000
      Term notes payable to foreign banks (b)        601,000            844,000
      Capitalized lease and equipment loan
        obligations (c)                              248,000            327,000
                                               --------------     --------------
                                                   1,049,000          1,246,000
      Current portion                               (516,000)          (504,000)
                                               --------------     --------------
                                               $     533,000      $     742,000
                                               ==============     ==============

---------------
(a)   The Company's domestic credit facility provides for a term loan of
      $200,000 secured by equipment, amortizable over 36 months, commencing in
      January 2007, at a variable rate equal to the prime rate plus 1.0%. The
      term loan portion of the facility had balances of $200,000 and $75,000 at
      December 31, 2006 and 2005, respectively.

(b)   The Company has agreements with several foreign banks that include term
      borrowings that mature at various dates through 2008. Interest rates on
      the borrowings bear interest at rates ranging from 3.25% to 7% and are
      payable in monthly installments.

         UNITED KINGDOM - The unsecured United Kingdom term loan in the original
      principal amount of $979,000 is payable over 36 months commencing in
      September 2005 at $24,000 per month and interest is the base rate plus
      2.5%. At December 31, 2006 and 2005, the outstanding balances were
      $558,000 and $778,000, respectively.

         FRANCE - The term loans in France had aggregate balances of $28,000 and
      $34,000 at December 31, 2006 and 2005, respectively, and are payable over
      60 months and secured by the assets of the local subsidiary, bear an
      annual interest rate of 4% and are not subject to financial performance
      covenants.

         JAPAN - The term loan in Japan is a five-year amortizable loan that
      commenced in November 2002 and had balances of $15,000 and $32,000 as of
      December 31, 2006 and 2005, 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 totaling $151,000 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. The capital equipment
      loans totaling $97,000 are amortized over five years and bear interest at
      the bank's 30-day LIBOR plus 4%.

                                      F-23



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Principal maturities related to long-term debt, including loans from
stockholders (see Note 14), as of December 31, 2006 were as follows:

                Year Ending December 31,                    Amount
                ------------------------                --------------
                         2007                           $    1,016,000
                         2008                                  887,000
                         2009                                  623,000
                         2010                                  264,000
                         2011                                    9,000
                                                        --------------
                         Total                          $    2,799,000
                                                        ==============

(7)   ACCRUED EXPENSES

      Accrued expenses as of December 31 consisted of the following:

                                                    2006               2005
                                               --------------     --------------
      Accrued salaries                         $     717,000      $     675,000
      Accrued payroll taxes and benefits             830,000            735,000
      Advance payments from customers              1,840,000            219,000
      Other accrued expenses                       1,922,000          1,942,000
                                               --------------     --------------
      Total accrued expenses                   $   5,309,000      $   3,571,000
                                               ==============     ==============

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

(8)   SHARE-BASED COMPENSATION

      On January 1, 2006, the Company adopted the provisions of SFAS No. 123R
under the modified prospective method (see Note 1). The Company applied SFAS No.
123R to new awards in 2006 and to any previous awards that were modified,
repurchased, or cancelled after the date of adoption of this standard.

      At December 31, 2006, a variety of the Company's stock-based compensation
grants or awards were outstanding for employees (including officers) and members
of the board of directors. All stock-based compensation plans were approved by
the Company's board of directors.

DESCRIPTION OF STOCK OPTION PLANS

      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.

                                      F-24



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 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 EMRISE
            Electronics 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 (the "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.

      Stock option activity for the years ended December 31, 2006, 2005 and 2004
was as follows:

<TABLE>
<CAPTION>
                                              2006                       2005                         2004
                                   --------------------------  --------------------------  --------------------------
                                                    Weighted                    Weighted                    Weighted
                                                    Average                     Average                     Average
                                       Shares       Exercise      Shares        Exercise      Shares        Exercise
                                    (thousands)      Price      (thousands)      Price      (thousands)      Price
                                   -------------  -----------  -------------  -----------  -------------  -----------
<S>                                       <C>     <C>                 <C>     <C>                 <C>     <C>
Outstanding, beginning of year            2,108   $     1.05          2,133   $     0.97          1,729   $     0.96
Granted                                      50   $     1.00            725   $     1.92            424   $     0.96
Exercised*                                 (181)  $     0.54           (106)  $     0.38            (19)  $     0.33
Forfeited (including expirations)           (12)  $     3.13           (644)  $     1.88             (1)  $     3.44
                                   -------------  -----------  -------------  -----------  -------------  -----------
Outstanding at end of year                1,965   $     1.08          2,108   $     1.05          2,133   $     0.97
                                   =============  ===========  =============  ===========  =============  ===========
Exercisable, end of year                  1,860   $     1.08          1,908   $     1.00          1,918   $     0.97
                                   =============  ===========  =============  ===========  =============  ===========
</TABLE>
------------------------------------
*     Exercised at option prices ranging from $0.35 to $1.00 during 2006, from
      $0.32 to $1.00 during 2005, and from $0.20 to $0.35 during 2004.

      The total fair value of options that vested during the years ended
December 31, 2006, 2005, and 2004, was approximately $213,000, $738,000, and
$127,000, respectively. As of December 31, 2006, the Company had 1,860,000
fully-vested stock options, with a weighted-average exercise price of $1.08 and
remaining term of 6.2 years. The Company expects that 105,000 stock options
(after forfeitures), with a weighted-average exercise price of $1.17 and
remaining term of 8.3 years, will vest in the future. The aggregate intrinsic
value is approximately $531,000 for unvested and vested options at December 31,
2006 based on the Company's average common stock closing price in the fourth
quarter of 2006.

                                      F-25



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company received $97,000 from the exercise of stock options in 2006.
The tax benefit realized was de minimis. For options exercised during the years
ended December 31, 2006, 2005, and 2004, the differences between the fair value
of the common shares issued and their respective exercise price were
approximately $141,000, $144,000, and $19,000, respectively.

      If the fair values of the options granted during 2005 and 2004 had been
recognized as compensation expense on a straight-line basis over the vesting
period of the grant, stock-based compensation costs would have impacted the
Company's net income and earnings per common share as follows:

                                                    2005               2004
                                               --------------     --------------
Net income as reported                         $   1,441,000      $   1,327,000
Add: Stock-based employee compensation expense
   included in net loss, net of
   related tax effects                                    --                 --
Deduct: Total stock-based employee compensation
   expense determined under fair
   value based method for all awards,
   net of related tax effects                       (738,000)          (127,000)
                                               --------------     --------------
Pro forma net (loss) income                    $     703,000      $   1,200,000
                                               ==============     ==============

Earnings per share:
   Basic earnings per share -- as reported     $        0.04      $        0.06
                                               ==============     ==============
   Diluted earnings per share -- as reported   $        0.04      $        0.05
                                               ==============     ==============
   Basic earnings per share -- pro forma       $        0.02      $        0.06
                                               ==============     ==============
   Diluted earnings per share -- pro forma     $        0.02      $        0.05
                                               ==============     ==============

      As of December 31, 2006, there was approximately $100,000 in unrealized
compensation cost related to non-vested stock options. This expense will be
recognized over a weighted average period of 8 years. A summary of the status of
the Company's non-vested shares and changes during 2006 follows:

                                                                     Weighted-
                                                                      Average
                                                  Shares            Grant-Date
                                                (thousands)         Fair Value
                                               --------------     --------------
Nonvested, beginning of year                             200      $        1.12
Granted                                                   50               1.00
Vested                                                  (145)              1.07
Forfeited (including expirations)                         --                 --
                                               --------------     --------------
Nonvested end of year                                    105      $        0.96
                                               --------------     --------------

                                      F-26



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The estimated fair value of stock options at the time of grant using the
Black-Scholes option-pricing model was as follows:

<TABLE>
<CAPTION>
                                            2006               2005               2004
                                       --------------     --------------     --------------
<S>                                    <C>                <C>                <C>
Fair value per option                  $        0.79      $        1.02      $        0.79
Assumptions:
   Annualized dividend yield                      0%                 0%                 0%
   Expected volatility                           86%                88%                92%
   Risk-free interest rate                     4.75%              4.25%               3.0%
   Expected option term (in years)               7.0                7.0                7.0
</TABLE>

      Details on various stock option exercise price ranges as of December 31,
2006 are as follows:

<TABLE>
<CAPTION>
                                Outstanding Options                   Exercisable Options
                        -----------------------------------------  ----------------------------
                                        Weighted      Weighted                      Weighted
       Range of                          Average      Average                       Average
       Exercise            Shares         Life        Exercise        Shares        Exercise
        Price            (thousands)     (years)        Price       (thousands)      Price
----------------------  -------------  -----------  -------------  -------------  -------------
<S>                            <C>           <C>    <C>                   <C>     <C>
$0.20 to $1.00                 1,185         5.29   $       0.56          1,130   $       0.55
$1.01 to $2.00                   780         8.8            1.87            730           1.90
                        -------------  -----------  -------------  -------------  -------------
Total options                  1,965         6.52   $       1.08          1,860   $       1.08
                        =============  ===========  =============  =============  =============
</TABLE>

      As discussed above, performance-based options granted in 2006 were
measured on the date of grant using a Black-Scholes model. The key assumptions
used for valuing the performance-based options during 2006 are as follows:

      Risk-free interest                                4.75%
      Expected dividends                                0.0%
      Expected volatility                              86.0%

(9)   STOCK ISSUANCE

      On January 5, 2005, the Company issued to 17 accredited record holders in
a private offering an aggregate of 12,503,500 shares of common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share, for total proceeds of approximately $18,005,000. The Company
paid cash placement agent fees and expenses of approximately $961,000, and
issued five-year placement warrants to purchase up to an aggregate of 650,310
shares of common stock at an exercise price of $1.73 per share in connection
with the offering. The total warrants issued, representing 3,776,185 shares of
the Company's common stock, have an estimated value of $4,400,000.

      Additional costs related to the financing include registration
rights-related liquidated damages of $803,000 (including payments of $44,064
during each of the months of June through November 2006 and a final payment of
$102,815 in December 2006 for a total of $323,135 in 2006, in addition to the
$480,000 paid in 2005), and legal, accounting and consulting fees that totaled
approximately $505,000 through December 31, 2006. The liquidated damages were
charged directly to equity as a return of capital against the gross proceeds of
the financing. No further liquidated damages are due.

                                      F-27



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company used portions of the proceeds from this financing to fund the
acquisitions of Pascall and RO described in Note 2. The Company used the
remaining proceeds from this financing primarily for investments in new products
and enhancements to existing products.

      The Company's 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>
<CAPTION>
                                                                                           Exercise Price
                                                                 Number         -------------------------------------
                                                                of Shares           Per Share            Total
                                                            ---------------------------------------------------------
<S>                                                                <C>            <C>      <C>        <C>
Balance outstanding at December 31, 2004                           806,000        $0.31 to $1.30      $   700,000
                                                            ---------------------------------------------------------
Warrants issued                                                  3,886,000        $1.73 to $2.00        6,741,000
Warrants exercised                                                (205,000)       $0.39 to $0.75         (111,000)
                                                            ---------------------------------------------------------
Balance outstanding at December 31, 2005                         4,487,000        $0.75 to $2.00       $7,330,000
                                                            ---------------------------------------------------------
Warrants issued                                                     25,000            $1.21                30,000
Warrants exercised                                                (351,000)       $0.75 to $2.00         (290,000)
                                                            ---------------------------------------------------------
Balance outstanding at December 31, 2006                         4,161,000        $0.75 to $2.00       $7,070,000
                                                            =========================================================
</TABLE>

      During 2006, the Company issued warrants to purchase up to 25,000 shares
of common stock at an exercise price of $1.21 per share for services rendered or
to be rendered. The estimated value of the warrants was $15,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 4.25%, expected life of 3 years, no dividend yield
and an expected volatility of 80%.

(10)  INCOME TAXES

      The Company files a consolidated United States 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 before income taxes was taxed under the following jurisdictions for
the years ended December 31:

                                 2006               2005               2004
                            --------------     --------------     --------------
      Domestic              $  (3,073,000)     $      25,000      $     762,000
      Foreign                     246,000          1,149,000            614,000
                            --------------     --------------     --------------
      Total                 $  (2,996,000)     $   1,174,000      $   1,376,000
                            ==============     ==============     ==============

      Income tax expense (benefit) consisted of the following for the years
ended December 31:

                                 2006               2005               2004
                            --------------     --------------     --------------
      Current
         Federal            $          --      $          --      $      34,000
         State                     36,000                 --             52,000
         Foreign                  548,000            535,000            242,000
                            --------------     --------------     --------------
      Total current         $     584,000      $     535,000      $     328,000
                            ==============     ==============     ==============

                                      F-28



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 2006               2005               2004
                            --------------     --------------     --------------
      Deferred
         Federal            $     109,000      $    (705,000)     $    (204,000)
         State                         --             30,000            (11,000)
         Foreign                  (74,000)          (127,000)           (64,000)
                            --------------     --------------     --------------
      Total deferred        $      35,000      $    (802,000)     $    (279,000)
                            ==============     ==============     ==============
      Total
         Federal            $     109,000      $    (705,000)     $    (170,000)
         State                     36,000             30,000             41,000
         Foreign                  474,000            408,000            178,000
                            --------------     --------------     --------------
      Total                 $     619,000      $    (267,000)     $      49,000
                            ==============     ==============     ==============

      Income tax expense (benefit) differed from the amount obtained by applying
the statutory federal income tax rate of 34% to income before income taxes as
follows for the years ended December 31:

                                 2006               2005               2004
                            --------------     --------------     --------------
Tax at U.S. federal
  statutory rate            $  (1,128,000)     $     399,000      $     468,000
State taxes, net of federal
  income tax benefit             (143,000)            30,000             41,000
Foreign income taxes             (101,000)           (42,000)           248,000
Change in valuation
  allowances                    2,024,000           (607,000)          (179,000)
Permanent differences             (33,000)           (47,000)            (6,000)
Utilization of net
  operating losses                     --                 --           (523,000)
Other                                  --                 --                 --
                            --------------     --------------     --------------
                            $     619,000      $    (267,000)     $      49,000
                            ==============     ==============     ==============

      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 were as follows as of December
31:

<TABLE>
<CAPTION>
                                                             2006               2005
                                                        --------------     --------------
<S>                                                     <C>                <C>
      Deferred tax assets:
        Fixed assets depreciation                       $      59,000      $          --
        Allowance for doubtful accounts                        38,000             44,000
        Inventory reserves and uniform capitalization       1,065,000            770,000
        Other accrued liabilities                             319,000            361,000
        Deferred compensation                                 218,000            118,000
        Alternative minimum tax credit carryforwards          142,000            142,000
        Capital loss carryforwards                            136,000            136,000
        Net operating loss carryforwards                    5,835,000          4,661,000
                                                        --------------     --------------
      Total deferred tax assets                             7,812,000          6,232,000
      Valuation allowance for deferred tax assets          (7,086,000)        (4,846,000)
                                                        --------------     --------------
      Deferred tax assets (current)                     $     726,000          1,386,000
                                                        --------------     --------------
</TABLE>

                                      F-29



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                             2006               2005
                                                        --------------     --------------
<S>                                                     <C>                <C>
      Deferred tax liabilities:
        Depreciation                                    $          --            (51,000)
        Intangible assets other than goodwill              (1,053,000)        (1,057,000)
                                                        --------------     --------------
      Deferred tax liabilities (long-term)                 (1,053,000)        (1,108,000)
                                                        --------------     --------------
      Net deferred tax assets (liabilities)             $    (327,000)     $     278,000
                                                        ==============     ==============
</TABLE>

      As of December 31, 2006 and 2005, the Company had recorded $726,000 and
$1,386,000, respectively, of net deferred tax assets and $1,053,000 and
$1,108,000, respectively, of deferred tax liabilities. The Company had federal
and state net operating loss carryforwards of approximately $15,459,000 and
$14,187,000 as of December 31, 2006 and 2005, respectively, that expire at
various dates through 2023. As of December 31, 2006 and 2005, the Company
recorded a valuation allowance on the deferred tax asset. Management believes
sufficient uncertainty exists regarding the realizability of the deferred tax
asset items and that a valuation allowance is required. Management considers
projected future taxable income and tax planning strategies in making this
assessment. For the years ended December 31, 2006 and 2005, management recorded
increases in its valuation allowances of $1,903,000 and a decrease of $948,000,
respectively, based on the domestic book income in 2006 and 2005 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 its net deferred tax asset. 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.

      As a result of the merger in 1997 of the privately held EMRISE Electronics
with a wholly-owned, newly formed subsidiary of the Company, with EMRISE
Electronics 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 a
significant portion of its federal net operating loss and credit carryforwards.
The Company currently has $9,606,000 of net operating losses not subject to
annual limitation, as these losses were generated subsequent to the 50% change
in ownership. The remaining net operating loss of $5,835,000 generated before
the change in ownership is subject to the annual limitation. Of the $4,581,000
net operating loss carryforward subject to limitation, approximately $276,000
per year is available to offset future federal taxable income.

                                      F-30



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)  EARNINGS PER SHARE

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

                                 2006               2005               2004
                            --------------     --------------     --------------

NUMERATOR:
Net (loss) income           $  (3,615,000)     $   1,441,000      $   1,327,000
(Loss) income attributable
  to common stockholders    $  (3,615,000)     $   1,441,000      $   1,327,000

DENOMINATOR:
Weighted average number of
  common shares outstanding
  during the period - basic    37,981,000         37,256,000         24,063,000
Incremental shares from
  assumed conversions of
  warrants, options and
  preferred stock                      --          1,195,000            776,000
Adjusted weighted average
  shares - diluted             37,981,000         38,448,000         24,839,000
Basic (loss) earnings per
  share                     $       (0.10)     $        0.04      $        0.06
Diluted (loss) earnings
  per share                 $       (0.10)     $        0.04      $        0.05

      The following table shows the common stock equivalents that were
outstanding as of December 31, 2006 and 2005 but were not included in the
computation of diluted (loss) earnings 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:

                                             Number              Exercise Price
                                           of Shares               Per Share
                                          -----------           ----------------
  Anti-dilutive common stock options:
      As of December 31, 2006                780,000             $1.13 to $2.00
      As of December 31, 2005                686,000                 $2.00

  Anti-dilutive common stock warrants:
      As of December 31, 2006              4,111,000             $1.30 to $2.00
      As of December 31, 2005              3,886,000             $1.73 to $2.00

(12)  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 2006, 2005 and 2004 was approximately $1,549,000, $885,000 and
$1,070,000, respectively.

                                      F-31



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 14) are as follows:

                Year Ending December 31,                    Amount
                ------------------------                --------------

                          2007                          $   1,648,000
                          2008                              1,257,000
                          2009                              1,078,000
                          2010                                962,000
                          2011                                241,000
                   2012 and thereafter                             --
                                                        --------------
                          Total                         $   5,186,000
                                                        ==============

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 United States domestic
employees. Participants may make voluntary pretax contributions to such plans up
to the limit as permitted by law. Company contributions to the 401(k) plan are
discretionary. The Company made contributions of $34,000, $36,000 and $25,000 to
the 401(k) Plan for the years ended December 31, 2006, 2005 and 2004,
respectively.

      The Company's subsidiary in France has a defined benefit pension plan. The
plan is an unfunded plan. As of the December 31, 2006 and 2005 measurement
dates, the status of the defined benefit pension plan was as follows:

                                                    2006               2005
                                               --------------     --------------
      Projected benefit obligation             $     208,000      $     163,000
      Fair value of plan assets                $          --      $          --
      Unfunded accumulated benefit             $     192,000      $     155,000
      Accumulated benefit obligation           $     208,000      $     163,000
      Employer contributions                   $          --      $          --
      Participant contributions                $          --      $          --
      Benefits paid                            $          --      $      18,000

      Contributions to be paid to the plan during the year ended December 31,
2006 are estimated to be none.

                                      F-32



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Weighted average assumptions used to determine pension benefit obligations
at December 31, 2006 and 2005 were as follows:

                                                    2006               2005
                                               --------------     --------------
      Discount rate                                 4.00%              4.50%
      Expected return on plan assets                4.25%              4.00%
      Rate of compensation increase                 2.00%                --

      The components of the net periodic pension costs for the years ended
December 31, 2006 and 2005 were as follows:

                                                    2006               2005
                                               --------------     --------------
      Service cost                             $      11,000      $      11,000
      Interest cost                                    7,000              7,000
      Expected return on plan assets                      --                 --
      Amortization of transition asset,
        prior service cost
        and actuarial loss                                --                 --
                                               --------------     --------------
      Net periodic benefit cost                $      18,000      $      18,000
                                               ==============     ==============

      The following table sets forth the changes in benefit obligation for the
years ended December 31, 2006 and 2005:

                                                    2006               2005
                                               --------------     --------------
      Change in benefit obligations:
      Benefit obligation at beginning of year  $     163,000      $     122,000
      Service cost                                    11,000             11,000
      Interest cost                                    7,000              7,000
      Benefits paid                                       --             18,000
      Contributions                                       --                 --
      Effect of foreign currency translation          27,000              5,000
                                               --------------     --------------
      Benefit obligation at end of year        $     208,000      $     163,000
                                               ==============     ==============

EXECUTIVE MANAGEMENT

      Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into an employment agreement that provided 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. On February 24, 2006, the Company and Mr. Oliva entered
into a new five-year employment agreement effective as of January 1, 2006. The
new employment agreement provides for an annual base salary of $350,000 and
severance of three times his annual base salary, net of taxes, under certain
circumstances.

      Effective July 2, 2001, the Company and Randolph D. Foote, its Senior Vice
President, Chief Financial Officer and Secretary, 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. On February 24, 2006, the Company and Mr. Foote
entered into a new two-year employment agreement effective as of January 1,
2006. The new employment agreement provided for an annual base salary of
$175,000 and severance of one and one-half times his annual base salary, net of
taxes, under certain circumstances.

                                      F-33



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On August 18, 2006, Mr. Foote resigned from all positions with the Company
and its subsidiaries. The Company entered into a Resignation and Separation
Agreement with Mr. Foote, which became effective on August 25, 2006. Under the
agreement, Mr. Foote resigned all of his positions with the Company, and the
Company and Mr. Foote jointly terminated his employment agreement dated
effective as of January 1, 2006. The agreement provides that effective as of
August 21, 2006, Mr. Foote will be assigned to temporary employment with the
Company, which the parties anticipated would terminate by approximately December
31, 2006.

      On December 31, 2006, the Company and Mr. Foote amended the separation
agreement to extend Mr. Foote's temporary employment to no later than March 30,
2007. The Company and Mr. Foote intend to amend the separation agreement to
extend Mr. Foote's temporary employment to no later than April 30, 2007. During
the time of his temporary employment, Mr. Foote has been assisting the Company
in, among other things, the preparation of the Company's restated financial
statements and various filings with the Commission and has continued to receive
his base salary and employment benefits (other than paid vacation benefits,
bonus or incentive compensation). Mr. Foote's stock options are scheduled to
terminate three months after termination of his temporary employment. For twelve
months following termination of his temporary employment, Mr. Foote has agreed
to continue to provide reasonable cooperation and assistance to the Company as
needed, and subject to Mr. Foote's performance of his obligations under the
separation agreement, the Company has agreed to pay to Mr. Foote in installments
on the Company's regular pay dates during that period the total gross amount of
$182,200 and to reimburse Mr. Foote for health plan benefit premiums at the same
benefit level he had as of his resignation date.

      Effective July 2, 2001, the Company and Graham Jefferies, Managing
Director of EEL and Executive Vice President and Chief Operating Officer of the
Company, 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. On
February 24, 2006, the Company and Mr. Jefferies entered into a new three-year
employment agreement effective as of January 1, 2006. The new employment
agreement provides for an annual base salary of 152,800 British pounds sterling
per year (approximately $263,350 as of January 1, 2006) and severance of twice
his annual base salary, net of taxes, under certain circumstances.

(13)  SEGMENT AND MAJOR CUSTOMER INFORMATION

      The Company has two reportable segments: electronic devices and
communications equipment. The electronic devices segment operates in the United
States, European and Asian markets and designs, manufactures and markets digital
switches and power supplies. The communications equipment segment operates
principally in the United States 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-34



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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, 2006:

      REPORTING UNITS WITHIN ELECTRONIC DEVICES SEGMENT:

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

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

      o     RO - Sunnyvale, California: manufacturer of standard power supplies
            using proprietary technology.

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

      o     EEL - Ashford, Kent, England: Power supplies and conversion for
            defense and aerospace applications; this reporting unit also
            includes XPS and Pascall.

      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 2, the Company acquired PEHL and Pascall in March
2005. These two entities are being included in EEL reporting unit of the
electronic devices segment.

                                      F-35



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                       2006            2005            2004
                                  --------------  --------------  --------------
SALES TO EXTERNAL CUSTOMERS
     Electronic devices           $  32,702,000   $  25,687,000   $  15,262,000
     Communications equipment        13,682,000      15,583,000      14,375,000
                                  --------------  --------------  --------------
     Total                        $  46,384,000   $  41,270,000   $  29,637,000
                                  ==============  ==============  ==============

INTEREST EXPENSE
     Electronic devices           $     172,000   $     181,000   $     180,000
     Communications equipment           318,000         274,000         250,000
                                  --------------  --------------  --------------
     Total                        $     490,000   $     455,000   $     430,000
                                  ==============  ==============  ==============

DEPRECIATION AND AMORTIZATION
     Electronic devices           $     922,000   $     674,000   $      91,000
     Communications equipment           232,000         241,000         126,000
                                  --------------  --------------  --------------
     Total                        $   1,154,000   $     915,000   $     217,000
                                  ==============  ==============  ==============

SEGMENT PROFITS BEFORE INCOME TAX
     Electronic devices           $   2,730,000   $   3,191,000   $   2,612,000
     Communications equipment        (1,368,000)        697,000       1,580,000
                                  --------------  --------------  --------------
     Total                        $   1,362,000   $   3,888,000   $   4,192,000
                                  ==============  ==============  ==============

SEGMENT ASSETS
     Electronic devices           $  27,514,000   $  25,144,000   $   8,435,000
     Communications equipment        15,912,000      16,358,000      16,371,000
                                  --------------  --------------  --------------
     Total                        $  43,426,000   $  41,502,000   $  24,806,000
                                  ==============  ==============  ==============


                                      F-36



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER INTANGIBLE ASSETS BY SEGMENT AS OF DECEMBER 31, 2006

<TABLE>
<CAPTION>
                                                                            Customer       Covenant
                                         Trademarks and    Technology      Relation-         Not                        Patents in
                           Goodwill --   Trade Names --    Acquired --      ships --     to Compete --    Backlog --    Progress --
                               Not            Not         10-Year Life    10-Year Life    3-Year Life    2-Year Life        Not
                           Amortizable     Amortizable     Amortizable     Amortizable    Amortizable    Amortizable    Amortizable
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
<S>                       <C>            <C>              <C>             <C>            <C>            <C>            <C>
GROSS COST
Electronic devices        $  7,379,000   $     850,000    $    500,000    $    350,000   $    200,000   $    200,000   $     89,000
Communications equipment     6,706,000         750,000       1,150,000         200,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $ 14,085,000   $   1,600,000    $  1,650,000    $    550,000   $    200,000   $    200,000   $     89,000
                          =============  ==============   =============   =============  =============  =============  =============

ACCUMULATED AMORTIZATION
Electronic devices        $    218,000   $          --    $     67,000    $     47,000   $    117,000   $    175,000   $         --
Communications equipment       872,000              --         287,000          50,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $  1,090,000   $          --    $    354,000    $     97,000   $    117,000   $    175,000   $         --
                          =============  ==============   =============   =============  =============  =============  =============

CARRYING VALUE
Electronic devices        $  7,161,000   $     850,000    $    433,000    $    303,000   $     83,000   $     25,000   $     89,000
Communications equipment     5,834,000         750,000         863,000         150,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $ 12,995,000   $   1,600,000    $  1,296,000    $    453,000   $     83,000   $     25,000   $     89,000
                          =============  ==============   =============   =============  =============  =============  =============

                                      F-37



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER INTANGIBLE ASSETS BY SEGMENT AS OF DECEMBER 31, 2005

                                                                            Customer       Covenant
                                         Trademarks and    Technology      Relation-         Not                        Patents in
                           Goodwill --   Trade Names --    Acquired --      ships --     to Compete --    Backlog --    Progress --
                               Not            Not         10-Year Life    10-Year Life    3-Year Life    2-Year Life        Not
                           Amortizable     Amortizable     Amortizable     Amortizable    Amortizable    Amortizable    Amortizable
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
GROSS COST
Electronic devices        $  6,702,000   $     813,000    $    484,000    $    200,000   $    200,000   $    200,000   $     52,000
Communications equipment     6,428,000         750,000       1,150,000         200,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $ 13,130,000   $   1,563,000    $  1,634,000    $    400,000   $    200,000   $    200,000   $     52,000
                          =============  ==============   =============   =============  =============  =============  =============

ACCUMULATED AMORTIZATION
Electronic devices        $    192,000   $          --    $     16,000    $      7,000   $     50,000   $     75,000   $         --
Communications equipment       872,000              --         172,000          30,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $  1,064,000   $          --    $    188,000    $     37,000   $     50,000   $     75,000   $         --
                          =============  ==============   =============   =============  =============  =============  =============

CARRYING VALUE
Electronic devices        $  6,510,000   $     813,000    $    468,000    $    193,000   $    150,000   $    125,000   $     52,000
Communications equipment     5,556,000         750,000         978,000         170,000             --             --             --
                          -------------  --------------   -------------   -------------  -------------  -------------  -------------
Total                     $ 12,066,000   $   1,563,000    $  1,446,000    $    363,000   $    150,000   $    125,000   $    52,000
                          =============  ==============   =============   =============  =============  =============  =============
</TABLE>

                                      F-38



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHANGES IN GOODWILL BY SEGMENT

<TABLE>
<CAPTION>
                                                            Electronic                     Communications
                                                              Devices        Equipment         Total
                                                          --------------   -------------   --------------
<S>                                                       <C>              <C>             <C>
Balance at January 1, 2005                                $   1,085,000    $  4,796,000    $   5,881,000
Goodwill acquired or reclassed from other intangibles         5,930,000         760,000        6,690,000
Impairment                                                           --              --               --
Foreign currency translation                                   (505,000)             --         (505,000)
                                                          --------------   -------------   --------------
Balance December 31, 2005                                 $   6,510,000    $  5,556,000    $  12,066,000


Balance at January 1, 2006                                $   6,510,000    $  5,556,000    $  12,066,000
Goodwill acquired                                                    --              --               --
Acquisition allocation adjustment                              (157,000)        278,000          121,000
Foreign currency translation                                    808,000              --          808,000
                                                          --------------   -------------   --------------
Balance December 31, 2006                                 $   7,161,000    $  5,834,000    $  12,995,000
                                                          ==============   =============   ==============
</TABLE>

      The Company's future aggregate amortization expense for intangibles for
the next five years is as follows:

                Year Ending December 31,                    Amount
                ------------------------                --------------
                         2007                           $     312,000

                         2008                           $     237,000

                         2009                           $     220,000

                         2010                           $     220,000

                         2011                           $     220,000

                                      F-39



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                       2006            2005            2004
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
NET SALES
   Total sales for reportable segments            $  46,384,000   $  41,270,000   $  29,637,000
   Elimination of intersegment sales                         --              --              --
                                                  --------------  --------------  --------------
Total consolidated net sales                      $  46,384,000   $  41,270,000   $  29,637,000
                                                  ==============  ==============  ==============

(LOSS) INCOME BEFORE INCOME TAXES
     Total (loss) income for reportable segments  $   1,362,000   $   3,888,000   $   4,192,000
     Unallocated amounts:
       General corporate expenses                    (4,358,000)     (2,714,000)     (2,816,000)
                                                  --------------  --------------  --------------
Consolidated (loss) income before income taxes    $  (2,996,000)  $   1,174,000   $   1,376,000
                                                  ==============  ==============  ==============

ASSETS
   Total assets for reportable segments           $  43,426,000   $  41,502,000   $  24,806,000
   Other assets                                       1,359,000       2,959,000         338,000
                                                  --------------  --------------  --------------
Total consolidated assets                         $  44,785,000   $  44,461,000   $  25,144,000
                                                  ==============  ==============  ==============

INTEREST EXPENSE
   Interest expense for reportable segments       $     490,000   $     455,000   $     430,000
   Other interest expense                                    --              --           3,000
                                                  --------------  --------------  --------------
Total interest expense                            $     490,000   $     455,000   $     433,000
                                                  ==============  ==============  ==============

DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense
   for reportable segments                        $   1,154,000   $     915,000   $     217,000
   Other depreciation and amortization expense           36,000          49,000          70,000
                                                  --------------  --------------  --------------
Total depreciation and amortization               $   1,190,000   $     964,000   $     287,000
                                                  ==============  ==============  ==============
</TABLE>

                                      F-40



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                       2006            2005            2004
                                  --------------  --------------  --------------
NET SALES:
    United States                 $  16,952,000   $  15,957,000   $  12,521,000
    Japan                             1,186,000       1,271,000         935,000
    France                            7,120,000       6,657,000       7,016,000
    United Kingdom                   21,126,000      17,385,000       9,165,000
                                  --------------  --------------  --------------
                                  $  46,384,000   $  41,270,000    $ 29,637,000
                                  ==============  ==============  ==============
LONG-LIVED ASSETS:
    United States                 $     765,000   $     734,000    $    440,000
    Japan                                 7,000           7,000          11,000
    France                               90,000         101,000         142,000
                                  --------------  --------------  --------------
    United Kingdom                    1,376,000       1,231,000         316,000
                                  $   2,245,000   $   2,073,000    $    909,000
                                  ==============  ==============  ==============

      Sales and purchases between geographic areas have been accounted for on
the basis of prices set between the geographic areas, generally at cost plus
40%. 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.

      No customer in the electronic devices segment accounted for 10% or more of
net sales during 2006 and one customer accounted for 10% or more of net sales
during 2005 and 2004.

(14)  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

      The following is a summary of the quarterly operations for the years ended
December 31, 2006 and 2005 (in thousands, except for per share data).

<TABLE>
<CAPTION>
                                                                                2006
                                                     -------------------------------------------------------------
                                                        Mar. 31         June 30         Sept. 30        Dec. 31
                                                     -------------   -------------   -------------   -------------
<S>                                                  <C>             <C>             <C>             <C>
Net sales                                            $     10,734    $     10,817    $     12,177    $     12,656
Gross profit                                         $      4,384    $      3,792    $      4,678    $      4,117
Net loss                                             $       (322)   $     (1,010)   $       (716)   $     (1,567)
Loss applicable to common stockholders               $       (322)   $     (1,010)   $       (716)   $     (1,567)
Loss per share:
     Basic and diluted                               $      (0.01)   $      (0.03)   $      (0.02)   $      (0.10)
                                                     =============   =============   =============   =============

                                                                                2005
                                                     -------------------------------------------------------------
                                                        Mar. 31         June 30         Sept. 30        Dec. 31
                                                     -------------   -------------   -------------   -------------
Net sales                                            $      7,523    $      9,962    $     11,177    $     12,608
Gross profit                                         $      3,278    $      3,963    $      4,866    $      5,449
Net (loss) income                                    $       (197)   $         21    $        816    $        801
(Loss) income (applicable) available to
     common stockholders                             $       (197)   $         21    $        816    $        801
(Loss) earnings per share:
     Basic                                           $      (0.01)   $       0.02    $       0.02    $       0.02
                                                     =============   =============   =============   =============
     Diluted                                         $      (0.01)   $       0.00    $       0.02    $       0.02
                                                     =============   =============   =============   =============
</TABLE>

                                      F-41



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15)  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 2). 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 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. At December 31, 2006,
the 30-day LIBOR was 5.3279%.

      Future maturities of notes payable to stockholders are as follows:

                Year Ending December 31,
                ------------------------
                          2007                          $     500,000
                          2008                                500,000
                          2009                                500,000
                          2010                                250,000
                          2011                                     --
                                                        --------------
                                                        $   1,750,000
                                                        ==============

      Interest paid on these notes in 2006 and 2005 was $152,000 and $179,000,
respectively.

      The Company entered into an above-market real property lease with the
sellers. The lease represented an obligation that exceeded 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 2006 and 2005 totaled $456,000 and $378,000,
respectively. Future minimum lease payments under the operating lease payable to
the stockholders are included in Note 11.

      The Company entered into a lease for the RO building with Caspian
Associates ("Caspian"), a California general partnership. Richard Okada, who was
President of RO prior to the Company's acquisition and is currently the
President of RO, is a general partner of Caspian. The lease provided for a
two-year term commencing on September 1, 2005 and ending on August 31, 2007, at
a base rent of $9,210 per month. Additionally, the lease provided for an
extension of the lease term for an additional three years, to August 31, 2010,
and a rent increase if RO achieves certain net sales and cumulative gross profit
targets. However, the targets were eliminated from the lease when the property
was sold on November 1, 2006. Also, on March 1, 2007, the lease converted into a
month-to-month tenancy where either party may provide the other with 30 days'
notice to terminate the lease. As of December 31, 2006, the lease obligation was
$12,280 per month, which was more than the original $9,210 because a sublessee
terminated its sublease in May 2006. The Company paid $138,000 and $37,000 on
the lease in 2006 and 2005, respectively. The Company terminated the lease on
March 31, 2007.

      There are no guarantees by officers or fees paid to officers or loans to
or from officers.

                                      F-42



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      See Note 11 for information regarding employment arrangements with the
Company's executive management.

(16)  NEW ACCOUNTING PRONOUNCEMENTS

      The Company adopted SFAS No. 123R on January 1, 2006 (see Note 1).

      In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43, CHAPTER 4. SFAS No.
151 clarifies that abnormal inventory costs such as costs of idle facilities,
excess freight and handling costs, and wasted materials (spoilage) are required
to be recognized as current period costs. The provisions of SFAS No. 151 are
effective for 2006. The Company is currently evaluating the provisions of SFAS
No. 151 and does not expect that adoption will have a material effect on its
financial position, results of operations or cash flows.

      On December 16, 2004, the FASB issued SFAS No. 153, EXCHANGES OF
NONMONETARY ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR
NONMONETARY TRANSACTIONS. SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets and redefines the scope of transactions that should be
measured based on the fair value of the assets exchanged. SFAS No. 153 is
effective for nonmonetary asset exchanges beginning in the second quarter of
2006. The Company does not believe its adoption of SFAS No. 153 will have a
material effect on its consolidated financial position, results of operations or
cash flows.

      On June 7, 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS, a replacement of APB Opinion No. 20, ACCOUNTING CHANGES, and
SFAS No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS. SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition of a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005. However, SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements. The Company
does not believe its adoption of SFAS No. 154 will have a material effect on its
consolidated financial position, results of operations or cash flows.

      In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS, which amends SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES and SFAS No. 140, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Specifically, SFAS No. 155
amends SFAS No. 133 to permit fair value remeasurement for any hybrid financial
instrument with an embedded derivative that otherwise would require bifurcation,
provided the whole instrument is accounted for on a fair value basis.
Additionally, SFAS No. 155 amends SFAS No. 140 to allow a qualifying special
purpose entity to hold a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 applies to all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006, with
early application allowed. The Company does not expect that the adoption of SFAS
No. 155 will have a material effect on its results of operations or financial
position.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS.
This new statement provides a single definition of fair value, together with a
framework for measuring it, and requires additional disclosure about the use of
fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy with the highest priority being quoted
prices in active markets. The required effective date of SFAS No. 157 is the
first quarter of 2008. The Company currently is evaluating the effect this
statement may have on its consolidated financial statements.

                                      F-43



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. SFAS No. 159 permits an entity to
irrevocably elect fair value on a contract-by-contract basis as the initial and
subsequent measurement attribute for many financial assets and liabilities and
certain other items including insurance contracts. Entities electing the fair
value option would be required to recognize changes in fair value in earnings
and to expense up front cost and fees associated with the item for which the
fair value option is elected. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of SFAS No. 157, FAIR VALUE
MEASUREMENTS. The Company is currently evaluating the effect that adoption of
SFAS No. 159 would have on its financial condition or results of operations.

      In June 2006, the FASB issued Financial Interpretation No. 48, ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109.
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement. The interpretation also provides
guidance on derecognition, classification, interest and penalties, and other
matters. These provisions are effective for the Company beginning in the first
quarter of 2007. The Company currently is assessing the effect of this statement
and currently does not believe that adoption will have a material effect on its
consolidated financial statements.

      On June 29, 2005, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 05-06, DETERMINING THE AMORTIZATION PERIOD FOR LEASEHOLD IMPROVEMENTS.
EITF Issue No. 05-06 provides that the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception
of a lease shall be the shorter of (a) the useful life of the assets or (b) a
term that includes required lease periods and renewals that are reasonably
assured upon the acquisition or the purchase. The provisions of EITF Issue No.
05-06 are effective on a prospective basis for leasehold improvements purchased
or acquired beginning in the Company's second quarter of 2005. The Company does
not believe its adoption of EITF Issue No. 05-06 will have a material effect on
its consolidated financial position, results of operations or cash flows.

      In September 2006, the Securities and Exchange Commission ("Commission")
issued Staff Accounting Bulletin ("SAB") No. 108, Topic 1N, FINANCIAL STATEMENTS
- CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN THE CURRENT YEAR FINANCIAL STATEMENTS. SAB No. 108 addresses
how to quantify the effect of an error on the financial statements and requires
a dual approach to compute the materiality of the misstatement. Specifically,
the amount of the misstatement is to be computed using both the "rollover" (that
is, the current year income statement perspective) and the "iron curtain" (that
is, the year-end balance sheet perspective). SAB No. 108 is effective for all
fiscal years ending after November 15, 2006. Accordingly, the Company adopted
SAB No. 108 in the fourth quarter of 2006. The adoption of SAB No. 108 did not
have a material effect on the Company's financial condition or results of
operations.

                                      F-44



<Page>

                       EMRISE CORPORATION AND SUBSIDIARIES
          CONSOLIDATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                       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, 2006       $   379,000   $    69,000   $    (57,000)  $        --  $    391,000
     Year ended December 31, 2005       $   153,000   $   151,000   $    (33,000)  $   108,000  $    379,000
     Year ended December 31, 2004       $   161,000   $        --   $    (32,000)  $    24,000  $    153,000

Allowance for inventory obsolescence:
     Year ended December 31, 2006       $ 4,053,000   $ 1,771,000   $   (167,000)  $        --  $  5,657,000
     Year ended December 31, 2005       $ 2,251,000   $ 1,403,000   $ (1,150,000)  $ 1,549,000  $  4,053,000
     Year ended December 31, 2004       $ 1,692,000   $ 1,116,000   $   (557,000)  $        --  $  2,251,000
</TABLE>

                                      F-45



<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 (13)
2.3            Supplemental Agreement dated March 18, 2005 among Intelek
               Properties Limited, XCEL Corporation Limited, Intelek PLC and
               EMRISE Corporation (13)
2.4            Loan Agreement dated March 18, 2005 among XCEL Corporation
               Limited, Pascall Electronics Limited and Pascall Electronic
               (Holdings) Limited (13)
2.5            Stock Purchase Agreement dated September 2, 2005 between EMRISE
               Electronics Corporation, a New Jersey corporation, Robert H.
               Okada, as Trustee of the Robert H. Okada Trust Agreement dated
               February 11, 1992, and Sharon Vavro, an individual (16)
2.6            Amendment No. 1 dated effective as of September 28, 2005 to Stock
               Purchase Agreement dated September 2, 2005 between EMRISE
               Electronics Corporation, a New Jersey corporation, Robert H.
               Okada, as Trustee of the Robert H. Okada Trust Agreement dated
               February 11, 1992, and Sharon Vavro, an individual (17)
3.1            Amended and Restated Certificate of Incorporation of EMRISE
               Corporation filed with the Secretary of State of Delaware on May
               9, 2005 (14)
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 (#) (5)
10.2           Employee Stock and Stock Option Plan (#) (6)
10.3           1997 Stock Incentive Plan (#) (7)
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,
               Laurence P. Finnegan, Jr., Otis W. Baskin, Richard E. Mahmarian,
               Randolph D. Foote and Graham Jefferies (2)
10.6           Description of Compensation of Directors (#) (20)
10.7           Credit Facility Agreement dated April 8, 2003, between IFN
               Finance and CXR, S.A.S. (11)
10.8           English Summary of Credit Facility Agreement dated April 8, 2003
               between IFN Finance and CXR, S.A.S. (12)
10.9           Subordinated Secured Promissory Note dated July 13, 2004 in the
               principal amount of $1,681,318.68 made by MicroTel International
               Inc. in favor of Noel C. McDermott Revocable Living Trust dated
               December 19, 1995 (10)
10.10          Subordinated Secured Promissory Note dated July 13, 2004 in the
               principal amount of $1,318,681.32 made by MicroTel International
               Inc. in favor of Warren P. Yost and Gail A. Yost, as Co-Trustees
               Under Declaration of Trust dated March 9, 1988 (10)

                                       72



<Page>

EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------
10.11          Pledge and Security Agreement dated July 13, 2004 between
               MicroTel International Inc.; Noel C. McDermott, as Collateral
               Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott
               Revocable Living Trust dated December 19, 1995; and Warren P.
               Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust
               dated March 9, 1988 (10)
10.12          Intercreditor Agreement dated July 13, 2004 between MicroTel
               International Inc.; Noel C. McDermott, as Trustee of the Noel C.
               McDermott Revocable Living Trust dated December 19, 1995; and
               Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration
               of Trust dated March 9, 1988 (10)
10.13          Continuing Guarantee dated July 13, 2004 made by Larus
               Corporation in favor of Noel C. McDermott, as Trustee of the Noel
               C. McDermott Revocable Living Trust dated December 19, 1995, and
               Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration
               of Trust dated March 9, 1988 (10)
10.14          Continuing Guarantee dated July 13, 2004 made by Vista Labs
               Incorporated in favor of Noel C. McDermott, as Trustee of the
               Noel C. McDermott Revocable Living Trust dated December 19, 1995,
               and Warren P. Yost and Gail A. Yost, as Co-Trustees Under
               Declaration of Trust dated March 9, 1988 (10)
10.15          Continuing Guarantee dated July 13, 2004 made by CXR Telcom in
               favor of Noel C. McDermott, as Trustee of the Noel C. McDermott
               Revocable Living Trust dated December 19, 1995, and Warren P.
               Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust
               dated March 9, 1988 (10)
10.16          Security Agreement dated July 13, 2004 made by Larus Corporation
               in favor of Noel C. McDermott, as Trustee of the Noel C.
               McDermott Revocable Living Trust dated December 19, 1995, and
               Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration
               of Trust dated March 9, 1988 (10)
10.17          Security Agreement dated July 13, 2004 made by Vista Labs
               Incorporated in favor of Noel C. McDermott, as Trustee of the
               Noel C. McDermott Revocable Living Trust dated December 19, 1995,
               and Warren P. Yost and Gail A. Yost, as Co-Trustees Under
               Declaration of Trust dated March 9, 1988 (10)
10.18          Security Agreement dated July 13, 2004 made by CXR Telcom in
               favor of Noel C. McDermott, as Trustee of the Noel C. McDermott
               Revocable Living Trust dated December 19, 1995, and Warren P.
               Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust
               dated March 9, 1988 (10)
10.19          Lease agreement between the Registrant and Property Reserve Inc.
               dated September 16, 1999 (8)
10.20          Lease agreement between XET, Inc. and Rancho Cucamonga
               Development dated August 30, 1999 (8)
10.21          Commercial Lease dated July 13, 2004 between the Registrant, as
               Tenant, and Noel C. McDermott and Warren P. Yost, as Landlord,
               for the premises located at 894 Faulstich Court, San Jose,
               California (10)
10.22          Executive Employment Agreement dated February 24, 2006 by and
               between the Registrant and Carmine T. Oliva (#) (19)

                                       73



<Page>

EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------
10.23          Executive Employment Agreement dated February 24, 2006 by and
               between the Company and Graham Jefferies (#) (19)
10.24          Executive Employment Agreement dated February 24, 2006 by and
               between the Registrant and Randolph D. Foote (#) (19)
10.25          Resignation and Separation Agreement dated August 18, 2006 by and
               between EMRISE Corporation and Randolph D. Foote (4)
10.26          Consulting Extension Letter Agreement dated December 31, 2006 by
               and between EMRISE Corporation and Randolph D. Foote
10.27          Loan Agreement dated March 18, 2005 among XCEL Corporation
               Limited, Pascall Electronics Limited and Pascall Electronic
               (Holdings) Limited (13)
10.28          Form of Incentive Stock Option Agreement Under Amended and
               Restated 2000 Stock Option Plan (#) (15)
10.29          Form of Non-Qualified Stock Option Agreement Under Amended and
               Restated 2000 Stock Option Plan (#) (15)
10.30          Credit Agreement between EMRISE Corporation and Wells Fargo Bank,
               National Association dated as of August 25, 2005 (18)
10.31          First Amendment to Credit Agreement dated as of November 17, 2005
               by and between EMRISE Corporation and Wells Fargo Bank, N.A.(20)
10.32          Second Amendment to Credit Agreement dated as of March 28, 2006
               by and between EMRISE Corporation and Wells Fargo Bank, N.A. *
10.33          Third Amendment to Credit Agreement entered into as of September
               1, 2006 by and between EMRISE Corporation and Wells Fargo Bank,
               N.A. (21)
10.34          Revolving Line of Credit Note dated September 1, 2006 made by
               EMRISE Corporation in favor of Wells Fargo Bank (21)
10.35          Letter Agreement dated October 1, 2006 by and between EMRISE
               Corporation and Wells Fargo Bank, N.A. (22)
10.36          Forbearance Agreement dated as of November 20, 2006 between
               EMRISE Corporation and Wells Fargo Bank, N.A. (23)
10.37          Credit and Security Agreement dated December 1, 2006 between
               EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus
               Corporation, RO Associates Incorporated and Wells Fargo Bank,
               N.A. through its Wells Fargo Business Credit operating division
               (23)
10.38          Revolving Note dated December 1, 2006 executed by EMRISE
               Corporation, EMRISE Electronics Corporation, CXR Larus
               Corporation and RO Associates Incorporated in favor of Wells
               Fargo Bank, N.A. through its Wells Fargo Business Credit
               operating division (23)
10.39          Term Note dated December 1, 2006 executed by EMRISE Corporation,
               EMRISE Electronics Corporation, CXR Larus Corporation and RO
               Associates Incorporated in favor of Wells Fargo Bank, N.A.
               through its Wells Fargo Business Credit operating division (23)

                                       74



<Page>

EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------
10.40          Patent and Trademark Security Agreement dated December 1, 2006
               between EMRISE Corporation and Wells Fargo Bank, N.A. through its
               Wells Fargo Business Credit operating division (23)
10.41          Patent and Trademark Security Agreement dated December 1, 2006
               between RO Associates Incorporated and Wells Fargo Bank, N.A.
               through its Wells Fargo Business Credit operating division (23)
10.42          Debt Purchase Agreement between Lloyds TSB Commercial Finance
               Limited and Pascall Electronics Limited dated June 28, 2005 (18)
10.43          Debt Purchase Agreement between Lloyds TSB Commercial Finance
               Limited and XCEL Power Systems Limited dated June 28, 2005 (18)
10.44          Loan Agreement between Lloyds TSB Commercial Finance Limited and
               XCEL Power Systems Limited dated June 28, 2005 (18)
10.45          Business Loan Agreement between Lloyds TSB Bank PLC and XCEL
               Corporation Limited dated June 30, 2005 (18)
10.46          Guaranty and Indemnity between XCEL Power Systems Limited,
               Pascall Electronics Limited, Pascall Electronic (Holdings)
               Limited, Belix Wound Components Limited and Lloyds TSB Commercial
               Finance Limited dated June 21, 2005 (18)
10.47          Deed of Guaranty and Indemnity between XCEL Corporation Limited
               and Lloyds TSB Commercial Finance Limited dated June 21, 2005
               (18)
10.48          Deed of Guarantee and Indemnity between Pascall Electronics
               Limited and Lloyds TSB Commercial Finance Limited dated June 21,
               2005 (18)
10.49          Deed of Guarantee and Indemnity between XCEL Corporation Limited
               and Lloyds TSB Commercial Finance Limited dated June 21, 2005
               (18)
10.50          Deed of Priorities between Lloyds TSB Commercial Finance Limited
               and Lloyds TSB Bank PLC and Pascall Electronics Limited dated
               June 28, 2005 (18)
10.51          Deed of Priorities between Lloyds TSB Commercial Finance Limited
               and Lloyds TSB Bank PLC and XCEL Power Systems Limited dated June
               28, 2005 (18)
10.52          All Assets Debenture given by XCEL Power Systems Limited in favor
               of Lloyds TSB Commercial Finance Limited dated June 28, 2005 (18)
14.1           Amended and Restated Code of Business Conduct and Ethics (20)
14.2           Code of Business Ethics for CEO and Senior Financial Officers
               (20)
16             Letter dated April 19, 2006 from Grant Thornton LLP regarding
               change in certifying accountant (24)
21             Subsidiaries of the Registrant (20)

                                       75

<Page>

EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------
23             Consent of Hein & Associates LLP, Independent Registered Public
               Accounting Firm *
31.1           Certification of Principal Executive Officer Required by Rule
               13a-14(a) of the Securities Exchange Act of 1934, as amended, as
               Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002 *
31.2           Certification of Principal Financial Officer Required by Rule
               13a-14(a) of the Securities Exchange Act of 1934, as amended, as
               Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002 *
32             Certification of Chief Executive Officer and Chief Financial
               Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to
               Section 906 of the Sarbanes-Oxley Act of 2002 *
-----------------------------
*     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 August 16, 2006 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, 2000 and incorporated herein by reference.

(6)   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.

(7)   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.

(8)   Filed as an exhibit to the Registrant's interim report on Form 10-Q for
      September 30, 1999 and incorporated herein by reference.

(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.

                                       76



<Page>

(13)  Filed as an exhibit to the Registrant's current report on Form 8-K for
      March 18, 2005 and incorporated herein by reference.

(14)  Filed on May 19, 2005 as an exhibit to the Registrant's current report on
      Form 8-K for May 6, 2005 and incorporated herein by reference.

(15)  Filed as an exhibit to the Registrant's annual report on Form 10-K for the
      year ended December 31, 2004 and incorporated herein by reference.

(16)  Filed as an exhibit to the Registrant's current report on Form 8-K for
      September 2, 2005 and incorporated herein by reference.

(17)  Filed as an exhibit to amendment no. 1 to the Registrant's current report
      on Form 8-K for September 2, 2005 and incorporated herein by reference.

(18)  Filed as an exhibit to the Registrant's quarterly report on Form 10-Q for
      September 30, 2005 and incorporated herein by reference.

(19)  Filed as an exhibit to the Registrant's Form 8-K for February 24, 2006 and
      incorporated herein by reference.

(20)  Filed as an exhibit to the Registrant's annual report on Form 10-K for the
      year ended December 31, 2005.

(21)  Filed as an exhibit to the Registrant's Form 8-K for September 19, 2006
      and incorporated herein by reference.

(22)  Filed as an exhibit to the Registrant's Form 8-K for October 9, 2006 and
      incorporated herein by reference.

(23)  Filed as an exhibit to the Registrant's Form 8-K for November 24, 2006 and
      incorporated herein by reference.

(24)  Filed as an exhibit to the Registrant's Form 8-K for April 13, 2006 and
      incorporated herein by reference.

                                       77

<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 2nd day of
April, 2007.

                                       EMRISE CORPORATION

                                       By: /s/ Carmine T. Oliva
                                           -------------------------------------
                                           Carmine T. Oliva
                                           Chairman of the Board, President,
                                           Chief Executive Officer, Acting Chief
                                           Financial Officer and Secretary

      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>
<CAPTION>

SIGNATURE                                       CAPACITY                              DATE
---------                                       --------                              ----
<S>                                 <C>                                           <C>
/s/ Carmine T. Oliva               Chairman of the Board, President, Chief        April 2, 2007
-------------------------------    Executive Officer (principal executive
Carmine T. Oliva                   officer), Acting Chief Financial Officer
                                   (principal accounting and financial
                                   officer), Secretary and Director


/s/ Laurence P. Finnegan, Jr.      Director                                       April 2, 2007
-------------------------------
Laurence P. Finnegan, Jr.


/s/ Otis W. Baskin                 Director                                       April 2, 2007
-------------------------------
Otis W. Baskin


/s/ Richard E. Mahmarian           Director                                       April 2, 2007
-------------------------------
Richard E. Mahmarian
</TABLE>

                                       78



<Page>
                        EXHIBITS ATTACHED TO THIS REPORT

EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------
10.26          Consulting Extension Letter Agreement dated December 31, 2006 by
               and between EMRISE Corporation and Randolph D. Foote

10.32          Second Amendment to Credit Agreement dated as of March 28, 2006
               by and between EMRISE Corporation and Wells Fargo Bank, N.A.

23             Consent of Hein & Associates LLP, Independent Registered Public
               Accounting Firm

31.1           Certification of Principal Executive Officer required by Rule
               13a-14(a) of the Securities Exchange Act of 1934, as amended, as
               adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2           Certification of Principal Financial Officer required by Rule
               13a-14(a) of the Securities Exchange Act of 1934, as amended, as
               adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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


                                       79