8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (earliest event reported):   August 20, 2008

EMRISE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	1-10346	77-0226211
(State or other jurisdiction	(Commission	(I.R.S. Employer
of incorporation)	file number)	Identification No.)

9485 Haven Avenue, Suite 100

Rancho Cucamonga, California 91730

(Address of principal executive offices) (Zip code)

(909) 987-9220

(Registrant’s telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240-13e-4(c))

Item 2.01.Completion of Acquisition or Disposition of Assets.

On August 26, 2008, EMRISE Corporation (the “Company”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) reporting its acquisition of Custom Components, Inc. (“CCI”) and its subsidiary Advanced Control Components, Inc. (“ACC”).  This Current Report on Form 8-K/A amends and supplements the Initial Form 8-K to include financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K.  The information previously reported in the Initial Form 8-K is hereby incorporated by reference into this Current Report on Form 8-K/A.

Item 9.01Financial Statements and Exhibits

(a)Financial Statements of Businesses Acquired.

The following financial statements required by Item 9.01(a) of Form 8-K are included in this report:

(i)Audited Consolidated Financial Statements of Custom Components, Inc. and Subsidiary for the Nine Months Ended March 31, 2008 and the Year Ended June 30, 2007 are attached hereto as Exhibit 99.1.

(ii)Unaudited Condensed Consolidated Balance Sheet of Custom Components, Inc. and Subsidiary as of June 30, 2008 and Unaudited Condensed Consolidated Statement of Operations of Custom Components, Inc. and Subsidiary for the Three Months Ended June 30, 2008 are attached hereto as Exhibit 99.2.

(b)Pro Forma Financial Information

The following pro forma financial information required by Item 9.01(b) of Form 8-K is included in this report:

(i)Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2008 and Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2007 and for the Six Months Ended June 30, 2008 of EMRISE Corporation are attached hereto as Exhibit 99.3.

2

(d)Exhibits:

Exhibit No.	Description
99.1	Audited Consolidated Financial Statements of Custom Components, Inc. and Subsidiary for the Nine Months Ended March 31, 2008 and the Year Ended June 30, 2007
99.2	Unaudited Condensed Consolidated Balance Sheet of Custom Components, Inc. and Subsidiary as of June 30, 2008 and Unaudited Condensed Consolidated Statement of Operations of Custom Components, Inc. and Subsidiary for the Three Months Ended June 30, 2008
99.3	Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2008 and Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2007 and for the Six Months Ended June 30, 2008 of EMRISE Corporation

3

SIGNATURES

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

	EMRISE CORPORATION
Dated: October 30, 2008	By:	/s/ D. JOHN DONOVAN
		D. John Donovan, Vice President of Finance
		and Administration (principal financial
		officer)

4

INDEX TO EXHIBITS ATTACHED TO THIS REPORT

Exhibit No.	Description
99.1	Audited Consolidated Financial Statements of Custom Components, Inc. and Subsidiary for the Nine Months Ended March 31, 2008 and the Year Ended June 30, 2007
99.2	Unaudited Condensed Consolidated Balance Sheet of Custom Components, Inc. and Subsidiary as of June 30, 2008 and Unaudited Condensed Consolidated Statement of Operations of Custom Components, Inc. and Subsidiary for the Three Months Ended June 30, 2008
99.3	Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2008 and Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2007 and for the Six Months Ended June 30, 2008 of EMRISE Corporation

5

EX-99.1

Exhibit 99.1

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Financial Statements

For the Nine Months Ended March 31, 2008
and the Year Ended June 30, 2007

	Page
Independent Auditors’ Report	1
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Stockholder’s Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6 - 12

Independent Auditors’ Report

To the Stockholder of

Custom Components, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Custom Components, Inc. and Subsidiary (collectively, the “Company”) as of March 31, 2008 and June 30, 2007, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 financial statements referred to above present fairly, in all material respects, the financial position of Custom Components, Inc. and Subsidiary as of March 31, 2008 and June 30, 2007, and the results of their operations and their cash flows for the nine months ended March 31, 2008 and the year ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 15, on August 20, 2008, the stockholders of the Company sold 100% of their stock in the Company.

/s/ Amper, Politziner & Mattia, LLP

August 21, 2008

Wall, New Jersey

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2008 and June 30, 2007

Assets
Current assets
Cash	$	1,753,117	$	2,075,834
Accounts receivable	1,635,126		1,784,309
Inventories	1,584,815		847,582
Income taxes receivable	141,405		502,539
Deferred tax asset	340,584		294,669
Prepaid expenses and other current assets	58,115		8,524
	5,513,162		5,513,457
Property and equipment, net	803,523		557,681
Security deposits	37,276		37,276
	$	6,353,961	$	6,108,414
Liabilities and Stockholder’s Equity
Current liabilities
Borrowings under line of credit	$	286,025	$	286,025
Current maturities of long term debt	4,417		4,406
Current maturities of capital lease obligations	110,577		41,105
Accounts payable	759,399		375,546
Accrued expenses	873,298		1,000,675
Due to stockholder	146,562		232,399
	2,180,278		1,940,156
Long-term debt, net of current maturities	4,553		7,674
Capital lease obligations, net of current maturities	183,035		11,465
Deferred tax liability	119,176		104,574
Total liabilities	2,487,042		2,063,869
Minority interest	772,813		794,666
Commitments and contingencies
Stockholder’s equity
Common stock, no par value, 1,000 shares authorized, 50 shares issued and outstanding	12,446		12,446
Retained earnings	3,081,660		3,237,433
Total stockholder’s equity	3,094,106		3,249,879
	$	6,353,961	$	6,108,414

See accompanying notes to consolidated financial statements.

2

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Operations

	Nine Months Ended March 31,			Percentage of Net		Year Ended			Percentage of Net
	2008			Sales		June 30, 2007			Sales
Net sales	$	7,610,227		100.0		$	15,733,792		100.0
Cost of goods sold	5,095,351			67.0		6,637,760			42.2
Gross profit	2,514,876			33.0		9,096,032			57.8
Selling, general and administrative expenses	2,673,688			35.1		3,287,292			20.9
Operating (loss) income	(158,812		)	(2.1	)	5,808,740			36.9
Other income (expense)
Interest income	71,731			0.9		31,895			0.2
Interest expense	(42,961		)	(0.5	)	(130,970		)	(0.8	)
	28,770			0.4		(99,075		)	(0.6	)
(Loss) income before income taxes and minority interest	(130,042		)	(1.7	)	5,709,665			36.3
Benefit from (provision for) income taxes	6,896			0.1		(2,118,395		)	(13.5	)
(Loss) income before minority interest	(123,146		)	(1.6	)	3,591,270			22.8
Minority interest, net of tax	21,853			0.3		(718,744		)	(4.6	)
Net (loss) income	$	(101,293	)	(1.3	)	$	2,872,526		18.2

See accompanying notes to consolidated financial statements.

3

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholder’s Equity
For the Nine Months Ended March 31, 2008 and the Year Ended June 30, 2007

	Common Stock			Retained			Total Stockholder’s
	Shares	Amount		Earnings			Equity
Balance at June 30, 2006	1,000	$	12,446	$	364,907		$	377,353
Net income	—	—		2,872,526			2,872,526
Balance at June 30, 2007	1,000	12,446		3,237,433			3,249,879
Dividend	—	—		(54,480		)	(54,480		)
Net loss	—	—		(101,293		)	(101,293		)
Balance at March 31, 2008	1,000	$	12,446	$	3,081,660		$	3,094,106

See accompanying notes to consolidated financial statements.

4

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows

	Nine Months Ended March 31, 2008			Year Ended June 30, 2007
Cash flows from operating activities
Net (loss) income	$	(101,293	)	$	2,872,526
Adjustments to reconcile net (loss) income to net cash from operating activities
Minority interest	(21,853		)	718,744
Deferred tax benefit	(31,313		)	(60,435		)
Depreciation and amortization	118,515			157,580
(Increase) decrease in
Accounts receivable	149,183			352,938
Inventory	(737,233		)	(255,503		)
Income tax receivable	361,134			(583,288		)
Prepaid expenses and other current assets	(49,591		)	1,346
Security deposits	—			1,600
Increase (decrease) in
Accounts payable	383,853			(84,810		)
Accrued expenses	(127,377		)	286,663
Total adjustments	45,318			534,835
Net cash (used in) provided by operating activities	(55,975		)	3,407,361
Cash flows from investing activities
Purchases of property and equipment	(67,532		)	(98,021		)
Cash flows from financing activities
Repayment of loans from related parties	(85,837		)	(829,623		)
Principal payments of long-term debt	(3,110		)	(499,473		)
Principal payments on capital lease obligation	(55,783		)	(37,101		)
Dividend	(54,480		)	—
Net cash used in financing activities	(199,210		)	(1,366,197		)
Net change in cash	(322,717		)	1,943,143
Cash - beginning of period	2,075,834			132,691
Cash - ending of period	$	1,753,117		$	2,075,834
Supplemental disclosure of cash paid
Interest	$	110,909		$	411,383
Income taxes	$	163,283		$	2,781,000

See accompanying notes to consolidated financial statements.

5

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 1 -Nature of Operations and Summary of Significant Accounting Policies 
Business Description

Custom Components, Inc. (“Custom”), and its subsidiary, Advanced Control Components, Inc. (“Advanced”), (collectively the “Company”), was founded in 1975 and 1982, respectively, by engineers and entrepreneurs. The Company is a supplier of high performance solid-state RF and microwave components and sub-systems serving military, aerospace, commercial, and instrumentation markets.

Principles of Consolidation

The consolidated financial statements include the accounts of Custom and its 80% owned subsidiary, Advanced, after elimination of all significant intercompany transactions and balances.

Use of Estimates

The preparation of the 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the first in - first out method.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight line method over the estimated useful lives as follows:

	Estimated
Asset Category	Useful Life
Machinery and equipment	5 - 10 years
Furniture and fixtures	5 - 7 years
Computers and software	3 years
Leasehold improvements	The lesser of the
	lease term or the estimated useful life

Certain equipment held under capital leases is classified as property and equipment and amortized using the straight-line method over its estimated life, and the related obligations are recorded as liabilities. Maintenance and repairs are charged to expense as incurred. Expenditures for betterments and major renewals are capitalized. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposal is reflected in operations.

Income Taxes

The Company accounts for income taxes under the asset and liability method as prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred tax assets and liabilities are recognized based upon differences arising from the carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company files a consolidated tax return.

6

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 1 -Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes (continued)

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, title and the risks and rewards of ownership of the products have been transferred to the customer, the sales price is fixed or determinable, and collectibility of the relevant receivable is reasonably assured. For arrangements requiring multiple shipments of products over a period of time, revenue is recognized for each shipment when all of the aforementioned criteria have been met and the Company has met all of its relevant obligations contained in the sales contract.

Accounts Receivable

On a periodic basis, the Company’s management evaluates its accounts receivable and allowance for doubtful accounts. In order to reduce its credit risk, the Company has adopted credit policies and procedures, which include the analysis of the financial position of its customers and the regular review of the credit limits. Based on the Company’s history and a review of the detailed accounts, an allowance for doubtful accounts was not necessary as all accounts receivable at March 31, 2008 and June 30, 2007 are deemed to be fully collectible.

Advertising Costs

Advertising costs are expensed as incurred and were approximately $87,800 for the nine months ended March 31, 2008 and approximately $88,600 for the year ended June 30, 2007.

Concentration of Cash Balance

At times during the year, the Company maintains balances in banks, which exceed the federally insured limit of $100,000. These balances fluctuate during the year and the uninsured portion can vary greatly. Management monitors regularly the financial condition of the banking institution, along with their balance of cash and cash equivalents in order to minimize this risk.

Shipping and Handling Costs

The Company has classified shipping and handling costs billed to customers as revenue. Related freight costs are reported as selling, general, and administrative expenses. Freight related costs were approximately $65,000 for the nine months ended March 31, 2008 and approximately $76,500 for the year ended June 30, 2007.

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, accounts payable, accrued liabilities and customer advances approximates their fair value because of the short-term maturities of these items. The carrying value of borrowings under the line of credit agreement approximate their fair value because the related interest rate represents the market rate for comparable agreements.

7

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 2 -Inventories

Inventories are summarized as follows:

	March 31, 2008		June 30,2007
Raw materials	$	1,049,120	$	418,060
Work in process	535,695		429,522
	$	1,584,815	$	847,582

Note 3 -Property and Equipment

Property and equipment are summarized as follows:

	March 31,		June 30,
	2008		2007
Machinery and equipment	$	1,783,913	$	1,430,997
Furniture and fixtures	57,714		57,714
Computers and software	278,589		267,147
Leasehold improvements	102,491		102,491
	2,222,707		1,858,349
Less accumulated depreciation and amortization	1,419,184		1,300,668
Net property and equipment	$	803,523	$	557,681

Depreciation and amortization expense for the nine months ended March 31, 2008 was approximately $118,500 and for the year ended June 30, 2007 was approximately $157,600.

Machinery and equipment includes assets recorded under capital leases of $437,337 and $140,513 at March 31, 2008 and June 30, 2007, respectively. Related accumulated depreciation was $51,105 and $42,415 as of March 31, 2008 and June 30, 2007, respectively.

Note 4 -Accrued Expenses

Accrued expenses are summarized as follows:

	March 31,		June 30,
	2008		2007
Vacation pay	$	292,195	$	280,013
Customer advances	224,927		186,494
Payroll	106,516		208,624
Professional fees	201,203		263,031
Warranty reserve	5,169		10,970
Other	43,288		51,543
Total accrued liabilities	$	873,298	$	1,000,675

8

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 5 -Income Taxes

Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities are summarized as follows:

	March 31, 2008		June 30, 2007
Current assets
Inventory reserve	$	174,556	$	201,531
Accrued vacation	107,220		88,731
Warranty reserve	2,077		4,407
Net operating loss carryforward	56,731		—
Total current deferred asset	$	340,584	$	294,669
Non-current liabilities
Depreciation and amortization	$	119,176	$	104,574

The (benefit from) provision for income taxes consists of the following:

	Nine months
	ended			Year ended
	March 31,			June 30,
	2008			2007
Current tax expense	$	24,417		$	2,178,830
Deferred tax benefit	(31,313		)	(60,435		)
	$	(6,896	)	$	2,118,395

The reconciliation of income taxes calculated at the U.S federal tax statutory rate to the Company’s effective tax rate is set forth below:

	Nine months
	ended			Year ended
	March 31,			June 30,
	2008			2007
Tax (benefit) at federal statutory rate	$	(44,214	)	$	1,941,939
State income tax, net of federal benefit	(12,011		)	343,264
Other, net	49,329			(166,808		)
Effective income tax	$	(6,896	)	$	2,118,395

Note 6 -Borrowings Under Line of Credit

At June 30, 2007, the Company had a short-term line of credit with a bank which was renewed in May of 2008 and expires on May 4, 2009, whereby it may borrow up to $1,500,000 at the bank’s prime rate which was 5.25% at March 31, 2008 and is personally guaranteed by the stockholder of the Company. The line is collateralized by inventory, accounts receivable, equipment and fixtures of the Company. The agreement provides for certain financial covenants.

9

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 7 -Long-term Debt

	March 31, 2008		June 30, 2007
Fixed rate bank note; due January 2010, payable in monthly installments of $429, including interest at 7.25%, collateralized by an automobile with a net book value of $13,965	$	8,970	$	12,080
Less current installments	4,417		4,406
Long-term debt, less current installments	$	4,553	$	7,674

Maturities of long-term debt are as follows:

For the Years Ending
March 31,
2009	$	4,417
2010	4,553

Note 8 -Related Parties

Due to Stockholder

The Company has a note payable, with no repayment terms, due to the stockholder of Custom. The note is unsecured and had a balance of $146,562 and $232,399 at March 31, 2008 and June 30, 2007, respectively. Interest on the note is set at a fixed rate of 9%. Interest expense of $14,953 was accrued and added to the balance of the loan.

The Company paid off a note payable due to a former stockholder of Advanced during the year ended June 30, 2007. Interest on the note had been set at a fixed rate of 9%. Interest and principal payments of $10,854 and $207,252, respectively, were made during the year ended June 30, 2007.

Note 9 -Capital Leases

The Company has various capital leases for equipment expiring through February 2011.

The following is a schedule, by year, of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2008.

For the Twelve Months Ending March 31,
2009	$	145,590
2010	114,571
2011	76,780
Total minimum lease payments	336,941
Less: Amount representing interest	43,329
Present value of minimum lease payments	293,612
Less: Current maturities	110,577
Long-term maturities	$	183,035

10

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 10 -Retirement Plan

The Company has a 401(k) defined contribution plan, which covers full-time employees upon completion of at least three months of continuous service with the Company. The Company currently contributes to the plan an amount equal to five percent of the employee’s contribution. The Company contributions to the 401(k) plan were approximately $7,200 and $12,300 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively.

Note 11 -Significant Risks and Uncertainties

Major Customers

The Company did not have any individual concentrations for the nine months ended March 31, 2008.

The Company had two major customers who accounted for approximately 59% of sales during the year ended June 30, 2007, one of which accounted for approximately 46%. The 46% customer’s sales were made under a contract which was completed prior to June 30, 2007.

Significant Vendors

The Company had three major suppliers who accounted for approximately 39% of purchases during the nine months ended March 31, 2008.

The Company has three major suppliers who accounted for approximately 49% of purchases during the year ended June 30, 2007.

Note 12 -Operating Leases

The Company leases office and warehouse space under a lease which expires in October 2012. Rent expense charged to operations was approximately $235,000 and $296,000 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. The Company also leases various equipment for periods ending through September 2011. Rent expense charged to operations was approximately $8,400 and $11,000 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. At March 31, 2008, minimum rental commitments under existing noncancellable leases with an initial term of more than one year are summarized as follows:

For the Twelve Months Ending March 31,
2009	$	343,100
2010	331,100
2011	325,600
2012	320,000
2013	186,700
	$	1,506,500

Note 13 -Stock Options

In July 2004, Advanced issued a stock option to one of its employees. The option was for 1% of the outstanding shares of the Company at a cost to the employee of $15,000. The option becomes null and void if employment ceases. If the Company undergoes a change of control, defined as change in majority ownership, the cost will revert to $100 and the option will be considered exercised.

11

CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 14 -Non-Cash Investing and Financing Activities

During the nine months ended March 31, 2008, the Company acquired $296,825 of equipment under capital leases.

Note 15 -Subsequent Event

On August 20, 2008 the stockholders of the Company sold their stock in the Company to EMRISE, a designer, manufacturer and marketer of electronic devices and communications equipment that operates in the United States, England, France and Japan. The purchase price includes $13,000,000 paid at closing, subject to adjustments for working capital and cash as of the closing date. In addition, EMRISE is obligated to issue promissory notes in the aggregate principal amount of an additional $2,000,000 and pay up to an additional $3,000,000 in cash if the operations of the Company meet certain operating income targets for one or both of the two twelve-month periods following the closing.

12

EX-99.2

Exhibit 99.2

Unaudited Condensed Consolidated Financial Statements

CUSTOM COMPONENTS, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheet

June 30, 2008

Assets
Current assets
Cash	$	935,908
Accounts receivable	2,234,043
Inventories	1,813,673
Income taxes receivable	141,405
Deferred tax asset	340,584
Prepaid expenses and other current assets	28,784
Total Current Assets	5,494,397
Property and equipment, net	939,759
Security Deposits	37,276
	$	6,471,432
Liabilities and Stockholder’s Equity
Current liabilities
Borrowings under line of credit	$	286,025
Current maturities of long term debt	4,743
Current maturities of capital lease obligations	158,102
Accounts payable	592,150
Accrued expenses	1,308,499
Due to stockholder	22,798
Total Current Liabilities	2,372,317
Long-term debt, net of current maturities	2,931
Capital lease obligations, net of current maturities	240,232
Deferred tax liability	119,176
Total Liabilities	2,734,656
Minority interest	738,279
Commitments and contingencies
Stockholder’s equity
Common Stock, no par value, 1,000 shares authorized 50 shares issued and outstanding	12,446
Retained earnings	2,986,051
Total stockholder’s equity	2,998,497
	$	6,471,432

See accompanying notes to unaudited condensed consolidated financial statements

Unaudited Condensed Consolidated Financial Statements

CUSTOM COMPONENTS, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Operations

For the three months ended June 30, 2008

Net sales	$	3,207,044
Cost of goods sold	2,504,827
Gross profit	702,217
Selling, general and administrative expenses	1,024,115
Operating loss	(321,898		)
Other income (expense)
Interest income	8,173
Interest expense	(17,054		)
Loss before income taxes and minority interest	(330,779		)
Benefit from income taxes	200,638
Loss before minority interest	(130,141		)
Minority interest, net of tax	34,532
Net Loss	$	(95,609	)

See accompanying notes to unaudited condensed consolidated financial statements

Unaudited Condensed Consolidated Financial Statements

CUSTOM COMPONENTS, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Cash Flow

For the three months ended June 30, 2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(95,609	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	39,332
Minority Interest	(34,534		)
Changes in assets and liabilities:
Accounts receivable	(598,917		)
Inventories	(228,858		)
Prepaid expenses and other assets	29,331
Accounts payable and accrued expenses	267,952
Total adjustments	(525,694		)
Net cash used in operating activities	(621,303		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(25,568		)
Net cash used in investing activities	(25,568		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt	(46,574		)
Repayment of loans from related parties	(123,764		)
Net cash used in financing activities	(170,338		)
Net change in cash	(817,209		)
Cash at beginning of period	1,753,117
Cash at end of period	$	935,908

See accompanying notes to unaudited condensed consolidated financial statements

Unaudited Condensed Consolidated Financial Statements

CUSTOM COMPONENTS, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Business Description and Summary of Significant Accounting Policies

Business Description

Custom Components, Inc. (“Custom”) and its subsidiary, Advanced Control Components, Inc. (“Advanced”), (collectively the “Company”), was founded in 1975 and 1982, respectively, by engineers and entrepreneurs.  The Company is a supplier of high performance solid-state radio frequency (“RF”) and microwave components and sub-systems serving military, aerospace, commercial and instrumentation markets.

Principles of Consolidation

The consolidated financial statements include the accounts of Custom and its 80% owned subsidiary, Advanced, after elimination of all significant intercompany transactions and balances.

Use of Estimates

The preparation of the 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are provided on the straight-line method over the estimated useful lives as follows:

Machinery and equipment	5 – 10 years
Furniture and fixtures	5 – 7 years
Computers and software	3 years
Leasehold improvements	lesser of lease term or estimated useful life

Certain equipment held under capital leases is classified as property and equipment and amortized using the straight-line method over its estimated life and the related obligations are recorded as liabilities.  Maintenance and repairs are charged to expense as incurred.  Expenditures for betterments and major renewals are capitalized.  Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposal is reflected in operations.

Unaudited Condensed Consolidated Financial Statements

Income Taxes

The Company accounts for income taxes under the asset and liability method as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 109 Accounting for Income Taxes.  Under the asset and liability method, deferred tax assets and liabilities are recognized based upon differences arising from the carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse.  The Company files a consolidated tax return.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change in tax rates is enacted.  A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Revenue Recognition

The Company recognizes revenue when the persuasive evidence of an arrangement exists, title and the risks and rewards of ownership of the products have been transferred to the customer, the sales price is fixed or determinable, and collectibility of the relevant receivable is reasonably assured.  For arrangements requiring multiple shipments of products over a period of time, revenue is recognized for each shipment when all of the aforementioned criteria have been met and the Company has met all of its relevant obligations contained in the sales contract.

Concentration of Cash Balance

At times during the year, the Company maintains balances in banks, which exceed the federally insured limit of $100,000.  These balances fluctuate during the year and the uninsured portion can vary greatly.  Management monitors regularly the financial condition of the banking institution, along with their balance of cash and cash equivalents in order to minimize this risk.

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, accounts payable, accrued liabilities and customer advances approximates their fair value because of the short-term maturities of these items.  The carrying value of borrowings under the line of credit agreement approximate their fair value because the related interest rate represents the market rate for comparable agreements.

Unaudited Condensed Consolidated Financial Statements

NOTE 2 – Inventories

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

	June 30,
	2008
Raw materials	$	1,022,430
Work-in-process	791,243
Total inventories	$	1,813,673

NOTE 3 – Property and Equipment

Property and equipment are summarized as follows:

	June 30,
	2008
Machinery and equipment	$	1,953,536
Furniture and fixtures	57,714
Computers and software	284,535
Leasehold improvements	102,491
	2,398,276
Less accumulated depreciation	1,458,517
Net property and equipment	$	939,759

NOTE 4 – Lines of Credit

The Company is party to an agreement with a bank for a line of credit, which expires on May 4, 2009, whereby it may borrow up to $1,500,000 at the bank’s prime rate, which was 5.25% at June 30, 2008 and is personally guaranteed by the stockholder of the Company.  The line is collateralized by inventory, accounts receivable, equipment and fixtures of the Company.  The agreement provides for certain financial covenants.

NOTE 5 – Related Parties

The Company has a note payable, with no repayment terms, due to the stockholder of Custom.  The note is unsecured and had a balance of $22,798 at June 30, 2008.  Interest on the note is set at a fixed rate of 9%.

EX-99.3

Exhibit 99.3

Unaudited Condensed Consolidated Proforma Financial Statements

On May 23, 2008, EMRISE Corporation (the “Company”) and its wholly-owned subsidiary, EMRISE Electronics Corporation (“EEC”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Charles S. Brand, Thomas P.M. Couse, Joanne Couse and Michael Gaffney (the “Sellers”) and Custom Components, Inc. (“CCI”) and Advanced Control Components, Inc. (“ACC”) pursuant to which EEC agreed to acquire CCI and its subsidiary, ACC.

On August 20, 2008, the Stock Purchase Agreement was amended pursuant to Amendment No. 1 to Stock Purchase Agreement (the “Amendment to Stock Purchase Agreement,” and collectively with the Stock Purchase Agreement, the “Purchase Agreement”) to, among other things, reduce the initial purchase price for all of the capital stock of both CCI and ACC to $12,400,000, subject to adjustments for working capital and net cash.  Additionally, pursuant to the terms of the Amendment to Stock Purchase Agreement, the Company is obligated to pay interest on a principal amount of $600,000 at a rate equal to the prime rate as reported in the Wall Street Journal on August 20, 2008 plus 1% for the period commencing on August 20, 2008 and ending on the later of November 18, 2008 or the actual date such interest payment is made.

The closing of the Purchase Agreement occurred on August 20, 2008.  Under the terms of the Purchase Agreement, EEC acquired all of the issued and outstanding shares of common stock of CCI and all of the issued and outstanding shares of common stock of ACC not owned by CCI (the “Acquisition”).  In addition to the purchase price, EEC issued Subordinated Secured Contingent Promissory Notes (the “Notes”) to each of Charles S. Brand, Thomas P.M. Couse, Joanne Couse and Michael Gaffney, in the amount of $1,584,000, $198,000, $198,000 and $20,000, respectively.  The Notes bear an interest rate per annum equal to the prime rate as reported in the Wall Street Journal plus 1%. In connection with entering into the Purchase Agreement, the Sellers and EEC entered in to a Security Agreement dated August 20, 2008 (the “Security Agreement”).  Pursuant to the terms of the Security Agreement, EEC’s obligations under the Purchase Agreement and the Notes are secured by a perfected subordinated lien on all the assets of ACC (subject to customary exceptions).  Additionally, the obligations due under the Purchase Agreement and the Notes are guaranteed by a Continuing Guaranty, dated August 20, 2008, executed by the Company for the benefit of the Sellers.

The unaudited pro forma condensed consolidated balance sheet as of June 30, 2008 and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2007 and the six months ended June 30, 2008 are based on the separate historical consolidated financial statements of the Company and CCI.  These unaudited pro forma condensed consolidated financial statements (the “pro forma financial statements”) reflect the acquisition and related events using the purchase method of accounting and apply the assumptions and adjustments described in the accompanying notes.  The unaudited pro forma condensed consolidated balance sheet as of June 30,

Unaudited Condensed Consolidated Proforma Financial Statements

2008 reflect the acquisition and related events as if they had been consummated on June 30, 2008.  The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2007 and the six months ended June 30, 2008 reflect the acquisition and related events as if they had been consummated on January 1, 2007, the beginning of the Company’s 2007 fiscal year.  CCI’s fiscal year end was June 30, 2007 and interim period end was June 30, 2008.  For clarity of presentation, such periods are presented consistent with those of the Company, as December 31, 2007 and June 30, 2008.

The pro forma adjustments are based upon available information and assumptions that management believes reasonably reflect the acquisition.  The pro forma financial statements are presented for informational purposes only and are not necessarily indicative of what the Company’s financial position or results of operations would have been had the Company completed the acquisition as of the dates indicated.  In addition, the pro forma financial statements do not purport to project the future financial position or operating results of the combined company.  You should read this information together with the following:

·accompanying notes to the pro forma financial statements;

·the separate historical audited financial statements of the Company as of and for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2008;

·the separate historical unaudited financial statements of the Company as of and for the three and six months ended June 30, 2008 included in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2008;

·the separate historical audited consolidated financial statements of CCI and its Subsidiary as of June 30, 2007 and March 31, 2008 and for the year ended June 30, 2007 and nine months ended March 31, 2008 included as Exhibit 99.1 to this current report; and

·the separate historical unaudited consolidated financial statements of CCI and its Subsidiary as of and for the three months ended June 30, 2008 included as Exhibit 99.2 to this current report.

We prepared the pro forma financial statements using the purchase method of accounting.  Accordingly, the total purchase price of $12.4 million is allocated to the net tangible and identifiable intangible assets acquired, based on their estimated respective fair values.  The allocation is dependent upon valuations and other studies that have not progressed to a stage where there is sufficient information to make a definitive allocation.  Accordingly, the purchase price allocation pro forma adjustments are preliminary and have been made using the Company’s best judgment given the information currently available solely for the purpose of providing the pro forma financial statements.  The final purchase price allocation and its effect on results of operations may differ significantly from the pro forma amounts included in the pro forma financial statements.  These amounts represent management’s best estimate as of the date of this Form 8-K/A.

In connection with the Company’s plan to integrate the operations of the Company, CCI and ACC, management of the Company anticipates that non-recurring expenditures will be incurred.  The Company is not able to determine the timing, nature and amount of these expenditures as of the date of this report.  However, these expenditures could affect the results of the combined company following the acquisition in the period in which they are recorded.  The pro forma financial statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the acquisition as they are non-recurring in nature and not factually supportable at the time that the pro forma financial statements were prepared.  In addition, the pro forma financial statements do not include the realization of any cost savings from the operating efficiencies or synergies resulting from the acquisition, nor do they include any potential incremental revenues and earnings that may be achieved with the combined capabilities of the companies.

Unaudited Condensed Consolidated Proforma Financial Statements

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of June 30, 2008

(in thousands)

				Custom
	EMRISE			Components		Pro Forma			Pro Forma
	Corporation			Inc, & Sub		Adjustments			Consolidated
Current assets
Cash and cash equivalents	$	1,942		$	936	$	(1,048	)(b)(h)	$	1,830
Accounts receivable, net	8,976			2,234		—			11,210
Inventories, net	12,059			1,814		—			13,873
Current deferred tax assets	333			340		—			673
Other current assets	1,578			170		—			1,748
Total current assets	24,888			5,494		(1,048		)	29,334
Property and equipment	6,697			940		601		(e)	8,238
Accumulated Depreciation	(4,360		)	—		—			(4,360		)
Property and equipment, net	2,337			940		601			3,878
Goodwill	13,078			—		4,651		(c)	17,729
Intangible assets, net	3,165			—		4,750		(d)	7,915
Deferred tax asset	610			—		—			610
Other assets	1,160			37		—			1,197
Total assets	$	45,238		$	6,471	$	8,954		$	60,663
Current liabilities
Accounts payable and accrued expenses	$	10,244		$	1,901	$	—		$	12,145
Notes payable (current portion)	500			23		(23		)(h)	500
Current portion of long-term debt	176			163		5,000		(f)	5,339
Other current liabilities	357			—		—			357
Total current liabilities	11,277			2,087		4,977			18,341
Lines of Credit	2,007			286		(286		)(h)	2,007
Long-term debt	5,250			243		6,594		(f)(g)	12,087
Notes payable	500			—		—			500
Deferred tax liabilities	904			119		—			1,023
Other liabilities	1,151			—		—			1,151
Total liabilities	21,089			2,735		11,285			35,109
Minority Interest	—			738		(738		)(a)	—
Stockholders’ equity
Common stock	126			5		(5		)(b)	126
Additional paid-in capital	44,560			7		1,398		(b)(g)	45,965
Accumulated deficit	(21,814		)	2,986		(2,986		)(a)(b)	(21,814		)
Accumulated other comprehensive income	1,277			—		—			1,277
Total stockholders’ equity	24,149			2,998		(1,593		)	25,554
Total liabilities & stockholders’ equity	$	45,238		$	6,471	$	8,954		$	60,663

See accompanying notes to unaudited pro forma condensed combined financial statements

Unaudited Condensed Consolidated Proforma Financial Statements

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Six Months Ended June 30, 2008

(in thousands, except per share data)

				Custom
	EMRISE			Components,			Pro Forma			Pro Forma
	Corporation			Inc. & Sub			Adjustments			Consolidated
Net sales	$	26,296		$	5,757		$	—		$	32,053
Cost of goods sold	16,898			4,390			104		(l)	21,392
Gross profit	9,398			1,367			(104		)	10,661
Selling, general and administrative	7,981			2,091			578		(k)(l)(m)	10,650
Engineering	1,446			—			—			1,446
Total operating expenses	9,427			2,091			578			12,096
Operating loss	(29		)	(724		)	(682		)	(1,435		)
Interest income	41			28			—			69
Interest expense	(1,188		)	(35		)	(657		)(i)(j)	(1,880		)
Other income (expense)	103			—			—			103
Total other income (expense)	(1,044		)	(7		)	(657		)	(1,708		)
Loss before taxes	(1,073		)	(731		)	(1,339		)	(3,143		)
Provision (benefit) for income taxes	80			(269		)	269		(n)	80
Net loss	$	(1,153	)	$	(462	)	$	(1,608	)	$	(3,223	)
Loss per share	$	(0.03	)							$	(0.08	)
Weighted average shares outstanding	38,254									38,254

See accompanying notes to unaudited pro forma condensed combined financial statements

Unaudited Condensed Consolidated Proforma Financial Statements

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2007

(in thousands, except per share data)

				Custom
	EMRISE			Components,			Pro Forma			Pro Forma
	Corporation			Inc. & Sub			Adjustments			Consolidated
Net sales	$	51,345		$	13,999		$	—		$	65,344
Cost of goods sold	33,995			6,889			209		(l)	41,093
Gross profit	17,350			7,110			(209		)	24,251
Selling, general and administrative	15,392			3,450			1,196		(k)(l)(m)	20,038
Engineering	2,792			—			—			2,792
Total operating expenses	18,184			3,450			1,196			22,830
Operating income (loss)	(834		)	3,660			(1,405		)	1,421
Interest income	155			84			—			239
Interest expense	(1,044		)	(85		)	(1,745		)(i)(j)	(2,874		)
Other income (expense)	529			—			—			529
Total other income (expense)	(360		)	(1		)	(1,745		)	(2,106		)
Income (loss) before taxes	(1,194		)	3,659			(3,150		)	(685		)
Provision (benefit) for income taxes	734			601			(565		)(n)	770
Net income (loss)	$	(1,928	)	$	3,058		$	(2,585	)	$	(1,455	)
Loss per share	$	(0.05	)							$	(0.04	)
Weighted average shares outstanding	38,176									38,176

See accompanying notes to unaudited pro forma condensed combined financial statements

Unaudited Condensed Consolidated Proforma Financial Statements

Note 1. Purchase Price Allocation

The following table reflects the allocation of the purchase price to the assets acquired and the liabilities assumed (in thousands):

Cash paid to seller, net of cash acquired	$	12,372
Additional cash paid for transaction costs	739
Total purchase price	13,111
Allocations:
Fair value of assets acquired:
Accounts receivable	2,234
Inventories	1,814
Property and equipment, net	1,541
Goodwill	4,651
Intangible assets, net	4,750
Other assets	547
Liabilities assumed
Accounts payable	(1,901		)
Other liabilities	(525		)
Net assets acquired	$	13,111

The allocation of the purchase price consideration paid at closing to the assets acquired and liabilities assumed will be based upon an appraisal of the fair market value of the acquired assets and liabilities assumed in accordance with FAS 141. The business acquired is a recognized leader in its industry, has had long-term relationships with its major vendors and customers, a history of increasing sales and earnings, and introduces a number of favorable strategic opportunities to the Company; accordingly, the Company believes that the excess of purchase price over net assets acquired is justified.

Note 2. Pro Forma Adjustments

Pro Forma Adjustments to Condensed Consolidated Balance Sheet

(a)To eliminate minority interest balance relating to the 80% ownership of ACC by CCI, which is now wholly-owned by the Company.

(b)Purchase accounting adjustments to adjust net assets acquired and liabilities assumed to fair value. Additionally, this adjustment records the $739,000 of cash paid related to transaction costs incurred as part of the acquisition.

(c)To record the estimated goodwill resulting from the acquisition.

(d)To record the estimated identifiable intangible assets acquired, which include trade name, covenant not to compete, backlog and customer relationships.

(e)To record the adjustment to estimated fair value of net assets acquired.

(f)To record debt incurred as a result of the acquisition.

(g)To record the debt discount related to warrants issued to the lenders associated with the acquisition debt.

(h)To record the extinguishment of existing ACC debt associated with the acquisition.

Unaudited Condensed Consolidated Proforma Financial Statements

Pro Forma Adjustments to Condensed Consolidated Statements of Operations

(i)To record the increase in interest expense associated with the additional borrowings to fund the acquisition of $13 million and to reverse the interest expense incurred by CCI associated with its line of credit that was extinguished at the acquisition date.

(j)To amortize the debt discount recorded in (g) above.

(k)To record the amortization of purchased intangible assets resulting from the acquisition.

(l)To record the additional depreciation expense related to purchased tangible assets adjusted to fair value at the acquisition date.

(m)To record stock option expense associated with the issuance of the Company’s stock options in connection with the acquisition.

(n)To adjust provision (benefit) for income taxes recorded by CCI in the periods presented, which would not be recorded by the combined company as a result of the anticipated tax losses of the combined company.