10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to

Commission File Number 1-10346

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.)

2530 Meridian Parkway

Durham, North Carolina 27713

(Address of principal executive offices) (Zip code)

(408) 200-3040

(Registrant’s telephone number, including area code)

611 Industrial Way, Eatontown, NJ 07724

(Former name, former address and former fiscal year, if changed since last report)

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

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

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

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

The number of shares outstanding of the Registrant’s common stock, $0.0033 par value, as of November 10, 2010 was 10,667,337.

EMRISE CORPORATION

TABLE OF CONTENTS

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)		2
Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2010 (unaudited)		3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)		4
Notes to Condensed Consolidated Financial Statements (unaudited)		6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4T.	CONTROLS AND PROCEDURES	41
PART II
OTHER INFORMATION
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 6.	EXHIBITS	45
SIGNATURES		47

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EMRISE CORPORATION

Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

	September 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,798		$	3,994
Accounts receivable, net of allowances for doubtful accounts of $151 at September 30, 2010 and $160 at December 31, 2009	5,035			6,059
Inventories	7,116			8,031
Current deferred tax assets	—			158
Prepaid and other current assets	1,912			841
Current assets of discontinued operations	—			6,368
Total current assets	19,861			25,451
Property, plant and equipment, net	859			987
Goodwill	4,935			2,878
Intangible assets other than goodwill, net	1,006			1,107
Deferred tax assets	509			308
Other assets	84			121
Noncurrent assets of discontinued operations	—			19,425
Total assets	$	27,254		$	50,277
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,466		$	2,734
Accrued expenses	5,086			5,232
Line of credit	—			5,156
Current portion of long-term debt, net of discount of $0 and $290	169			8,109
Notes payable to stockholders, current portion	56			348
Income taxes payable	—			604
Other current liabilities	329			370
Current liabilities of discontinued operations	—			6,994
Total current liabilities	9,106			29,547
Long-term debt	3,953			2,938
Deferred income taxes	315			144
Other liabilities	1,155			688
Noncurrent liabilities of discontinued operations	—			1,572
Total liabilities	14,529			34,889
Commitments and contingencies
Stockholders’ equity:
Preferred stock,$0.01 par value. Authorized 10,000,000 shares no shares issued and oustanding	—			—
Common stock,$0.0033 par value. Authorized 150,000,000 shares; 10,630,739 and 10,213,214 issued and outstanding at September 30, 2010 and December 31, 2009, respectively	128			126
Additional paid-in capital	44,035			43,480
Accumulated deficit	(29,440		)	(26,586		)
Accumulated other comprehensive loss	(1,998		)	(1,632		)
Total stockholders’ equity	12,725			15,388
Total liabilities and stockholders’ equity	$	27,254		$	50,277

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

1

EMRISE CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)
(in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net Sales	$	7,790		$	9,260		$	21,356		$	25,970
Cost of Sales	5,472			6,109			15,146			17,180
Gross profit	2,318			3,151			6,210			8,790
Operating expenses:
Selling, general and administrative	2,491			3,257			7,591			9,179
Engineering and product development	458			435			1,382			1,274
Employee transaction costs	872			—			872			—
Total operating expenses	3,821			3,692			9,845			10,453
Loss from operations	(1,503		)	(541		)	(3,635		)	(1,663		)
Other income (expense):
Interest income	36			18			83			87
Interest expense	(303		)	(742		)	(1,873		)	(3,066		)
Other, net	(285		)	(25		)	6			133
Gain on extinguishment of debt	450			—			450			—
Total other expense, net	(102		)	(749		)	(1,334		)	(2,846		)
Loss before income taxes	(1,605		)	(1,290		)	(4,969		)	(4,509		)
Income tax provision (benefit)	(208		)	215			(647		)	490
Loss from continuing operations	(1,397		)	(1,505		)	(4,322		)	(4,999		)
Discontinued operations:
Income from discontinued operations including gain (loss) on sale (see Note 3)	338			(312		)	2,225			8,366
Tax provision on discontinued operations	48			—			757			852
income (loss) from discontinued operations	290			(312		)	1,468			7,514
Net (loss) income	$	(1,107	)	$	(1,817	)	$	(2,854	)	$	2,515
Weighted average shares outstanding
Basic	10,319			10,213			10,256			10,213
Diluted	10,319			10,213			10,256			10,213
Earnings (loss) per share:
Basic
Continuing operations	$	(0.14	)	$	(0.15	)	$	(0.42	)	$	(0.49	)
Discontinued operations	$	0.03		$	(0.03	)	$	0.14		$	0.74
Net earnings (loss)	$	(0.11	)	$	(0.18	)	$	(0.28	)	$	0.25
Diluted
Continuing operations	$	(0.14	)	$	(0.15	)	$	(0.42	)	$	(0.49	)
Discontinued operations	$	0.03		$	(0.03	)	$	0.14		$	0.74
Net earnings (loss)	$	(0.11	)	$	(0.18	)	$	(0.28	)	$	0.25

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

2

EMRISE CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)
(in thousands)

									Accumulated
				Additional					Other
	Common Stock			Paid-in		Accumulated			Comprehensive
	Shares	Amount		Capital		Deficit			Loss			Total
Balance at December 31, 2009	10,213	$	126	$	43,480	$	(26,586	)	$	(1,632	)	$	15,388
Stock-based compensation	—	—		107		—			—			107
Stock issued to retire debt	418	2		448		—			—			450
Net loss and comprehensive loss	—	—		—		(2,854		)	(366		)	(3,220		)
Balance at September 30, 2010	10,631	$	128	$	44,035	$	(29,440	)	$	(1,998	)	$	12,725

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

3

EMRISE CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(in thousands)

	Nine Months Ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)	$	(2,854	)	$	2,515
Adjustments to arrive at net loss from continuing operations	(1,468		)	(7,514		)
Net loss from continuing operations	(4,322		)	(4,999		)
Reconciliation to net cash provided by operating activities:
Depreciation and amortization	341			414
Provision for doubtful accounts	53			28
Provision for warranty reserve	38			(165		)
Deferred taxes	128			(62		)
Loss on sale of assets	14			—
Gain on extinguishment of debt	(450		)	—
Amortization of deferred issuance costs	316			616
Amortization of debt discount	290			564
Stock-based expense	107			114
Change in fair value of common stock warrant	123			(369		)
Changes in assets and liabilities:
Accounts receivable	976			2,043
Inventories	916			(109		)
Prepaid and other assets	(1,350		)	(70		)
Accounts payable and accrued expenses	588			36
Operating cash flow used in continuing operations	(2,232		)	(1,959		)
Operating cash flow provided by discontinued operations	568			3,020
Net cash (used in) provided by operating activities	(1,664		)	1,061
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(33		)	(7		)
Investing cash flow used in continuing operations	(33		)	(7		)
Investing cash flow provided by discontinued operations including proceeds from sale of subsidiary operations, net of cash	17,749			10,213
Net cash provided by investing activities	17,716			10,206
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from lines of credit	28,888			42,301
Repayments of lines of credit	(34,044		)	(42,353		)
Repayments of long-term debt	(8,427		)	(10,675		)
Payments of notes to stockholders	(292		)	(418		)
Proceeds from exercise of stock options and warrants	—			7
Financing cash flow used in continuing operations	(13,875		)	(11,138		)
Financing cash flow used in discontinued operations	(107		)	(149		)
Net cash used in financing activities	(13,982		)	(11,287		)
Effect of exchange rate changes on cash	(266		)	775
Net increase in cash and cash equivalents	1,804			755
Cash and cash equivalents at beginning of period	3,994			3,001
Cash and cash equivalents at end of period	$	5,798		$	3,756

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

4

EMRISE CORPORATION

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)
(in thousands)

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through capital lease	$	112	$	52
Cumulative effect of change in accounting principle - reclassification of common stock warrants to liability upon adoption of EITF 07-5	$	—	$	473
Issuance of notes relating to ACC purchase adjustment	$	—	$	3,116
Stock issued to retire debt	$	450	$	—

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

5

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

EMRISE Corporation (the “Company”) designs, manufactures and markets proprietary electronic devices and communications equipment for aerospace, defense, industrial, and communications applications. The Company has operations in the United States (the “U.S.”), England and France.  The Company conducts its business through two operating segments: electronic devices and communications equipment. The subsidiaries within the electronic devices segment design, develop, manufacture and market electronic devices for defense, aerospace and industrial markets and operate out of facilities located in England.  The subsidiaries within the communications equipment segment design, develop, manufacture and market network access equipment, including network timing and synchronization products and operate out of facilities located in the U.S. and France.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and therefore do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the U.S. (“GAAP”).  The year-end balance sheet was derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.  The unaudited condensed consolidated financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of September 30, 2010 and the results of operations and cash flows for the related interim periods ended September 30, 2010 and 2009. However, these results are not necessarily indicative of results for any other interim period or for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its annual report on Form 10-K and Form 10-K/A for the year ended December 31, 2009 as filed with the SEC and the Company’s restated Form 10-K, Part II, Item 8 as of December 31, 2009 as filed with the SEC as an exhibit to Form 8-K on July 7, 2010.

In March of 2009, the Company sold substantially all of the assets related to the Digitran division of the Company’s wholly-owned subsidiary, EMRISE Electronics Corporation’s (“EEC”), and all of the issued and outstanding equity interests of EEC’s wholly-owned subsidiary, XCEL Japan, Ltd. (collectively the “Digitran Operations”).  The accompanying financial statements include the Digitran Operations as a discontinued operation for all periods presented.

In March of 2010, EMRISE completed the sale of substantially all of the assets of EEC’s subsidiary, RO Associates, to Massachusetts based Astrodyne Corporation.  In this Quarterly Report on Form 10-Q, we refer to the businesses of RO Associates as the “RO Operations” or “RO,” and we refer to the sale of the RO Associates’ assets as the “RO Transaction.”  The accompanying financial statements include the RO Operations as a discontinued operation for all periods presented.

On August 31, 2010, EMRISE completed the sale of all of the issued and outstanding shares of common stock of EEC’s subsidiary, Advanced Control Components, Inc. (“ACC”) and all of the issued and outstanding shares of common stock of Custom Components, Inc. (“CCI”) (collectively the “ACC Operations”).  The accompanying financial statements include the ACC Operations as a discontinued operation for all periods presented.

6

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Comprehensive (Loss) Income

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net (loss) income	$	(1,107	)	$	(1,817	)	$	(2,854	)	$	2,515
Other comprehensive income (loss):
Foreign currency translation adjustment	665			(113		)	(366		)	1,260
Comprehensive (loss) income	$	(442	)	$	(1,930	)	$	(3,220	)	$	3,775

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 and/or services being purchased and the purchase price.  The Company recognizes revenues when shipment of products has occurred or services have been rendered, no significant obligations remain on the part of the Company, and collectability is reasonably assured based on the Company’s credit and collections practices and policies.

The Company recognizes revenues from its U.S. communications equipment business unit at the point of shipment of those products.  An estimate of warranty cost is recorded at the time the revenue is recognized.  Product returns are infrequent and require prior authorization because sales are final and the Company tests its products for quality prior to shipment to ensure products meet the specifications of the binding purchase orders under which those products are shipped. Normally, when a customer requests and receives authorization to return a product, the request is accompanied by a purchase order for a repair or for a replacement product.

Revenue recognition for products and services provided by the Company’s subsidiaries in England 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 revenue deferred until each milestone defined in the contract is reached.  Production contracts provide for a specific quantity of products to be produced over a specific period of time.  Customers issue binding purchase orders or enter into binding agreements for the products to be produced.  The Company recognizes revenues on these orders as the products are shipped.  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.  An estimate of warranty cost is recorded at the time revenue is recognized.

The Company recognizes revenues for products sold by its subsidiary in France 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.  An estimate of warranty cost is recorded at the time revenue is recognized.

7

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenues from services such as repairs and modifications are recognized when the service is 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 contribute less than 5% of total revenue and, therefore, are considered to be immaterial to overall financial results.

Loss Per Share from Continuing Operations

Basic loss per share from continuing operations is computed by dividing net loss from continuing operations by the weighted average common shares outstanding during a period.  Diluted loss per share from continuing operations is based on the treasury stock method and includes the dilutive effect of stock options and warrants outstanding during the period.  Common share equivalents have been excluded where their inclusion would be anti-dilutive.  As a result of the losses from continuing operations incurred by the Company for the periods ended September 30, 2010 and 2009, the potentially dilutive common shares have been excluded from the loss per share computation because their inclusion would have been anti-dilutive.  The following table illustrates the computation of basic and diluted loss per share from continuing operations (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
NUMERATOR:
Net (loss) income	$	(1,107	)	$	(1,817	)	$	(2,854	)	$	2,515
Less: Net (loss) income from discontinued operations	290			(312		)	1,468			7,514
Net loss from continuing operations	$	(1,397	)	$	(1,505	)	$	(4,322	)	$	(4,999	)
DENOMINATOR:
Basic weighted average common shares outstanding	10,319			10,213			10,256			10,213
Diluted weighted average common shares outstanding	10,319			10,213			10,256			10,213
Basic and diluted loss per share from continuing operations	$	(0.14	)	$	(0.15	)	$	(0.42	)	$	(0.49	)

The following table shows the common stock equivalents that were outstanding as of September 30, 2010 and 2009, but were not included in the computation of diluted 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 have been anti-dilutive:

		Range of
	Number of	Exercise Price
	Shares	Per Share
Anti-dilutive common stock options:
As of September 30, 2010	647,423	$1.31 — $7.50
As of September 30, 2009	637,625	$1.53 — $7.50
Anti-dilutive common stock warrants:
As of September 30, 2010	8,334	$4.31 — $4.31
As of September 30, 2009	1,791,079	$1.80 — $6.49

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EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

Adopted

None.

Issued, but not adopted

Revenue Recognition.  In October 2009, the FASB issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables.  This update will allow companies to allocate consideration received for qualified separate deliverables using estimated selling prices for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable.  Additional disclosures discussing the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required.  The Company will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011.  The Company does not expect the adoption of this new revenue recognition guidance to have a material effect on its condensed consolidated financial statements.

NOTE 2 — LIQUIDITY

The Company reported a net loss from continuing operations for the three and nine months ended September 30, 2010 of $1.4 million and $4.3 million, respectively (including non-recurring employee and other transaction costs related to transaction activities of $1.2 million and $1.4 million for the three and nine months ended September 30, 2010, respectively).  The Company also reported negative working capital from continuing operations of $3.5 million at December 31, 2009.  As a result of the ACC Transaction and the resulting repayment of debt (see Note 11), the Company reported positive working capital from continuing operations of $10.8 million at September 30, 2010.  In combination with the proceeds received from the sale of the ACC Operations and the cash flow from operations, the Company believes it has sufficient funding to support its working capital requirements during the next 12 months.  The Company is still evaluating the funding requirements to support its business plan beyond 12 months.

The ability of the Company to support its business plan is dependent upon its ability to achieve profitable operations, manage costs and satisfy long-term debt service obligations, which will begin in the first quarter of 2012. Management believes the Company will be able to achieve profitability, manage costs and satisfy its debt service obligations.  However, if it is unable to do so, the Company may be required to sell additional assets or stock, complete a recapitalization, or consummate a merger transaction in order to continue operations.

If the Company’s net losses from operations continue, it will likely experience negative cash flow and if the Company is not able to attain, sustain or increase profitability on a quarterly or annual basis, it may not be able to continue operations.

To address these potential financing needs, the Company may need to explore a revised debt structure with its existing Lenders; additional or new financing with another lender or lenders; expedite the sale of additional assets to generate cash; complete a recapitalization of the Company, or consummate a merger or other transaction.  Successfully executing these strategies is uncertain and there are many risks associated with attempting to execute each, in addition to the risks and uncertainties of the short and long term impact of executing any of these strategies.   Failure to meet the Company’s financing requirements, if and when needed, would have an adverse effect on the Company’s operations and/or ability to do business after that date or could restrict its growth, limit the development of new products, hinder its ability to fulfill existing or future orders or negatively affect its ability to secure new customers or product orders.

9

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 — DISCONTINUED OPERATIONS

Digitran Operations

On March 20, 2009, the Company and EEC entered into an Asset and Stock Purchase Agreement (the “Digitran Purchase Agreement”) with Electro Switch Corp., a Delaware corporation (the “Buyer”) and ESC Worldwide, Inc., a Massachusetts corporation and subsidiary of Buyer (the “Stock Buyer”).  At the closing of the transaction pursuant to the Digitran Purchase Agreement on March 20, 2009, (i) the Buyer purchased from the Company and EEC substantially all of the assets related to EEC’s Digitran division, and (ii) the Stock Buyer purchased from EEC all of the issued and outstanding equity interests of its wholly-owned subsidiary, XCEL Japan, Ltd., for an aggregate purchase price of approximately $11,560,000 (the “Disposition”).  Under the terms of the Digitran Purchase Agreement, the Buyer was obligated to pay an additional $0.4 million in cash to EEC that was contingent upon net sales for the fiscal year ending December 31, 2009 related to the businesses that were sold pursuant to the Digitran Purchase Agreement exceeding $6,835,120.

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

The Digitran Purchase Agreement contains five year non-competition and non-solicitation provisions covering the Company, EEC and each of their respective affiliates.  In addition, the Company and EEC provided customary indemnification rights to the Buyer and Stock Buyer in connection with the Disposition.

The Company has classified the Digitran Operations, which was a component of its electronic devices segment, as a discontinued operation in the accompanying consolidated financial statements for all periods presented.

RO Operations

On March 22, 2010, EEC, a wholly-owned subsidiary of the Company, entered into and consummated the closing under an asset purchase agreement by and among Astrodyne Corporation (“Astrodyne”), RO, and EEC dated March 22, 2010 (the “RO Purchase Agreement”) pursuant to which Astrodyne purchased substantially all of the assets, properties, and business as a going concern of RO.  The assets of RO that were sold and transferred to Astrodyne include, but are not limited to, the following:  (i) machinery and equipment; (ii) raw materials, work-in-process, and finished goods relating to RO; (iii) tangible personal property, such as office furniture and equipment; (iv) advance payments, rental deposits, and other similar assets; (v) rights to payments from customers; (vi) books and records; (vii) rights under certain contracts; (viii) intangible rights and property, such as goodwill and rights in and to the name “RO Associates,” product names, trade names, trademarks, fictitious names and service marks; (ix) information and data; (x) unfilled purchase and sale orders; (xi) governmental authorizations relating to RO’s business and pending applications in connection with such authorizations; (xii) RO’s rights to its business of manufacturing and selling standard, high-density AC to DC, and DC to DC converters (the “Business”); and (xiii) all claims, causes of action, and judgments relating to the Business.  Such sale and transfer was deemed to be a disposition of an insignificant amount of assets by the Company and EEC. 

10

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RO retained certain rights, as fully described in the RO Purchase Agreement, including certain records, rights to benefits plans and insurance policies and proceeds, and certain assets.

As part of the transactions contemplated by the RO Purchase Agreement, Astrodyne assumed certain specified liabilities of RO pursuant to an Assignment and Assumption Agreement by and between Astrodyne and RO (the “Assignment and Assumption Agreement”).  Pursuant to the RO Purchase Agreement, EEC also agreed to guarantee the full, complete, and timely compliance with and performance of all agreements, covenants and obligations of RO in connection with the RO Transaction.

Astrodyne paid RO an aggregate purchase price for the RO Transaction of $1,000,000, plus the assumption of certain liabilities pursuant to the Assignment and Assumption Agreement, subject to a purchase price adjustment.  As additional consideration for Astrodyne’s entry into the RO Purchase Agreement and consummation of the contemplated transactions under such agreement, EEC and RO agreed that, for a certain period immediately following the closing date, they would not compete with the Business, perform services for any person in competition with the Business or solicit certain specified customers of the Business, or hire any employees of Astrodyne or its affiliates.

In connection with the Company’s divestiture of RO, which comprised a portion of the Company’s electronic devices segment, the Company incurred approximately $0.4 million in charges relating to legal, accounting and investment banking fees.  The Company does not expect to incur any additional costs associated with this transaction.  The Company incurred a loss on the sale of the RO assets of approximately $0.5 million.

The Company has classified RO, which is a component of its electronic devices segment, as discontinued operations in the accompanying consolidated financial statements for all periods presented.

ACC Operations

On June 7, 2010, EEC, a wholly-owned subsidiary of the Company, entered into a Stock Purchase Agreement by and among Aeroflex Incorporated, as buyer, and EEC, as seller, relating to the sale of all of the issued and outstanding shares of common stock of ACC and all of the issued and outstanding shares of common stock of CCI (the “ACC Purchase Agreement”), which was subsequently assigned by Aeroflex Incorporated to its subsidiary, Aeroflex/KDI, Inc. (“Aeroflex”).

On August 31, 2010, EEC completed its previously announced sale to Aeroflex of all of the issued and outstanding shares of ACC and all of the issued and outstanding shares of common stock of CCI (the “ACC Transaction”) pursuant to the Purchase Agreement.

The ACC Transaction consisted of an aggregate purchase price of $20 million in cash (the “Purchase Price”).  An amount equal to $0.8 million was placed in a 12-month escrow account pursuant to an agreement between Aeroflex and EEC to satisfy any indemnification claims.  Following the 12-month escrow period, any unused funds in the account will be returned to the Company.  In addition, the following amounts were satisfied out of the Purchase Price:  (i) $10.6 million to the Company’s senior lender, representing the aggregate amount of the indebtedness owed by EEC to the senior lender, which was satisfied by payment of $9.6 million in cash and by delivering a two-year, interest bearing note in the amount of $1 million described herein, and (ii) $3.1 million in cash and a $2.8 million, three-year, interest bearing note, both in satisfaction of the deferred purchase price and contingent payments owed by EEC to certain of ACC’s previous shareholders, Charles S. Brand, Thomas P.M. Couse, Joanne Couse and Michael Gaffney (collectively, the “Former Shareholders”), as further described in Note 10.  The Purchase Price was also adjusted by $0.8 million based on the estimated level of adjusted net working capital of ACC at the closing of the Transaction, subject to final determination pursuant to the procedures set forth in the Purchase Agreement.

11

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In connection with the ACC Transaction, the Company incurred approximately $1.4 million in closing costs including legal, accounting and investment advisory fees.  The Company does not expect to incur any additional costs associated with this transaction with the exception of any adjustment to working capital as mentioned above.  The Company incurred a loss on the ACC Transaction of approximately $0.3 million.

The Company has classified the ACC Operations, which was a component of its electronic devices segment, as discontinued operations in the accompanying unaudited consolidated financial statements for all periods presented.

The ACC Operations was a substantial portion of the Company’s assets in the electronic devices segment.  These assets contributed approximately $20 million or 37% of the Company’s net sales and approximately $3 million of the Company’s total operating income from continuing operations of $1.4 million for 2009.

The following table summarizes those components of the statements of operations for discontinued, which are associated with the electronic devices segment, for the three months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

	Three Months Ended									Three Months Ended
	September 30, 2010									September 30, 2009
	RO			ACC						Digitran			RO			ACC
	Operations			Operations			Total			Operations			Operations			Operations			Total
Net Sales	$	—		$	2,848		$	2,848		$	—		$	617		$	4,442		$	5,059
Income (loss) from operations	$	8		$	762		$	770		$	—		$	(781	)	$	699		$	(82	)
Other income (expense)	—			(69		)	(69		)	—			—			(50		)	(50		)
Loss on sale	(45		)	(318		)	(363		)	(132		)	—			—			(132		)
Provision for income taxes	—			48			48			—			—			48			48
Net (loss) income	$	(37	)	$	327		$	290		$	(132	)	$	(781	)	$	601		$	(312	)
(Loss) earnings per share:
Basic	$	(0.00	)	$	0.03		$	0.03		$	(0.01	)	$	(0.08	)	$	0.06		$	(0.03	)
Diluted	$	(0.00	)	$	0.03		$	0.03		$	(0.01	)	$	(0.08	)	$	0.06		$	(0.03	)
Weighted average shares outstanding:
Basic	10,319			10,319			10,319			10,213			10,213			10,213			10,213
Diluted	10,319			10,319			10,319			10,213			10,213			10,213			10,213

12

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes those components of the statements of operations for discontinued, which are associated with the electronic devices segment, for the nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

	Nine Months Ended									Nine Months Ended
	September 30, 2010									September 30, 2009
	RO			ACC						Digitran		RO			ACC
	Operations			Operations			Total			Operations		Operations			Operations			Total
Net Sales	$	442		$	13,546		$	13,988		$	1,478	$	1,934		$	14,898		$	18,310
Income (loss) from operations	$	190		$	3,129		$	3,319		$	178	$	(1,435	)	$	2,758		$	1,501
Other income (expense)	1			(281		)	(280		)	—		9			(123		)	(114		)
(Loss) gain on sale	(496		)	(318		)	(814		)	6,978		—			—			6,978
Provision for income taxes	—			757			757			707		—			145			852
Net (loss) income	$	(305	)	$	1,773		$	1,468		$	6,449	$	(1,426	)	$	2,490		$	7,513
(Loss) earnings per share:
Basic	$	(0.03	)	$	0.17		$	0.14		$	0.63	$	(0.14	)	$	0.24		$	0.74
Diluted	$	(0.03	)	$	0.17		$	0.14		$	0.63	$	(0.14	)	$	0.24		$	0.74
Weighted average shares outstanding:
Basic	10,256			10,256			10,256			10,213		10,213			10,213			10,213
Diluted	10,256			10,256			10,256			10,213		10,213			10,213			10,213

The following table reflects the major classes of assets and liabilities for discontinued operations as of December 31, 2009 (in thousands):

	RO			ACC		Total
Cash and cash equivalents	$	(24	)	$	52	$	28
Accounts receivable, net	431			2,189		2,620
Inventory, net	1,058			2,495		3,553
Prepaids and other current assets	31			136		167
Total current assets	1,496			4,872		6,368
Property, plant and equipment, net	—			1,326		1,326
Goodwill	—			12,755		12,755
Intangible assets other than goodwill, net	—			3,774		3,774
Other noncurrent assets	—			1,570		1,570
Total assets	$	1,496		$	24,297	$	25,793
Total current liabilities	$	745		$	6,249	6,994
Total long-term liabilities	$	—		$	1,572	1,572

13

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 — STOCK-BASED COMPENSATION

The Company has the following five stock option plans, which are described more fully in the Company’s Annual Report on Form 10-K for the year ending December 31, 2009:

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

·1993 Stock Option Plan;

·1997 Stock Incentive Plan;

·Amended and Restated 2000 Stock Option Plan; and

·2007 Stock Incentive Plan.

The Company’s board of directors does not intend to issue any additional options under the Employee Stock and Stock Option Plan, 1993 Stock Option Plan, 1997 Stock Incentive Plan or Amended and Restated 2000 Stock Option Plan.

Total stock-based compensation expense included in wages, salaries and related costs was $34,000 and $36,000 for the three months ended September 30, 2010 and 2009, respectively, and $107,000 and $114,000 for the nine months ended September 30, 2010 and 2009, respectively. These compensation expenses were charged to selling, general and administrative expenses. As of September 30, 2010, the Company had $128,000 of total unrecognized compensation expense related to stock option grants, which will be recognized over the remaining weighted average period of two years.

NOTE 5 — 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):

	September 30,		December 31,
	2010		2009
Raw materials	$	2,909	$	3,791
Work-in-process	1,760		1,792
Finished goods	2,447		2,448
Total inventories	$	7,116	$	8,031

NOTE 6 — OPERATING SEGMENTS

The Company has two reportable operating segments: electronic devices and communications equipment. The electronic devices segment manufactures and markets electronic power supplies, RF and microwave devices and subsystem assemblies. The electronic devices segment consists of the Company’s two electronic device subsidiaries located in England, both of which offer the same or similar products to the same or similar customers.  The communications equipment segment designs, manufactures and distributes network access products and timing and synchronization products.  The communications equipment segment consists of operating entities CXR Larus Corporation (“CXR Larus”), which is located in the U.S., and CXR Anderson Jacobson (“CXR AJ”), which is located in France, both of which offer the same or similar products to similar customers.  Both segments operate primarily in the U.S. and European markets, but they have distinctly different customers, design and manufacturing processes and marketing strategies.  Each segment has discrete financial information and a separate management structure.

14

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company evaluates performance based upon contribution margin of the segments and also upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at pre-determined prices negotiated between the individual segments.

During the first quarter of 2009, the Company sold its Digitran Operations, during the first quarter of 2010, the Company sold its RO Operations and during the third quarter of 2010, the Company sold its ACC Operations (see Note 3), all of which were part of its electronic devices segment.  These transactions resulted in differences in the basis of segmentation from the amounts disclosed in the Company’s unaudited condensed consolidated financial statements included in its quarterly report on Form 10-Q for the three and nine months ended September 30, 2010 and 2009.  In this report, the Digitran Operations, RO Operations and ACC Operations are reported as discontinued operations and are excluded from the electronics devices segment.  Therefore, prior period amounts have been adjusted to conform to this presentation.

Selected financial data for each of the Company’s operating segments reconciled to the consolidated totals is shown below (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net sales
Electronic devices	$	4,285		$	5,928		$	12,680		$	17,399
Communications equipment	3,505			3,332			8,676			8,571
Net sales from continuing operations	7,790			9,260			21,356			25,970
Discontinued operations	2,848			5,059			13,988			16,832
Total net sales	$	10,638		$	14,319		$	35,344		$	42,802
Operating loss
Electronic devices	$	301		$	895		$	988		$	3,061
Communications equipment	149			(307		)	(542		)	(1,225		)
Corporate and other	(1,953		)	(1,129		)	(4,081		)	(3,499		)
Operating loss from continuing operations	(1,503		)	(541		)	(3,635		)	(1,663		)
Discontinued operations	770			(82		)	3,319			1,324
Total operating loss	$	(733	)	$	(623	)	$	(316	)	$	(339	)

	September 30,		December 31,
	2010		2009
Total assets
Electronic devices	$	14,894	$	12,273
Communications equipment	8,060		8,439
Corporate and other	4,300		3,772
Total assets from continuing operations	27,254		24,484
Discontinued operations	—		25,793
Total assets	$	27,254	$	50,277

15

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 — GOODWILL

The following table reflects changes in our goodwill balances, by segment, for the nine months ended September 30, 2010 (in thousands):

	Electronic		Communications
	Devices		Equipment		Total
Balance at December 31, 2009	$	2,878	$	—	$	2,878
Allocation of goodwill to continuing operations	1,934		—		1,934
Foreign currency translation	123		—		123
Balance at September 30, 2010	$	4,935	$	—	$	4,935

The increase in goodwill during the nine months ended September 30, 2010 was the result of the Company completing the sale of the ACC Operations, which allowed it to place a final fair value on that business unit. As a result, in accordance with FASB guidance, the Company adjusted its allocation of goodwill at September 30, 2010 between continuing operations and discontinued operations resulting in an additional $1.9 million allocated to the portion of the electronic devices reporting unit remaining in continuing operations.

NOTE 8 — INCOME TAXES

The effective tax rate for the nine month period ended September 30, 2010 was different than the 34% U.S. statutory rate primarily because the Company’s foreign entities generate a tax obligation and related tax expense as a result of their net income, which cannot be offset by U.S. tax loss carryforwards.

The Company’s business is subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies.  The majority of the Company’s foreign subsidiaries have earnings and profits that are reinvested indefinitely.  However, under the Credit Agreement described in Notes 9 and 10, the foreign subsidiaries have issued guarantees on the Credit Agreement and, as a result, under IRC §956, have been deemed to have distributed these earnings to fund U.S. operations.  This has resulted in U.S. federal taxable income and an increase in U.S. tax liability, which has been reduced through utilization of available net operating loss carryforwards and foreign tax credits.  However, the Company has exhausted a significant portion of its net operating losses available to be carried forward into future periods and, as a result, any income from operations and/or gain on sales of assets could result in tax obligations.

The Company adopted FASB guidance for accounting for uncertainty in income taxes on January 1, 2007. The implementation of this guidance did not result in a material adjustment to the Company’s liability for unrecognized income tax benefits. At the time of adoption and as of September 30, 2010, the Company had recorded no net unrecognized tax benefits.  The Company currently has no open matters with tax authorities nor is it engaged in an examination by any tax authority.  The Company recognizes interest and penalties related to uncertain tax positions in interest expense and selling, general and administrative expense, respectively, in the condensed consolidated statements of operations and comprehensive income. No interest or penalties were recognized during the first nine months of 2010. As of September 30, 2010, the Company had nothing accrued for interest and penalties.

The Company files income tax returns in the United States federal jurisdiction, the United Kingdom and France, and in the state jurisdictions of California, Texas, Pennsylvania and New Jersey. The Company is no longer subject to United States federal and state tax examinations for years before 2006 and 2005, respectively, and is no longer subject to tax examinations for the United Kingdom and Japan for years prior to 2008, and for France for years prior to 2006.

16

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 — LINES OF CREDIT

The Company and certain of its subsidiaries, including EEC and CXR Larus, CCI, ACC and EMRISE Power Systems, Incorporated (collectively, the “Borrowers”), were parties to a Credit Agreement (as amended from time to time, the “Credit Agreement”) with GVEC Resource IV Inc., an affiliate of Private Equity Management Group LLC (“PEM Group”) (the “Lender”) providing for a Credit Agreement which included term loans and a revolving credit facility and was secured by accounts receivable, other rights to payment and general intangibles, inventories and equipment. The Credit Agreement included a revolving credit facility for up to $7 million, which expired on August 31, 2010 (the “Revolver”).

The closing of the ACC Transaction satisfied the Company’s obligations to the Lender under the Credit Agreement, as EEC and the Company used a portion of the net proceeds from the ACC Transaction to pay the obligations to the Lender pursuant to the ACC Purchase Agreement.  The entire outstanding principal balance of the Revolver was paid in full on August 31, 2010.  There are no outstanding borrowings on the Revolver as of September 31, 2010 and no further borrowings are available under the amended Credit Agreement.

On August 31, 2010, two of the Company’s UK subsidiaries, Pascall Electronics Limited (“Pascall”) and XCEL Power Systems, Ltd. (“XCEL”), each entered into a Receivables Finance Agreement with LloydsTSB Commercial Finance (“Lloyds”) (each, a “Receivables Finance Agreement” and, collectively, the “Receivables Finance Agreements”), pursuant to which Lloyds agreed to provide Pascall and XCEL a credit facility to support their UK operations in the aggregate principal amount of £2,75 million ($4.3 million based on the exchange rate on September 30, 2010), in each case at an advance rate of 85%, a discount charge of 2.5% above the base rate, and a service fee of 0.2%.  The Receivables Finance Agreement between Pascall and Lloyds is secured by the All Assets Debenture, dated August 31, 2010, Given by Pascall Electronics Limited in favour of Lloyds TSB Commercial Finance Limited (the “Pascall Debenture”) and the Receivables Finance Agreement between XCEL and Lloyds is secured by the All Assets Debenture, dated August 31, 2010, Given by XCEL Power Systems Limited in favour of Lloyds TSB Commercial Finance Limited (the “XCEL Debenture”).  The security interests given to Lloyds pursuant to the Pascall Debenture and the XCEL Debenture are senior to the security interests of both PEM and the former shareholders of ACC (the “Former Shareholders”).  The Receivables Finance Agreements bear interest at the base rate plus 2.5% on the outstanding balance and is paid monthly.

As of September 30, 2010, Pascall and XCEL had no outstanding borrowings under the Receivables Finance Agreements.

On September 20, 2010, the Company’s French subsidiary, CXR AJ entered into an accounts receivable financing arrangement with FACTOCIC S.A., a subsidiary of CIC Group (“CIC”) (the “CIC Agreement”), pursuant to which CIC agreed to provide CXR AJ a financing arrangement to support its French operations in the aggregate principal amount of €1.35 million ($1.8 million based on the exchange rate on September 30, 2010) at an advance rate of 90% of presented receivables.  The CIC Agreement bears interest at the three month EURIBOR plus 1.4%.

As of September 30, 2010, CXR AJ had no outstanding borrowings under the CIC Agreement.

17

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 — DEBT

The Credit Agreement, as described in Note 9, consisted of the Revolver (see Note 9 — “Lines of Credit) and three term loans: (i) a term loan in the original principal amount of $6 million (“Term Loan A”), (ii) a term loan in the original principal amount of $10 million (“Term Loan B”) and (iii) a term loan in the original principal amount of $3 million (“Term Loan C”).  Term Loan A was fully funded on November 30, 2007 while Term Loans B and C were fully funded on August 20, 2008 in connection with the acquisition of ACC. $6.8 million of Term Loan B and all of Term Loan C was repaid in March 2009, in connection with the sale of the Company’s Digitran Operations.  The remaining outstanding principal balance of Term Loan B of $2.1 million and $4.0 million of Term Loan A was repaid on August 31, 2010 in connection with the ACC Transaction.

On August 31, 2010, the Borrowers and the Lender entered into Amendment Number 16 to Loan Documents (“Amendment 16”), which amends the Credit Agreement as of such date.  Pursuant to Amendment 16, the Lender, among other things, (i) provided a term loan of up to $1 million to the Borrowers, as further described below, (ii) terminated and released all of the Lender’s security interests in the assets of ACC and CCI, (iii) provided consent to the consummation of the transactions contemplated by a Master Agreement, dated June 7, 2010, by and among the Company, EEC, CXR Larus, Pascall, XCEL, CXR AJ, and the Former Shareholders, (the “Master Agreement”), as further described below, (iv) waived approximately $0.2 million in amendment and waiver fees owing to the Lender, and (v) provided for the execution and delivery of the Deeds of Priority in favor of Lloyds with respect to the Receivables Finance Agreements provided by Lloyds to each of XCEL and Pascall, as further described in Note 9.

Also in connection with Amendment 16, the Lender accepted an Amended and Restated Term Loan A Note, dated August 31, 2010, which is a two-year, interest bearing secured note in the principal amount of $1.0 million (the “PEM Note”).  The PEM Note will be payable interest only on a monthly basis for the first 18 months, with equal monthly payments of principal plus interest due thereafter through maturity.  The PEM Note will be payable at a rate of 12.5% per annum during the first 12 months and 15.5% per annum thereafter until paid in full, plus any applicable default rate or late fees.

As part of the consideration for entering into the Credit Agreement in 2007, the Company issued warrants to purchase 775,758 shares of the Company’s common stock with a fair value of $1.5 million, which was accounted for as a discount to the Credit Agreement and was amortized over the term of the Credit Agreement.  In connection with the ACC Transaction, the Company repurchased these warrants, which resulted in a gain as the fair value of the warrants exceeded the purchase price.  See Note 11.

The changes to the Credit Agreement discussed above resulted in accounting for the transaction as an extinguishment of debt in the accompanying condensed consolidated financial statements.  As a result, the Company recorded a gain on extinguishment of debt of $0.5 million, which includes the gain on the warrant repurchase of $0.3 million, the reversal of the $0.2 million in fees previously owed to the Lender, and all costs associated with the amendment.

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

18

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Former Shareholder Debt

In connection with the ACC Transaction, pursuant to the Master Agreement, EEC used a portion of the proceeds from the sale of ACC to pay approximately half of the $6.6 million secured debt owed to the Former Shareholders, which amounts were owed in connection with deferred purchase price obligations, contingent notes and other related payments.  Such payments were made, in part, to repay Mr. Gaffney in full.  In addition, Mr. Brand also accepted $450,000 worth of the Company’s common stock as partial payment on his Amended Subordinated Contingent Note pursuant to a Stock Issuance Agreement, dated August 31, 2010, by and between Mr. Brand and the Company (the “Stock Issuance Agreement”).  See Note 12.

The Former Shareholders’ subordinated secured contingent promissory notes, which EEC issued in May 2008 and which were subsequently amended in November 2009, were amended by Amendment No. 2, effective August 31, 2010 (the “Amended Subordinated Contingent Notes”).  The Amended Subordinated Contingent Notes bear interest at the prime rate as reported in The Wall Street Journal plus 1% and mature on August 31, 2013 (“Maturity Date”).  Interest is payable quarterly beginning October 1, 2010 through the Maturity Date.  No principal payments are due until October 1, 2012, when quarterly principal payments in the amount of $0.2 million will be paid with the outstanding principal balance due at the Maturity Date.  As of September 30, 2010, the Company had $2.9 million outstanding principal balance under the Amended Subordinated Contingent Notes.

NOTE 11 — WARRANTS

In connection with entering into the Credit Agreement in 2007 (discussed in Notes 9 and 10), the Company issued a seven year warrant to PEM Group, an affiliate of the Lender, to purchase up to 775,758 shares of the Company’s common stock on a cash or cashless basis at an original exercise price of $4.13 per share, (which amount reflects the Company’s 1-for-3.75 reverse split of its common stock effective November 18, 2008).  The estimated fair value of the warrants was $1.5 million, which was calculated using the Black-Scholes pricing model.  The warrants were originally accounted for as debt discount and the adjustment resulting from the repricing of the warrants increased the debt discount, which is being amortized over the remaining life of the Credit Agreement.  The warrants were previously recorded in stockholder’s equity.

In February 2009, the warrants were amended and reissued in conjunction with an amendment to the Credit Agreement.  Pursuant to the Second Amendment to Loan Documents, the original warrant was divided into two warrants (each, a “Second Amended and Restated Warrant” and collectively, the “Second Amended and Restated Warrants”).  Each Second Amended and Restated Warrant covers 387,879 shares of the Company’s common stock (which amount reflects the Company’s 1-for-3.75 reverse split of its common stock effective November 18, 2008).  One of the Second Amended and Restated Warrants provides for an exercise price of $1.99 per share (which amount reflects the Company’s 1-for-3.75 reverse split of its common stock effective November 18, 2008).  The other Second Amended and Restated Warrant provides for an exercise price of $1.80 per share (which amount reflects the Company’s 1-for-3.75 reverse split of its common stock effective November 18, 2008 and a reduction from a post-split exercise price of $3.06 per share).

19

EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The exercise price and/or number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including certain issuances of securities at a price equal to less than the then current exercise price, subdivisions and stock splits, stock dividends, combinations, reorganizations, reclassifications, consolidations, mergers or sales of properties and assets and upon issuance of certain assets or securities to holders of the Company’s common stock, as applicable. On January 1, 2009, the Company adopted FASB guidance which affected how instruments indexed to an entity’s own stock are accounted for.  The adoption of the revised FASB guidance resulted in the reclassification of the PEM Group warrants from stockholders’ equity to liabilities, and required that the warrants be fair valued pursuant to “mark to market” provisions at each reporting period, with the changes in fair value recognized in the Company’s consolidated statement of operations.

At December 31, 2009, the Company had warrants subject to “mark to market” provisions outstanding to purchase 775,758 shares of common stock.  The Company computed the fair value of the warrants using a Black-Scholes valuation model.  The fair value of these warrants on December 31, 2009 was determined using the following assumptions:

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

During the three months ended September 30, 2010, the change in fair value of the warrants resulted in a $0.2 million decrease to other income (expense) in the unaudited condensed consolidated statement of operations and a corresponding increase to the warrant liability.  During the nine months ended September 30, 2010, the change in fair value of the warrants resulted in a $0.1 million decrease to other income (expense) in the unaudited condensed consolidated statement of operations and a corresponding increase to the warrant liability.

On August 31, 2010, the Company completed a transaction with PEM Group involving the repurchase of the two outstanding stock warrants for an aggregate purchase price of $100,000 pursuant to a Warrant Purchase Agreement by and among the Company and PEM Group that was entered into on August 30, 2010.  The Company recorded a gain on the repurchase of the warrants of $0.3 million as a result of the fair value of the warrants exceeding the purchase price.  The gain on the repurchase of the warrants was recorded as part of the gain on the extinguishment of debt in the unaudited condensed consolidated statements of operations.

NOTE 12 — STOCKHOLDER’S EQUITY

In connection with the ACC Transaction, Mr. Brand accepted $450,000 worth of the Company’s common stock as partial payment on his Amended Subordinated Contingent Note pursuant to the Stock Issuance Agreement.  See Note 10.  The Company issued Mr. Brand 417,525 shares of Company common stock pursuant to the Stock Issuance Agreement, which was calculated using a per share price of $1.07778.  The per share price was determined by applying a 15% premium to $0.9372, the volume weighted average price of the shares from June 8, 2010 through June 10, 2010, as required by the Master Agreement.

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EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 — FAIR VALUE MEASUREMENTS

FASB guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The fair value hierarchy distinguishes between three levels of inputs that may be utilized when measuring fair value as follows:

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2 — Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3 — Inputs that are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

As of January 1, 2009, the Company was required to apply updated FASB guidance to the derivative that is within the warrant that was issued as consideration for the Company’s Credit Agreement as discussed in Note 10 and, which was included as a discount on the Company’s long-term debt as of December 31, 2009.  The warrants were repurchased on August 30, 2010 (see Note 11).  The derivative was valued using the Black-Scholes model at August 30, 2010 to determine the value just prior to the repurchase.  The key inputs in the model at August 30, 2010 are as follows:

	August 30, 2010
Dividend yield	None
Expected volatility	101		%
Risk-free interest rate	0.50		%
Expected term	7 years
Stock price	$	0.74

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

	Warrant Liability
Beginning balance at December 31, 2009	$	292
Total expense recognized in earnings	123
Fair value of warrants repurchased	(415		)
Ending balance at September 30, 2010	$	—

Cash, accounts receivable, accounts payable and accrued expenses reflected in the unaudited condensed consolidated balance sheets are a reasonable estimate of their fair value due to the short term nature of these instruments.  The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit arrangements have variable rates that reflect currently available terms and

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EMRISE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

conditions for similar debt.  As of September 30, 2010, the Company did not have any financial assets and liabilities measured at fair value on a recurring basis that would be subject to the disclosure provisions of FASB guidance noted above.

NOTE 14 — CASUALTY LOSS

On September 27, 2010, the Company’s French subsidiary, CXR AJ, sustained significant damage to a portion of the building comprising its Abondant, France facility as a result of a fire.  The portion of the building damaged was primarily used for raw materials storage.  Virtually all of the raw materials that were on-site were destroyed in the fire.  CXR AJ’s main operating facility, which includes administration, finance, sales and engineering, was not damaged by the fire.  Immediately after the fire, CXR AJ’s insurer was on-site evaluating the damage.  CXR AJ maintains adequate insurance coverage for such events and it anticipates that any business interruption impact will be recoverable under the insurance policy.  The insurance company intends to provide an advance of funds in early November 2010, which will be applied towards replacement of the raw materials that were destroyed by the fire.  CXR AJ is still evaluating the impact of the fire on CXR AJ’s future operations, including the effects of this event on CXR AJ’s liquidity and cash flows.

As of September 30, 2010, the Company recorded an impairment for the raw materials inventory destroyed by the fire of €0.8 million (approximately $1.1 million at the September 30, 2010 exchange rate).  As the CXR AJ insurance policy covers this inventory amount and the insurance company has confirmed that this inventory is covered under replacement cost, the Company has recorded a receivable for the same amount as the impairment loss.

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

Cautionary Statement

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10-Q and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which discuss our business in greater detail.  This report and the following discussion contain forward-looking statements, which generally include the plans, objectives and expectations of management for future operations, including plans, objectives and expectations relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation:

·the ongoing revenues and profitability of the Company will be substantially reduced as a result of our sale of ACC;

·the potential negative impact on shipments and long-term contracts as a result of the fire loss at our French facility;

·our ability to successfully enter into strategic alliances or merge with or acquire other companies in the communications business segment;

·our ability to organically grow our European based aerospace and defense divisions;

·exposure to and impacts of various international risks including legal, business, political and economic risks associated with our international operations, also including the impact of foreign currency translation;

·our inability to compete directly against ACC, RO Associates or the Digitran Operations as a result of previous sales of such whereby we are prohibited under the relevant sales agreements;

·the projected growth or contraction in the electronic devices and communications equipment markets in which we operate;

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

·anticipated and unanticipated trends in our financial condition and results of operations;

·our ability to meet our working capital and other financing needs;

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

·our ability to secure long term purchase orders;

·our ability to deliver against existing or future backlog;

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

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

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

·our ability to successfully support the working capital needs of the Company;

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

·our ability to successfully compete against competitors that in many cases are larger than we, have access to significantly more working capital than we and have significant resources in comparison to us; and

·our ability to sell additional assets, complete a recapitalization, or consummate a merger or other type of transaction, if necessary.

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

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Any of the factors described above or in the “Risk Factors” sections contained in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Recent Developments

On September 27, 2010, the Company’s French subsidiary, CXR AJ, sustained significant damage to a portion of the building comprising its Abondant, France facility as a result of a fire.  The portion of the building damaged was primarily used for raw materials storage.  Virtually all of the raw materials that were on-site were destroyed in the fire.  CXR AJ’s main operating facility, which includes administration, finance, sales and engineering, was not damaged by the fire.  CXR AJ is still evaluating the impact of the fire on CXR AJ’s future operations, including the effects of this event on CXR AJ’s liquidity and cash flows.

On August 31, 2010, EEC completed the sale to Aeroflex of all of the issued and outstanding shares of ACC and all of the issued and outstanding shares of common stock of CCI (the “ACC Transaction”) pursuant to the June 7 ACC Purchase Agreement.

On June 7, 2010, EMRISE Electronics Corporation (“EEC”), a wholly-owned subsidiary of EMRISE Corporation (the “Company”), entered into a Stock Purchase Agreement by and among Aeroflex Incorporated (“Aeroflex”), as buyer, and EEC, as seller, relating to the sale of all of the issued and outstanding shares of common stock of Advanced Control Components, Inc. (“ACC”) and all of the issued and outstanding shares of common stock of Custom Components, Inc. (“CCI”) (collectively the “ACC Operations”) (the “ACC Purchase Agreement”), which was subsequently assigned by Aeroflex to its subsidiary, Aeroflex/KDI, Inc.

At the closing of the ACC Transaction, the Company received net proceeds, after closing costs, of $17.0 million.  The consideration for the ACC Transaction consisted of an aggregate purchase price of $20 million in cash (the “Purchase Price”).  An amount equal to $0.8 million was placed in a 12-month escrow account pursuant to an agreement between Aeroflex and EEC to satisfy any indemnification claims.  Following the 12-month escrow period, any unused funds in the account will be returned to the Company.  In addition, the following amounts were satisfied out of the Purchase Price:  (i) $10.6 million to the Company’s senior lender, which represents the aggregate amount of the indebtedness owed by EEC to the senior lender, which was satisfied by payment of $9.6 million in cash and by delivering a two-year interest bearing note in the amount of $1 million, and (ii) $3.1 million in cash and a $2.8 million, three-year interest bearing note, both in satisfaction of the deferred purchase price and contingent payments owed by EEC to certain of ACC’s previous shareholders, Charles S. Brand, Thomas P.M. Couse, Joanne Couse and Michael Gaffney (collectively, the “Former Shareholders”).  The Purchase Price was also adjusted by $0.8 million based on the estimated level of adjusted net working capital of ACC at the closing of the Transaction, subject to final determination pursuant to the procedures set forth in the Purchase Agreement.

In March of 2009, the Company sold substantially all of the assets related to the Digitran division of EEC, and all of the issued and outstanding equity interests of EEC’s wholly-owned subsidiary, XCEL Japan, Ltd. (collectively, the “Digitran Operations”).  In March of 2010, the Company completed the sale of substantially all of the assets of EEC’s subsidiary, RO Associates (the “RO Operations”).

The Company has classified the ACC Operations, RO Operations and Digitran Operations as discontinued and held for sale operations in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for all periods presented.

Business Description

We design, manufacture and market proprietary electronic devices and communications equipment for aerospace, defense, industrial, and communications applications. We have operations in the U.S., England, and France.  We organize our business in two operating segments: electronic devices and communications equipment.

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In the third quarter of 2010, our electronic devices segment contributed approximately 55% of overall net sales while the communications segment contributed approximately 45% of overall net sales. Our subsidiaries within our electronic devices segment design, develop, manufacture and market power supplies, radio frequency, or RF, and microwave devices for defense, aerospace and industrial markets.  Our subsidiaries within our communications equipment segment design, develop, manufacture and market network access equipment, including network timing and synchronization products, for communications applications in defense, public and private networks and industrial markets.

Within our electronic devices segment, we produce a range of power systems and RF and microwave devices.  This segment is primarily “project” driven with the majority of revenues being derived from custom products with long life cycles and high barriers to entry.  The majority of manufacturing and testing is performed in-house or through sub-contract manufacturers.  Our electronic devices are used in a wide range of military airborne, seaborne and land-based systems, and in-flight entertainment systems, including the latest next generation in-flight entertainment and communications, or IFE&C, systems — such as applications for mobile phone, e-mail and internet communications and real time, on-board satellite and broadcast TV — which are being installed in new commercial aircraft as well as being retrofitted into existing commercial aircraft.

Within our communications equipment segment, we produce a range of network access equipment, including network timing and synchronization products, for public and private communications networks.  This segment is “end user product” based with a traditional cycle of internally funded development and marketing prior to selling via direct and indirect sales channels.  Manufacturing is primarily outsourced.  Our communications equipment is used in a broad range of network applications primarily for private communications networks, public communications carriers, and also for utility companies and military applications, including homeland security.

Critical Accounting Policies

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

Revenue Recognition

We derive revenues from sales of electronic 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 and/or services 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 collectability 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.  An estimate of warranty cost is recorded at the time the revenue is recognized.  Product returns are infrequent and require prior authorization because our sales are final and we quality test our products prior to shipment to ensure the products meet the specifications of the binding purchase orders under which those products are shipped. Normally, when a customer requests and receives authorization to return a product, the request is accompanied by a purchase order for a repair or for a replacement product.

Revenue recognition for products and services provided by our subsidiaries in England 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 revenue deferred until each milestone defined in the contract is

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reached.  Production contracts provide for a specific quantity of products to be produced over a specific period of time.  Customers issue binding purchase orders or enter into binding agreements for the products to be produced.  We recognize revenues on these orders as the products are shipped.  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.  An estimate of warranty cost is recorded at the time revenue is recognized.

We recognize revenues for products sold by our subsidiary in France 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.  An estimate of warranty cost is recorded at the time revenue is recognized.

Revenues from services such as repairs and modifications are recognized when the service is 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 contribute less than 5% of total revenue and, therefore, are considered to be immaterial to overall financial results.

Product Warranty Liabilities

Generally, our products carry a standard one-year, limited parts and labor warranty.  In certain circumstances, we provide a two-year limited parts and labor warranty.  We offer extended warranties beyond two years for an additional cost to our customers.  Products returned under warranty typically are tested and repaired or replaced at our option.  Historically, we have not experienced significant warranty costs or returns.

We record a liability for estimated costs that we expect to incur under our basic limited warranties when product revenue is recognized.  Factors affecting our warranty liability include the number of units sold, the types of products involved, historical and anticipated rates of claim and historical and anticipated costs per claim.  We periodically assess the adequacy of our warranty liability accrual based on changes in these factors.

Inventory Valuation

Our electronic devices segment finished goods 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 be served promptly.  Our products consist of numerous electronic and other materials, which necessitate 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 cycle counts of inventories using an ABC inventory methodology, which groups inventory items into prioritized cycle counting categories, or we conduct 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 12 to 24 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 inventory that we determine to be obsolete, either in connection with the physical count or at other times of observation, are reserved for and subsequently written-off.

The electronic devices and communications equipment industries are 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.

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Foreign Currency Translation

We have foreign subsidiaries that together accounted for approximately 81% and 85% of our net revenues from continuing operations for the nine months ended September 30, 2010 and 2009, respectively, and 64% and 69% of our assets and 70% and 29% of our total liabilities as of September 30, 2010 and December 31, 2009, respectively.  In preparing our consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the functional currencies in which they keep their accounting records into U.S. dollars. This process results in exchange gains and losses which, under relevant accounting guidance, are included either within our statement of operations under the caption “other income (expense)” 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 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 U.S. dollars, then any gain or loss associated with the translation of these financial statements would be included in other income (expense) within our statement of operations.

If we dispose of any of our subsidiaries, 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 U.S. 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 to be each subsidiary’s local currency. Accordingly, we had cumulative translation losses of $2.0 million and $1.6 million that were included as part of accumulated other comprehensive loss within our balance sheets at September 30, 2010 and December 31, 2009, respectively. During the three months ended September 30, 2010 and 2009, we included translation gains of $0.7 million and losses of $0.1 million, respectively, under accumulated other comprehensive loss.  During the nine months ended September 30, 2010 and 2009, we included translation losses of $0.4 million and gains of $1.3 million, respectively, under accumulated other comprehensive loss.

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 U.S. dollar. During the third quarter of 2010 and 2009, these currencies primarily included the euro and the British pound sterling. Any future translation gains or losses could be significantly higher or lower than those we recorded for these periods.

A 2.5 million British pound sterling loan payable from one of our subsidiaries in England to EMRISE was outstanding as of September 30, 2010 ($4.0 million based on the exchange rate at September 30, 2010).  Exchange rate losses and gains on the long-term portion of 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 many factors including market conditions and operational performance of our acquired businesses.

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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.  Under FASB guidance related to goodwill and other intangible assets, we are required to analyze our goodwill for impairment issues at least annually 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 September 30, 2010, our reported goodwill totaled $4.9 million.

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Results of Operations

Overview

A majority of our products are customized to the unique specifications of our customers and are subject to variable timing of delivery.  Shipments of products can be accelerated or delayed due to many reasons including, but not limited to, exceeding or not meeting customer contract requirements, a change in customer timing or specifications, technology related issues and production related issues.  Comparability of our revenues and gross profit is difficult from period to period due to this product variability.  Exceptions to this include certain long-term military contracts and certain long-term telecommunications contracts.

Overall sales from continuing operations decreased 15.9% in the third quarter of 2010 as compared to the third quarter of 2009.  Our overall net sales of $7.8 million for the third quarter of 2010 reflected declines in net sales volume at our subsidiaries in England, which were partially offset by increases in net sales volume in both of our communications equipment subsidiaries.  The declines were also affected by the negative impact of exchange rates between the U.S. dollar and the British pound sterling and the euro.

Overall gross profit, as a percentage of sales, from continuing operations decreased to 29.8% in the third quarter of 2010 from 34.0% in the third quarter of 2009, but is consistent with second quarter 2010 gross profit, as a percentage of sales.  The decrease in gross profit, as a percentage of sales, from continuing operations from third quarter 2009 was primarily due to the decline in gross margins within our electronic devices segment and our French communications equipment subsidiary, which was partially offset by improvements in gross profit, as a percentage of sales, within our U.S. communications equipment subsidiary.

The following is a detailed discussion of our results of operations by business segment.  As a result of the sale of the Digitran Operations in March of 2009, the sale of the RO Operations in March of 2010 and the sale of the ACC Operations in August of 2010, for purposes of the following discussion and analysis, the Digitran, RO and ACC Operations have been removed from the prior period comparisons and are reported as discontinued operations for all periods presented.

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Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

Net Sales

	Three Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Electronic devices	$	4,285		$	5,928		$	(1,643	)	(27.7	)%
as % of net sales from continuing operations	55.0		%	64.0		%
Communications equipment	3,505			3,332			173			5.2	%
as % of net sales from continuing operations	45.0		%	36.0		%
Total net sales from continuing operations	7,790			9,260			(1,470		)	(15.9	)%
Discontinued operations	2,848			5,059
Total net sales	$	10,638		$	14,319

Electronic Devices Segment

The decrease in sales of our electronic devices segment in the third quarter of 2010 as compared to the third quarter of 2009 was primarily due to delays in the production schedule for the European fighter aircraft (Typhoon) and other military power supply projects.  Additionally, and equally as contributory, a significant portion of our business at our U.K. subsidiaries is transacted in U.S. dollars and was negatively impacted by exchange rate fluctuations, albeit to a lesser extent than previous periods, as the subsidiary’s local currency is the British pound sterling.  The translation impact of exchange rates remains an uncertainty and could negatively or positively impact our overall results in future periods.

We expect quarterly sales volumes in the fourth quarter of 2010 to be slightly higher than third quarter 2010 levels due to an expected increase in In Flight Entertainment (“IFE”) during the fourth quarter of 2010 as a result of orders received and a potential for a slight increase in military power supply orders.  The backlog for our electronic devices segment has increased significantly over the 2009 third quarter and the 2010 second quarter.

Communications Equipment Segment

The increase in net sales within our communications equipment segment in the third quarter of 2010 compared to 2009 was due to increased sales volume in both of our communications equipment subsidiaries.  Our French subsidiary has experienced increases in orders and resulting shipments for networking equipment, partially offset by the negative effect of exchange rate fluctuations between the U.S. dollar and the euro.  Net sales of test equipment at our U.S. communications equipment subsidiary remains strong as a result of our Federal Aviation Administration (“FAA”) and U.S. military contracts and is a primary reason for the increase in sales compared to the 2009 third quarter.  We also experienced an increase in net sales of our timing equipment over the prior year quarter.

Both of our communications equipment subsidiaries have a strong backlog going into the fourth quarter of 2010.  We continue to make efforts to increase our commercial business for our French operations and are experiencing the positive effects of those efforts.  We expect sales at our French subsidiary to be lower in the fourth quarter of 2010 as a result of the damage sustained from the fire at the end of September, as further described in Note 14 in the accompanying notes to unaudited condensed consolidated financial statements.  However, we are still evaluating the actual impact of the fire damage on our operations and our French subsidiary’s ability to ship product beginning in the first quarter of 2011.  We expect sales at our U.S. communications equipment subsidiary to be higher in the fourth quarter of 2010 compared to the third quarter of 2010 as a result of the ongoing contracts with the FAA and U.S. military and anticipated orders for network timing products.

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Gross Profit

Electronic Devices Segment

	Three Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Electronic devices	$	1,018		$	1,894		$	(876	)	(46.3	)%
as % of net sales from continuing operations	23.8		%	32.0		%
Communications equipment	1,300			1,257			43			3.4	%
as % of net sales from continuing operations	37.1		%	37.7		%
Total gross profit from continuing operations	2,318			3,151			(833		)	(26.4	)%
Total gross margin from continuing operations	29.8		%	34.0		%
Discontinued operations	1,288			2,170
Total gross profit	$	3,606		$	5,321

The decrease in gross profit, as a percentage of net sales, for our electronic devices segment from 32.0% in the third quarter of 2009 to 23.8% in the third quarter of 2010 is primarily due to the decrease in volume of sales, as discussed above, and also due to changes in product mix as a result of a shift between military and commercial sales and the negative impact of exchange rate fluctuations between the U.S. dollar and the British pound sterling.

We expect that gross profit, as a percentage of sales, in the fourth quarter of 2010 will be slightly above those levels achieved in the third quarter of 2010 as a result of expected changes in product mix to higher margin products and the improvement of sales volumes.

Communications Equipment Segment

The slight decrease in gross profit, as a percentage of sales, for our communications equipment segment from 37.7% in the third quarter of 2009 to 37.1% in the third quarter of 2010 is primarily the result of sales of test instruments, which carry a lower margin, and the negative impact of exchange rates between the U.S. dollar and the euro at our French subsidiary.  These decreases were partially offset by increases in gross profit, as a percentage of sales, at our U.S. communications equipment subsidiary primarily due to an increase in sales volume of higher margin network access timing products during the quarter.

We expect that gross profit, as a percentage of sales, for the fourth quarter of 2010 will remain relatively consistent with the gross profit, as a percentage, of sales experienced in the third quarter of 2010.

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Operating Expenses

	Three Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Selling, general and administrative	$	2,491		$	3,257		$	766		23.5	%
as % of net sales from continuing operations	32.0		%	35.2		%
Engineering and product development	458			435			(23		)	(5.3	)%
as % of net sales from continuing operations	5.9		%	4.7		%
Employee transaction costs	872			—			(872		)	100.0	%
Total operating expenses from continuing operations	3,821			3,692			(129		)	(3.5	)%
Discontinued operations	518			2,252
Total operating expenses	$	4,339		$	5,944

Selling, general and administrative expenses

General and administrative expenses decreased in the third quarter of 2010 as compared to 2009 primarily related to cost savings realized in the current year as a result of headcount reductions, salary reductions and facility closures in the prior year.  Partially offsetting these decreases, we experienced some minor increases in facility expense during the quarter due to slightly higher facility costs at our U.S. communications equipment subsidiary, CXR Larus Incorporated (“CXR Larus”).  CXR Larus and RO shared a facility prior to the sale of the RO Operations in March 2010, but subsequent to the sale, CXR Larus is burdened with the entire facility cost. The facility lease at CXR Larus ends in June of 2011, at which time we anticipate moving to a less expensive facility or negotiating a reduced rate at the current facility.  Additionally, during the quarter we incurred $0.3 million of costs associated with transaction activities, which are in excess of the costs we would have normally incurred if we had not been engaged in such transaction activities.

During the fourth quarter of 2010, we expect selling, general and administrative expense to be lower than the 2009 comparative period as we see the affects of the cost reduction actions taken in 2009, which included headcount reductions, office closures in France and California, and an overall decrease in the corporate budget as the majority of these non-recurring costs mentioned above are eliminated.  In addition, we have further reduced corporate general and administrative costs as a result of additional headcount reductions subsequent to the ACC Transaction, which will favorably impact our selling, general and administrative costs going forward.

Engineering and product development

The slight increase in engineering and product development costs is primarily due to an increase in investment in engineering and product development at our communications equipment subsidiaries to further develop our next generation network timing products and support existing products.

During the fourth quarter of 2010, engineering and product development expenses are expected to increase as we continue to invest in our existing products.

Employee transaction costs

As a result of the ACC Transaction, we incurred $0.9 million in employee transaction costs for employees of EMRISE, which remain in continuing operations and are non-recurring.  Effective September 1, 2010, the employment three corporate personnel, including our former Chief Financial Officer, was terminated, by mutual agreement, as part of a realignment of our corporate finance organization in connection with the significant changes caused by the sale of the ACC Operations and other divisions including the RO Operations and Digitran Operations.  Additionally, in consideration for forfeiting their change in control provision within their existing

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employment contracts, our Chief Executive Officer and our President and Chief Operating Officer both received a transaction payment.

Interest expense

Interest expense was $0.3 million for the three months ended September 30, 2010 compared to $0.7 million for the three months ended September 30, 2009 due to lower outstanding loan balances, the conclusion of amortizing the debt discount and deferred financing costs incurred in 2007 and the repayment of a substantial portion of our senior lender debt in August of 2010.  We expect quarterly interest expense for the fourth quarter of 2010 to decrease significantly from the comparable prior year period due to the substantially lower outstanding loan balances resulting from the repayment of debt from the proceeds of the ACC Transaction.

Other income and expense

We recorded other expense of $0.3 million in the third quarter of 2010 compared to $25,000 in the third quarter of 2009.  Other income and expense consists primarily of (i) fair value adjustments on warrants and (ii) short-term exchange rate gains and losses associated with the volatility of the U.S. dollar to the British pound sterling and euro on the current portion of certain assets and liabilities.  The change in the fair value of warrants during the three months ending September 30, 2010 resulted in expense of $0.2 million compared to expense of $0.1 million in the same period of 2009.  The remaining expense of $0.1 million for the third quarter of 2010 was predominantly related to short-term exchange rate losses.

Gain on extinguishment of debt

We recorded a gain on the extinguishment of debt of $0.5 million in the third quarter of 2010 as a result of the substantial modification of the credit facility with our senior lender.  On August 31, 2010, we repaid all except $1 million of debt owed to our senior lender and amended the Credit Agreement substantially for amount, terms, rates and repayment.  This resulted in the transaction being accounted for as an extinguishment of debt.  In connection with the transaction, the senior lender waived the deferred fees owed to them at maturity and agreed to sell the warrants held by their affiliate for $100,000.  The gain on extinguishment of debt includes the amount of fair value of the warrants that exceeded the purchase price of $0.3 million, the reversal of the deferred fees and the legal costs associated with the transaction.  See Note 11 in the accompanying notes to condensed consolidated financial statements.

Income tax provision (benefit)

Income tax benefit amounted to $0.2 million for the third quarter of 2010 compared to expense of $0.2 million for the third quarter of 2009.  We recorded income tax expense in the 2009 period primarily as a result of foreign income tax on foreign earned profits in Europe.  The income tax benefit in the third quarter of 2010 was related to the losses from continuing operations that we incurred during the quarter.

The Company has exhausted a significant portion of its net operating losses available to be carried forward into future periods and, as a result, any income from operations and/or gain on sales of assets could result in tax obligations in 2010.

(Loss) Income from discontinued operations

We reported net income from discontinued operations of $0.3 million during the third quarter of 2010 compared to a net loss of $0.3 million during the third quarter of 2009.  The income from discontinued operations included a $0.3 million loss on the sale of the ACC Operations, offset by operating profits for the ACC Operations.  The loss from discontinued operations for the third quarter of 2009 relates to a purchase price adjustment for the Digitran Operations, the operating losses incurred by the RO Operations, partially offset by operating income from the ACC Operations.

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Net (loss) income

We reported a net loss of $1.1 million in the third quarter of 2010 compared to $1.8 million in the third quarter of 2009.  Included in net loss in the third quarter of 2010 was an overall decline in net sales and gross profit from continuing operations, $0.9 million in non-recurring employee transaction costs and $0.3 million in non-recurring costs associated with transaction activities resulting in a loss from continuing operations of $1.4 million, offset by income on discontinued operations discussed above of $0.3 million.  We expect net loss from continuing operations for the fourth quarter of 2010 to improve as a result of additional headcount reductions and lower interest expense.

Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009

Net Sales

	Nine Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Electronic devices	$	12,680		$	17,399		$	(4,719	)	(27.1	)%
as % of net sales from continuing operations	59.4		%	67.0		%
Communications equipment	8,676			8,571			105			1.2	%
as % of net sales from continuing operations	40.6		%	33.0		%
Total net sales from continuing operations	21,356			25,970			(4,614		)	(17.8	)%
Discontinued operations	13,988			16,832
Total net sales	$	35,344		$	42,802

Electronic Devices Segment

The decrease in sales of our electronic devices in the nine months ending September 30, 2010 as compared to the same period of 2009 was primarily due to lower volume as a result of the global economic conditions, delays in the production schedule for the European fighter aircraft (Typhoon) and other military power supply projects.  Additionally, In Flight Entertainment (“IFE”) has experienced delays in orders and one large contract at one of our U.K. subsidiaries concluded in the second quarter of 2009.  Additionally, a significant portion of our business at U.K. subsidiaries is transacted in U.S. dollars and was negatively impacted by exchange rate fluctuations, as the subsidiary’s local currency is the British pound sterling.  The translation impact of exchange rates remains an uncertainty and could negatively or positively impact our overall results in future periods.

Communications Equipment Segment

During the nine months ending September 30, 2010, net sales within our communications equipment segment remained relatively consistent with the same period of 2009.  We experienced an increase in sales of test equipment to the FAA and the U.S. military at our U.S. communications equipment subsidiary, offset by a decrease in orders and shipments for network timing products at our French subsidiary due largely to economic impacts and spending reductions by the French Defense Ministry.

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Gross Profit

	Nine Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Electronic devices	$	3,101		$	5,787		$	(2,686	)	(46.4	)%
as % of net sales from continuing operations	24.5		%	33.3		%
Communications equipment	3,109			3,003			106			3.5	%
as % of net sales from continuing operations	35.8		%	35.0		%
Total gross profit from continuing operations	6,210			8,790			(2,580		)	(29.4	)%
Total gross margin from continuing operations	29.1		%	33.8		%
Discontinued operations	7,011			6,947
Total gross profit	$	13,221		$	15,737

Electronic Devices Segment

The decrease in gross profit, as a percentage of net sales, for our electronic devices segment from 33.3% in the nine months ending September 30, 2009, to 24.5% in the same period of 2010 is primarily due to the decrease in volume of sales as discussed above and also due to changes in product mix and the negative impact of exchange rate fluctuations between the U.S. dollar and the British pound sterling.

Communications Equipment Segment

The increase in gross profit, as a percentage of sales, for our communications equipment segment from 35.0% in the nine months ending September 30, 2009, to 35.8% in the same period of 2010 is primarily the result of increases in gross margins at our U.S. communications equipment subsidiary primarily due to an increase in sale of higher margin network timing products, partially offset by unfavorable impacts as a result of the changes in foreign currency exchange rates between the U.S. dollar and the euro.

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Operating Expenses

	Nine Months Ended						Variance
	September 30,						Favorable (Unfavorable)
(in thousands)	2010			2009			Dollar			Percent
Selling, general and administrative	$	7,591		$	9,179		$	1,588		17.3	%
as % of net sales from continuing operations	35.5		%	35.3		%
Engineering and product development	1,382			1,274			(108		)	(8.5	)%
as % of net sales from continuing operations	6.5		%	4.9		%
Employee transaction costs	872			—			(872		)	100.0	%
Total operating expenses from continuing operations	9,845			10,453			608			5.8	%
Discontinued operations	3,692			5,623
Total operating expenses	$	13,537		$	16,076

Selling, general and administrative expenses

The decrease in selling, general and administrative expenses is primarily the result of the cost reduction activities implemented in 2009, which included headcount reductions, office closures in France and California, and an overall decrease in corporate expenses.  Also contributing to the decrease was the impact of the headcount reductions in the first half of 2009, which resulted in employee termination costs that were not present in the nine months ending September 30, 2010.  These decreases were offset slightly by CXR Larus absorbing all of the facility costs at its location in the second and third quarter of 2010 where it had previously shared costs with the RO Operations.  However, selling, general and administrative costs, as a percentage of sales, remained relatively consistent with the current year period reflecting certain costs for consulting, legal and audit of approximately $0.5 million that will not recur in future periods.  We have made additional headcount reductions for our corporate headquarters as a result of the ACC Transaction.

Engineering and product development

The increase in engineering and product development costs is primarily due to communications equipment subsidiaries related to development of upgrades and enhancements to our next generation network timing products and enhancements of existing products.

Employee transaction costs

As a result of the ACC Transaction, we incurred $0.9 million in employee transaction costs for employees of EMRISE, which remain in continuing operations and are non-recurring.  Effective September 1, 2010, the employment of three corporate personnel, including our former Chief Financial Officer, was terminated, by mutual agreement, as part of a realignment of our corporate finance organization in connection with the significant changes caused by the sale of the ACC Operations and other divisions, including the RO Operations and Digitran Operations.  Additionally, in consideration for forfeiting their change in control provision within their existing employment contracts, our Chief Executive Officer and our President and Chief Operating Officer both received a transaction payment.

Interest expense

Interest expense was $1.9 million for the nine months ending September 30, 2010 compared to $3.1 million for the nine months ending September 30, 2009 due to substantially lower outstanding loan balances.  Additionally, in the nine months ending September 30, 2009, we accelerated the amortization of deferred financing costs and debt discount in the amount of $0.5 million associated with the partial repayment of our Term Loan B, which was absent in the same period of 2010.  Included in interest expense in the nine months ending

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September 30, 2010 was $0.6 million of non-cash amortization of deferred financing costs and non-cash amortization of debt discount compared to $1.2 million in the same period of 2009.

Other income and expense

We recorded other income of $6,000 in the nine months ending September 30, 2010 compared to $0.1 million in the same period of 2009.  Other income and expense consists primarily of (i) fair value adjustments on warrants and (ii) short-term exchange rate gains and losses associated with the volatility of the U.S. dollar to the British pound sterling and euro on the current portion of certain assets and liabilities.  The change in the fair value of warrants during the nine months ending September 30, 2010 resulted in expense of $0.1 million compared to income of $0.4 million in the same period of 2009.  The remaining income of $0.1 million for the nine months ending September 30, 2010 was predominantly related to short-term exchange rate gains.

Gain on extinguishment of debt

We recorded a gain on the extinguishment of debt of $0.5 million in the third quarter of 2010 as a result of the substantial modification of the credit facility with our senior lender.  On August 31, 2010, we repaid all except $1 million of debt owed to our senior lender and amended the Credit Agreement substantially for amount, terms, rates and repayment.  This resulted in the transaction being accounted for as an extinguishment of debt.  In connection with the transaction, the senior lender waived the deferred fees owed to them at maturity and agreed to sell the warrants held by their affiliate for $100,000.  The gain on extinguishment of debt includes the amount of fair value of the warrants that exceeded the purchase price of $0.3 million, the reversal of the deferred fees and the legal costs associated with the transaction.  See Note 11 in the accompanying notes to condensed consolidated financial statements.

Income tax provision (benefit)

Income tax benefit amounted to $0.6 million for the nine months ending September 30, 2010 compared to expense of $0.5 million for the same period of 2009.  We recorded income tax expense in the 2009 period primarily as a result of foreign income tax on foreign earned profits in Europe.  The income tax benefit in the 2010 period was related to the losses from continuing operations that we incurred during 2010.

(Loss) Income from discontinued operations

In connection with the sale of the RO Operations on March 20, 2010 and the sale of the ACC Operations on August 31, 2010, we reported income from discontinued operations of $1.5 million (net of tax of $0.8 million) during the nine months ending September 30, 2010, which includes a $0.5 million loss on the sale of the RO Operations and a $0.3 million loss on the sale of the ACC Operations, offset by $1.9 million in operating income from those subsidiaries.  We reported income from discontinued operations of $7.5 million during the nine months ending September 30, 2009, which includes a $7.2 million gain on the sale of the Digitran Operations.

Net income (loss)

We reported a net loss of $2.9 million in the nine months ending September 30, 2010 and net income of $2.5 million in the same period of 2009.  Included in net loss in the 2010 period was an overall decline in net sales and gross profit from continuing operations, $0.9 million in non-recurring employee transaction costs, $0.5 million in non-recurring costs associated with transaction activities and $1.9 million of interest expense, which were partially offset by $0.5 million gain on extinguishment of debt and $1.5 million of income from discontinued operations, discussed above.

Liquidity and Capital Resources

In making an assessment of our liquidity, we believe that the items in our financial statements that are most relevant to our ongoing operations are working capital, cash generated from operating activities and cash available from financing activities.  We fund our daily cash flow requirements through funds provided by

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operations and through borrowings under our various lines of credit.  Working capital from continuing operations was $10.8 million at September 30, 2010 as compared to negative $3.5 million at December 31, 2009.  The increase in working capital was the result of the repayment of substantially all of the debt owed to GVEC Resource IV Inc. (“Lender”) and an increase in cash balances from the proceeds of the ACC Transaction.  At September 30, 2010 and December 31, 2009, we had accumulated deficits of $29.4 million and $26.6 million, respectively, and cash and cash equivalents of $5.8 million and $4.0 million, respectively.

Net cash used in operating activities during the nine months ended September 30, 2010 totaled $1.7 million.  Significant non-cash adjustments to our net loss for 2010 include (i) the amortization of debt discount and amortization of deferred financing costs which, on a combined basis, totaled $0.6 million, both of which are non-cash components of interest expense associated with our Credit Agreement, and (ii) depreciation and amortization expense which totaled $0.8 million.  The primary significant use of cash associated with operating activities during the nine months ending September 30, 2010 was an increase in prepaid and other assets by approximately $1.4 million primarily associated with a receivable recorded for insurance recoveries from the fire at CXR AJ.  The primary sources of cash associated with operating activities during the nine months ending September 30, 2010 included a decrease in accounts receivable, which decreased by $1.0 million, due primarily to steady collections on sales and lower sales in 2010, a decrease in inventory of $0.9 million primarily due to the impairment of raw materials inventory destroyed in the fire at CXR AJ, and an increase in accounts payable and accrued expenses of $0.6 million primarily related to transaction costs accrued at the time of the ACC Transaction.

Cash generated from our investing activities during the nine months ending September 30, 2010 totaled $17.7 million. This amount consisted primarily of net cash proceeds generated by the March 2010 sale of the RO Operations and the August 2010 sale of the ACC Operations.

Cash used in financing activities during the nine months ending September 30, 2010 totaled $14.0 million, which was primarily from the repayment of $9.5 million of debt owed to the Lender and $3.1 million owed to the Former Shareholders.

At September 30, 2010, we had total debt obligations of $4.2 million.  Total debt includes a term loan to the Lender of $1.0 million, notes payable to stockholders of less than $0.1 million, capital lease obligations of $0.3 million and notes payable to the Former Shareholders of $2.8 million, the current portion of which loans and obligations totaled $0.2 million.

On August 31, 2010, two of our UK subsidiaries, Pascall Electronics Limited (“Pascall”) and XCEL Power Systems, Ltd. (“XCEL”), each entered into a Receivables Finance Agreement with Lloyds (each, a “Receivables Finance Agreement” and, collectively, the “Receivables Finance Agreements”), pursuant to which Lloyds agreed to provide Pascall and XCEL a credit facility to support their UK operations in the aggregate principal amount of £2,75 million ($4.3 million based on the exchange rate on September 30, 2010), in each case at an advance rate of 85%, a discount charge of 2.5% above the base rate, and a service fee of 0.2%.  The Receivables Finance Agreements bear interest at the base rate plus 2.5% on the outstanding balance and is paid monthly.

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As of September 30, 2010, Pascall and XCEL had no outstanding borrowings under the Receivables Finance Agreements.

On September 20, 2010, our French subsidiary, CXR Anderson Jacobson (“CXR AJ”) entered into a Factoring Agreement with FACTOCIC S.A., a subsidiary of CIC Group (“CIC”) (the “CIC Agreement”), pursuant to which CIC agreed to provide CXR AJ a financing arrangement to support its French operations in the aggregate principal amount of €1.35 million ($1.8 million based on the exchange rate on September 30, 2010) at an advance rate of 90% of presented trade receivables.  The CIC Agreement bears interest at the three month EURIBOR plus 1.4%.

As of September 30, 2010, CXR AJ had no outstanding borrowings under the CIC Agreement.

Our backlog from continuing operations was $18.6 million as of September 30, 2010 as compared to $16.9 million as of December 31, 2009. 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. Our backlog as of September 30, 2010 was approximately 86% 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 14% related to our communications equipment business, which business tends to deliver standard or modified standard products from stock as orders are received. We believe that the majority of our current backlog will be shipped within the next 12 months.  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.

Credit Agreement

EMRISE (including each of its direct subsidiaries), are parties to a Credit Agreement, as amended, with the Lender, providing for a Credit Agreement in the aggregate amount of $26 million.  As of September 30, 2010, we owed a total of $1.0 million under the terms of the Credit Agreement.  All references to the Credit Agreement herein refer to the Credit Agreement as amended.

The Credit Agreement consisted of the Revolver and three term loans (i) a term loan in the original principal amount of $6 million (“Term Loan A”), (ii) a term loan in the original principal amount of $10 million (“Term Loan B”) and (iii) a term loan in the original principal amount of $3 million (“Term Loan C”).  Term Loan A was fully funded on November 30, 2007 while Term Loans B and C were fully funded on August 20, 2008 in connection with the acquisition of ACC. $6.8 million of Term Loan B and all of Term Loan C was repaid in March 2009, in connection with the sale of the Digitran Operations.  The remaining outstanding principal balance of Term Loan B of $2.1 million and $4.0 million of Term Loan A was repaid on August 31, 2010 in connection with the ACC Transaction.

On August 31, 2010, the Borrowers and the Lender entered into Amendment Number 16 to Loan Documents (“Amendment 16”), which amends the Credit Agreement as of such date.  Pursuant to Amendment 16, the Lender, among other things, (i) provided a term loan of up to $1 million to the Borrowers, (ii) terminated and released all of the Lender’s security interests in the assets of ACC and CCI, (iii) provided consent to the consummation of the transactions contemplated by a Master Agreement, dated June 7, 2010, by and among the Company, EEC, CXR Larus, Pascall, XCEL, CXR AJ, and the Former Shareholders, (the “Master Agreement”), as further described below, (iv) waived approximately $0.2 million in amendment and waiver fees owing to the Lender, and (v) provided for the execution and delivery of the Deeds of Priority in favor of Lloyds with respect to the Receivables Finance Agreements provided by Lloyds to each of XCEL and Pascall.

Also in connection with Amendment 16, the Lender accepted an Amended and Restated Term Loan A Note, dated August 31, 2010, which is a two-year interest bearing secured note in the principal amount of $1.0 million (the “PEM Note”).  The PEM Note will be payable interest only on a monthly basis for the first 18

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months, with equal monthly payments of principal plus interest due thereafter through maturity.  The PEM Note will be payable at a rate of 12.5% per annum during the first 12 months and 15.5% per annum thereafter until paid in full, plus any applicable default rate or late fees.

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

Former Shareholder Debt

The Former Shareholders’ subordinated secured contingent promissory notes, which EEC issued in May 2008 and which were subsequently amended in November 2009, were amended by Amendment No. 2, effective August 31, 2010 (the “Amended Subordinated Contingent Notes”).  The Amended Subordinated Contingent Notes bear interest at the prime rate as reported in The Wall Street Journal plus 1% and mature on August 31, 2013 (the “Maturity Date”).  Interest is payable quarterly beginning October 1, 2010 through the Maturity Date.  No principal payments are due until October 1, 2012, when quarterly principal payments in the amount of $0.2 million will be paid with the outstanding principal balance due at the Maturity Date.  As of September 30, 2010, the Company had $2.9 million outstanding principal balance under the Amended Subordinated Contingent Notes.

Liquidity

In combination with the net cash proceeds of the sale of the ACC Operations and the cash flow from operations, we believe we have sufficient funding to support our working capital requirements during the next 12 months.  We are still evaluating the funding requirements to support our business plan beyond 12 months.

Our ability to support our business plan is dependent upon our ability to achieve profitable operations, manage costs and satisfy long-term debt service obligations, which will begin in the first quarter of 2012. Management believes we will be able to achieve profitability, manage costs and satisfy our debt service obligations.  However, if we are unable to do so, we may be required to sell additional assets or stock, complete a recapitalization, or consummate a merger transaction in order to continue operations.

If our net losses from operations continue, we will likely experience negative cash flow and if we are not able to attain, sustain or increase profitability on a quarterly or annual basis, we may not be able to continue operations.

To address these potential financing needs, we may explore a revised debt structure with our existing lenders; additional or new financing with another lender or lenders; expedite the sale of additional assets to generate cash; complete a recapitalization, or consummate a merger or other transaction.  Successfully executing these strategies is uncertain and there are many risks associated with attempting to execute each, in addition to the risks and uncertainties of the short and long term impact of executing on any of these strategies.   Failure to meet our financing requirements, if and when needed, would have an adverse effect on our operations and/or ability to do business after that date or could restrict our growth, limit the development of new products, hinder our ability to fulfill existing or future orders or negatively affect our ability to secure new customers or product orders.

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Effects of Inflation

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

Impacts of New Accounting Pronouncements

Revenue Recognition.  In October 2009, the Financial Accounting Standards Board (“FASB”) issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables.  This update will allow companies to allocate consideration received for qualified separate deliverables using estimated selling prices for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable.  Additional disclosures discussing the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required.  We will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011.  We are still evaluating the impact, if any, of the adoption of this new revenue recognition guidance on our condensed consolidated financial statements.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4T.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on an evaluation of our disclosure controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of September 30, 2010, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective, because of the four material weaknesses set forth below that were identified as part of our evaluation of the effectiveness of our internal controls over financial reporting at December 31, 2009.

Summary of Material Weaknesses

Set forth below is a summary of the various significant deficiencies which caused management to conclude that we had four material weaknesses.

(1) We did not effectively implement comprehensive entity-level internal controls, as evidenced by the following control deficiencies:

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· Entity Level Internal Control Evaluation. We did not formally consider entity-wide controls that are pervasive across our company when considering whether control activities are sufficient to address identified risks.

· Fraud Considerations. We did not conduct regular formalized assessments to consider risk factors that influence the likelihood of someone committing a fraud and the impact of a fraud on our financial reporting.

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

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

· Information Technology. We did not have sufficient information technology controls, where applicable, designed and implemented to support the achievement of financial reporting objectives.

· Ongoing and Separate Evaluations. We did not effectively create and maintain effective evaluations on the progress of our remediation efforts nor the constant evaluations of the operating effectiveness of our internal controls over financial reporting.

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

(2) We did not maintain effective controls over changes to critical financial reporting applications and over access to these applications and related data, as evidenced by the fact that certain of our personnel had unrestricted access to various financial application programs and data beyond the requirements of their individual job responsibilities. This control deficiency could result in a material misstatement of significant accounts or disclosures, including those described above, that could result in a material misstatement of our interim or annual consolidated financial statements that would not be prevented or detected.

(3) We did not maintain a sufficient level of information technology personnel to execute general computing controls over our information technology structure, which include the implementation and assessment of information technology policies and procedures. This control deficiency did not result in an audit adjustment to our 2010 interim or 2009 annual consolidated financial statements, but could result in a material misstatement of significant accounts or disclosures, which would not have been prevented or detected.

(4) We are a relatively complex company with operations conducted in multiple countries, multiple currencies and multiple languages. We have divested four separate operations in the past 18 months, acquired a large subsidiary during the same time, and we are in the process of divesting additional assets in order to repay our current obligations. All of these transactions give rise to complex accounting and tax treatments. Most recently, we have been concentrating our efforts in securing amendments to our current Credit Agreement and ensuring adherence to milestones set forth in our most recent Credit Agreement amendment. Our finance team is a relatively small but experienced staff. Although we believe the accounting staff are qualified to perform their functions, due to reasons above, the quantity of staff may be insufficient to deal with the work load and complexities created, which could result in material misstatements to our financial statements.

Remediation of Internal Control Deficiencies

Through the efforts of management, external consultants and our Audit Committee, we are currently in the process of executing specific action plans to remediate the material weaknesses identified above. If we are

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able to complete these actions in a timely manner, we anticipate that all control deficiencies and material weaknesses will be remediated in 2011.

We are developing specific action plans for each of the above material weaknesses. In addition, we have retained an external tax consulting firm to prepare the tax provision on a quarterly and annual basis and review our complex tax treatments, which we hope will resolve one of our material weaknesses in 2010.  The audit committee will also work directly with management and outside consultants, as necessary, to ensure that board level deficiencies are addressed.

We are uncertain at this time of the costs to remediate all of the above listed material weaknesses, however, we anticipate the cost to be in the range of $50,000 to $100,000, most of which costs we expect to incur during 2011. We cannot guarantee that the actual costs to remediate these deficiencies will not exceed this amount.

Through these steps, we believe that we are addressing the deficiencies that affected our internal control over financial reporting. Because the remedial actions require hiring of additional resources, upgrading certain of our information technology systems, and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting systems. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting systems, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the engagement of a tax consulting firm to prepare our quarterly and annual tax provisions and evaluate tax complex tax positions, which will assist in remediation of the above material weaknesses.

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PART II — OTHER INFORMATION

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Common Stock Issuance to Charles Brand

In connection with the ACC Transaction, pursuant to the Master Agreement, Mr. Brand accepted $450,000 worth of the Company’s common stock pursuant to a Stock Issuance Agreement, dated August 31, 2010, by and between Mr. Brand and the Company (the “Stock Issuance Agreement”).  The Company issued to Mr. Brand 417,525 shares of Company common stock pursuant to the Stock Issuance Agreement, which was calculated using a per share price of $1.07778.  The per share price was determined by applying a 15% premium to $0.9372, the volume weighted average price of the shares from June 8, 2010 through June 10, 2010, as required by the Master Agreement.  Such issuance was made in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  The shares were issued as partial payment on Mr. Brand’s Amended Subordinated Contingent Note, reducing the principal by $450,000, and with no cash consideration.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Program
July 1 - July 31, 2010	—	—	N/A	N/A
August 1 - August 31, 2010	775,758	N/A	N/A	N/A
September 1 - September 30, 2010	—	—	N/A	N/A

(1)  On August 31, 2010, the Company closed on a transaction with PEM involving the purchase from PEM of two warrants for an aggregate purchase price of $100,000, each warrant representing the right to purchase 387,879 shares of common stock of the Company and which were originally issued by the Company to PEM on November 30, 2007 and amended and restated on February 12, 2009, pursuant to a Warrant Purchase Agreement by and among the Company and PEM that was entered into on August 30, 2010.

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ITEM 6.EXHIBITS.

Number	Description
10.1	Amended and Restated Term Loan A Note, dated August 31, 2010, executed by EMRISE Corporation, EMRISE Electronics Corporation, and CXR Larus Corporation in favor of GVEC Resource IV Inc. (1)
10.2	Amendment Number 14 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC. *
10.3	Amendment Number 15 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC. *
10.4	Amendment Number 16 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC. (1)
10.5	Amended and Restated Security Agreement, dated August 31, 2010, by and among EMRISE Electronics Corporation, EMRISE Corporation, CXR Larus Corporation, Pascall Electronics Limited, XCEL Power Systems, Ltd., Charles S. Brand, Thomas P.M. Couse and Joanne Couse.(1)
10.6	Form of Amendment No. 2 to Subordinated Contingent Secured Promissory Notes issued by EMRISE Electronics Corporation, Charles S. Brand, Thomas P.M. Couse, and Joanne Couse.(1)
10.7	Stock Issuance Agreement, dated August 31, 2010, by and between Charles Brand and EMRISE Corporation.(1)
10.8	Form of Receivables Finance Agreement, dated August 31, 2010, between Lloyds TSB Commercial Finance Limited and Pascall Electronics Limited.(1)
10.9	Form of Receivables Finance Agreement, dated August 31, 2010, between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited.(1)
10.10	Form of All Assets Debenture Given by Pascall Electronics Limited in Favour of Lloyds TSB Commercial Finance Limited.(1)
10.11	Form of All Assets Debenture Given by XCEL Power Systems Limited in Favour of Lloyds TSB Commercial Finance Limited.(1)
10.12	Warrant Purchase Agreement, dated August 31, 2010, by and among EMRISE Corporation and Private Equity Management Group, LLC.(1)
10.13	Form of Separation and Release Agreement, dated August 31, 2010, by and between EMRISE Corporation and D. John Donovan.(1)
10.14	The English translation of a Factoring Agreement dated September 20, 2010 by and between CXR Anderson Jacobson and Factocic S.A.*
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

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31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

(1) Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 7, 2010.

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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: November 15, 2010	By:	/s/ CARMINE T. OLIVA
		Carmine T. Oliva,
		Chief Executive Officer (Principal Executive Officer)
Dated: November 15, 2010	By:	/s/ BRANDI L. FESTA
		Brandi L. Festa,
		Director of Finance and Administration
		(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS ATTACHED TO THIS REPORT

Number	Description
10.2	Amendment Number 14 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC.
10.3	Amendment Number 15 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC.
10.14	The English translation of a Factoring Agreement dated September 20, 2010 by and between CXR Anderson Jacobson and Factocic S.A.
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.2

Exhibit 10.2

AMENDMENT NUMBER 14 TO LOAN DOCUMENTS

This AMENDMENT NUMBER 14 TO LOAN DOCUMENTS (this “Fourteenth Amendment”) is entered into as of July 16, 2010, by and among GVEC RESOURCE IV INC. (the “Agent”), as Agent and as a Lender, PRIVATE EQUITY MANAGEMENT GROUP LLC, a Delaware limited liability company (“PEMG”), EMRISE CORPORATION, a Delaware corporation (“Parent”), and Parent’s Subsidiaries that are signatories hereto (collectively, with Parent, the “Borrowers” and each individually, a “Borrower”), with reference to the following facts:

A.Borrowers, Agent and the Lenders named therein are parties to that certain Credit Agreement, dated as of November 30, 2007, as amended by that certain Amendment Number 1 to Loan Documents, dated as of August 20, 2008, that certain Amendment Number 2 to Loan Documents, dated as of February 12, 2009, that certain Forbearance Agreement and Amendment Number 3 to Loan Documents, dated as of March 20, 2009 (as amended by that certain Amendment to Forbearance Agreement and Amendment Number 3 to Loan Documents, dated as of April 9, 2009), that certain Amendment Number 4 to Loan Documents, dated as of April 14, 2009, that certain Amendment Number 5 to Loan Documents, dated as of August 14, 2009, that certain Amendment Number 6 to Loan Documents, dated as of November 3, 2009, that certain Amendment Number 7 to Loan Documents, dated as of November 13, 2009, that certain Amendment Number 8 to Loan Documents, dated as of December 31, 2009, that certain Amendment Number 9 to Loan Documents, dated as of April 13, 2010, that certain Amendment Number 10 to Loan Documents, dated as of May 3, 2010, that certain Amendment Number 11 to Loan Documents, dated as of May 17, 2010, that certain Amendment Number 12 to Loan Documents, dated as of June 1, 2010 and that certain Amendment Number 13 to Loan Documents, dated as of June 17, 2010 (as further amended, restated, supplemented or modified from time to time, the “Credit Agreement”).

NOW, THEREFORE, for good and valuable consideration, the parties agree as follows:

1.Defined Terms.  Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Credit Agreement

2.Representations and Warranties.

(a)Each Borrower hereby represents and warrants that, after giving effect to this Fourteenth Amendment, no Event of Default or failure of condition has occurred or exists, or would exist with notice or lapse of time or both under the Credit Agreement.

(b)All representations and warranties of Borrowers in this Fourteenth Amendment and the Credit Agreement are true and correct as of the date hereof, and shall survive the execution of this Fourteenth Amendment.

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3.Amendments.

(a)“Key Milestone” numbered 10, as set forth in Annex Y to the Credit Agreement, as Annex Y has been amended from time to time, is hereby replaced in its entirety with the Key Milestone set forth in Annex Y-5 attached hereto.

(b)The defined term “Maturity Date” in the Credit Agreement shall mean and refer to July 31, 2010.

4.Default.  In addition to all other Events of Default under the Credit Agreement, Borrowers’ failure to pay any amount when due under this Fourteenth Amendment or to perform any covenant or other agreement contained in this Fourteenth Amendment, or any other document entered into pursuant hereto, shall constitute Events of Default under this Fourteenth Amendment and the Credit Agreement.

5.Conditions Precedent.  The effectiveness of this Fourteenth Amendment is subject to Agent’s receipt of all of the following:

(a)this Fourteenth Amendment and such other agreements and instruments reasonably requested by Agent pursuant hereto (including such documents as are necessary to create and perfect Agent’s interest in the Collateral), each duly executed by each Borrower;

(b)payment by Borrowers to PEMG of an amendment fee in the amount of Ten Thousand Dollars ($10,000), which shall be due and payable on, and nonrefundable as of, the date of this Fourteenth Amendment;

(c)payment by Borrowers of all legal fees and expenses incurred through (which shall be due and payable on, and nonrefundable as of) the date of this Fourteenth Amendment (which shall be remitted via wire transfer according to the instructions set forth on Exhibit A hereto); and

(d)such other documents and completion of such other matters as Agent may reasonably deem necessary or appropriate.

6.Release.

(a)Each Borrower acknowledges that neither Agent, any Lender nor PEMG (the “Released Parties”) would enter into this Fourteenth Amendment without Borrowers’ assurance hereunder.  Except for the obligations arising hereafter under this Fourteenth Amendment, each Borrower hereby absolutely discharges and releases the Released Parties, any person or entity that has obtained any interest from any of them under the Credit Agreement or otherwise and each of the Released Parties’ and such entities’ former and present partners, stockholders, officers, directors, employees, successors, assignees, agents and attorneys from any known or unknown claims which any Borrower now has against any of them of any nature, including any claims that any Borrower, its successors, counsel, and advisors may in the future discover they would have now had if they bad known facts not now known to them, whether founded in contract, in tort or pursuant to any other theory of liability, including but not limited to any claims arising out of or related to the Credit Agreement or the transactions contemplated thereby.

2

(b)Each Borrower waives the provisions of California Civil Code Section 1542, which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

(c)The provisions, waivers and releases set forth in this section are binding upon each Borrower and each Borrower’s shareholders, agents, employees, assigns and successors in interest.  The provisions, waivers and releases of this section shall inure to the benefit of the Released Parties and their respective agents, employees, officers, directors, assigns and successors in interest.

(d)Each Borrower warrants and represents that such Borrower is the sole and lawful owner of all right, title and interest in and to all of the claims released hereby and no Borrower has heretofore assigned or transferred or purported to assign or transfer to any person any such claim or any portion thereof.  Each Borrower shall indemnify and hold harmless Agent, each Lender and PEMG from and against any claim, demand, damage, debt, liability (including payment of attorneys’ fees and costs actually incurred whether or not litigation is commenced) based on or arising out of any such assignment or transfer.

(e)The provisions of this section shall survive payment in full of the Obligations, full performance of all the terms of this Fourteenth Amendment and the Credit Agreement, and/or Agent’s, any Lender’s or PEMG’s actions to exercise any remedy available under the Credit Agreement or otherwise.

7.Consultation of Counsel.  Each Borrower acknowledges that such Borrower has had the opportunity to be represented by legal counsel of its own choice throughout all of the negotiations that preceded the execution of this Fourteenth Amendment.  Each Borrower has executed this Fourteenth Amendment after reviewing and understanding each provision of this Fourteenth Amendment and without reliance upon any promise or representation of any person or persons acting for or on behalf of Agent.  Each Borrower further acknowledges that such Borrower and its counsel have had adequate opportunity to make whatever investigation or inquiry they may deem necessary or desirable in connection with the subject matter of this Fourteenth Amendment prior to the execution hereof and the delivery and acceptance of the consideration described herein.

8.Miscellaneous.

(a)Successors and Assigns.  This Fourteenth Amendment shall be binding upon and shall inure to the benefit of Borrower and Agent and their respective successors and assigns; provided, however, that the foregoing shall not authorize any assignment by Borrower of its rights or duties hereunder.

(b)Integration.  This Fourteenth Amendment and any documents executed in connection herewith or pursuant hereto contain the entire Fourteenth Amendment between the

3

parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Fourteenth Amendment; except that any financing statements or other agreements or instruments filed by Agent with respect to Borrower shall remain in full force and effect.

(c)Course of Dealing: Waivers.  No course of dealing on the part of Agent or its officers, nor any failure or delay in the exercise of any right by Agent, shall operate as a waiver thereof, and any single or partial exercise of any such right shall not preclude any later exercise of any such right.  Agent’s failure at any time to require strict performance by Borrower of any provision shall not affect any right of Agent thereafter to demand strict compliance and performance.  Any suspension or waiver of a right must be in writing signed by an officer of Agent.

(d)Time is of the Essence.  Time is of the essence as to each and every term and provision of this Fourteenth Amendment and the other Credit Agreement.

(e)Legal Effect.  The Credit Agreement remains in full force and effect.  If any provision of this Fourteenth Amendment conflicts with applicable law, such provision shall be deemed severed from this Fourteenth Amendment, and the balance of this Fourteenth Amendment shall remain in full force and effect

(f)Choice of Law and Venue; Jury Trial Waiver; Judicial Reference; Service of Process.  Section 12 of the Credit Agreement hereby is incorporated herein by this reference as though fully set forth.

(g)Upon the effectiveness of this Fourteenth Amendment, each reference in the Credit Agreement to “this Fourteenth Amendment,” “hereunder,” “herein,” “hereof” or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Fourteenth Amendment.

(h)Upon the effectiveness of this Fourteenth Amendment, each reference in the Loan Documents to the “Credit Agreement,” “thereunder,” “therein,” “thereof” or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Fourteenth Amendment.

(i)Assignment and Indemnity.  Borrower consents to Agent’s assignment, in accordance with Section 13 of the Credit Agreement, of all or any part of Agent’s rights under this Fourteenth Amendment and the Credit Agreement.

9.Entire Amendment; Effect of Fourteenth Amendment.  This Fourteenth Amendment, and the terms and provisions hereof, constitutes the entire Fourteenth Amendment among the parties pertaining to the subject matter hereof and supersedes any and all prior or contemporaneous amendments relating to the subject matter hereof.  Except as expressly set forth in this Fourteenth Amendment, the Credit Agreement and other Loan Documents shall remain unchanged and in full force and effect.  To the extent any terms or provisions of this Fourteenth Amendment conflict with those of the Credit Agreement or other Loan Documents,

4

the terms and provisions of this Fourteenth Amendment shall control.  This Fourteenth Amendment is a Loan Document.

10.Counterparts; Electronic Transmission.  This Fourteenth Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Fourteenth Amendment by signing any such counterpart.  Delivery of an executed counterpart of this Fourteenth Amendment by electronic mail shall be equally as effective as delivery of an original executed counterpart of this Fourteenth Amendment.  Any party delivering an executed counterpart of this Fourteenth Amendment by electronic mail also shall deliver an original executed counterpart of this Fourteenth Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Fourteenth Amendment.

[Balance of Page Intentionally Left Blank]

5

IN WITNESS WHEREOF, the parties have caused this AMENDMENT NUMBER 14 TO LOAN DOCUMENTS to be executed and delivered on the date first written above.

EMRISE CORPORATION		EMRISE ELECTRONICS
		CORPORATION
By:	/s/ Carmine Oliva	By:	/s/ Carmine Oliva
Name:	Carmine Oliva	Name:	Carmine Oliva
Title:	Chief Executive Officer	Title:	President
CXR LARUS CORPORATION		ADVANCED CONTROL
		COMPONENTS, INC.
By:	/s/ Carmine Oliva	By:	/s/ Carmine Oliva
Name:	Carmine Oliva	Name:	Carmine Oliva
Title:	President	Title:	President
CUSTOM COMPONENTS, INC.		GVEC RESOURCE IV INC.,
		As Agent and a Lender
By:	/s/ Carmine Oliva	By: PRIVATE EQUITY MANAGEMENT
Name:	Carmine Oliva	GROUP LLC, its Court-Appointed Receiver
Title:	President
		By:	/s/ Jim LeSieur
		Name:	Jim LeSieur
		Title:	Chief Operating Officer
PRIVATE EQUITY MANAGEMENT
GROUP LLC
By:	/s/ Jim LeSieur
Name:	Jim LeSieur
Title:	Chief Operating Officer

[Signature Page to Amendment Number 14 to Loan Documents]

6

ANNEX Y-5
(Amended “Key Milestones” re Sale of ACC)

Key Milestone #	Date	PEM Deliverable	Description
10	7/31	Closing documentation	·   Complete vote and close transaction

7

EX-10.3

Exhibit 10.3

AMENDMENT NUMBER 15 TO LOAN DOCUMENTS

This AMENDMENT NUMBER 15 TO LOAN DOCUMENTS (this “Fifteenth Amendment”) is entered into as of July 31, 2010, by and among GVEC RESOURCE IV INC. (the “Agent”), as Agent and as a Lender, PRIVATE EQUITY MANAGEMENT GROUP LLC, a Delaware limited liability company (“PEMG”), EMRISE CORPORATION, a Delaware corporation (“Parent”), and Parent’s Subsidiaries that are signatories hereto (collectively, with Parent, the “Borrowers” and each individually, a “Borrower”), with reference to the following facts:

A.Borrowers, Agent and the Lenders named therein are parties to that certain Credit Agreement, dated as of November 30, 2007, as amended by that certain Amendment Number 1 to Loan Documents, dated as of August 20, 2008, that certain Amendment Number 2 to Loan Documents, dated as of February 12, 2009, that certain Forbearance Agreement and Amendment Number 3 to Loan Documents, dated as of March 20, 2009 (as amended by that certain Amendment to Forbearance Agreement and Amendment Number 3 to Loan Documents, dated as of Apri1 9, 2009), that certain Amendment Number 4 to Loan Documents, dated as of Apri1 14, 2009, that certain Amendment Number 5 to Loan Documents, dated as of August 14, 2009, that certain Amendment Number 6 to Loan Documents, dated as of November 3, 2009, that certain Amendment Number 7 to Loan Documents, dated as of November 13, 2009, that certain Amendment Number 8 to Loan Documents, dated as of December 31, 2009, that certain Amendment Number 9 to Loan Documents, dated as of Apri1 13, 2010, that certain Amendment Number 10 to Loan Documents, dated as of May 3, 2010, that certain Amendment Number 11 to Loan Documents, dated as of May 17, 2010, that certain Amendment Number 12 to Loan Documents, dated as of June 1, 2010, that certain Amendment Number 13 to Loan Documents, dated as of June 17, 2010 and that certain Amendment Number 14 to Loan Documents, dated as of July 16, 2010 (as further amended, restated, supplemented or modified from time to time, the “Credit Agreement”).

NOW, THEREFORE, for good and valuable consideration, the parties agree as follows:

1.Defined Terms.  Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Credit Agreement.

2.Representations and Warranties.

(a)Each Borrower hereby represents and warrants that, after giving effect to this Fifteenth Amendment, no Event of Default or failure of condition has occurred or exists, or would exist with notice or lapse of time or both under the Credit Agreement.

(b)All representations and warranties of Borrowers in this Fifteenth Amendment and the Credit Agreement are true and correct as of the date hereof, and shall survive the execution of this Fifteenth Amendment.

1

3.Amendments.

(a)“Key Milestone” numbered 10, as set forth in Annex Y to the Credit Agreement, as Annex Y has been amended from time to time, is hereby replaced in its entirety with the Key Milestone set forth in Annex Y-6 attached hereto.

(b)The defined term “Maturity Date” in the Credit Agreement shall mean and refer to August 31, 2010.

4.Default.  In addition to all other Events of Default under the Credit Agreement, the following shall constitute Events of Default under this Fifteenth Amendment and the Credit Agreement: (i) Borrowers’ failure to pay any amount when due under this Fifteenth Amendment or to perform any covenant or other agreement contained in this Fifteenth Amendment, or any other document entered into pursuant hereto, and/or (ii) the termination of the Stock Purchase Agreement between Emrise Electronics Corporation and Aeroflex Incorporated dated as of June 7, 2010, as amended from time to time.

5.Conditions Precedent.  The effectiveness of this Fifteenth Amendment is subject to Agent’s receipt of all of the following:

(a)this Fifteenth Amendment and such other agreements and instruments reasonably requested by Agent pursuant hereto (including such documents as are necessary to create and perfect Agent’s interest in the Collateral), each duly executed by each Borrower;

(b)payment by Borrowers to PEMG of an amendment fee in the amount of Thirty Thousand Dollars ($30,000), which shall be nonrefundable as of the date hereof and due and payable as follows: (i) Twenty Thousand Dollars ($20,000) on the date of this Fifteenth Amendment; and (ii) an additional Ten Thousand Dollars ($10,000) on August 20, 2010;

(c)payment by Borrowers of all legal fees and expenses incurred through (which shall be due and payable on, and nonrefundable as of) the date of this Fifteenth Amendment (which shall be remitted via wire transfer according to the instructions set forth on Exhibit A hereto); and

(d)such other documents and completion of such other matters as Agent may reasonably deem necessary or appropriate.

6.Release.

(a)Each Borrower acknowledges that neither Agent, any Lender nor PEMG (the “Released Parties”) would enter into this Fifteenth Amendment without Borrowers’ assurance hereunder.  Except for the obligations arising hereafter under this Fifteenth Amendment, each Borrower hereby absolutely discharges and releases the Released Parties, any person or entity that has obtained any interest from any of them under the Credit Agreement or otherwise and each of the Released Parties’ and such entities’ former and present partners, stockholders, officers, directors, employees, successors, assignees, agents and attorneys from any known or unknown claims which any Borrower now has against any of them of any nature, including any claims that any Borrower, its successors, counsel, and advisors may in the future

2

discover they would have now had if they had known facts not now known to them, whether founded in contract, in tort or pursuant to any other theory of liability, including but not limited to any claims arising out of or related to the Credit Agreement or the transactions contemplated thereby.

(b)Each Borrower waives the provisions of California Civil Code Section 1542, which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

(c)The provisions, waivers and releases set forth in this section are binding upon each Borrower and each Borrower’s shareholders, agents, employees, assigns and successors in interest.  The provisions, waivers and releases of this section shall inure to the benefit of the Released Parties and their respective agents, employees, officers, directors, assigns and successors in interest.

(d)Each Borrower warrants and represents that such Borrower is the sole and lawful owner of all right, title and interest in and to all of the claims released hereby and no Borrower has heretofore assigned or transferred or purported to assign or transfer to any person any such claim or any portion thereof.  Each Borrower shall indemnify and hold harmless Agent, each Lender and PEMG from and against any claim, demand, damage, debt, liability (including payment of attorneys’ fees and costs actually incurred whether or not litigation is commenced) based on or arising out of any such assignment or transfer.

(e)The provisions of this section shall survive payment in full of the Obligations, full performance of all the terms of this Fifteenth Amendment and the Credit Agreement, and/or Agent’s, any Lender’s or PEMG’s actions to exercise any remedy available under the Credit Agreement or otherwise.

7.Consultation of Counsel.  Each Borrower acknowledges that such Borrower has had the opportunity to be represented by legal counsel of its own choice throughout all of the negotiations that preceded the execution of this Fifteenth Amendment.  Each Borrower has executed this Fifteenth Amendment after reviewing and understanding each provision of this Fifteenth Amendment and without reliance upon any promise or representation of any person or persons acting for or on behalf of Agent.  Each Borrower further acknowledges that such Borrower and its counsel have had adequate opportunity to make whatever investigation or inquiry they may deem necessary or desirable in connection with the subject matter of this Fifteenth Amendment prior to the execution hereof and the delivery and acceptance of the consideration described herein.

8.Miscellaneous.

(a)Successors and Assigns.  This Fifteenth Amendment shall be binding upon and shall inure to the benefit of Borrower and Agent and their respective successors and assigns;

3

provided, however, that the foregoing shall not authorize any assignment by Borrower of its rights or duties hereunder.

(b)Integration.  This Fifteenth Amendment and any documents executed in connection herewith or pursuant hereto contain the entire Fifteenth Amendment between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Fifteenth Amendment; except that any financing statements or other agreements or instruments filed by Agent with respect to Borrower shall remain in full force and effect.

(c)Course of Dealing; Waivers.  No course of dealing on the part of Agent or its officers, nor any failure or delay in the exercise of any right by Agent, shall operate as a waiver thereof, and any single or partial exercise of any such right shall not preclude any later exercise of any such right.  Agent’s failure at any time to require strict performance by Borrower of any provision shall not affect any right of Agent thereafter to demand strict compliance and performance.  Any suspension or waiver of a right must be in writing signed by an officer of Agent.

(d)Time is of the Essence.  Time is of the essence as to each and every term and provision of this Fifteenth Amendment and the other Credit Agreement

(e)Legal Effect.  The Credit Agreement remains in full force and effect.  If any provision of this Fifteenth Amendment conflicts with applicable law, such provision shall be deemed severed from this Fifteenth Amendment, and the balance of this Fifteenth Amendment shall remain in full force and effect.

(f)Choice of Law and Venue; Jury Trial Waiver; Judicial Reference; Service of Process.  Section 12 of the Credit Agreement hereby is incorporated herein by this reference as though fully set forth.

(g)Upon the effectiveness of this Fifteenth Amendment, each reference in the Credit Agreement to “this Fifteenth Amendment,” “hereunder,” “herein” “hereof” or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Fifteenth Amendment.

(h)Upon the effectiveness of this Fifteenth Amendment, each reference in the Loan Documents to the “Credit Agreement,” “thereunder,” “therein,” “thereof” or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Fifteenth Amendment.

(i)Assignment and Indemnity.  Borrower consents to Agent’s assignment, in accordance with Section 13 of the Credit Agreement, of all or any part of Agent’s rights under this Fifteenth Amendment and the Credit Agreement.

9.Entire Amendment; Effect of Fifteenth Amendment.  This Fifteenth Amendment, and the terms and provisions hereof, constitutes the entire Fifteenth Amendment among the parties pertaining to the subject matter hereof and supersedes any and all prior or

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contemporaneous amendments relating to the subject matter hereof.  Except as expressly set forth in this Fifteenth Amendment, the Credit Agreement and other Loan Documents shall remain unchanged and in full force and effect.  To the extent any terms or provisions of this Fifteenth Amendment conflict with those of the Credit Agreement or other Loan Documents, the terms and provisions of this Fifteenth Amendment shall control.  This Fifteenth Amendment is a Loan Document.

10.Counterparts; Electronic Transmission.  This Fifteenth Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Fifteenth Amendment by signing any such counterpart.  Delivery of an executed counterpart of this Fifteenth Amendment by electronic mail shall be equally as effective as delivery of an original executed counterpart of this Fifteenth Amendment.  Any party delivering an executed counterpart of this Fifteenth Amendment by electronic mail also shall deliver an original executed counterpart of this Fifteenth Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Fifteenth Amendment

[Balance of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the parties have caused this AMENDMENT NUMBER 15 TO LOAN DOCUMENTS to be executed and delivered on the date first written above.

EMRISE CORPORATION		EMRISE ELECTRONICS
		CORPORATION
By:	/s/ Carmine Oliva	By:	/s/ Carmine Oliva
Name:	Carmine Oliva	Name:	Carmine Oliva
Title:	Chief Executive Officer	Title:	President
CXR LARUS CORPORATION		ADVANCED CONTROL
		COMPONENTS, INC.
By:	/s/ Carmine Oliva	By:	/s/ Carmine Oliva
Name:	Carmine Oliva	Name:	Carmine Oliva
Title:	President	Title:	President
CUSTOM COMPONENTS, INC.		GVEC RESOURCE IV INC.,
		As Agent and a Lender
By:	/s/ Carmine Oliva	By: PRIVATE EQUITY MANAGEMENT
Name:	Carmine Oliva	GROUP LLC, its Court-Appointed Receiver
Title:	President
		By:	/s/ Robert P. Mosier
		Name:	Robert P. Mosier
		Title:	Receiver
PRIVATE EQUITY MANAGEMENT
GROUP LLC
By:	/s/ Robert P. Mosier
Name:	Robert P. Mosier
Title:	Receiver

[Signature Page to Amendment Number 15 to Loan Documents]

6

ANNEX Y-6

(Amended “Key Milestones” re Sale of ACC)

Key Milestone #	Date	PEM Deliverable	Description
10	8/31	Closing documentation	·     Complete vote and close transaction

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EX-10.14

Exhibit 10.14

[This document has been translated into English from the original document, which is in French.]

FACTOCIC

DEVELOPMENT FACTOR

Head office: Tour Facto – 92988 Paris La Défense Cedex   Telephone: 01 46 35 74 00 Fax: 01 46 35 69 21

General conditions

Factoring contract no.: 24283

Company stamp:

[stamp]

CXR ANDERSONJACOBSON	Rue de l’omette28410 ABONDANT
Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
R.C.S. Dreux – SIREN 785 754 706

Limited company with capital of €7,680,000 RCS NANTERRE B 380 307 413 - Financial Company approved by the Credit Establishments Committee

AMENDMENT No. 1 TO FACTORING CONTRACT No. 024283

Agreed between the company: CXR ANDERSON JACOBSON
SAS with capital of €1,350,000.00
Head office: Rue de l’ornette – 28410 ABONDANT
RCS: 785 754 706 001 39	hereinafter referred to as the Company;
and: FACTOCIC
FACTOCIC, a limited company with capital of €7,680,000.00
Financial company approved by the Credit Establishment Committee
Head office: Tour Facto 92988 PARIS LA DEFENSE CEDEX
RCS NANTERRE B 380 307 413	hereinafter referred to as the Factor;

The company wished to obtain certain contractually scheduled services from the Factor, in particular the funding of its invoices (with the exception of any insolvency guarantee) during the rebilling time-limit set out in Article L 341-18 of the Monetary and Financial Code, the aim of this amendment is to organize the parties’ relationships for cases where rebilling would be exercised;

It is expressly agreed that no transferred credit will be covered by credit guarantee or insurance while the rebilling time-limit has not expired and even more so if this faculty is exercised: once this time-limit is passed and complying with Article 2-2 of the general conditions, any guarantee will retroactively cover up to its date of delivery; the existing outstanding amount in the Factor’s accounts.

Exercise of the rebilling faculty by the company will not call into question the subrogation occurred for the Factor against payment in the current account.

The price of intervention of the Factor, paid in case of rebilling, will be 25 EUROS per invoice transferred between the date of signing of the contract and the date of receipt by the Factor of the rebilling form appended to this contract, duly completed and signed by the Company.

From exercise of its right to rebilling, the Company must reimburse without delay the debit balance released by the global position of the factoring accounts and sub-accounts.

A repayment request will not bring revocation of the rights of subrogatee held by the Factor, who, as long as s/he has not been paid, will be bound to act counter to any debt transferred and/or of the Company.

During closure of the accounts, the guarantee funds will be credited into the current account and the balance noted should be paid by the Factor to the Company if s/he is the creditor and by the Company to the Factor if the balance is in debit.

Duration of the amendment

This amendment will take effect from the date of signing of the contract and will transfer its effect particularly in the case of non-exercise, within the legal time-limit, of the rebilling stated in Article L 341-16 of the Monetary and Financial Code.

Completed in two copies in Paris La Défense, on

THE COMPANY20                    September 2010                               THE FACTOR

Stamps and authorized signatures

[stamp]

CXRANDERSONJACOBSON	Rue de l’omette28410 ABONDANT
Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
R.C.S. Dreux – SIREN 785 754 706

AVA GN03

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Factoring Contract General Conditions

Article 1: Subject - Field of application

1-1Services of the Factor – Exclusivity – In the conditions defined above, and for all of the commercial and professional debts of the Company, pertaining to the field of application specified in the special conditions, the Factor ensures their payment against subrogation, by inscription in the current account, the financing of the debts guaranteed by anticipation of their collection, keeping of the accounts of its clients (hereinafter called Purchasers). Their guarantee against the financial failures of their private Purchasers, their current recovery and their collection, In return, the Company is bound to transfer, exclusively to the Factor, ownership of the debts concerned and is prohibited from completing or executing any agreement conferred upon third parties of the rights of these debts.

1-2Globality – This contract applies, unless stipulated to the contrary, to all of the debts which correspond to closed sale of goods delivered or to provisions of services rendered by the Company complying with the orders received

1-3Exclusions – The billings are excluded from the field of application:

a) Intermediaries within the scope of company or similar contracts or – the payment of which, even after receipt without reservation – is subordinated to observation of execution of an obligation of result.

b) Relating to the services or provisions undertaken by a subcontractor.

c) Issued to the Purchasers who are also suppliers or with which the latter holds dependency or interdependency reports (the latter case is particularly aimed at who would have direct or indirect financial links with the company or with common de facto or de jure directors).

The respect of these exclusions is the responsibility of the Company, the Factor not having to control their application.

Article 2 – Guarantee against the risk of insolvency

2-1Benefit – To benefit from this guarantee, the company must obtain prior agreement from the Factor on a tax inclusive outstanding amount for each of its private Purchasers. The Factor supports within the limit of the guarantees in force the charge of the debts in case of non-payment exclusively linked to insolvency of the Purchasers. This insolvency is recorded by opening of a procedure of recovery or of legal liquidation. From the moment the debit is not contested and subject to respect by the Company of the obligations placed under its responsibility by this contract, the Factor’s guarantee will be implemented. However, if subsequently to the payment by the Factor, the debt was, in whole or in part, rejected by a legal decision, the Company is bound to repay it without delay in principal and interests.

2-2Definition – Coverage – The guarantee processes should be undertaken by using the Telematic Services of the Factor in accordance with the conditions appearing in the special conditions and modalities described in the Customer’s guide given to the Company. The answers will be sent to the Company by all telematic means and confirmed by sending of a monthly summary document. Apart from mention of a date of coming into effect, any guarantee retroactively covers up to its date of issue, the existing outstanding amount in the Factor’s accounts.

2-3Exceptions – the Company remains of the payment of the debts transferred in the aforementioned cases.

a) absence of Guarantee or outstanding exceeding the Guarantee amount, within the limit of the overspend observed on the date of the failure of the Purchaser or, if it is prior to it, on the date of revocation of the Guarantee.

b) default of payment on the due date of a guarantee debt, based on an exception drawn from its reports with the Purchaser, or with the third-parties, or difference on collection resulting in a change loss.

c) debts outside of the field of application or for which the Company receives another Guarantee granted by an insurance company or a credit company authorized to practice in France.

d) franchises stipulated with special conditions particular accordingly of their amount.

2-4Evolution of Guarantees – The Factor may, at any time, notify the Company of evolution of the Guarantees – and in particular their increase and their reduction – with immediate effect but without retroactivity except for the increases.

2-5Collections -   Any amount credited to factoring accounts (where the outstanding amount of the transferred credits are recorded) in the Factor’s books allocated by priority on the guaranteed outstanding amount. As determined by the renewal effect, the debts exceeding the outstanding ceiling will therefore be covered, gradually by the effective collections, according to their due dates. The renewal effect no longer comes into play when the guarantee is revoked. It is limited to the new amount in case of reduction.

2-6Recoveries – after revocation of a Guarantee or in case of insolvency of the Purchaser, any recovery of any kind obtained by either party, is charged au pro rata on the guaranteed outstanding amount and not guaranteed in the Factor’s accounts. The Guarantees being issued inclusive of tax, the Company is bound to reverse to the Factor the recoverable VAT amount, and this, au prorate of the guaranteed outstanding. This

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repayment will intervene from receipt of a document attesting to the non-recoverability of the debt or on the date of judgment sanctioning the recovery plan and deciding on continuation of activity or declaring legal liquidation of the Purchaser.

2-7Contestation – in case of contestation of the amount of the Guarantee, the Company should produce in support of its request any document from the Factor attesting to the validity of the Guarantee.

Article 3: Transfer of the debts

3-1Time-limit – the Company is bound to transfer its debts before their due dates and at the latest, thirty calendar days after the issue date of the invoices.

3-2Subrogation – in return for the payments of the Factor by registering the credit in the current account, the Company subrogates it within all the rights and actions attached to the debts, complying with Article 1250 of the Civil Code. The Factor remains the sole holder of any transferred debt, even in the case of debit in the current account and this up until it has been effectively repaid. The Company must set up a subrogative receipt complying with the formula approved by the Factor and attaching to it in particular a copy of the invoices as well as details of the discount on the appended list or any other justification agreed between the parties.

3-3Validity – The Company vouches for the legal effectiveness of each of the subrogative receipts and in particular the existence and validity of the debts as well as the opposability of their transfer, with regards to the Purchasers as well as other third-parties in such a way that the subrogation is not in any way, deprived of effect, in fact or in law.

3-4Information from the Purchasers – The Company must, from signing of this contract, inform its Purchasers of it by a letter the wording of which must be subject to the Factor’s approval. It must insert in the same body of the invoices a mention focusing on the special conditions indicating, due to the subrogation, only a payment from the Factor is released.

The Factor is authorized by operation of law and at any time to notify the purchasers and any other third-parties of the existence of this contract and its quality as subrogatee.

3-5Seizures – When the debts transferred to the Factor are the subject of seizures (or of any equivalent procedures) at the request of a third-party presenting itself as a Company debtor,

·in the hands of a Purchaser

·in the hands of the Factor

The latter will be able to, as a total withdrawal/release of it not being notified, to transfer the available amount from the current account to credit an escrow account, and this accordingly for the total amount of seizure.

This faculty also concerns the available amount observed after each subrogated prior payment of seizures.

3-6Contracts – Before any invoicing within the scope of a contract, the Company is bound to transfer to the Factor, in application of articles L 31 3-23 to L 31 3-34 of the Monetary and Financial Code the contract, within the scope of which the invoice is to be issued, and to give a copy of the private contract to it or the sole copy of the public contract.

Article 4 – Disputes – direct payments – Credit notes

4-1Contestation of debts (disputes) – In case of contestation by a Purchaser refusing to pay the Factor all or part of a transferred debt, this debt will be known to be contentious accordingly. It will be a case of exceptions inherent to the debt such as notably non-compliance (qualities, quantities, time-limits) of the goods or services provided in respect of the order, with external exceptions to the debt, for example in particular compensation, opposition.

Each party is bound to inform the other one, as soon as possible, of any contestation of this type brought to its knowledge.

4-2Processing of the contested debts – From issue of a notice of dispute by the Purchaser or the Factor, the Company has, for its part, a maximum time-limit of thirty calendar days to obtain from the Buyer what it pays the Factor.

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Failing that, the Factor will be able to debit the current account of a sum at least equal to the amount of this debt, to credit an escrow account, or to credit the factoring account recording the outstanding of the transferred debts to revoke the subrogation accordingly of the available amount.

The time-limit stated in the two previous paragraphs becomes non applicable as soon as the contestation focuses on the very existence of the debt (absence of order or of delivery) or that this debt is contested within the scope of a legal action.

4-3Direct payments – When the payment means are sent directly to the Company as payment for transferred debts to the Factor, the latter, which can only receive them in the quality of depository of the Factor, must, from receipt, return them to it.  Failing that, the latter will be able to debit the current account, due at concurrence, and without prejudice to any other recourse.

4-4Compliant credit notes – The Company is bound not to modify the extent of the rights attached to a transferred credit without the Factor’s agreement. This agreement is assumed in case of issue, within the scope of current business management, of credit notes complying with the usual practices. In all cases, it is bound to send to the Factor, from their issue and at the latest within five working days, the totality of the credit notes pertaining to the transferred debts.

4-5Non-compliant credit notes – Credit notes not complying with the usual practices (the issue of credit notes significantly affecting the transferred debts does not for example constitute complying with the usual practice) or issued in fraud of the rights of the Factor, will be acknowledged as non-invocable to it even in the case where they would have been the subject of a credit with the factoring account recording the outstanding of the transferred debts. Without prejudice of any recourse against the Company, it will in particular be for non-motivated credit notes, while waiting for written justification and for those followed by rebilling issued with no mention of the subrogation for the Factor.

Article 5 – Duty of information – The Company must inform the Factor as soon as possible of any acts or events likely to affect the rights of the latter over the transferred debts. In case of characterized or reiterated lack by the Company of its information obligations, the Factor will be able to declare the loss of right of all guarantees issued on the outstanding amounts of the transferred debts and to claim repayment of the losses sustained.

The Company acknowledges to the Factor as well as to any person designated by it, the right to obtain communication of all documents to ensure the respect of the contractual obligations. It is bound to facilitate for the Factor exercise of this right and to send to the Factor, within the legal time-limits, its statement, certified by its auditors in cases stipulated by the law, as well as the appended documents.

Article 6 – Current accounts

6-1Agreement – The sums paid by the Factor in virtue of this contract and those which are due to it, for any purpose whatsoever, by the Company will enter into the current account. The reciprocal debts, related indivisible, will be expressed in items of credit and debit and will there be compensated between them when they are payable. Il will be the same case of opening of sub-accounts of the current account to facilitate monitoring of the operations.

6-2Balance – The current account and its sub-accounts form an indivisible whole, it is the general balance of the single account after compensation of the debits and the credits, which will be considered at any time – and in particular after cessation of the factoring operations. – like the balance of the current account.

6-3Overdraft – The current account does not include overdraft authorization. Any debit balance is immediately payable without a demand for payment being required and bearing interest even after its closure, at the rates of the Special Financing Commission (SFC), up until full repayment.

6-4Operations – The current account will be credited in particular with the amounts of transferable bills, payments to the order of the Company that the Factor will collect in its quality of proxy as well as bank transfers coming from the sub-accounts to the current account. It will be debited from the Company direct debits, the sums transferred to the sub-accounts, as well as all of the sums due par the Company to the Factor, particularly in respect of this contract and any other contracts or operations.

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6-5Statements – The monthly account statements are acknowledged as being definitively accepted by the Company, unless there is written and relevant contestation within the thirty calendar days following their stop date.

6-6Payment – Any debit of a debt is not valid as payment if the present current account before this entry or credit balance at least equal to the amount of the debit.

6-7Closure – After termination of the contract and complete of the operations, the current account will be closed and its balance, if it is in credit, paid back to the Company.

Article 7 – Guarantee funds

7-1Subject – This is a sub-account of the current account with the objective of guaranteeing to the Factor exercise of its contractual recourses in respect of the acknowledged or potential non-values, such as in particular the credit notes issued or requested, direct payments, disputes, deferred discounts, delay on credits financed and non Guaranteed. Its balance may not be lower than a certain quota of the outstanding of the transferred debts and at a minimum threshold. This quota was calculated in accordance with the items brought to the Factor’s knowledge during the study on entry into relation. It will later be minified in case of significant variation of the items and especially a modification of the percentage of recognized and potential non-values.

7-2Constitution – It is supplied by direct debits on the available amount while subrogatory payments. The adjustments to the reduction are the subject of a credit in a current account.

7-3Use - The Factor may withdraw on this account the necessary amounts to cover a debtor position of the current account. In the same case, the quota and/or the contractual threshold are immediately rebuilt. On closure of the accounts between the parties, the balance is transferred to the credit of the current account.

Article 8 – Escrow accounts

These are sub-accounts of the current account where the subrogatory payments are transferred corresponding to non-financed debts, when waiting for their collection. They can be opened to facilitated monitoring of each type of operation such as in particular debts covered by the ceiling of guaranteed outstanding amounts the payment of which at term is not attested by a justification, available values after in case of seizure or opposition. These amounts will be transferred to the current account as soon as the operation concerned is put in order.

Article 9: Management of Purchasers’ accounts

9-1 – Current recovery – As it remains holder of the transferred debts, the Factor or its proxy with the sole quality to undertake management of their recovery and their collection. It holds the accounts pertaining to it, grants or refuses the reports, prorogations or arrangements, with or without discounts, requested by the Purchasers. Subject to their effective collection, it carried the payments for the factoring account. The Company is bound to lend its competition to the Factor and to give it in particular all documents, correspondences and special proxies as required. For the non-guaranteed fraction of the transferred debts, the Factor does not bear the costs and fees of contentious recovery after their due date. If it undertakes it in advance, it will by operation of law debit them to the current account.

9-2 Mandate – For it to enable collection without delay the payment instruments received from the Purchasers, the Company gives mandate to the Factor to appose there any mention and necessary signature.  If it acknowledges that the payments to its order did not concern the transferred debts, the Factor will be repute for having collected them as a proxy and this, even after fulfillment of the contract. These collections will be, subject to correct execution, credited into the current account.

9-3 Ownership reserve – For the sales completed with property reserves, the Factor is not held to claim, unless on written request from the Company and accepted by the Factor.  This claim will be undertaken at the Company’s cost. In case of a claim, the Company is bound to provide every assistance especially for identification and recovery. For the goods and repurchase of the recovered goods for a price which will not be lower than two-thirds of the amount initially billed. In any case, the Company cannot oppose the Factor the risk charge in case of loss or destruction of the item sold. The mandates set out in this article are stipulated in the common interest of both parties.

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9-4 Late penalties and interests – With a view to maintaining management of its business relations with its clientele, the Company expressly reserves the right to override or abandon any late penalties and all late interests which will be due by its Purchasers for the debts factored and to undertake accounting of them in its books. To do so, it will be up to the Company to factor its accounts by any means available to it. The debts corresponding to the late penalties and/or interests are excluded from the field of application of the factoring contract.

Article 10: Compensation of the Factor

10-1 Factoring commission – In respect of its services, the Factor will receive commission calculated on the tax inclusive amount of the transferred invoices, its rate is, like the annual minimum, specified in the Special Conditions. The accumulated amount of the factoring commissions received in a calendar year will not in any case be lower than the minimum annual amount. At the start of the second calendar half-year, the Factor will be able to withdraw, if there is one, the difference between the accumulation of the factoring commissions deducted since the start of the year and half of the annual minimum. In case of termination on the Factor’s initiative, the minimum amount set out above is only due for the six months current on expiration of the time limit of the notice. In all other cases, termination without notice or on the Company’s initiative, the annual minimum becomes payable immediately from notification of termination of the contract.

10-2 Evolution – The parameters which determine evolution of the factoring commission rates are renowned for being set in constant Euros. They will thereby be revalued on the 1st of January and the 1st of July of each year in accordance with evolution of the Consumer Price Index (CPI), Services heading (Identifier: 4009E). The references and revision index will be respectively the last index published on date of signing of the contract and the last index published before each revision,

In either of the following cases;

·Modification affecting the composition and/or definition of the CPI index or of the rate in which the special financing commission is set out below.

·Disappearance of this index or of the rate and substitution of a rate or index of the same type or equivalent, modification affecting the body publishing it or the modalities of publication, following in particular passage to the single European currency, the index or rate issued from this modification of this substitution will apply by operation of law.

10-3 Financing commission – In respect of the amounts it is funding, the Factor receives a special commission (CSF) the annual rate of which varies according to evolution of a reference rate agreed between the parties. Unless stipulated to the contrary, it is the Factor’s reference rate. This rate will vary in such a way that it will never exceed the arithmetical average of the base rates of the CIC increased by a half-point (fifty base points). From issue of the Factor’s checks or payments, this commission is provisionally estimated and in accordance with the average due date of the debts. Its definitive amount is liquidated on the date of effective collection of the debts. At the end of each month, after taking into account the dates of value applied to collections and payments, a CSF discount is established, its net debit balance of any deductions is brought to the debit of the current account. The value dates, which the Company acknowledges it is aware of, are only the CSF’s calculation modalities, this disposition forming an indivisible whole with the other clauses of the contract.

10-4 Promissory notes – Subscription by the Factor, at the Company’s request, of promissory notes, will result in the collection of a commission calculated prorate temporis depending on the due date of the promissory note.

10-5 Taxes – The Company is liable for the taxes it is subject to, on the date of their realization, the operations processed in virtue of this contract.

10-6 Collection or transfer costs – the collection or transfer costs will be borne in full by the Company by way of debit of its current account.

Article 11: Confidentiality – Substitution

11-1 – Confidentiality – All information sent by the Factor, particularly Guarantees and their modifications, is confidential. The Company is bound not to divulge it directly, or via a third party. Any breach could result in termination of the contract and in the Company entering into third party liability.

11-2 – Substitution – Unless there is an agreement in writing from the Factor, the Company cannot, in any form whatsoever, be substituted by a third party for execution of the obligations it is responsible for by this contract.

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Article 12 – Duration – Termination

12-1 – Duration – Unless stipulation to the contrary in the special conditions, this contract, completed without a duration limit, comes into effect on the date of signing. Subject to three months’ notice, each party may terminate it at any time by notifying the other party of its decision by registered letter with proof of receipt.

12-2 – Termination by the Factor – The Factor may terminate the contract without notice in the following cases:

a) non-respect by the Company of its obligations in respect of the contract,

b) appointment of a provisional administrator, closing down of business, cessation of payments from the Company or amiable liquidation, recovery or legal liquidation against it.

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SPECIAL CONDITIONS OF FACTORING CONTRACT No. 024283

Completed between the Company:
CXR ANDERSON JACOBSON
SAS with capital of €1,350,000.00
Head office: Rue de l’ornette – 28410 ABONDANT
RCS: 785 754 706 001 39	hereinafter referred to as the Company;
and:
FACTOCIC
Factocic, a limited company with capital of €7,680,000.00
Financial company approved by the Credit Establishment Committee
Head office: Tour Facto 92988 PARIS LA DEFENSE CEDEX
RCS NANTERRE B 380 307 413	hereinafter referred to as the Factor;

This contract is comprised of special conditions and general conditions of the factoring contract of the Factor (referenced FC 3007.01.03) numbered from 1 to 15 and appended to this document, which the Company acknowledges it is fully aware of.

This is a factoring contract with notification of subrogation for the Factor to the Purchasers. Furthermore, the Factor entrusts the Company, in the conditions defined below, mandate of recovery of the transferred debts.

Article 15: Field of application

Sales and services invoiced to the Purchasers location in Metropolitan France.

Any transfer of debts to a determined Purchaser results in an obligation for the Company to transfer to the Factor all of the debts that it holds or will hold on this Purchaser.

The maximum credit duration granted by the Company to its Purchasers will be 120 calendar days.

Article 17 – Frequency of discounts – Justifications – Legal obligation – Indicative payment clause – Subrogation advertising.

Article 17-1: Frequency of discounts

The discounts will be taken at a maximum 4 times a month with sending of the originals of the invoices to the Purchasers by the Company or the Factor in case of revocation of the mandate.

Article 17-2: Justifications

The following justifications will have to be made available from the Factor to the Company: the public and private contracts and the purchase orders and the accepted quotes and the order confirmations and the signed delivery notes, and the collection notes signed by the transporter.

The wording of this note which must appear on the invoices is as follows: “To be released, your payment must be made directly for the order of FACTOCIC – TOUR FACTO 92988 PARIS LA DEFENSE TEL: 01 46 35 74 00 RIB 11978 00001 02428310090 78 – who receives it by subrogation within the scope of a factoring contract and should be informed of any claim relating to this debt”.

Article 17-3: Legal obligation – New Economic Regulations – TRACFIN –

Invoices with an amount greeter than or equal to 150,000.00 should be subrogated to us by a subrogative receipt isolated and identified to which is attached a copy of the invoice the public or private contracts and the purchase orders and the accepted quotes and the order confirmations and the signed delivery notes, and the collection notes signed by the transporter, and any justification available from the Company of a type to justification economic founding of the transferred debt.

Article 17-4: Indicative payment clause – Subrogation advertising

In application of Article 3-4 of the General Conditions, the Company is bound to show the Factor a copy of the invoice including the signature comprising the wording of the following note:

“To be discharged, the payment of this debt must be worded to the order of FACTOCIC subrogated in our rights within the scope of a factoring contract, and sent to FACTOCIC – TOUR FACTO 92988 PARIS LA DEFENSE CEDEX TEL: 01 46 35 74 00 RIB 11978 00001 02428310090 78.”

The company will inform its purchasers of the existence of the factoring contract by a letter whose project will be subject to the Factor. Any new purchaser will be informed before the first transfer to the Factor of the first invoices of the existence of the factoring contract by the same letter.

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The drafts sent to the Purchasers and drawn up by the Company for covering the invoices will be payable to the Factor.

The Factor reserves the possibility, furthermore, of notifying the Company’s purchasers itself, at any time, of the existence of the factoring contract and of its role of subrogated.

Article 18 – Recovery mandate

The Company possesses an administrative structure and proven methods for management of its customer accounts and wishes to retain management of the recovery on its Purchasers.

The Factor accepts as a result to entrust it with a recovery mandate within the conditions defined below and subject to respect by the Company of its own procedures as regards recovery of which are integral parts of this contract.

18-1 Common interest and character

The mandate in this contract is stipulated in the common interest of both parties.

In this respect, the Company will receive no payment, this mandate not being free for all that, taking into account the essential commercial interest that the Company attaches to recovery on its Purchasers.

18-2 Recovery mandate

The Company is mandated by the Factor to undertake recovery of the transferred debts. For each debt, the mandate ends 100 calendar days after its due date except for application of article 18-6 below.

18-3 Diligences and General obligations of the proxy

The Company is bound to bring the recovery of the transferred debts, as with conservation of the rights pertaining to them, all the diligence normally required for management of its own debts and generally, to execute the mandate in a prudent, diligent and informed manner. Furthermore, the Company is bound to respect its recovery procedures appended here.

18-4 Report of execution of the mandate

The Company is bound to:

·notify the Factor without delay, by any means in writing or any other media approved by the parties, the occurrence of any event of a nature to compromise payment on the correct date of the transferred debts of an amount greater than 45,000.00 (request for prorogation, payment default on the due date, disputes, recovery or legal liquidation, etc),

·to inform, among other events, the Factor of any change affecting the general and special conditions governing its contractual relationships with all of its clientele.

18-5 Checks by the Factor

The Factor will have the right to undertake – or to have another company carry out – at any time a check of to ensure that the Company is complying permanently with the obligations it is liable for in application of this contract.

The Company is bound to bring all of its assistance to the Factor for implementation of these checks as well as any circularization procedures to its Purchasers. To maintain confidentiality of the operations during validity of the mandate, these circulars will be sent on Company-headed paper.

Taking into accounts the specific details of this contract, the Factor will be able, at any time, to appoint, at the cost of the Company, its auditors to check the regularity of the billings and the realities and the consistency of the debts transferred by the Company.

18-6 Revocations of the recovery mandate

18-6-1 Revocation

Revocation of the recovery mandate may take place in the following cases:

a) Revocation of the mandate following termination of the factoring contract:

The coming into effect of termination of the factoring contract may result in, for the Factor, revocation without notice of the recovery mandate.

b) Revocation for a specific reason:

Revocation of the recovery mandate, notified as stated in Article 14-1 of the general conditions, may occur in one of the following cases:

2

b-1) Revocation with notice for a specific reason:

b-1.1) Deterioration of the Company’s financial situation or any other event of a type to compromise correct execution of the mandate, in that they do not permit continuation of the contract.

b-1.2) Observation in one of the Company’s books and documents of one of the following events:

·percentage of invoices failed for over 30 days for 3 consecutive months greater than 15% of the turnover factored each month,

·existence of acknowledged or potential non-values (for example in particular credit notes not being the subject or rebilling, disputes) greater than 10% of the turnover transferred over 3 consecutive months, and this without prejudice of application of article 20,

b-2) Revocation without notice of the mandates:

·on a general scale any significant or reiterated breach of the Company in its obligations and for which the Factor does not intend to override the clauses of article 12-2 of the General Conditions.

·more specifically, the non-respect by the Company of its recovery procedures.

18-6-2: Revocation notifications:

The Factor:

·undertakes recovery of all of the transferred debts even subsequent to the date or revocation of the mandate,

·notifies without delay the Purchasers of the transfer of debts by means of subrogation by causing interdiction of paying the Company,

·sends the originals of the invoices to the Purchasers,

·increase the factoring commission rate by 0.20 points,

·increases the funds guarantee withdrawal rate by 5 points,

·withdraws 10.00 Euros exclusive of tax in set fees per invoice.

The Company:

·is bound to put the following note in its invoices, “To be released, your payment must be made directly for the order of FACTOCIC TOUR FACTO – 18 rue Hoche – Cedex 88 - 92988 LA DEFENSE CEDEX - TEL: 01 46 35 74 00 RIB 11978 00001 02428310090 78 – who receives it by subrogation within the scope of a factoring contract and should be informed of any claim relating to this debt”.

Article 19 Putting the Factor’s guarantee into play

In case of insolvency observed by a Purchaser in the sense of Article 2 of the General Conditions, the Company will send to the Factor, within a maximum delay of 30 days from the end of its mandate, the following documents:

·detailed statements of the account of the Purchaser concerned,

·invoices, purchase orders, delivery notes and all documents singed by the Purchaser attesting to the payability of the debt,

·reminder letter, correspondences exchanged with the Purchaser and any other document concerning the unpaid debts and their recovery in application of the procedures appended to this contract,

·demanding accordance with the approved model by the parties, informing the Purchaser that if payment is not made, legal recovery of the debt will be undertaken,

·instrument of payment of the Purchaser returned unpaid.

If the Factor does not receive within the time-limit prescribed above, the entire dossier containing the documents mentioned above, the debts and guarantee will be definitely acknowledged as being paid, the factoring account being credited accordingly by debit of the current account.

Advance   Article 20 – Guarantee funds

rateIt is set at 10% minimum of the outstanding inclusive of tax of the transferred debts, and will be doneby debit of 10.00% on the subrogatory payments. Its minimum threshold is set at 31,000.00 Euros.

In case of investment by the Company under collective procedure or termination of the contract, theGuarantee funds will be increased by 10 points.

Article 21: Factoring commission

The rate is set at 0.430% exclusive of tax of the amount inclusive of tax of the transferred debts and thecredit notes issued.

3

Commission scale

The commission rate was set in accordance with the criteria of the following table:

FMT in Euros with Turnover in KEuros inclusive of  tax	1700 to 2100		2100 to 2800		Greater than 2800
2500 to 3000	0.559	%	0.516	%	0.495	%
3000 to 4000	0.473	%	0.430	%	0.409	%
Greater than 4000	0.439	%	0.396	%	0.374	%

This rate will be adjusted on 1st January and on 1st July of each year, in accordance with the factored turnover, and the average unit value of the invoices transferred during the twelve months preceding the adjustment. This adjustment will have a retroactive effective on the previous six months. The first revision will take place on 01/07/11. When the reference period is less than the calendar year, the corresponding turnover is divided by the number of days left to run and multiplied by 365.

The minimum annual amount of the commission will be 10,000.00 Euros exclusive of tax.

Article 22: Financing by the Factor

By direct debit on the available amount in the current account, the Factor will issue payments payable to the Company.

Article 23: Special funding commission

Interest rate

The special funding commission rate is equal to the monthly average set up the previous month by l’EURIBOR 3 months increased by 14.0 points or, to date, 2.30 per year exclusive of tax.

Article 24: Miscellaneous commissions

Administrative fees: 300 EUROS EXCLUSIVE OF TAX

Article 25: Guarantee requests

It receives a contract start-up credit of 864 Euros with a validity of 3 months and an annual set price of 216 Euros which will be tacitly except for denunciation one month after the contract anniversary date.

Beyond these amounts, the uses will be invoiced as follows:

In case of agreement, total or partial, on the request amount

· Request comprised between 0 and 15,000 EUR	= 17.00 Euros exclusive of tax
· Request comprised between 15 and 50,000 EUR	= 27.00 Euros exclusive of tax
· Request equal or superior to 50,000 EUR	= 53.00 Euros exclusive of tax

In case of refusal

· Whatever the amount of the guarantee request = 17.00 Euros exclusive of tax

Article 25: Specific pricing – Collection or transfer fees

Article 10-6 of the General Conditions, from now on entitled “Specific pricing – Collection or transfer fees” is completed by a §1 written as follows:

Any service from the Factor, other than those described in Article 1-1 of the General Conditions and/or priced in the Special conditions and the amendments, will be the subject of specific pricing, detailed in the company price guide or failing that in a quote subject to the approval of the Company.

Article 27 – Definancing

The debts unpaid over 30 days after their due dates will be withdrawn from the escrow account by debit from the current account. They will be the subject of a recovery and therefore be credited to the current account after effective collection of the corresponding debts.

4

Article 28 – Banks notification

The Factor will inform the Company’s bankers of the factoring contract and of its field of application. The Company is bound, for the duration of this contact, to keep the Factor informed of any new entry in relation with the banking or financing establishment, the Factor reserves all right to verification by any appropriate means, within the scope of a short-term contact.

Article 29 – Telematic Services

The methods of information of the FACTOCICNET customer site are described in the Customer guide. They operate within the scope of article 13 of the general conditions and of the software license contract. These services provide detailed information online about the Company’s accounts and about its Purchasers’ accounts. By using the FACTOCICNET customer site, the Company may download all of this information to its microcomputer and send its invoices to the Factor by file transmission.

Billing of these services is included in the monthly set price stated in the e-Pack purchase order.

Any additional information request, especially for paper editions, will be the subject of specific pricing mentioned in the company price guide in a quote subject to the approval of the Company; this payment will be debited from the current account.

Article 30: Annual Percentage Rate (APR)

30-1: Notification of the General Conditions

Article 10-3 of the general conditions (“Financing commission”) is completed by the following paragraph:

For application of the clauses in article R 313-1 of the Monetary and Financial Code, each of the parties considers that, taking into account the specific details of this contract (especially the variability of the rate and the effective base of applicable special financing commission), the annual percentage rate (APR) may not be calculated on the date of signing of the contract but a calculation indicative of the aforementioned rate is given in the special conditions.

30-2: Calculation indicative of the APR

In application of the clauses of article R 313-1 of the Monetary and Financial Code, the applicable annual percentage rate to the factoring advances is set on the date of this document at 2.60% per year.

This rate is calculated for information only on the basis of a calendar year, or 365 days (366 in leap years), by placing it, during the life of the contract, in consideration of the terms and conditions applicable to its normal functioning, and therefore within the following cases:

·financing on transferred debts of: 43800000 EUR (INCLUSIVE OF TAX)

·an average payment time-limit for Purchasers of: 45 calendar days

·a special financing commission rate (see article 23) of 2.30% per year

·a Guarantee Fund withdrawal rate (see article 20) of: 10.00%

Article 31: Documents and information to send to the Factor

The intermediate half-yearly accounting scenarios that the Company is liable to establish, copy of the reminder procedure as well as the customers/suppliers quarterly balance.

Article 32: Coming into effect of the contract

Coming into effect of the contract is subordinated on reception of the following items:

·sending by the Company from initial handing over of the debts for the old balance;

·recovery procedures of the Company set out by its legal representative as well as implementation of IT Relations – RIV, complying with the specifications of the IT Terms and Conditions.

Article 33 – Signatories

The signatories of this contract are the legal representatives of the Company and of the Factor or their duly authorized representatives. They act as proxy in respect for the party they represent of the contractual obligations incumbent on the latter.

Completed in two copies in Paris La Défense, on

20 September 2010

5

THE COMPANY	THE FACTOR
Represented by Mr. Pierre EYBRALY	Represented by Mr. Bernard SANCIER
General Manager	General Manager

Authorized stamps and signatures

[stamp]

CXR ANDERSONJACOBSON	Rue de l’omette28410 ABONDANT
Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
R.C.S. Dreux – SIREN 785 754 706

AMENDMENT NO. 2 TO FACTORING AGREEMENT NO. 024283

Entered into between: CXR ANDERSON JACOBSON
S.A.S. [Simplified Joint Stock Company] with capital of €1,350,000.00
Registered office: Rue de l’omette – 28410 ABONDANT
R.C.S. [Trade and Company Register] 785.754.706.001.39	hereinafter referred to as the Company;
and FACTOCIC
FACTOCIC, Public Limited Company with capital of 7,680,000 euros,
Financial Company chartered by the Committee of Credit Institutions
Registered office: Tour Facto 92988 PARIS LA DEFENSE CEDEX
R.C.S. Nanterre B 380.307.413	hereinafter referred to as the Factor;

New articles for special terms of the factoring agreement:

Preliminarily, it is stated that the Company and the Factor have agreed, as professionals, to expressly to dispense with items 1 to 5 of Article 1369-4 of the Civil Code, as well as the provisions of Article 1369-5 of that Code with respect to the conclusion of the factoring agreement, as well as the its amendments and annexes.

Article No. 34 – e-médi@t – option 3

1 – Purpose of the Service

The e-médi@t service, hereinafter referred to as “the Service,” enables the company to undertake online:

· the transfer of receivables in the form of computerized subrogation releases and

· the issuance of computerized payment orders

with complete security thanks to the use of an electronic signature by means of an electronic certificate delivered by an approved certification authority (see Decree No. 2001-272 of MARCH 30, 2001).

2 – Availability and Suspension of the Service

a)As the Service is secured through the use of electronic signatures, its availability is subject to:

· the signing of a contract for subscribing to a level 3+ electronic certification service with one of the providers referred by the Factor,

· the legalization of a power-of-attorney for each holder of an electronic certificate, in addition to the legal representative of the Company.

The transactions consummated electronically between the Company and the Factor within the scope of the e-médi@t Service shall be validly concluded upon verification by us of the validity of your electronically signed order.

The Factor cannot guarantee the availability of the Service, which may be subject to interruptions particularly due to an interruption of the Internet network or a temporary failure of the computer equipment.

b)The Factor may be compelled to suspend all or part of the Service in the event of:

· impairment of the operation of the factoring agreement,

· deterioration of the financial situation of the Company,

· distraint(s) or an equivalent proceeding(s) against the Company,

· cancellation of this agreement during the prior notification period.

3 – Electronic Certificate – Power-of-Attorney

The electronic certificates and powers-of-attorney must be consistent with one another to enable in all circumstances (interruption or suspension of the network or of the Service, etc.) the continuity of the operation of the factoring agreement, with, if applicable, at the the Company’s initiative, upon simple notification that will be sent to it, continuation of the performance of the factoring agreement in paper form.

The Company thus undertakes to notify the Factor within twelve working hours of any new power-of-attorney and/or any revocation of prior powers-of-attorney made by the provider of the electronic certification. Consequently, the Factor will not be held liable in the event that the Company should breach the above-mentioned provisions.

024283

4 – Details of the Option

Following the processing of two computerized subrogation releases, the Company will be dispensed from sending the invoices and supporting documents pursuant to Article No. 17. “The public and private contracts, the purchase orders, the accepted quotations, the order confirmations, the signed delivery orders, and the pick-up orders signed by the transporter must be available within the Company” of the Special Terms.

Nevertheless, the Factor may, on the basis of a random inspection system, require the transmission of certain invoices and supporting documents at any time.

If these items are not received within the time limit allowed, the Factor reserves the right to then transfer said receivables to the escrow account by debiting the current account (definancing) and/or to require transmission of the invoices and supporting documents in support of each remittance.

The billing of this service is included in the monthly flat rate indicated in the purchase order attached in annex for a maximum of 15 transactions (transaction shall be understood to mean any transmission, the signature of which has been validated by the approved provider and the recording of which has been confirmed by the Factor). The Factor may make payment, free-of-charge, by order and on behalf of the Company, of all sums due by the Company to the approved certifying beneficiary by charge to the current account of the Company, up to the date that the cancellation of the factoring agreement takes place or that the electronic certification, if applicable.

If the needs of the Company should exceed the 15 transactions included in the flat rate, each additional operation may be billed at EUR 1.90 excluding tax.

Article 35: Collection of information of a personal nature

With respect to the provisions of Law No. 78-17 of January 6, 1978, amended by the Law of August 6, 2004, relative to computerized processing, to files and to freedoms, the Factor utilizes an automated processing of personal information of the managers and of some of their agents, specifically the representatives or the attorneys-in-fact signing the subrogation releases and related documents.

Information of a personal nature is processed and retained for a purpose strictly necessary for the services rendered within the context hereof. The Factor may, however, need to transmit it to other companies of the group to which it belongs, within the scope of applicable laws or regulations. With respect thereto, the Company shall be accountable for allowing its managers and agents to transmit the information mentioned in the preceding article.

The concerned persons may request communication of their personal information and request that any inaccurate information concerning them be corrected or removed by contacting the sales department of the Factor at the address mentioned in the heading of this agreement.

The Company undertakes to inform its concerned managers and agents of the existence, the methods and the purpose of the automated processing by the Factor undertaken within the context hereof.

The other general and special terms of the agreement remain unchanged.

This amendment will take effect from the day of its signing.

Executed in two counterparts in Paris, on

ANNEX – Purchase order

THE COMPANY                                                               THE FACTOR

On September 2, 2010

Authorized Seals and Signatures

[stamp]

CXRANDERSONJACOBSON	Rue de l’omette28410 ABONDANT
Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
R.C.S. Dreux – SIREN 785 754 706

CONVEYANCE OF PROFESSIONAL RECEIVABLES

Article L.313-23 to L.313-34 of The Monetary and Financial Code

Beneficiary Institution	Assignor
CICCIO	CXR ANDERSON JACOBSON
9, Place Marceau	Rue de l’omette
B.P. 9	28410 ABONDANT
28001 CHARTRES CEDEX

This schedule, subject to the provisions of Articles L.313-23 to L.313-34 of The Monetary and Financial Code, on the one hand, and to the signed special covenants, on the other hand, concerns the following receivables enumerated here. It is deemed to be endorsable.

Designation and address of the debtor	Designation of the account receivable
FACTOCIC	All amounts payable in connection with the credit balance of the current account of the factoring agreement No. 024283 CXR ANDERSON JACOBSON upon the closing of the accounts.
Public Limited Company with capital of € 7,680,000, the registered office of which is at:
Tour Kupka – 18, Rue Hoche - 92988 PARIS LA DEFENSE
Date of the assignment	Signature and seal of the assignor
	[stamp]
On September 2, 2010	CXR
	ANDERSON	Rue de l’omette
	JACOBSON	28410 ABONDANT
	Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
	R.C.S. Dreux – SIREN 785 754 706

CES/024283 GN09

PURCHASE ORDER corporate e-services

Corporate e-services

· e-defact o € 15 Excl. Tax

Computerized and secure transmission of your invoices, supporting documents and subrogation releases.

The qualification of your customers item is available through Siretage

· e-médiat x  € 22 Excl. Tax

Access to the e-médiat service for the computerized management of your financing requests in real time and in a secure environment. Up to 15 monthly transactions; refer to the attached pricing for all additional transactions.

· Computerized promissory notes o € 8 Excl. Tax

Financing of your CIC account within 24 hours.

Automatic e-mail to your CIC bank notifying the issuance of a promissory note and/or bank transfer is available.

·  Factocic Net x € 40 Excl. Tax

Requests for guarantees, access via the Internet, account and statistical queries, secure sharing of information within the company, downloading and remote transmission.

Tax exclusive total of the chosen services: 62 Excluding tax

1)  General remarks: In order to enable the company to have access to all the management information within the context of the agreement, the factor has established data communication (Internet and specific software) services, the content and the operating methods of which are described in the customer guide. Access to these services requires the use of a microcomputer. The company assumes all the relative costs, including those for telecommunications. The services can only be accessed through confidential codes and an identification code and a password, which are notified to the company upon the signing hereof.

2)  Industrial property rights – Granting of a license – All the industrial property rights and copyrights relative to the data communication services, their presentation, content, (software, visual and sound functions, articles and in general all the information appearing therein) are works protected by the Industrial Property Code and International Conventions on Copyrights, which belong exclusively to the factor, in the old, current or future versions.

Any reproduction or dissemination, in whole or in part, by any means whatever, is expressly prohibited without the written and prior consent of the Factor:

The Factor grants to the company the non-exclusive right to use its specific software mentioned in 1 above, for its own use alone and for the sole purpose of performing, within the context of the performance of the agreement, the operations described in the customer guide.

The company is obligated to respect the terms of the license agreement that is delivered to it with the software. It undertakes to return it to the Factor at the end of the agreement and to destroy all the copes that it has made of it.

3)  Liability of the Factor – The Factor cannot be held liable for the improper operation of the telephone lines, the equipment necessary for the use of the data communication services, for the use that is made of them, or for the results obtained. Furthermore, it shall have the right to interrupt or to modify the operation of the services, at any time, specifically for the purpose of maintaining their quality, reliability, security or performances. In no case can it be held liable the consequences, particularly loss of data, loss of operation or any other financial loss that would result from one of the preceding events.

4)  Confidentiality – Liability – The Factor has taken all measures for the purpose of protecting the confidentiality of the access to the information. The company undertakes to keep the access codes secret. It alone is responsible for the codes and the conservation of them, for their confidentiality and their use. The Factor cannot be held liable in case of fraudulent or improper use due to a voluntary or involuntary disclosure of any of the confidential codes attributable to the company. The latter further guarantees that it will at all times observe

all the laws and regulations applicable to the use of the data communication services. It shall answer for the respect for the provisions of this article by its staff.

5) Pricing – The Company e-services are billed at the beginning of the month at the above-indicated monthly rates. They are subject to review at the beginning of each civil year.

Failure to use the e-defact and e-médiat services or to transmit your subrogation releases by computer file shall entail a billing of € 10 excluding tax per release.

Factocic

Factor of Development

Tour Facto - 92988 PARIS LA DEFENSE Cedex

Corporate e-services SUBSCRIPTION

www.factocic.fr

Company:	CXR ANDERSON JACOBSON	Seller code: 024283
Address:	Rue de l’omette	Name:	Mr. Pierre EYBRALY
Postal Code:	28410    City: ABONDANT	Function of the signatory	Assistant General Manager
Date:	September 2, 2010
		Seal and signature
		September 2, 2010
		[signature]

POWER OF ATTORNEY

APPENDIX TO THE FACTORING CONTRACT NR. 024283  on this date 08/20/2010

I, the undersigned, Mr. Pierre EYBRALY

Born on	04/21/1954 [handwritten]
Living at the address:	66 Route Lignerolles	27810 MARCILLY / EURE [handwritten]
Acting as the General Director	Adjunct [handwritten]
of the CXR ANDERSON JACOBSON Company		with a capital of 1,350,000.00 € EUR
Simplified Limited Liability Company
With headquarters at: Rue de l’ornette – 28410 ABONDANT

hereafter referred to as “the company”

·considering the reference factoring contract entered into between the company and FACTOCIC, public limited company with headquarters at TOUR FACTO, 92988 PARIS LA DEFENSE, hereafter referred to as “the Factor”.

·delegates through this present the following authorities to

Mrs. Magali Inizan [handwritten]

living at

50 rue Albert Sarraut 78000 VERSAILLES [handwritten]

1 – Surrogate in my name and stead the Factor in the rights related to the credits of the company, sign all subrogation releases and all transfer and credit transfer deeds.

2 – Use all existing or potential accounts in the name of the company for the Factor, make all payments or withdrawals, emit and sign all debit orders.

3 – Accept, subscribe, endorse and pay all commercial papers, extend all deadlines, certify all invoices.

4 – More generally, do whatever may be deemed necessary for the complete execution of the factoring contract referred to above.

·I declare the Factor discharged of any and all responsibility with regard to the consequences that may result from the present mandate, that will remain valid until express revocation by certified mail to the Factor.

Made in Paris La Défense, on 08/20/2010 [handwritten]

·constituent’s signature preceded by the handwritten words “good for authority”

·constituent’s signature preceded by the handwritten words “good for acceptance”

·company seal

Good for authority [handwritten]		Good for acceptance [handwritten]
[stamp]
CXR
ANDERSON	Rue de l’omette
JACOBSON	28410 ABONDANT
Tel. 02 37 62 88 00 – Fax 02 37 62 88 01
R.C.S. Dreux – SIREN 785 754 706
PR		GN06

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(a) or 15D-14(a) 
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Carmine T. Oliva, certify that:

1.I have reviewed EMRISE Corporation’s Quarterly Report on Form 10-Q;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2010

/s/ CARMINE T. OLIVA

Carmine T. Oliva

Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY RULE 13A-14(a) or 15D-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brandi L. Festa, certify that:

1.I have reviewed EMRISE Corporation’s Quarterly Report on Form 10-Q;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2010

/s/ BRANDI L. FESTA

Brandi L. Festa

Director of Finance and Administration (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with EMRISE Corporation’s (the “Company”) Quarterly Report on Form 10-Q for the period ended September 30, 2010, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies in his capacity as Chief Executive Officer, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge:

1.             the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.             the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 15, 2010	By:	/s/ CARMINE T. OLIVA
		Carmine T. Oliva
		Chief Executive Officer (Principal Executive Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with EMRISE Corporation’s (the “Company”) Quarterly Report on Form 10-Q for the period ended September 30, 2010, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies in her capacity as Principal Financial Officer, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on her knowledge:

1.             the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.             the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 15, 2010	By:	/s/ BRANDI L. FESTA
		Brandi L. Festa
		Director of Finance and Administration
		(Principal Financial Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.