RAE Reports Q4 and 2004 Year-End Financials

Q4 revenue up 75 precent from Q4 2003; annual 2004 revenue up 46 percent from 2003

RAE Systems Inc., a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical and radiation detection monitors and networks for homeland security and industrial applications, today reported results for the fourth quarter and full year of 2004.

"RAE Systems achieved many important milestones in 2004, including expanding in markets around the world, acquiring key distributors in Europe and Asia, and focusing on the development of cutting-edge products for hazardous environment sensing. In addition, we celebrated 10 years of manufacturing in China," said Robert I. Chen, chief executive officer of RAE Systems. "We are executing on our vision of becoming the preferred provider of hazardous environment data -- whether from personal monitors, wireless sensing systems or wired networks -- to the first responders, security organizations and industrial users who must make life-critical decisions on a daily basis."

Fourth Quarter Financials

For the fourth quarter of 2004, RAE Systems reported revenue of $15.0 million as compared to revenue of $8.6 million for the same quarter in 2003, an increase of 75 percent. The growth in revenue was largely attributable to sales from KLH, which contributed $4.7 million in revenue for the quarter, as well as from increased sales of our integrated systems products and patented photoionization detection (PID) products for homeland security.

Gross margins for the fourth quarter of 2004 were 54 percent as compared to 62 percent for the fourth quarter of 2003. The decrease was primarily attributable to an increase in sales from KLH's distribution business, which carries lower gross margins. Net income for the fourth quarter of 2004 was $315,000, or $0.01 diluted earnings per share, as compared to net income of $483,000 for the same period in 2003, or $0.01 diluted earnings per share.

Sales and marketing expenses were $3.6 million or 24 percent of revenue for the fourth quarter of 2004 as compared to $2.2 million or 26 percent of revenue for the fourth quarter of 2003. The increase in sales and marketing expenses was related to the addition of our KLH acquisition as well as an increase in sales infrastructure in Europe.

Research and development expenses were $1.3 million or 9 percent of revenue for the fourth quarter of 2004. For the fourth quarter of 2003, research and development expenses were $803,000 or 9 percent of revenue. The additional expenses were mainly due to the development of several gas detection products, including the ToxiRAE 2 and EntryRAE, our new 5-gas confined space entry product as well as the further development of our radiation detection products.

General and administrative expenses for the fourth quarter of 2004 were $2.6 million dollars or 18 percent of revenue as compared to $1.4 million or 16 percent for the fourth quarter of 2003. The additional expenses were primarily attributable to costs of complying with Section 404 of the Sarbanes-Oxley Act, non-cash charges associated with the issuances of warrants and options, the addition of KLH's G &A expenses, increased legal fees, and to build the infrastructure to position the company for future growth.

For the fourth quarter of 2004, the company's tax provision was $35,000 or 6 percent of pretax income. The provision was below statutory rates, largely due to the utilization of research and development credits.

Fourth Quarter 2004 Key Highlights and Developments

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