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Press Release

RAE Systems Reports First Quarter Revenue of $8.2 Million


Profitable quarter reflects 11.5% growth in revenue over Q1 2003; company reaffirms 2004 revenue guidance of $38 to $42 million

SUNNYVALE, Calif. May 3, 2004 RAE Systems Inc. (AMEX: RAE), a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical detection monitors and networks for homeland security and industrial applications, today reported revenue for the quarter ended March 31, 2004 of $8.2 million compared to revenues of $7.3 million in the first quarter of 2003, an increase of 11.5%.

The growth in revenue was largely attributable to the continued expansion of the homeland defense market and repeat orders from the industrial and environmental sectors. Second quarter revenue is expected to increase to between $9.3 million and $9.7 million, partially due to a few contracts that were won near the end of March for which shipment was made in April.

Gross margins increased from 60.3% in the first quarter of 2003 to 63.6% in the first quarter of 2004 as a result of increased volume and sales of higher margin products. Consolidated net income for the first quarter of 2004 was $185,000, compared to net income of $775,000 for the same quarter in 2003.

General and administrative expenses, including legal fees and settlement costs, increased from $1.3 million for the quarter ended March 31, 2003 to $1.7 million for the quarter ended March 31, 2004, an increase of 34.1%. Non-cash accounting charges related to the issuances of options and warrants increased from $125,000 for the quarter ended March 31, 2003 to $405,000 for the same period in 2004. The increase to general and administrative expenses is also attributable to increased expenses to comply with the internal controls requirements of Section 404 of The Sarbanes-Oxley Act.

Sales and marketing expenses increased from $1.5 million in the first quarter of 2003 to $2.1 million for the same time period in 2004, an increase of 40.6%. The increase was attributable to additional costs associated with significantly increasing the sales infrastructure in Asia and Europe to position the company for future growth, and increased spending on wireless sensing solutions sales and marketing focus in the United States.

Research and development expenses increased from $706,000 for the quarter ended March 31, 2003 to $920,000 for the quarter ended March 31, 2004. Research and development costs increased by 30.3% to complete the development of the AreaRAE Gamma, the first wireless, networked, combined chemical and radiation detector; and RAEWatch, a wireless mesh network sensor system with a range of applications in cargo container security, transportation security and indoor air security.

During the traditionally soft first quarter, RAE Systems continued to win new business and, importantly, repeat orders from existing customers, said Robert I. Chen, president and CEO of RAE Systems. Our solutions were chosen around the world for use in public safety and first response, environmental and indoor air quality monitoring, and industrial applications including fixed monitoring systems and confined space entry. We are reaffirming our guidance of $38 million to $42 million in revenue for the 2004 fiscal year, excluding acquisitions, with gross margins of 60% to 63%.

Selected highlights of the first quarter include:
Increased worldwide adoptions, including Rapid Deployment Kits purchased by fire departments and HazMat organizations in the U.S., Europe and Australia

Environmental monitoring and indoor air quality purchases by industry and government agencies in China, Korea and Japan

Bo Andersson, a former RAE Systems board member, was appointed managing director of RAE Systems Europe. Sigrun Hjelmquist, a telecommunications veteran who was most recently president and CEO of Ericsson Components in Stockholm, Sweden, was selected to replace Mr. Andersson on the RAE Systems board of directors.

RAE Systems was deployed at several high profile public events such as New Years celebrations in New York, a major televised parade, and the Super Bowl.

On January 28, the company closed a follow-on offering of 8,050,000 shares of stock at $4.25 a share, with net proceeds of approximately $31.8 million.

About RAE Systems
RAE Systems is a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical detection monitors and networks for homeland security and industrial applications. In addition, RAE Systems offers a full line of portable single-sensor chemical and radiation detection products. RAE Systems products enable the military and first responders such as firefighters, law enforcement and other emergency management personnel to detect and provide early warning of weapons of mass destruction and other hazardous materials. Industrial applications include the detection of toxic industrial chemicals, volatile organic compounds and petrochemicals. RAE Systems products are used by many U.S. government agencies, including the Department of Homeland Security, the Department of Justice, and the Department of State, as well as all branches of the U.S. military, and by numerous city and state agencies. Our end users also include many of the worlds leading corporations in the airline, automotive, computer and oil industries. Our products are used in civilian and government atmospheric monitoring programs in over 50 countries. For more information about RAE Systems, please visit www.RAESystems.com

Safe Harbor Statement
This press release contains “forward-looking” statements, as that term is used in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are denoted by such words as expected to increase and guidance. These types of statements address matters that are subject to risks and uncertainties, which could cause actual results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, the general economic and industry factors and receptiveness of the market to RAE and its products. In addition, our forward-looking statements should be considered in the context of other risk factors discussed in our filings with the Securities and Exchange Commission, including but not limited to our annual report on Form 10-K and Form 10-Q filings, available online at http://www.sec.gov. All forward-looking statements are based on information available to the company on the date hereof, and the company assumes no obligation to update such statements.


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