Rae Systems (RAE) 8-K Independent Auditor’s Reports, and Consolidated Financial Statements

EXHIBIT 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On July 11, 2006, RAE Systems Inc. (“RAE”) purchased the assets of Aegison Corporation (“Aegison”), a Santa Clara, California based supplier of fixed and mobile digital video surveillance systems, for $2.1 million in cash (the “Transaction”).

The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of RAE and Aegison. The unaudited pro forma condensed combined balance sheet as of June 30, 2006 (the “Pro Forma Balance Sheet”) was prepared by combining RAE’s consolidated balance sheet as of June 30, 2006 with Aegison’s consolidated balance sheet as of June 30, 2006, with the assumption that the Transaction had occurred as of June 30, 2006.

The following unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2006 and for the year ended December 31, 2005 (together the “Pro Forma Statements of Operations”), have been prepared by combining RAE’s consolidated statement of operations for the six months ended June 30, 2006 and fiscal year ended December 31, 2005 with Aegison’s corresponding consolidated statement of operations for the six months ended June 30, 2006 and fiscal year ended December 31, 2005. The Pro Forma Statements of Operations give effect to the Transaction as if it had occurred at the beginning as of January 1, 2005 or January 1, 2006, respectively. Neither the Pro Forma Statements of Operations nor the Pro Forma Balance Sheet reflects the anticipated cost savings or revenue enhancements in connection with the Transaction.  

The Pro Forma Statements of Operations and the Pro Forma Balance Sheet are presented for illustrative purposes only. It is not necessarily indicative of the operating results or financial position that would have occurred if the Transaction had been consummated at the beginning of the period indicated, nor is such information indicative of the future operating results or financial position of RAE Systems Inc. after the acquisition.

1

RAE Systems Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2006

						Pro Forma					Pro Forma
	RAE		Aegison			Adjustments			Note		Combined
Assets
Cash and cash equivalents	$	13,409,000	$	22,000		$	(1,899,000	)		A	$	11,532,000
Short-term investments		11,929,000		4,000			—					11,933,000
Accounts receivable, net of allowance for doubtful accounts		12,551,000		27,000			—					12,578,000
Inventories, net		12,000,000		47,000			—					12,047,000
Other current assets		8,594,000		1,000			—					8,595,000
Property and equipment, net		14,972,000		39,000			—					15,011,000
Intangible assets, net		1,547,000		6,000			909,000			B		2,462,000
Goodwill		136,000		—			803,000			C		939,000
Other long term assets		2,704,000		—			353,000			D		3,057,000
Total Assets	$	77,842,000	$	146,000		$	166,000				$	78,154,000
Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity
Accounts payable	$	6,528,000	$	65,000		$	—				$	6,593,000
Accrued liabilities		6,664,000		22,000			—					6,686,000
Other current liabilities		3,277,000		569,000			(344,000	)		E		3,502,000
Long term liabilities		2,511,000		—			—					2,511,000
Total Liabilities		18,980,000		656,000			(344,000	)				19,292,000
Minority Interest in Consolidated Entities		4,081,000		—			—					4,081,000
Shareholders’ Equity		54,781,000		(510,000	)		510,000			F		54,781,000
Total Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity	$	77,842,000	$	146,000		$	166,000				$	78,154,000

2

RAE Systems Inc.
Unaudited Pro Forma Condensed Combined Statement of Income for the Year Ended December 31, 2005

							Pro Forma					Pro Forma
	RAE			Aegison			Adjustments			Note		Combined
Net Sales	$	60,293,000		$	957,000		$	—				$	61,250,000
Cost of Sales		24,690,000			435,000			—					25,125,000
Gross Profit		35,603,000			522,000			—					36,125,000
Operating Expenses:
Sales and marketing		16,835,000			264,000			92,000			G		17,191,000
Research and development		5,414,000			323,000			63,000			G		5,800,000
General and administrative		12,915,000			570,000			—					13,485,000
Loss on abandonment of lease		2,027,000			—			—					2,027,000
Total Operating Expenses		37,191,000			1,157,000			155,000					38,503,000
Loss from Operations		(1,588,000	)		(635,000	)		(155,000	)				(2,378,000	)
Other Income		290,000			2,000			—					292,000
Income tax benefit		477,000			—			292,000			I		769,000
Minority interest in loss of consolidated subsidiaries		62,000			-			-					62,000
Net Loss	$	(759,000	)	$	(633,000	)	$	137,000				$	(1,255,000	)
Net loss per share
Basic Loss Earnings Per Common Share	$	(0.01	)									$	(0.02	)
Diluted Loss Earnings Per Common Share	$	(0.01	)									$	(0.02	)
Shares used in computing net loss per share
Basic		57,687,714											57,687,714
Diluted		57,687,714											57,687,714

3

RAE Systems Inc.
Unaudited Pro Forma Condensed Combined Statement of Income for Six Months Ended June 30, 2006

							Pro Forma					Pro Forma
	RAE			Aegison			Adjustments			Note		Combined
Net Sales	$	28,327,000		$	214,000		$	—				$	28,541,000
Cost of Sales		13,155,000			93,000			—					13,248,000
Gross Profit		15,172,000			121,000			—					15,293,000
Operating Expenses:
Sales and marketing		8,491,000			88,000			46,000			H		8,625,000
Research and development		2,726,000			116,000			32,000			H		2,874,000
General and administrative		6,002,000			251,000			—					6,253,000
Total Operating Expenses		17,219,000			455,000			78,000					17,752,000
Loss from Operations		(2,047,000	)		(334,000	)		(78,000	)				(2,459,000	)
Other Income		333,000			—			—					333,000
Income tax benefit		484,000			—			152,000			I		636,000
Minority interest in loss of consolidated subsidiaries		145,000			-			-					145,000
Net Loss	$	(1,085,000	)	$	(334,000	)	$	74,000				$	(1,345,000	)
Net loss per share
Basic Loss Earnings Per Common Share	$	(0.02)										$	(0.02)
Diluted Loss Earnings Per Common Share	$	(0.02)										$	(0.02)
Shares used in computing net loss per share
Basic		58,007,469											58,007,469
Diluted		58,007,469											58,007,469

4

Note To Unaudited Condensed Combined Pro Forma Financial Statements

The Company recorded the following pro forma adjustments to the Pro Forma Balance Sheet and Pro Forma Statements of Operations:

A – The total purchase price of the Transaction was $2.1 million. Of this amount, $1.8 million was paid shortly after the Transaction’s purchase agreement was signed, $0.1 million was paid for costs incurred due to the Transaction and $0.2 million remains as a current liability, which is due six months after the Transaction date.

B – To reflect fair value of intangible assets purchased. Intangible assets included the following:

			Weighted
			Average Useful
	Amount		Life (Years)
Customer List	$	91,000		3
Business name and trade name		108,000		2
Trade secret		79,000		10
Patents and technology		631,000		10
Total	$	909,000

C – Goodwill represents excess purchase price over fair value of assets purchased and liabilities assumed.

D – Aegision has a 20% equity interest in Tianjin SecuRay, which is primarily a research and development company in China. The fair market value of the 20% equity interest was $0.4 million. In January 2007, RAE completed the acquisition of Tianjin SecuRay. The total purchase price of Tianjin SecuRay was $2 million cash.

E – $0.3 million reduction in other current liabilities was a net of:

• $0.5 million of reduction of Aegison’s liabilities not assumed by RAE

• $0.2 million of additional current liability recorded as part of the purchase price (see Note A).

F – Represents elimination of Aegison’s equity balance at June 30, 2006.

G – Represents twelve months amortization of intangible assets.

H – Represents six months amortization of intangible assets.

I – Income tax benefit calculated based on an estimated tax rate of 37%.

5