8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 8-K/A

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Date of Report (Date of earliest event reported): July 30, 2003

COMMISSION FILE NUMBER: 000-26109

_________________

RAE Systems Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation) 77-0588488
(I.R.S. Employer
Identification No.)

1339 Moffett Park Drive
Sunnyvale, California 94089
408-752-0723
(Address and telephone number of registrant’s principal executive offices)

_________________

TABLE OF CONTENTS

Item 7. Financial Statements and Exhibits.

Item 12. Disclosure of Results of Operations and Financial Condition.

SIGNATURE

EXHIBIT INDEX

EXHIBIT 99.1

EXHIBIT 99.2

Item 7. Financial Statements and Exhibits.

           c. Exhibits

Exhibit No.
99.1
99.2 Description
Press Release dated July 30, 2003
Transcript of Conference Call conducted by Registrant on July 30, 2003

Item 12. Disclosure of Results of Operations and Financial Condition.

        On July 30, 2003, RAE Systems Inc. (the “Company”) issued an amended press release announcing its financial results for the second quarter of 2003. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

        On July 30, 2003, RAE Systems Inc. held an earnings conference call to discuss its results of operations for the second quarter of 2003. A transcript of the conference call is furnished with this Form 8-K/A as Exhibit 99.2.

        The information in this Form 8-K and the Exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

SIGNATURE

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

Date: August 4, 2003 RAE Systems Inc.

By: /s/ Joseph Ng         
Joseph Ng
Chief Financial Officer

EXHIBIT INDEX

Exhibit No.
99.1
99.2 Description
Press Release dated July 30, 2003
Transcript of Conference Call conducted by Registrant on July 30, 2003

EX-99

Contact:
Lea-Anne Matsuoka
877-723-2878
investorrelations@raesystems.com

RAE SYSTEMS REPORTS RECORD SECOND QUARTER EARNINGS
Company Posts Fourth Consecutive Profitable Quarter with 44% Growth Over Q2 2002

SUNNYVALE, Calif. – July 30, 2003 –RAE Systems Inc. (OTC BB: RAEE.OB), a leading provider of hazardous environment detection solutions for homeland defense, today announced record financial results for the second quarter ended June 30, 2003.

For the quarter, RAE Systems reported total revenues of $7.5 million compared to revenues of $5.2 million in the second quarter of 2002, an increase of 44%. Worldwide consolidated net profit for the second quarter was $794,800 or 1.7 cents per share, compared to a loss of 23 cents for the same quarter in 2002. For the first half of 2003, revenues were $14.8 million as compared to $9.7 million in the first half of 2002, an increase of 52.4%. Net profit for the first half of 2003 was $1.6 million as compared to a net loss of $10.2 million in the first half of 2002. The loss in 2002 was primarily attributable to a one-time non-cash merger cost related to the reverse merger completed in April 2002. The growth in revenue was largely due to increasing customer acceptance of the AreaRAE wireless network system among first responders. RAE Systems also benefited from federal Homeland Security funding funneled through organizations such as EMS teams, fire and rescue squads, HAZMAT teams, and law enforcement agencies. They also experienced increased sales in Asia for Indoor Air Quality applications.

“We’re pleased with our solid performance in our fourth consecutively profitable quarter,” said Robert I. Chen, president and CEO of RAE Systems. “Following a surge in demand during the spring due to the war in Iraq and a heightened focus on homeland defense, our outlook continues to be strong in light of our long-standing relationships with first responders. RAE is the brand of choice among many first responder organizations around the U.S. as the federal government continues to release homeland defense grants.”

Highlights of the second quarter include:

• RAE Systems extended its reach into America’s heartland with the adoption of the company’s MultiRAE by the HAZMAT / Weapons of Mass Destruction (WMD) response team in Cole County, Missouri. The purchase marks the 10,000^th MultiRAE unit sold.
  
  
• RAE Systems played a key role in the TOPOFF II terrorism drills that took place in Seattle and Chicago in May 2003. The simulated attacks effectively demonstrated how the AreaRAE pervasive sensing capability provided life-critical data directly to FEMA coordinators in Virginia.
  
  
• Added world-class expertise to the company's advisory board, including wireless communications, networking, electrical engineering and nuclear terrorism leaders Dr. Andrea Goldsmith (Stanford University), Dr. Lyle Feisel (State University of New York), Dr. Mario Gerla (University of California, Los Angeles), and Dr. Friedrich Steinhausler (Stanford University and the University of Salzburg, Austria).
  
  
• Launched the “Rapid Deployment Kit”, designed for quick assessment of environmental and WMD threats. The kit includes four, market proven, wireless AreaRAE chemical detection monitors with in-case charging as well as a Host Controller for monitoring from a command center up to two miles away. This ad-hoc network is self-configuring and enables various agencies and counties to interoperate in the even of a large scale attack.
  
  
• Enhanced support of first responders with two new equipment “peace of mind” programs, Guaranteed Cost of Ownership, offering four-year unconditional parts replacement and a fixed price, two-tier maintenance and repair plan.
  
  
• Continued leadership in photo-ionization detection solutions by creating rugged, miniaturized PID lamps that stand up to more severe conditions. RAE Systems has also pioneered self-cleaning PID lamps, a critical advantage when in hazardous environments.
  
  
• RAE Systems responded to the U.S. Government’s Maritime Transportation Security Act, signed into effect as Public Law 107-295 by President George W. Bush in November of 2002 by joining forces with All Set Tracking AB, a provider of technology and security solutions to intermodal container transportation companies around the world. The companies will work to jointly develop solutions to monitor the safety of ocean-based cargo.
  
  
  
  
  
  
  
• RAE Systems established partnerships with CIMC (China International Maritime Container) and Savi Technology to jointly develop smart and secure containers to enhance security in cargo container transport.
  

About RAE Systems
RAE Systems Inc. is the leader in rapidly deployable sensing networks for homeland defense and a leading manufacturer of portable, wireless and fixed atmospheric monitors, photo-ionization detectors, radiation detectors, gas detection tubes, sampling pumps and security monitoring devices. Our customers use our products to monitor gas and other volatile organic compounds in confined spaces, to establish a perimeter security around hazardous material sites and to detect the illicit traffic of radioactive materials. RAE Systems’ customers operate in such industries as safety and security, oil and gas, pharmaceuticals, utilities, food, chemical, airlines, military and hazardous material storage and disposal, and its monitors are used in civilian and government atmospheric monitoring programs in over 40 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 “continue to be strong”. 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 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.

TABLES

                          RAE Systems Inc.
                 Condensed Consolidated Balance Sheets

                                              June 30,    December 31,
                                                2003          2002
                                           ------------- -------------
                                            (Unaudited)
Assets

Current Assets:
  Cash and cash equivalents                $  7,116,000  $  7,193,500

  Accounts receivable, net of allowance
   for doubtful accounts of $175,700 and
   $175,700, respectively                     3,428,600     2,475,700
  Inventories                                 4,204,500     3,176,400
  Prepaid expenses and other current
   assets                                     1,007,500       402,000
  Deferred income taxes                         528,800       528,800
                                           ------------- -------------
Total Current Assets                         16,285,400    13,776,400
                                           ------------- -------------
Property and Equipment, net                   2,015,600     2,026,800

Deposits and Other Assets                       143,000        81,800

Investment in Unconsolidated Affiliate          651,600       784,700
                                           ------------- -------------
                                           $ 19,095,600  $ 16,669,700
                                           ============= =============
Liabilities and Shareholders' Equity

Current Liabilities:
  Accounts payable                         $  1,507,800  $    942,400
  Accounts payable to affiliate                 725,400       757,900
  Accrued expenses                            1,699,600     1,689,700
  Income taxes payable                        1,502,600     1,726,200
  Current portion of deferred revenue            50,700       149,700
  Current portion of capital lease
   obligations                                  159,600       159,600
                                           ------------- -------------
Total Current Liabilities                     5,645,700     5,425,500
                                           ------------- -------------
Deferred Revenue, net of current portion         26,700            --
Capital Leases Obligations, net of current
 portion                                         14,200       107,300
Deferred Income Taxes                           277,200       277,200
                                           ------------- -------------
Total Liabilities                             5,963,800     5,810,000
                                           ------------- -------------
Commitments and Contingencies

Shareholders' Equity:
  Common stock, $0.001 par value;
   200,000,000 shares authorized; 45,982,223
   and 45,516,675 shares issued and
   outstanding, respectively                     46,000        45,500
  Additional paid-in capital                 18,141,000    17,955,800
  Deferred compensation                              --      (516,600)
  Accumulated deficit                        (5,055,200)   (6,625,000)
                                           ------------- -------------
Total Shareholders' Equity                   13,131,800    10,859,700
                                           ------------- -------------
                                           $ 19,095,600  $ 16,669,700
                                           ============= =============

See accompanying notes to condensed consolidated financial statements.


                           RAE Systems Inc.
            Condensed Consolidated Statements of Operations

                      Three months ended         Six months ended
                           June 30,                  June 30,
                 -----------------------------------------------------
                     2003          2002         2003          2002
                 ------------ ------------- ------------ -------------
                  (Unaudited)  (Unaudited)   (Unaudited)  (Unaudited)

Net Sales        $ 7,459,100  $  5,167,300  $14,798,500  $  9,712,600

Cost of Sales      2,615,700     2,151,400    5,528,500     4,176,200
                 ------------ ------------- ------------ -------------
Gross Margin       4,843,400     3,015,900    9,270,000     5,536,400
                 ------------ ------------- ------------ -------------
Operating Expenses:
  Sales and
   marketing       1,911,500     1,466,300    3,381,600     2,539,600
  Research and
   development       757,000       611,300    1,463,000     1,205,300
  General and
   administrative  1,160,400     1,951,400    2,348,000     2,796,600
  Legal fees and
   settlement
   costs               1,900       166,100       90,500       244,000
  Merger costs            --     8,734,700           --     8,734,700
                 ------------ ------------- ------------ -------------
Total Operating
 Expenses          3,830,800    12,929,800    7,283,100    15,520,200
                 ------------ ------------- ------------ -------------
Operating
 Income (Loss)     1,012,600    (9,913,900)   1,986,900    (9,983,800)
                 ------------ ------------- ------------ -------------
Other Income
 (Expense):
  Interest income      7,300        17,900       16,700        32,000
  Interest expense    (5,700)      (40,600)     (14,200)     (100,100)
  Other, net          21,900       (13,500)      23,000       (15,900)
  Equity in loss of
   unconsolidated
   affiliate         (67,200)      (59,300)    (133,100)     (120,600)
                 ------------ ------------- ------------ -------------
Total Other
 Income
 (Expense)           (43,700)      (95,500)    (107,600)     (204,600)
                 ------------ ------------- ------------ -------------
Income (Loss)
 Before Income
 Taxes               968,900   (10,009,400)   1,879,300   (10,188,400)

Income Taxes         174,100         7,800      309,500         7,800
                 ------------ ------------- ------------ -------------
Net Income
 (Loss)          $   794,800  $(10,017,200) $ 1,569,800  $(10,196,200)
                 ============ ============= ============ =============
Basic Earnings
 (Loss) Per
 Common Share    $      0.02  $      (0.23) $      0.03  $      (0.30)
                 ============ ============= ============ =============
Diluted Earnings
 (Loss) Per
 Common Share    $      0.02  $      (0.23) $      0.03  $      (0.30)
                 ============ ============= ============ =============
Weighted-average
 common shares
 outstanding      45,851,788    43,228,593   45,745,275    34,435,323
Stock options      1,697,686            --    1,525,955            --
                 ------------ ------------- ------------ -------------
Diluted
 weighted-average
 common shares
 outstanding      47,549,474    43,228,593   47,271,230    34,435,323
                 ============ ============= ============ =============



                           RAE Systems Inc.
            Condensed Consolidated Statements of Cash Flows

                                             Six months ended June 30,
                                            --------------------------
                                                2003          2002
                                            ------------ -------------
                                             (Unaudited)  (Unaudited)

Increase (Decrease) in Cash and Cash
 Equivalents

Cash Flows From Operating Activities:
 Net Income (Loss)                          $ 1,569,800  $(10,196,200)
   Adjustments to reconcile net income to
    net cash (used in) provided by operating
    activities:
      Depreciation and amortization             438,000       263,800
      Provision for doubtful accounts                --       (24,300)
      Inventory reserve                        (179,800)           --
      Compensation expense related to
       options                                  280,300            --
      Amortization of deferred compensation          --       862,800
      Common stock issued for services               --     2,121,600
      Common stock purchase rights granted
       below fair value                              --     2,308,300
      Compensation expense related to
       warrants                                  27,400     4,305,800
      Equity in loss of unconsolidated
       affiliate                                133,100       120,600
      Deferred income taxes                          --            --
      Changes in operating assets and
       liabilities, net of effects of
       deconsolidation:
         Accounts receivable                   (952,900)      (31,400)
         Inventories                           (848,300)      532,800
         Prepaid expenses and other current
          assets                               (304,100)      (72,200)
         Accounts payable                       565,400       (50,100)
         Accounts payable to affiliate          (32,500)       59,200
         Accrued expenses                         9,900       (69,400)
         Income taxes payable                  (223,600)     (211,000)
         Deferred revenue                       (72,300)      (94,500)
                                            ------------ -------------
Net Cash Provided by (Used In) Operating
 Activities                                     410,400      (174,200)
                                            ------------ -------------

Cash Flows From Investing Activities:
  Cash relinquished in deconsolidation               --      (878,300)
  Restricted cash                                    --     3,000,000
  Investment in affiliate                            --      (500,000)
  Acquisition of property and equipment        (426,800)     (570,300)
  Deposits and other                            (61,200)     (686,400)
                                            ------------ -------------
Net Cash (Used In) Provided By Investing
 Activities                                    (488,000)      365,000
                                            ------------ -------------
Cash Flows From Financing Activities:
  Proceeds from the issuance of common stock     93,200           200
  Proceeds from merger/reorganization                --     6,965,500
  Payments on notes payable and lines of
   credit                                            --    (4,425,800)
  Payment on capital lease obligation           (93,100)      (65,000)
                                            ------------ -------------

Net Cash Provided By Financing Activities           100     2,474,900
                                            ------------ -------------

Net (Decrease) Increase in Cash and Cash
 Equivalents                                    (77,500)    2,665,700

Cash and Cash Equivalents, beginning of
 period                                       7,193,500     3,742,600
                                            ------------ -------------
Cash and Cash Equivalents, end of period    $ 7,116,000  $  6,408,300
                                            ============ =============
Supplemental Disclosure of Cash Flow
 Information:
  Cash Paid:
    Income taxes                            $   509,500  $    218,800
    Interest                                $    14,200  $    100,100
  Noncash Investing and Financing
   Activities:
    Warrant issued for services             $   328,800  $         --
    Capital leases entered into for
     equipment                              $        --  $    329,800
                                            ============ =============

See accompanying notes to condensed consolidated financial statements.

EX-99

Forward-Looking Statements

This transcript 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 “continue to be strong”. 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 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.

RAE Systems Inc. (RAEE.OB)
Q2 2003 Financial Release Conference Call
July 30^th2003 11am PST

The Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the RAE Systems quarterly earnings conference call. During the presentation all the participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time, if you have a question please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, July 30^th, 2003. I would now like the turn the conference over to Lea-Anne Matsuoka, corporate secretary and treasurer of RAE Systems. Please go ahead ma’am.

Ms. Lea Anne Matsuoka

Thank you. Good morning and thank you for joining us. With me is Bob Chen, our chairman and CEO who’s presently in Europe, and Joseph Ng, our CFO. If you haven’t seen the earnings release, it can be retrieved at www.raesystems.com, or on Business Wire or similar websites. Today, Bob will discuss the second quarter highlights, including RAE’s progress made in the Homeland Security Market. Joseph will review, in detail, the financial results for the quarter ended June 30, 2003.

Before I turn the call over to Bob, I’d like to remind you that the matters that we discuss today include forward looking statements, and as such, are subject to the risks and uncertainties that we discuss in detail in our Forms 10-K and 10-Q filed with the SEC, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Bob?

Mr. Robert I. Chen

Thank you, Lea Anne and good morning to everyone. It is night time in Europe, and I am in Copenhagen hosting a sales meeting with our European distributors. I would like to take this opportunity to introduce Mr. Tord Wingren, Managing Director for RAE Europe. Mr. Wingren was formerly Managing Director of the Ericsson Mobile Platform, a $200 million operation based in Lund, Sweden. Mr. Wingren, along with Mr. Michael Jorgensen, Director of Sales in Europe, will form the backbone of our operation in Europe.

Today, I will be talking about our results for the second quarter. I will first make a couple of specific comments, highlight some of the details of our financial performance, then I will share my observations of customer needs and focus on why RAE’s wireless sensing solutions are gaining traction with first responders. A first responder can be a fireman, a policeman, or a medic and collectively there are 2.5 million first responders in the U.S. today. Lastly, I will give you a brief update on our initiative with the cargo container security opportunity that we touched on during our last conference call. Joseph, our CFO, will discuss the financial results in more detail following my remarks.

So, first for the quarter’s results. We had a good quarter. Revenue was $7.5 million, a 44% increase over the same period last year. Net profit was $795K, or 2 cents per share compared to a net loss of $10 million, or 23 cent per share last year. The loss last year was primarily the result of a one-time, non-cash merger charge related to the Nettaxi transaction. We continue to win business with our chemical detection solutions. The radiation sensors, GammaRAE, and NeutronRAE, introduced last quarter, have begun to ship in Q2 and we see increasing acceptance of this line among law enforcement, Customs, and Border Protection agencies. In China, sales increased by 31% over the same period last year as our parts-per-billion VOC detection solution is used in indoor air quality applications. Specifically, environmental and health concerns continue to drive regulations requiring the testing of buildings, both residential and industrial, prior to occupancy.

During our Q1 conference call, we described how we bundled our wireless chemical detector, the AreaRAE, into “Crisis Kits”. It has now been formally branded as the “Rapid Deployment Kit.” In Q1, this wireless solution was 4% of our business, and in Q2, it grew to 17% and the trend is continued increasing.

Let me describe how the “Rapid Deployment Kit” works. In an incident, whether accidental or intended (an act of terror if intended), first responders can quickly deploy a self configuring, ad hoc network of sensors surrounding ground zero. Firemen usually don protective garments as they enter this normally hot and toxic zone and stay there only as long as needed to rescue victims. With the AreaRAE solution, the incident commander and his crew can now retreat up to two miles away, and observe the sensor readings sent wirelessly on their control monitor, a rugged PC that is charged and ready in-case. This situation awareness helps first responders make better decisions during emergency response. In a large scale attack, adjacent county/city hazmat teams can join in the rescue and their AreaRAE systems will interoperate. As FEMA funding started to reach counties, we see more hazmat teams, as well as Civil Support Teams deploying our wireless sensing system solution.

In early May, there was a simulated dirty bomb and chemical attack exercise in Chicago and Seattle called TOPOFFII. Our AreaRAE systems, deployed at Boeing Field, captured the measurements and wirelessly relayed them to a local monitor, and in turn, relayed the data to FEMA headquarters over the Internet. The simulated attacks effectively demonstrate how the AreaRAE’s pervasive sensing capability provided life-critical data directly to FEMA coordinators in Virginia.

Now an update on our cargo container security initiative. I must emphasize that this is still very early in the development cycle and revenue is still very much regulation-driven and hence dependent on political process and evolving in different phases.

We started then technical discussion with China International Maritime Cargo Container (CIMC), the world’s largest cargo container maker, as well as our e-seal, and RFID (radio frequency identification) and network partners. We are working to integrate our technologies and plan to prototype the joint solutions during the next few quarters.

Now I will turn the call over to Joseph.

Mr. Joseph Ng

Thank you, Bob. Excuse my voice today I am a little under the weather. First, let me highlight the three (3) areas that have an impact on our Q2 results. Then I will review the pertinent income statement items, and balance sheet.

First, gross margins improved because homeland security applications required high precision products, including the AreaRAE wireless system, that normally come with higher margins.

Second, 13% of Q2 revenue was from spares replacement. Our instruments come with 1 to 5 sensors each and they are guaranteed to work for 2 years. Hence a built-in replacement market that grows with the installed base.

Third, non-cash fair value accounting charges made up 16% our G&A expenses in Q2.

Let me now review the income statement. Total revenue was $7.5 million, up 44% from last year. AreaRAE, our wireless sensing solution grew 366% compared to the same period last year and made up 17% of our Q2 revenue. Because of security concerns, we often cannot announce our customer wins unless we have their clearance. Suffice to say that approximately 50% of our business now is homeland security related.

Geographically, North America grew 47%, Asia 44% and Europe 33%. Together Europe and Asia constitute 22% of our total business, split almost equally between the two territories.

Gross margins were 65% compared to 58% for the quarter a year ago. This is driven by volume, product mix and lower cost of material. As mentioned above, homeland security application required high precision sensing products that are normally high margin.

Sales and marketing expenses were $1.9 million, and accounted for 26% of revenue, up from $1.5 million or 28% of revenue. We began our advertising campaign to support our radiation products that were announced last quarter and we continued to expand our European sales and service infrastructure.

G&A expenses were $1.2 million, and accounted for 16% of revenue, down from $2 million or 38% of revenue. Included in Q2 was 183,000 dollars of a non-cash fair value accounting charge in connection with our Stock Option Plans and warrants recently granted to our investment banking advisor. For the same period last year, $900K of the $2 million was related to non-cash accounting charges.

Legal expenses were minimal in Q2 compared to $166,000 for the same period last year. We settled two Nettaxi lawsuits during the last quarter and the settlement amounts were lower than our accrual. Hence the low legal expenses for the quarter. We should expect between $50K to $75K per quarter prospectively.

Operating margins were $1 million and thirteen thousand or 14% of revenue, compared to a loss a year ago. This works out to 1.8 cents per share.

Tax provision for the quarter was $174K. Net income was $795K or 11% of revenue.

Now a few comments on the balance sheet.

Cash was largely unchanged. We generated $410K cash from operations during the last six months. Current ratio was 2.88 to 1 and there was no long term debt.

Accounts receivable was $3.4 million compared to $2.5 million at year-end. The increase was due to higher sales volume. Day sales outstanding were 43 days. .

Inventory increased over $1 million since year-end. We made a conscious decision before the Iraqi war to build up inventory to avoid delays in shipment should supply chains be affected by the war. We expect inventory to gradually return to a more normal level in the coming quarters.

Now, I would like to take questions. And please, limit yourself to one question per person please. Thank you.

The Operator:

Ladies and gentlemen, if you would like to register a question please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question.

As a reminder ladies and gentlemen to register a question, please press the 1 followed by the 4.

The first question comes from the line of Gary Shemano with Shemano Group. Please go ahead sir.

Mr. Gary Shemano:

Hello, congratulations on good earnings. Question: you mentioned that you had given warrants to your banker. I’d like to know how many you gave to the banker, and who is the banker, and what service did they provide?

Mr. Joseph Ng:

We have retained Jefferies/Quarterdeck. They are based in New York City, and we have provided 450,000 shares of options of warrants at market value. And they are helping us to look at our financing options.

Mr. Gary Shemano:

And they got 400 some-odd thousand options to help you look at things?

Mr. Joseph Ng:

450,000. That’s correct.

Mr. Gary Shemano:

And you expense those out?

Mr. Joseph Ng:

Pardon me?

Mr. Gary Shemano:

Did you expense those out?

Mr. Joseph Ng:

Yes, we did. It would be amortized over two years. The impact on this quarter was 27,000 dollars.

Mr. Gary Shemano:

OK, thank you.

The Operator:

As a reminder ladies and gentlemen to register a question, please press the 1 followed by the 4. The next question comes from the line of Tom Lahey, private investor. Please go ahead, sir.

Mr Tom Lahey:

Hi, I would like to ask the question to follow up on Mr. Shemano’s question with respect to investment banking. What is the necessity of financing at this point when you’re cash rich and we see the same or lesser growth with respect to Homeland Security? I don’t understand what the role of Jefferies was for financing consulting.

Mr. Joseph Ng:

We are looking at the options for growth and I would like to get Mr. Chen to talk about the technology needs that we have.

Mr. Tom Lahey:

OK.

Mr. Bob Chen:

OK, we see several big government contracts on the horizon. In order to support our rapid growth, we anticipate the need for some growth capital to address new opportunities. As our business grew, we set up some good infrastructure in the manufacturing area, and the distribution and technology areas. We are interested in various business opportunities that are synergistic to us. To that extent, we are thinking about a possible acquisition for us to grow.

Mr. Tom Lahey:

Thank you, that sounds excellent.

The Operator:

The next question comes from the line of David Baker who is with Core Fund Management. Please go ahead sir.

Mr. David Baker:

Congratulations on a great quarter. Can you please address the size of the cargo container security opportunity for the company and what that could mean going forward?

Mr. Joseph Ng:

There are 16 million cargo containers around the world and seven million hit the US shores every year. That works out to be about 17 thousand per day. So we are working with container makers. CIMC, which Mr. Chen talked about, is a 40 to 50 percent market-share player. So we are working with them to install our sensor buff into their units so that they can offer anti-terror or anti-theft options to their users. That could be large companies from the US that are importing. The market is huge. The revenue is very large. But at this point it is dependent on the political process and we do not—we are not in a position to state the potential revenue.

Mr. David Baker:

Thank you.

The Operator:

Ladies and Gentlemen, to register a question please press the 1 followed by the 4.

I’m not showing any further questions at this time. Please continue with your closing remarks or additional comments.

Mr. Joseph Ng:

Thank you very much, everybody.

Mr. Bob Chen:

Thank you.

Mr. Joseph Ng:

Thank you.

The Operator:

Ladies and Gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.

[END OF CONFERENCE CALL]