UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to           

RAE Systems Inc.

Delaware		77-0280662
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
3775 North First Street San Jose, California		95134
(Address of principal executive offices)		(Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share		NYSE Alternext US

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 þ (Do not check if a smaller reporting company)

Smaller reporting company o

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

     As of June 30, 2010, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $47,545,281, based upon the closing sale price of $0.80 on the NYSE Alternext US (formerly the American Stock Exchange) on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter. As of the close of business on February 28, 2011, the number of shares of registrant’s Common Stock outstanding was 59,512,064.

     Portions of the registrant’s Definitive Proxy Statement, filed with the Commission on March 9, 2011, and Annual Report on Form 10-K, filed with the Commission on March 31, 2011, are incorporated by reference into Part III of this Form 10-K/A.

 

 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     The information required by this item with respect to the Company’s executive officers is incorporated herein by reference from the information contained in the Company’s 2010 Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 31, 2011.

     The following table sets forth information with respect to the ages and backgrounds of the members of the Board of Directors of the Company:

								Director
Name		Position with RAE Systems		Age				Since(*)
Robert I. Chen		President, Chief Executive Officer and Chairman			63				1991
Peter C. Hsi		Chief Technology Officer and Director			61				1991
Lyle D. Feisel		Director			75				2001
Sigrun Hjelmqvist		Director			55				2004
Keh-Shew Lu		Director			64				2009
James W. Power		Director			81				2006
Susan Wang		Director			60				2009

     Robert I. Chen co-founded RAE Systems in 1991 and has served as President and Chief Executive Officer, and as Chairman and a member of the Board of Directors, since inception. From 1981 to 1990, Mr. Chen served as President and Chief Executive Officer of Applied Optoelectronic Technology Corporation, a manufacturer of computer-aided test systems, a company he founded and subsequently sold to Hewlett-Packard. Mr. Chen currently serves on the Board of Directors for the Shanghai Ericsson Simtek Electronics Company, Limited, a telecommunications and electronics company. Mr. Chen received a B.S.E.E. from Taiwan National Cheng Kung University, an M.S.E.E. from South Dakota School of Mines and Technology, an advanced engineering degree from Syracuse University and graduated from the Harvard Owner/President program.

     Dr. Peter C. Hsi co-founded RAE Systems in 1991 and has served as Chief Technology Officer, and as a member of the Board of Directors, since inception. Prior to co-founding RAE Systems, Dr. Hsi worked at Applied Optoelectronic Technology Corporation as the Chief Architect for semiconductor test systems. He was also the General Manager for Shanghai Simax Technology Co. Ltd. Dr. Hsi has filed 21 patent applications, of which 16 have been granted and 5 are pending. Dr. Hsi received a B.S.E.E. from the National Chiao-Tung University, and a M.S. and Ph.D. in Electrical Engineering from Syracuse University.

     Dr. Lyle D. Feisel has served as a member of the Board of Directors since March 2001. Currently, Dr. Feisel is a private investor and educational consultant. From November 2010 to May 2011, he served as Interim Executive Director of the American Society for Engineering Education in Washington, DC. In 2001, he retired as the Dean of the Thomas J. Watson School of Engineering and Applied Science and Professor of Electrical Engineering at the State University of New York (SUNY) at Binghamton, where he was responsible, inter alia, for personnel, curriculum, and finance. Dr. Feisel joined the faculty of SUNY Binghamton in 1983. Dr. Feisel is a Life Fellow of the Institute of Electrical and Electronics Engineers and of the American Society for Engineering Education, and is a fellow of the National Society of Professional Engineers. He is active in the affairs of those organizations and in the development and accreditation of engineering education worldwide. He is a member of the Board of Directors of the IEEE Foundation and the Miles River Yacht Club Foundation and chairs the Audit Committee of the latter. Dr. Feisel received his B.S., M.S., and Ph.D. degrees in Electrical Engineering from Iowa State University.

     Sigrun Hjelmqvist has served as a member of the Board of Directors since March 2004 and holds a number of other non-executive directorships. From 2000 to 2005, Ms. Hjelmqvist was investment manager and one of the founding partners of BrainHeart Capital, a venture capital company focusing on wireless communication. From 1998 to 2000, Ms. Hjelmqvist was President of Ericsson Components AB, and from 1994 to 1997, General Manager of the Microelectronics Business Unit at Ericsson Components AB. Ms. Hjelmqvist currently serves on the Board of Directors of Fingerprint Cards AB, C2SAT AB, Setra Group AB, Almi Invest Östra Mellansverige AB, Almi Invest Stockholm AB, Eolus Vind AB, Com Hem AB, One Media AB, Silex Microsystems AB, Atea ASA,

Addnode AB and Bluetest AB. During the past five years, Ms. Hjelmqvist also served on the Boards of E&T Förlag, AU Systems AB, Sandvik AB, Svenska Handelsbanken AB, E.ON Sverige AB, Seamless Distribution AB, AudioDev AB, Micronic Laser Systems AB, Sight Executive AB, IBS AB and Symsoft AB. Ms. Hjelmqvist received an M.S. in Engineering Physics and a Licentiate of Engineering in Applied Physics from the Royal Institute of Technology in Stockholm, Sweden.

     Dr. Keh-Shew Lu was appointed President and Chief Executive Officer of the Company in June 2005 after serving on the Board since 2001. Dr. Lu is also a board member of Lite-On Technology Corporation, Nuvoton Technology Corporation and RAE Systems Inc., three publicly held companies, as well as LedEngin, Inc. and Lorentz Solution, Inc., both privately held companies. Dr. Lu is the founding Chairman of the Asia American Citizen’s Council, the Vice Chairman of the governing board of the Plano Chinese Alliance Church, a board member of the Texas Tech Foundation and a board member of the Advisory Board to the Southern Methodist University’s Asian Studies Program. From 2001 to 2005, Dr. Lu was a partner of the WK Technology Venture Fund. From 1998 to 2001, Dr. Lu served as Senior Vice President of Texas Instruments Incorporated (“TI”) and its General Manager of Worldwide Mixed-Signal and Logic Products. His responsibilities included all aspects of the analog, mixed-signal and logic products for TI worldwide business, including design, process and product development, manufacturing and marketing. From 1996 to 1998, Dr. Lu was the manager of TI’s worldwide memory business. In addition, he served as the President of TI Asia from 1994 to 1997 where he supervised all of TI activities in Asia, excluding Japan. Dr. Lu holds a Bachelor’s degree in Electrical Engineering from the National Cheng Kung University in Taiwan, and a Master’s degree and a Doctorate in Electrical Engineering from Texas Tech University.

     James W. Power has served as a member of the Board of Directors since May 2006, and is currently the principal partner in J. W. Power & Associates, a security systems development and marketing consultant group, which he founded in 1992. From 2004 to 2009, Mr. Power served as Chairman of the Board of Directors of MDI, Inc., a security controls systems company. From 2005 to 2010, Mr. Power served as a member of the Board of Directors of Henry Bros. Electronics, Inc., a security systems sales and integration company. From 1994 to 2003, Mr. Power served as the chairman of the Board of Directors for InfoGraphic Systems Corp., a security systems development, manufacturer and sales company.

     Susan Wang has served as a member of the Board of Directors since March 2009. Ms. Wang retired from Solectron Corporation in 2002 from her position as Executive Vice President, Corporate Development and Chief Financial Officer. From 2003 to 2008, she also served as Chairperson of the Audit Committee and a member of the Executive Committee of Calpine Corporation. From 2002 to 2009 she also served as Chairperson of the Audit Committee and a member of the Compensation Committee of Avanex Corp. She is currently a director and Chairperson of the Audit Committee of Altera Corporation, and a director and Chairperson of the Audit Committee and a member of the Nominating and Governance Committee of Nektar Therapeutics. She also serves as a member of the Audit Committee of Suntech Power. Ms. Wang is a CPA and holds a Bachelor of Arts degree in Accounting from the University of Texas and an MBA in Finance from the University of Connecticut.

Section 16(a) Beneficial Ownership Reporting Compliance

     James Power filed one Form 4 late in 2010. One transaction, the grant of a nonqualified stock option, was reported on this late Form 4.

Code of Business Conduct and Ethics

     The Board of Directors has adopted a code of business conduct and ethics that applies to all RAE Systems employees, including employees of RAE Systems’ subsidiaries, and each member of the Company’s Board of Directors. The code of business conduct and ethics is available at the Company’s website at http://www.raesystems.com. The Company intends to disclose future amendments to the code of business conduct and ethics on its website and any waivers thereof for executive officers and directors within four days of such action in a Form 8-K filed with the SEC.

Audit Committee

     The members of the Audit Committee are Messrs. Feisel and Power and Ms. Wang (Chair). The Board of Directors has determined that each of these members of the Audit Committee is “independent,” as such term is defined under the applicable NYSE Amex listing standards and the rules and regulations of the Securities and Exchange Commission (“SEC”) as they apply to audit committee members. The Board of Directors has also determined that each member of the Audit Committee is financially literate, and that Ms. Wang is a “financial expert,” as such term is defined by the applicable regulations of the SEC.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

     Role of Compensation Committee

     The Company’s executive compensation program is administered by the Compensation Committee of the Board of Directors.

     Under the terms of its Charter, the Compensation Committee is responsible for recommending to the Board of Directors the type and level of compensation granted to the Company’s executive officers. In fulfilling its role, the Compensation Committee (i) grants stock options pursuant to our stock option plans, (ii) recommends to the Board of Directors the compensation for our executives officers and other employees, including annual salary, bonus and stock options, and (iii) reviews, on a periodic basis, the operation and administration of our executive compensation programs.

     The Compensation Committee may retain a compensation consultant to assist the Compensation Committee in fulfilling its role. In November 2006, the Compensation Committee commissioned Mercer Human Resource Consulting to complete an assessment of our named executive officer (“NEO”) compensation packages. A presentation was made to the Compensation Committee for informational purposes. In addition, the Compensation Committee may obtain the advice and assistance from internal or external legal, accounting or other advisors, as necessary.

     Compensation Philosophy and Programs

     Our overall compensation philosophy is to provide an executive compensation package that enables us to attract, retain and motivate executive officers to achieve the Company’s short-term and long-term business goals. Consistent with this philosophy, the following goals provide a framework for our executive compensation program:

	•		pay competitively to attract, retain and motivate executives who must operate in a high demand environment;
	•		relate total compensation for each executive to overall Company performance as well as individual performance;
	•		the mix of total compensation elements will reflect competitive market requirements and strategic business needs;
	•		a significant portion of each executive’s compensation should be at risk, the degree of which will positively correlate to the level of the executive’s responsibility; and
	•		the interests of our executives will be aligned with those of our stockholders.

     In order to achieve the above goals, our total compensation package generally includes cash compensation in the form of base salary, non-equity incentives, as well as long-term compensation in the form of stock option grants. We believe that appropriately balancing the total compensation package and ensuring the viability of each component of the package is necessary in order to provide market-competitive compensation. We believe the Company’s compensation programs are a significant determinant of our competitiveness. Accordingly, we focus on ensuring that the balance of the various components of our compensation program is optimized to motivate employees to improve our results on a cost-effective basis.

Compensation Elements

     Cash Compensation

     Base Salary

     Base salary is primarily determined by competitive pay and individual job performance. Base salaries for our NEOs are reviewed annually or more frequently should there be significant changes in responsibilities. In each case, we take into account the results achieved by the executive, his or her future potential, scope of responsibilities and experience, and competitive salary practices. The apparent increases in Messrs. Chen, Gausman, Tang, and Watson’s base salaries in 2009 are largely due to the fact that the Company had 27 payroll periods in 2009 and only 26 in 2008.

Non-Equity Incentive Plans

          Management Incentive Plan

     We have a non-equity incentive plan called the RAE Systems Inc. Management Incentive Plan (the “MIP”), which is designed to reward employees for achieving stretch financial and operating goals that we believe are important to the success of the Company and align executive compensation with the interests of our shareholders. The goal of our MIP is to reward, retain, and provide a clear focus on the factors we believe are important to the near and long-term success of the Company. Management proposes non-equity incentives according to each participating NEO’s position and obtains the Compensation Committee’s approval on non-equity incentive targets for each eligible participant as a percentage of base salary.

     Of the NEOs, the Chief Executive Officer, the Chief Financial Officer, and the Executive Vice President Operations participated in the MIP in 2010. The two remaining NEOs—the Vice President, Asia-Pacific & Europe, Middle East and Africa (“EMEA”) Business Operations; and Vice President Americas Sales—participated in the Sales Incentive Plan described below.

     For 2010, awards under the MIP included a payout formula based upon the achievement of goals set by the Compensation Committee for each half of the year:

	•		the Company’s revenue (50%);
	•		the Company’s fully diluted EPS (35%); and
	•		individual goals (15%).

     The revenue, EPS, and individual goals were then used to calculate the size of the non-equity incentive payments to each participating NEO. Award targets generally are set to provide that the incentive pool will not be funded if specified thresholds are not met. In addition, the incentive pool is capped at a maximum of 200% of the base salary of each participating NEO.

     The non-equity incentive targets for the participating NEOs during 2008 were as follows:

	•		40% of base salary for the Chief Executive Officer;
	•		30% for the Chief Financial Officer; and
	•		30% for the Executive Vice President Operations.

     Each year, the Compensation Committee reviews the non-equity incentive plan parameters to ensure that the design and payment structure falls in line with our compensation philosophy and is competitive.

          Sales Incentive Plan

     The Compensation Committee established the RAE Systems Inc. Sales Incentive Plan (the “SIP”) in 2008 and approved it for 2009 and 2010 as well. The Compensation Committee believes that since the Vice Presidents of the three geographical business units have responsibility only for their specific area(s), the non-equity incentive compensation of each should be based on the financial results of his geographic area(s) of responsibility only.

     For 2010, a portion of the awards under the SIP to each of the two remaining NEOs were based on a formula that included achievement of the specified quarterly financial goals for his geographic area: revenues, gross margins, and sales and marketing expenses. The remainder of his awards were based on the achievement of individual goals related to reaching certain quarterly financial metrics for his region. The financial and individual goals were then used to calculate the size of the non-equity incentive payments. Award targets generally are set to provide that no award will be made for a financial goal if specified thresholds are not met. The non-equity incentives paid to the participating NEOs will not exceed the size of the incentive pool calculated according to the 2010 award targets under the SIP approved by the Compensation Committee. The non-equity incentive targets for the participating NEOs for 2010 follow the same formula as in 2009, but the target numbers have been adjusted to reflect 2010’s budget targets. The Company believes that the performance objectives under the SIP for all participants have been, and will continue to be, set at levels that would provide a strong incentive for each participant to achieve the maximum results for his business unit, and that each participant was neither substantially certain to achieve the goals, nor substantially certain to fail to achieve them.

     Long-Term Compensation

     Stock Options

     Based on our compensation philosophy, a substantial portion of compensation rewards long-term performance of the Company and is intended to promote executive retention. The long-term element of our executive compensation is delivered to our executives through stock options granted upon their initial hire and through ongoing grants. Similar to base salary increases, option grants may also be awarded to address promotions and significant changes in responsibility. Although the expense of stock options affects our financial results negatively, it is a major element of the overall compensation strategy which is specifically focused on creating long-term value for our stockholders. We believe that stock options are the most effective compensation element for attracting entrepreneurial, creative executives, and promoting their long-term commitment to the Company. To help promote retention, the Company’s stock option awards typically vest over a four-year period and have a ten-year term. A variety of factors are considered in determining awards, including the contributions of the executive during the prior year, an assessment of the executive’s ability to contribute to the Company in future periods, and the retention goals of the Company. The emphasis on long-term equity awards also is designed to align the interests of the named executive officers with the Company’s stockholders by ensuring that executives have a significant portion of their compensation tied to long-term stock price performance.

     Other Benefits

     Our NEOs are eligible to participate in all our employment benefit plans, such as our stock option and healthcare plans, in each case on the same basis as other employees. Except in limited circumstances, it is our policy not to provide any special perquisites or benefits to our NEOs.

     Tax and Accounting Considerations

     Section 162(m) of the Internal Revenue Code of 1986, as amended, or the code, generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to the corporation’s chief executive officer and four other most highly paid executive officers. Qualifying performance-based compensation will not be subject to the deduction limitation if certain requirements are met. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exemptions in Section 162(m). However, we reserve the right to use our judgment to authorize compensation payments that do not comply with the exemptions in Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer’s performance.

     The following table sets forth information concerning the compensation earned during the fiscal year ended December 31, 2010, by our Chief Executive Officer, our Chief Financial Officer, and our three other most highly-compensated executive officers.

2010 SUMMARY COMPENSATION TABLE

														Non-
														Equity
														Incentive
										Option				Plan				All Other
Name and Principal						Salary				Awards				Compensation				Compensation				Total
Position		Year				($)(1)				($)(2)				($)(3)				($)(4)				($)
Robert I. Chen			2010				350,000				—				198,844				22,226				571,070
President and Chief Executive			2009				363,462				129,160				—				23,194				515,816
Officer			2008				329,538				229,460				—				25,754				584,752
Randall Gausman			2010				250,000				—				168,967	(5)			7,314				426,281
Vice President and			2009				259,615				106,245				—				7,595				373,455
Chief Financial Officer			2008				242,701				121,875				—				4,153				397,889
Chris Hameister			2010				195,648				—				220,390				67,692				483,730
Vice President, Asia-Pacific &			2009				195,648				35,415				96,062				71,030				398,155
EMEA Business Operations			2008				195,648				40,625				140,396				65,769				442,438
Ming-Ching Tang			2010				240,038	(6)			—				107,129				33,229				380,396
Executive Vice President			2009				249,273	(6)			70,830				—				29,154				349,257
Operations			2008				229,153	(6)			40,625				—				28,217				297,995
Ryan Watson			2010				173,692				—				561,310				2,991				737,993
Vice President Americas Sales			2009				155,769				35,415				38,730				2,617				232,531
			2008				138,577				81,250				118,332				2,324				340,483

All Other Compensation

																						Payments
														Taxable								Associated
														Amount of								with
						Company								Group								Living &
Name and Principal						Match				Automobile				Term Life				Travel				working
Position		Year				401(k)($)				Allowance($)				Insurance($)				Allowance				abroad($)				Total($)
Robert I. Chen			2010				4,125				14,400				3,701				—				—				22,226
President and Chief Executive Officer			2009				3,894				15,599				3,701				—				—				23,194
			2008				3,750				18,440				3,564				—				—				25,754
Randall Gausman			2010				3,750				—				3,564				—				—				7,314
Vice President and			2009				3,894				—				3,701				—				—				7,595
Chief Financial Officer			2008				1,910				—				2,243				—				—				4,153
Chris Hameister			2010				—				—				—				—				67,692				67,692
Vice President, Asia-Pacific &			2009				—				—				—				3,338				67,692				71,030
EMEA Business Operations			2008				—				—				—				—				65,769				65,769
Ming-Ching Tang			2010				2,880				—				624				—				29,725	*			33,229
Executive Vice President Operations			2009				3,038				—				1,957				—				24,159	*			29,154
			2008				2,781				—				1,655				—				23,781	*			28,217
Ryan Watson			2010				2,670				—				321				—				—				2,991
Vice President Americas Sales			2009				2,337				—				280				—				—				2,617
			2008				2,079				—				245				—				—				2,324

     No options were granted to any named executive officer during the fiscal year ended December 31, 2010.

Outstanding Equity Awards at Fiscal Year-End

     The following table sets forth certain information with respect to the value of all unexercised options previously awarded to the Company’s named executive officers as of December 31, 2010:

OUTSTANDING STOCK OPTIONS AT DECEMBER 31, 2010

		Number of				Number of
		Securities				Securities
		Underlying				Underlying
		Unexercised				Unexercised				Option				Option
		Options (#)				Options (#)(*)				Exercise				Expiration
Name		Exercisable				Unexercisable				Price ($)				Date
Robert I. Chen			133,333				66,667				1.87				4/11/2018
President and Chief Executive Officer			79,166				120,834				1.078				5/1/2019
Randall Gausman			200,000				0				3.86				10/30/2016
Vice President and Chief Financial Officer			91,666				8,334				2.89				4/19/2017
			96,875				53,125				1.40				5/8/2018
			59,375				90,625				0.98				5/1/2019
Chris Hameister			50,000				0				3.22				8/5/2015
Vice President, Asia-Pacific & EMEA			100,000				0				3.75				5/17/2016
Business Operations			45,833				4,167				2.89				4/19/2017
			32,291				17,709				1.40				5/8/2018
			19,791				30,209				0.98				5/1/2019
Ming-Ching Tang			128,125				21,875			$	2.26				07/02/17
Executive Vice President Operations			32,291				17,709			$	1.40				05/08/18
			39,583				60,417			$	0.98				05/01/19
Ryan Watson			10,625				0			$	3.15				08/14/13
Vice President Americas Sales			10,000				0			$	2.81				08/11/16
			64,583				35,417			$	1.40				05/08/18
			19,791				30,209			$	0.98				05/01/19

Option Exercises and Stock Vested During Last Fiscal Year

     There were no option exercises or stock vested by the Company’s named executive officers during the fiscal year ended December 31, 2010.

Potential Payments upon Termination or Change in Control

     We have not entered into employment agreements with any of our NEOs. In order, however, to provide Randall Gausman, Vice President and Chief Financial Officer of the Company, with an incentive to continue his employment with the Company and to maximize the value of the Company upon a change of control of the Company, the Company and Mr. Gausman entered into a Change of Control Severance Agreement, dated September 19, 2010, pursuant to which Mr. Gausman will receive a lump sum severance payment equal to 12 months of Mr. Gausman’s base salary ($250,000) and reimbursement of COBRA premiums for up to 12 months, upon his termination of employment without “cause,” or for “good reason,” should either occur within 12 months following a change in control of the Company. In addition, upon the consummation of a change in control of the Company, Mr. Gausman will receive a bonus equal to $62,500 (three months of base salary).

     Regardless of the manner in which an NEO’s employment terminates, they are entitled to receive amounts earned during their term of employment. Such amounts include:

	•		exercise of vested options granted under the Company’s stock option plans subject to the forfeiture rules defined in the respective plans; and
	•		unused paid time off pay.

     Pursuant to the 1993 Stock Plan, in the event of a merger of the Company with or into another corporation, outstanding options or stock purchase rights will be assumed or an equivalent option or right substituted by such successor corporation or a parent or subsidiary of same. If outstanding options or stock purchase rights are not assumed or substituted, the options or stock purchase rights terminate as of the date of the closing of the merger.

     Pursuant to the 2002 Plan, the Board of Directors, in its sole discretion, in the event of a change in control, may take such actions as it deems appropriate to provide for acceleration of the exercisability and vesting in connection with such change in control of any or all options and shares acquired upon the exercise of such options outstanding under the 2002 Plan.

     Pursuant to the 2007 Plan, the Compensation Committee or any other committee of the Board of Directors appointed to administer the 2007 Plan, in its sole discretion, in the event of a change of control, may take such actions as it deems appropriate to provide for acceleration of the exercisability and vesting in connection with such change in control of any or all option and shares acquired upon the exercise of such options outstanding under the 2007 Plan.

     Consistent with the authority granted to the Board of Directors under all of these Plans, the Board has provided for the acceleration of vesting of all outstanding options upon the consummation of the pending acquisition of the Company (see Note 13 of Notes to Consolidated Financial Statements in the Company’s 2010 Form 10-K, filed with the SEC on March 31, 2010).

Compensation of Directors

     The following table sets forth information pertaining to compensation we paid to our outside, independent directors for their service on our Board of Directors and its committees in 2010.

2010 DIRECTOR COMPENSATION

		Fees Earned
		or Paid				Option
		in Cash				Award				All Other				Total
Name		($)(1)				($)(2)				Compensation				($)
Lyle D. Feisel.			18,000				—				—				18,000
Sigrun Hjelmqvist Neil W. Flanzraich			8,750				—				673	(3)			9,423
Keh-Shew Lu			20,250				—				—				20,250
James W. Power			32,750				71,687				—				104,437
Susan Wang			52,000				—				—				52,000

     We also reimburse our non-employee directors for all reasonable out-of-pocket expenses incurred in the performance of their duties as directors. Employee directors (Robert Chen and Peter Hsi) are not compensated for Board of Directors services in addition to their regular employee compensation.

Director’s Compensation Plan

     In 2006, the Compensation Committee of the Company’s Board of Directors approved the following compensation arrangements for the Company’s non-employee directors:

		Attendance Fees		Stock Option Award
All Board Members		$1,000 per Board meeting		100,000 shares vesting ratably over four years, with renewals for each additional four years of service
Audit Committee		$500 per committee meeting, plus a $5,000 annual retainer		—
Audit Committee Chair		Additional $5,000 annual retainer		Additional award of 50,000 shares vesting ratably over four years, with renewals for each additional four years of service
Compensation Committee		$250 per committee meeting		—
Compensation Committee Chair		—		Additional award of 10,000 shares vesting ratably over four years, with renewals for each additional four years of service
Nominating and Governance Committee		$250 per committee meeting		—
Nominating and Governance Committee Chair		—		Additional award of 10,000 shares vesting ratably over four years, with renewals for each additional four years of service

     In addition, in 2010 the Compensation Committee approved the following compensation to the Special Committee, which was charged with the responsibility of negotiating and reviewing the terms and conditions of the proposed acquisition of the Company (see Note 13 of Notes to Consolidated Financial Statements in the Company’s 2010 Form 10-K, filed with the SEC on March 31, 2010):

Special Committee		$500 per committee meeting
Special Committee Chair		$1,000 per committee meeting

The Special Committee is composed of Susan Wang (chairperson), Keh-Shew Lu, and James Power.

     Non-employee Director Awards. The Committee may, from time to time, establish awards to be granted on a periodic, nondiscriminatory basis to all members of our Board of Directors who are not employees of the Company or any parent or subsidiary corporation or other affiliate of the Company. Additional awards may be granted to non-employee directors in consideration of service on one or more committees of the Board, service as chairman of one or more committees of the Board, service as chairman or lead director of the Board or the individual’s initial appointment or election to the Board. Non-employee director awards may be granted at the Committee’s discretion in the form of nonstatutory stock options, stock appreciation rights, restricted stock or restricted stock units having such vesting terms as the administrator determines and other terms and conditions substantially similar to those described above under the applicable type of award. Subject to the following limits, the Committee will determine the numbers of shares for which non-employee director awards are granted. A non-employee director may not be granted in any fiscal year awards under the 2007 Plan for more than 200,000 shares, except that this limit may be increased by up to an additional 100,000 shares in the fiscal year in which the nonemployee director is first appointed or elected to the Board of Directors, by up to an additional 250,000 shares in any fiscal year in which the nonemployee director is serving as chairman or lead director of the Board, and by up to an additional 100,000 shares in any fiscal year for each committee of the Board on which the nonemployee director serves.

EQUITY COMPENSATION PLAN INFORMATION

     We currently maintain one compensation plan — our 2007 Equity Incentive Plan — that provides for the issuance of our common stock to officers and other employees, directors, and consultants. We formerly maintained a 1993 Stock Plan and 2002 Stock Option Plan. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of December 31, 2010:

Number of Shares

Remaining Available

for Future Issuance

under Equity

Number of Shares

Compensation

to be Issued

Weighted-Average

Plans [Excluding

upon Exercise of

Exercise Price of

Shares Reflected

Outstanding Options

Outstanding Options

in Column (a)]

Plan Category

(a)(#)

(b)($)

(c)(#)

Equity compensation plans approved by stockholders(1)

5,266,021

1.99

1,919,124

Equity compensation plans not approved by stockholders(2)

100,000

1.06

—

Total

5,366,021

1.97

1,919,124

Material Features of the Non-Stockholder Approved Plans

     Non-Plan Stock Options

     In 2002, the Company granted certain of its directors non-plan options to purchase an aggregate of 400,000 shares of non-plan restricted stock at a weighted-average exercise price of $0.99. The options vest 25% after one year with the remainder vesting monthly over the following three years and are exercisable over ten years. As of December 31, 2010, the Company had 100,000 non-plan options outstanding with a weighted average exercise price of $1.06 with a remaining contractual life of 1.41 years.

Compensation Committee Interlocks and Insider Participation

     Ms. Hjelmqvist and Messrs. Lu and Power served on the Compensation Committee in fiscal 2010. None of the members of the Compensation Committee is or has been an officer or employee of RAE Systems. During fiscal 2010, no member of the Compensation Committee had any relationship with RAE Systems requiring disclosure under Item 404 of Regulation S-K. During fiscal 2010, none of RAE Systems’ executive officers served on the compensation committee (or its equivalent) or Board of directors of another entity any of whose executive officers served on our Compensation Committee or Board of Directors.

Compensation Committee Report

     The Compensation Committee of the Board of Directors of the Company reviewed and discussed the Compensation Discussion and Analysis contained in this annual report with management. Based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010.

THE COMPENSATION COMMITTEE

James W. Power (Chair)
Sigrun Hjelmqvist
Keh-Shew Lu

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     Item 201(d) of Regulation S-K: The information required by this item is incorporated herein by reference from the information contained in the Company’s 2010 Form 10-K, filed with the SEC on March 31, 2011.

     Item 403 of Regulation S-K:

     The following table sets forth, as of April 14, 2011, certain information with respect to the beneficial ownership of the Company’s common stock by (i) each stockholder known by the Company to be the beneficial owner of more than 5% of its common stock, (ii) each director, (iii) each executive officer, and (iv) all directors and executive officers as a group.

     Except where otherwise indicated, the address for each of the persons listed the following table is c/o RAE Systems Inc., 3775 North First Street, San Jose, CA 95134.

		Number of Shares
		Beneficially Owned
Beneficial Owner		(1)				Percent
5% Holders:
Kopp Investment Advisors, LLC(2)			7,094,277				11.9	%
Vector Capital(3)			21,482,522				35.9	%
Executive Officers
Robert I. Chen(4)			15,826,608				26.5	%
Randall Gausman(5)			498,750				*
Peter C. Hsi(6)			2,755,914				4.6	%
Ming-Ching Tang(7)			237,499				*
Christopher Hameister(8)			264,582				*
Fei-Zhou Shen(9)			377,017				*
Ryan Watson(10)			128,266				*
Directors
Dr. Keh-Shew Lu (11)			322,083				*
Susan Wang (12)			78,125				*
Dr. Lyle D. Feisel (13)			319,448				*
Sigrun Hjelmqvist (14)			197,083				*
James W. Power (15)			179,791				*
Directors and executive officers as a group (12 persons)(16)			21,185,166				34.2	%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

     The Company accounts for its 40% ownership in Renex Technologies Ltd. (“Renex”), a Hong Kong company, following the equity method. The Company’s total investment in Renex at December 31, 2010 and 2009 was $166,000 and $339,000, respectively. The Company recorded losses of $173,000 $109,000 on its equity interest in Renex for the years ended December 31, 2010 and 2009, respectively, and income of $43,000 for the year ended December 31, 2008.

     The Company has a royalty agreement with Renex for modems which can be incorporated into certain RAE Systems products. However, in each of 2010, 2009 and 2008, the Company incurred no expenses under this royalty agreement. The Company paid $31,000, $95,000 and $181,000 to Renex for research projects in 2010, 2009 and 2008, respectively.

     In conjunction with the Company’s investment in RAE Beijing, unsecured notes payable were established for the previous RAE Beijing shareholders as part of the purchase price agreement in July 2006. Although these notes bear a stated interest rate of 3% per annum, the notes were discounted using a market interest rate of 6.48%. As of December 31, 2010 and December 31, 2009, $278,000 and $370,000, respectively, was included in current notes payable to related parties and zero and $363,000, respectively, was included in long term notes payable to related parties. The final scheduled payment of principal and accrued interest under the notes is due at maturity in July 2011.

     In addition to its 40% ownership in Renex, the Company has investments in three distributors of RAE Systems products, RAE Australia, RAE Benelux and RAE Spain. The Company owns 19%, 10% and 19% of RAE Australia, RAE Benelux and RAE Spain, respectively. These investments are accounted for under the cost method.

     Transactions and balances with the Company’s related parties were as follows:

		Year Ended December 31,
		2010				2009				2008
Sales:
Renex		$	345			$	509			$	282
RAE Australia			1,116				714				—
RAE Benelux			2,730				2,698				2,287
RAE Spain			361				429				604
		$	4,552			$	4,350			$	3,173
Purchases:
Renex		$	314			$	256			$	677

		December 31,				December 31,
		2010				2009
(In thousands)
Accounts receivable:
Renex		$	200			$	322
RAE Australia			131				59
RAE Benelux			268				253
RAE Spain			123				119
		$	722			$	753
Accounts payable:
Renex		$	25			$	92

     The Company’s Director of Information Systems, Lien Chen, is the wife of the Company’s Chief Executive Officer, Robert Chen. Ms. Chen was paid a salary and bonus of $127,000, $128,000 and $111,000 for 2010, 2009 and 2008, respectively. Ms. Chen also receives standard employee benefits offered to all other full-time U.S. employees. Ms. Chen does not report to Robert Chen and compensation decisions regarding Ms. Chen are performed in the same manner as other U.S. employees, with Robert Chen the final approval signatory on compensation recommendations.

Director Independence

     The Board of Directors has determined that each of Lyle Feisel, Sigrun Hjelmqvist, Keh-Shew Lu, James Power, and Susan Wang is an independent director for purposes of the NYSE Amex listing standards. Robert I. Chen and Peter C. Hsi, being executive officers of the Company, are not independent.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     The following table sets forth the aggregate fees billed to the Company for professional audit services rendered by Deloitte for the period from January 1, 2009 through December 31, 2010:

		2010				2009
Audit Fees(1)		$	1,454,000			$	1,511,000
Audit-Related Fees(2)		$	—			$	—
Tax Fees(3)		$	—			$	—
All Other Fees(4)		$	325,000			$	148,000
		$	1,779,000			$	1,659,000

     The Audit Committee has considered the role of Deloitte in providing certain tax services and other non-audit services to RAE Systems and has concluded that such services are compatible with Deloitte’s independence as our registered public accounting firm. In addition, since the effective date of the SEC rules stating that an auditor is not independent of an audit client if the services it provides to the client are not appropriately approved, the Audit Committee has and will continue to pre-approve all audit and permissible non-audit services provided by the independent auditors.

     The Audit Committee has adopted a policy for the pre-approval of services provided by the independent registered public accounting firm, pursuant to which it may pre-approve any service consistent with applicable law, rules, and regulations. Under the policy, the Audit Committee may also delegate authority to pre-approve certain specified audit or permissible non-audit services to one or more of its members, including the Committee chair. A member to whom pre-approval authority has been delegated must report his or her pre-approval decisions, if any, to the Audit Committee at its next meeting, and any such pre-approvals must specify clearly in writing the services and fees approved. Unless the Audit Committee determines otherwise, the term for any service pre-approved by a member to whom pre-approval authority has been delegated is twelve months.

In fiscal 2010 and 2009, all audit, audit related, tax, and all other fees were pre-approved by the Audit Committee. Under the SEC rules, subject to certain permitted de minimis criteria, pre-approval is required for all professional services rendered by the Company’s principal accountant for all services rendered after May 6, 2003. We are in compliance with these SEC rules.

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, on April 29, 2011.

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert I. Chen and Randall Gausman, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:

Signature		Title		Date
/s/ Robert I. Chen   Robert I. Chen		President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)		April 29, 2011
/s/ Randall Gausman   Randall Gausman		Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)		April 29, 2011
/s/ Peter C. Hsi   Peter C. Hsi		Chief Technology Officer and Director		April 29, 2011
/s/ Lyle D. Feisel   Lyle D. Feisel		Director		April 29, 2011
/s/ Sigrun Hjelmqvist   Sigrun Hjelmqvist		Director		April 29, 2011
/s/ Keh-Shew Lu   Keh Shew Lu		Director		April 29, 2011
/s/ James W. Power   James W. Power		Director		April 29, 2011
/s/ Susan Wang   Susan Wang		Director		April 29, 2011