8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 8-K

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

Date of Report (Date of earliest event reported):
November 6, 2006

RAE Systems Inc.

(Exact name of registrant as specified in its charter)

Delaware	001-31783	77-0588488
(State or other jurisdiction	(Commission File No.)	(I.R.S. Employer
of incorporation)		Identification No.)

3775 North First Street
San Jose, California 95134
408-952-8200
(Address and telephone number of registrant’s principal executive offices)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	Item 2.02 Results of Operations and Financial Conditions.
	Item 9.01 Financial Statements and Exhibits.
SIGNATURE
EXHIBIT INDEX
EXHIBIT 99.1

Item 2.02 Results of Operations and Financial Conditions.

     On November 6, 2006, RAE Systems Inc. (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended September 30, 2006. A copy of the Company’s press release is attached hereto as Exhibit 99.1.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibit No.	Description
99.1	Earnings release dated November 6, 2006 regarding the Company’s financial results for the fiscal quarter ended September 30, 2006.

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: November 6, 2006

RAE SYSTEMS INC.
By:	/s/ Randall Gausman
Name:	Randall Gausman
Title:	Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Earnings release dated November 6, 2006 regarding the Company’s financial results for the fiscal quarter ended September 30, 2006.

EX-99.1

Exhibit 99.1

Company Contact:	IR Agency Contact:
Investor Relations	Moriah Shilton.
408-952-8402	415-433-3777
investorrelations@raesystems.com	MShilton@lhai.com

RAE Systems Reports Third Quarter 2006 Results

Third Quarter Revenue Increased 15% from the Third Quarter of 2005

SAN JOSE, Calif. — November 6, 2006 — RAE Systems Inc. (AMEX: RAE), a leading global provider of rapidly deployable sensor networks that enable customers to identify safety and security threats in real time, today reported results for the third quarter and nine months ended September 30, 2006.

Financials Highlights
For the third quarter of 2006, RAE Systems reported revenue of $18.6 million as compared with revenue of $16.2 million for the same quarter in 2005. The 15 percent growth in revenue reflects increased industrial sales in both Asia and Europe, as well as increases in U.S. military orders. Europe and Asia sales grew at a combined rate of approximately 33 percent over the third quarter of 2005. Revenue in the Americas increased two percent compared to the third quarter of 2005, in which there was additional demand related to Hurricane Katrina. Sales in the Americas increased by 22 percent over the second quarter of 2006, primarily as a result of a large order for AreaRAE wireless products received from the U.S. National Guard.

Gross margin for the third quarter of 2006 was 54 percent as compared with 60 percent for the third quarter of 2005. The gross margin decrease was primarily attributable to increased sales of lower-margin installation and distributor products in Asia, a sales shift to lower-margin portable products and increased pricing pressure worldwide.

The company reported net income of $512,000, or $0.01 per fully diluted share, for the third quarter of 2006, compared to $397,000, or $0.01 per fully diluted share, for the third quarter of 2005.

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For the nine months ended September 30, 2006, revenues grew by 12 percent to $46.9 million from $42.0 million for the nine months ended September 30, 2005. Net loss for the first nine months of 2006 was $574,000, or $0.01 per fully diluted share. This compared to a net loss of $850,000, or $0.01 per fully diluted share, for the first nine months of 2005, which included a $2.0 million charge for loss on abandonment of its former headquarters and U.S. manufacturing site.

As of September 30, 2006, the company reported $18.7 million of cash and investments and $4.0 million of debt. In the third quarter of 2006, the Company invested $7.5 million to increase its ownership in KLH from 64 to 96 percent. In addition, the Company acquired Aegison Corporation, a developer of mobile and fixed digital video recorders for approximately $2.0 million.

“Our strategy of allocating additional resources to both the industrial safety and security markets is beginning to drive increased revenue from both investment initiatives. Industrial growth in Asia, Europe and the Americas drove solid year-over-year double-digit growth,” said Robert Chen, RAE Systems CEO. “In the third quarter, we received a large order from the US National Guard for our premier AreaRAE monitoring systems for first responders. This order brings the number of deployed AreaRAE wireless networks to over 600 and the number of individual wireless AreaRAE monitors to more than 2,500. This order contributed to the Americas’ third quarter 2006 growth of 22 percent over the second quarter of 2006.”

“We continue to see industrialization in China as a key growth opportunity, and we continue to implement strategies to capture that growth. Our confidence in the China market has been confirmed by two events: the listing of both worker safety and environmental remediation in the China five-year master plan and the beginning of spending for mining safety from the existing multi-billion-dollar coal tax fund. Finally, we expect fourth quarter revenues to be in a range of $17 million to $21 million and we are reaffirming our 2006 full- year revenue guidance range of $64 million and $68 million.”

Third Quarter 2006 Business Highlights

Americas

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• The United States National Guard purchased 57 AreaRAE Rapid Deployment Kits, our wireless toxic gas and radiation monitoring systems, for use by the National Guard Civil Support Teams.

• AreaRAE wireless monitors were once again deployed in the Major League Baseball World Series in both St. Louis and Detroit.

• Total Safety U.S. in Nederland, Texas has deployed approximately 30 wireless AreaRAE monitors for toxic gas detection and perimeter monitoring at several petrochemical plants and refineries along the Gulf Coast.

Asia

• Inner Mongolia Municipal TeleCom Company, a division of China NetCom, purchased a 336 fixed-point sensor network for toxic and combustible gas detection.

• The Liaohe Oil Field purchased toxic gas detectors, compressors and self-contained breathing apparatus.

• The Changqing Oil Field purchased portable and fixed toxic and explosive gas detectors.

Europe, Middle East and Australia

• GE Plastics in Spain specified RAEGuard PID fixed monitoring systems for one of its production locations.

• An oil company in southern France purchased AreaRAE wireless monitors, EntryRAE personal confined space entry monitors and UltraRAE benzene monitors for deployment at all of its facilities.

About RAE Systems
RAE Systems is a leading global provider of rapidly deployable sensor networks that enable customers to identify safety and security threats in real time. Products include multi-sensor chemical detection, radiation and digital video monitoring networks for homeland security and industrial applications. RAE Systems’ products enable the military and first responders such as firefighters, law enforcement and other emergency management personnel to detect, provide early warning and record events that involve 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 world’s 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 may contain “forward-looking” statements, as that term is used in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation: expressions of “belief,” “anticipation,” or “expectations” of management; statements as to industry trends or future results of operations of RAE Systems and its subsidiaries; and other statements that are not historical fact. 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 Systems 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

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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.

[Tables to Follow]

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RAE Systems Inc.
Condensed Consolidated Balance Sheets

	September 30,			December 31,
	2006			2005
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	7,984,000		$	13,524,000
Short-term investments		10,757,000			14,348,000
Trade notes receivable		209,000			1,087,000
Accounts receivable, net of allowance for doubtful accounts of $1,025,000 and $963,000, respectively		17,245,000			11,707,000
Accounts receivable from affiliate		143,000			84,000
Inventories, net		11,692,000			9,477,000
Prepaid expenses and other current assets		3,792,000			2,773,000
Deferred tax assets		2,859,000			2,869,000
Total Current Assets		54,681,000			55,869,000
Property and Equipment, net		15,277,000			14,911,000
Long Term Investments		—			1,616,000
Intangible Assets, net		3,415,000			1,782,000
Goodwill		3,870,000			136,000
Long Term Deferred Tax Assets		559,000			634,000
Deposits and Other Assets		683,000			867,000
Investment in Unconsolidated Affiliate		731,000			449,000
Total Assets	$	79,216,000		$	76,264,000
Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	5,933,000		$	3,979,000
Accounts payable to affiliate		92,000			—
Accrued liabilities		7,465,000			7,329,000
Notes payable — related parties		807,000			759,000
Income taxes payable		—			407,000
Current portion of deferred revenue		2,536,000			2,029,000
Total Current Liabilities		16,833,000			14,503,000
Deferred Revenue, net of current portion		746,000			296,000
Deferred Tax Liabilities		725,000			379,000
Other Long Term Liabilities		1,166,000			1,466,000
Long Term Notes Payable — Related Parties		3,165,000			821,000
Total Liabilities		22,635,000			17,465,000
Commitments and Contingencies
Minority Interest in Consolidated Entities		451,000			4,226,000
Shareholders’ Equity:
Common stock, $0.001 par value; 200,000,000 shares authorized; 59,103,322 and 57,837,843 shares		59,000			58,000
issued and outstanding, respectively
Additional paid-in capital		58,260,000			56,629,000
Accumulated other comprehensive income		809,000			310,000
Accumulated deficit		(2,998,000	)		(2,424,000	)
Total Shareholders’ Equity		56,130,000			54,573,000
Total Liabilities, Minority Interest in Consolidated Entities and Shareholders’ Equity	$	79,216,000		$	76,264,000

RAE Systems Inc.
Condensed Consolidated Statement of Operations
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net Sales	$	18,564,000		$	16,152,000		$	46,891,000		$	42,024,000
Cost of Sales		8,597,000			6,505,000			21,752,000			16,862,000
Gross Profit		9,967,000			9,647,000			25,139,000			25,162,000
Operating Expenses:
Sales and marketing		4,113,000			4,388,000			12,604,000			12,325,000
Research and development		1,540,000			1,244,000			4,266,000			3,696,000
General and administrative		3,655,000			3,173,000			9,657,000			8,925,000
Loss on abandonment of lease					—						2,027,000
Total Operating Expenses		9,308,000			8,805,000			26,527,000			26,973,000
Income (Loss) from Operations		659,000			842,000			(1,388,000	)		(1,811,000	)
Other Income (Expense):
Interest income		195,000			176,000			629,000			467,000
Interest expense		(73,000	)		(3,000	)		(159,000	)		(37,000	)
Other, net		53,000			57,000			215,000			2,000
Equity in loss of unconsolidated affiliate		(54,000	)		(4,000	)		(235,000	)		(156,000	)
Total Other Income		121,000			226,000			450,000			276,000
Income (Loss) Before Income Taxes, Minority Interest		780,000			1,068,000			(938,000	)		(1,535,000	)
and Cumulative Effect of Change in Accounting Principle
Income tax (expense) benefit		(199,000	)		(699,000	)		286,000			486,000
Income (Loss) Before Minority Interest and Cumulative Effect of Change in Accounting Principle		581,000			369,000			(652,000	)		(1,049,000	)
Minority interest in (income) loss of consolidated subsidiaries		(69,000	)		28,000			76,000			199,000
Income (Loss) Before Cumulative Effect of Change in Accounting Principle		512,000			397,000			(576,000	)		(850,000	)
Cumulative effect of change in accounting principle, net of tax effects		—			—			2,000
Net Income (Loss)	$	512,000		$	397,000		$	(574,000	)	$	(850,000	)
Basic Income (Loss) Earnings Per Common Share
Income (Loss) before cumulative effect of change in accounting principle	$	0.01		$	0.01		$	(0.01	)	$	(0.01	)
Cumulative effect of change in accounting principle		—			—			—			—
Basic Income (loss) per common share	$	0.01		$	0.01		$	(0.01	)	$	(0.01	)
Diluted Income (Loss) Earnings Per Common Share
Income (Loss) before cumulative effect of change in accounting principle	$	0.01		$	0.01		$	(0.01	)	$	(0.01	)
Cumulative effect of change in accounting principle		—			—			—			—
Diluted Income (loss) per common share	$	0.01		$	0.01		$	(0.01	)	$	(0.01	)
Weighted-average common shares outstanding		58,516,451			57,789,819			58,178,994			57,346,103
Stock options and warrants		941,716			1,542,125			—			—
Diluted weighted-average common shares outstanding		59,458,167			59,331,944			58,178,994			57,346,103