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):
March 5, 2009

RAE Systems Inc.

(Exact name of registrant as specified in its charter)

Delaware	001-31783	77-0280662
(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))

Item 2.02 Results of Operations and Financial Conditions.

     On March 5, 2009, RAE Systems Inc. (the “Company”) issued a press release announcing its financial results for the fiscal year ended December 31, 2008. A copy of the Company’s press release is attached hereto as Exhibit 99.1.

     The information disclosed under this Item 2.02, including Exhibit 99.1 hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference into any filing made under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

Exhibit No.	Description
99.1	Earnings release dated March 5, 2009 regarding the Company’s financial results for the fiscal year ended December 31, 2008.

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: March 5, 2009

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 March 5, 2009 regarding the Company’s financial results for the fiscal year ended December 31, 2008.

EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

Company Contact:	IR Agency Contact:
Investor Relations	Becky Herrick
408-952-8449	Lippert/Heilshorn & Associates, Inc.
investorrelations@raesystems.com	415-433-3777
	bherrick@lhai.com

RAE Systems Reports Fourth Quarter and Year-End 2008 Results

-Full Year 2008 Revenue Increased 5% Over 2007 -

SAN JOSE, Calif. – March 5, 2009 – RAE Systems Inc. (NYSE Alternext US: RAE), a leader in delivering innovative sensor solutions to serve industrial, energy, environmental and government safety markets worldwide, reported results for the fourth quarter and year-ended December 31, 2008.

Fourth Quarter 2008 Financial Results

For the fourth quarter of 2008, RAE Systems revenue was $24.0 million, compared to $27.5 million for the same quarter in 2007. For the fourth quarter, the Americas contributed 36 percent of total revenue, Asia contributed 50 percent and Europe contributed 14 percent. Gross margin for the quarter was 44 percent, compared with 51 percent for the same quarter of 2007.

During the fourth quarter, the company recorded a $3.3 million non-cash goodwill impairment charge and $0.6 million of costs associated with the previously announced Foreign Corrupt Practices Act (FCPA) investigation. The net loss for the fourth quarter of 2008 including the aforementioned charges was $4.9 million or $0.08 per share, compared with a net loss of $7.5 million or $0.13 per share for the fourth quarter of 2007.

Full Year 2008 Financial Results

For 2008 RAE Systems reported revenue of $95.4 million, compared to $90.8 million in 2007, representing a five percent year-over-year increase. For the full year gross margin remained at 51 percent for both 2008 and 2007. In addition to the non-cash goodwill impairment charge of $3.3 million during the fourth quarter, the company recorded $4.0 million in expenses associated with the previously announced FCPA

FOR IMMEDIATE RELEASE

investigation. Combined, these charges amounted to eight percent of revenue. For the full year, the net loss, including the $7.3 million in aforementioned charges, was $7.2 million or $0.12 per share, compared with a net loss of $14.7 million or $0.25 per share for 2007.

Robert Chen, RAE Systems president and chief executive officer said, “In 2008, while operating in a difficult economy, we grew our installed base and expanded our markets from 85 countries to 95. We have strengthened our senior management team in China. Recurring revenue from our installed base is increasing, and we delivered quarterly and annual revenue of $24.0 million and $95.4 million, respectively. For the full year, we maintained annual gross margins of 51 percent and we reduced our controllable operating expenses. Had it not been for our FCPA investigation expenses and a charge for impairment of goodwill the company would have been profitable for the year. We are confident of our position in the markets we serve, and we believe we can match our 2008 revenue performance in 2009, with the possibility of a modest year-over-year improvement.”

2008 Business Highlights

• The company’s two largest orders for the year were awarded by:

o The United States National Guard Civil Support teams for AreaRAE Steel to upgrade their wireless gas and radiation sensor networks, and

o The Beijing International Airport in preparation for the 2008 Beijing Olympics.

• Secured first orders for MeshGuard from major oil exploration firms.

• Won awards for other energy specific products from Bahrain, Brunei, Canada, China, Germany, Indonesia, Kuwait, Mexico, Singapore and the United States.

• Continued to secure orders from first responders in China, Germany, Japan, Kuwait, Spain and Vietnam, as well as, US municipalities for the wireless AreaRAE and other handheld products.

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FOR IMMEDIATE RELEASE

• Launched eight new products:

o Four new volatile organic compound (VOC) monitors, three of which include Bluetooth wireless interfaces for data management:

§	The MiniRAE 3000 for general purpose VOC measurement;
§	the ppbRAE 3000 for parts per billion VOC measurement;
§	the compound specific UltraRAE 3000 for benzene measurement; and
§	the MiniRAE Lite.

o QRAE 2 Pumped, 4-gas monitor for OSHA and ATEX compliance driven confined space entry.

o RAE Link 3, the new wireless modem/repeater to increase the flexibility of AreaRAE, MiniRAE 3000, ppbRAE 3000, MultiRAE and other wirelessly enabled products.

o ToxiRAE 3, the next generation single gas monitor, and the AutoRAE Lite a fast, single gas, calibration and bump test station.

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 disposable gas detection tubes, single gas personal monitors, multi-sensor chemical detection monitors, photoionization (PID) monitors for volatile organic compounds (VOCs), wireless gas detection systems, and radiation monitoring networks for energy production and refining, industrial and environmental safety, and public and government first responder security sectors. RAE Systems’ products are used in 95 countries by many of the world’s leading corporations and by many U.S. government agencies. 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, the resolution of issues associated with the Company’s Foreign Corrupt Practices Act,

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FOR IMMEDIATE RELEASE

investigation 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 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.
Consolidated Balance Sheets
(in thousands, except share and par value data)
(unaudited)

	December 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	14,845		$	15,906
Trade notes receivable		1,870			2,793
Accounts receivable, net of allowances of $3,472 and $2,060, respectively		20,961			22,749
Accounts receivable from affiliate		100			21
Inventories, net		17,604			17,542
Prepaid expenses and other current assets		4,991			2,930
Income taxes receivable		895			2,069
Total current assets		61,266			64,010
Property and equipment, net		14,976			12,258
Intangible assets, net		3,342			3,827
Goodwill		—			3,143
Investments in unconsolidated affiliates		467			425
Other assets		1,124			1,680
Total assets	$	81,175		$	85,343
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED ENTITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,387		$	6,071
Accounts payable to affiliate		382			411
Payable to Fushun shareholder		64			609
Bank lines of credit		2,584			2,618
Accrued liabilities		12,318			12,098
Notes payable to related parties, current		1,329			191
Income taxes payable		425			674
Deferred revenue, current		631			488
Total current liabilities		24,120			23,160
Deferred revenue, non-current		685			514
Deferred tax liabilities, non-current		83			277
Deferred gain on sale of real estate		5,079			5,794
Other long-term liabilities		1,292			1,487
Notes payable to related parties, non-current		1,219			2,370
Total liabilities		32,478			33,602
MINORITY INTEREST IN CONSOLIDATED ENTITIES		5,481			5,385
SHAREHOLDERS’ EQUITY:
Common stock, $0.001 par value, 200,000,000 shares authorized; 59,443,914 and 59,171,980 shares issued and outstanding, respectively		59			59
Additional paid-in capital		62,549			60,957
Accumulated other comprehensive income		6,555			4,135
Accumulated deficit		(25,947	)		(18,795	)
Total shareholders’ equity		43,216			46,356
Total liabilities, minority interest in consolidated entities and shareholders’ equity	$	81,175		$	85,343

RAE Systems Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

	Three Month Ended
	December 31						Year Ended December 31,
	2008			2007			2008			2007
Net sales	$	24,022		$	27,513		$	95,383		$	90,836
Cost of sales		13,528			13,548			47,168			44,428
Gross profit		10,494			13,965			48,215			46,408
Operating expenses:
Sales and marketing		5,429			8,111			21,427			25,434
Research and development		1,843			2,659			6,665			7,973
General and administrative		5,283			4,350			22,864			17,767
Reduction of goodwill		3,348			—			3,348			—
(Gain) loss on abandonment of lease		—			—			—			(595	)
Total operating expenses		15,903			15,120			54,304			50,579
Operating loss from continuing operations		(5,409	)		(1,155	)		(6,089	)		(4,171	)
Other income (expense):
Interest income		51			17			173			162
Interest expense		(105	)		(237	)		(397	)		(705	)
Other, net		(465	)		(270	)		(575	)		58
Equity in gain (loss) of unconsolidated affiliates		69			38			43			3
Loss from continuing operations before income taxes and minority interest		(5,859	)		(1,607	)		(6,845	)		(4,653	)
Income tax expense (benefit)		(621	)		5,480			538			5,883
Loss before minority interest		(5,238	)		(7,087	)		(7,383	)		(10,536	)
Minority interest in income (loss) of consolidated subsidiaries		335			(41	)		220			(6	)
Loss from continuing operations		(4,903	)		(7,128	)		(7,163	)		(10,542	)
Loss from discontinued operations, net of tax		—			(378	)		11			(4,154	)
Net loss	$	(4,903	)	$	(7,506	)	$	(7,152	)	$	(14,696	)
Net loss per share — basic and diluted Continuing operations	$	(0.08	)	$	(0.12	)	$	(0.12	)	$	(0.18	)
Discontinued operations		—			(0.01	)		—			(0.07	)
Net loss per share — basic and diluted	$	(0.08	)	$	(0.13	)	$	(0.12	)	$	(0.25	)
Weighted average common shares outstanding — Basic		59,333			58,989			59,204			58,852
Stock options and warrants		—			—			—			—
Weighted average common shares outstanding — Diluted		59,333			58,989			59,204			58,852

The following table sets forth the components of our Consolidated Statements of Operations as a percentage of net sales:

	Three Month Ended
	December 31						Year Ended December 31,
	2008			2007			2008			2007
Net sales		100	%		100	%		100	%		100	%
Cost of sales		56	%		49	%		49	%		49	%
Gross profit		44	%		51	%		51	%		51	%
Operating expenses:
Sales and marketing		22	%		29	%		22	%		28	%
Research and development		8	%		10	%		7	%		9	%
General and administrative		22	%		16	%		24	%		19	%
Reduction of goodwill		14	%		0	%		4	%		0	%
(Gain) loss on abandonment of lease		0	%		0	%		0	%		-1	%
Total operating expenses		66	%		55	%		57	%		55	%
Operating loss from continuing operations		-22	%		-4	%		-6	%		-4	%
Other income (expense):
Interest income		0	%		0	%		0	%		0	%
Interest expense		0	%		-1	%		0	%		-1	%
Other, net		-2	%		-1	%		-1	%		0	%
Equity in gain (loss) of unconsolidated affiliates		0	%		0	%		0	%		0	%
Loss from continuing operations before income taxes and minority interest		-24	%		-6	%		-7	%		-5	%
Income tax expense (benefit)		-3	%		20	%		1	%		6	%
Loss before minority interest		-21	%		-26	%		-8	%		-11	%
Minority interest in income (loss) of consolidated subsidiaries		1	%		0	%		0	%		0	%
Loss from continuing operations		-20	%		-26	%		-8	%		-11	%
Loss from discontinued operations, net of tax		0	%		-1	%		0	%		-5	%
Net loss		-20	%		-27	%		-8	%		-16	%