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): October 27, 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

Item 7. Financial Statements and Exhibits.

       c.                 Exhibits

Exhibit No.
99.1 Description
Press Release dated October 27, 2003

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

        On October 27, 2003, RAE Systems Inc. (the “Company”) issued a press release announcing its financial results for the third quarter of 2003. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

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.

	RAE Systems Inc.
Date: October 27, 2003	By: /s/ Joseph Ng    Joseph Ng Chief Financial Officer

EXHIBIT INDEX

Exhibit No.
99.1 Description
Press Release dated October 27, 2003

EX-99

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

RAE Systems Reports Record Third Quarter Revenue
Company Posts Fifth Consecutive Quarter Record Revenue with 35.8% Growth Over Q3 2002

SUNNYVALE, Calif. – October 27, 2003 – RAE Systems Inc. (AMEX: RAE), a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical detection monitors and networks for homeland security and industrial applications, today announced record revenue for the third quarter ended September 30, 2003.

For the quarter, RAE Systems reported total revenues of $8.0 million compared to revenues of $5.9 million in the third quarter of 2002, an increase of 35.8%. Worldwide consolidated net income for the third quarter was $724,800 or 2 cents per share (1 cent per share fully diluted), compared to a net income of $360,300 or 1 cent per share for the same quarter in 2002, an increase of over 100%. The growth in revenue was largely due to the continued growth of the homeland defense market, an increase in industrial sales to monitor air quality, and accelerating adoption of the AreaRAE mobile sensor network. Net income for the quarter of $724,800 takes into effect, a non-cash fair value compensation charge related to options in the amount of $216,600.

“The record third quarter revenue reflects our success in providing our homeland defense, environmental and industrial customers comprehensive, robust sensing solutions that contribute to the protection of lives and property,” said Robert I. Chen, president and CEO of RAE Systems. “Our installed base is growing rapidly as we continue to innovate cutting-edge sensor networks and new applications for a diverse range of industries. RAE Systems’ solutions provide the data that drives better response and better safety in situations such as detection of weapons of mass destruction, offshore oil platform crew protection, superfund site remediation, public venue protection, and equipping Civil Support Teams around the country.”

Selected highlights of the third quarter include:

North and South America

• Petroecuador, the state-run oil company of Ecuador, chose RAE Systems to monitor potential hazards such as hydrogen sulfide, sulfur dioxide, carbon monoxide as well as lower explosive limit (LEL) thresholds for a variety of toxic gases in the company’s drilling and production operations.
• The Orange County (California) Fire Department selected MultiRAE Plus for their HAZMAT teams. These teams frequently train with the Orange County bomb squad, and the adoption of RAE Systems will enable fast, integrated response to terrorist attack or HAZMAT accident.
• RAE Systems was deployed at Major League Baseball’s 2003 All-Star game at U.S. Cellular Field in Chicago. Working in conjunction with the Chicago Fire Department and the 5^th WMD Civil Support Team, AreaRAE and MultiRAE detectors were linked to AreaRAE Connect, providing full situational awareness of the environment during the game.

Asia/Pacific

• Emergency Management Australia, a division of the Attorney-General’s Department, adopted MiniRAE 2000 and ppbRAE to support the government’s CBR (chemical, biological and radiological) anti-terrorism program.
• Hong Kong International Airport adopted IAQRAE technology to monitor indoor air quality in terminals that see more than 45,000,000 passengers per year.
• The Beijing Economic and Business Administration Bureau, an agency of the Beijing municipal government, selected ppbRAE to provide indoor air quality testing for homes and businesses.

Technology and products

• RAE Systems announced the launch of the AreaRAE Gamma, the industry’s first combined radiation/chemical detector based on our wireless platform, at the ISA show in Houston, Texas.
• RAE Systems launched the Wing Tank Entry Kit, customized specifically for entering aircraft wing-tanks that contain jet fuel. The alarms, gas measurement scales and calibration gases in the Wing Tank Entry Kit are specially tailored for use in environments containing jet fuel vapors.
• RAE Systems launched two new products, AreaPORT and Sensor RAE. AreaPORT is a remote online monitoring product designed to provide better visibility into the multiple data streams generated by a variety of sensors and monitors in manufacturing environments. SensorRAE, a compact electrochemical (EC) sensor conditioning station, is a new accessory for all users of RAE Systems ‘multi-gas products. It is designed for HAZMAT/ WMD teams who require a complete suite of EC sensors, but may only have room in their detectors for two EC sensors at one time.

About RAE Systems

Founded in 1991, RAE Systems is a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical detection monitors and networks for homeland security and industrial applications. In addition, RAE Systems offers a full line of portable single-sensor chemical and radiation detection products. 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. RAE Systems’ end users also include many of the world’s leading corporations in the airline, automotive, computer and oil industries. RAE Systems’ products are used in civilian and government atmospheric monitoring programs in over 50 countries. Several government agencies and departments have standardized their programs based on our products for hazardous materials incident response. 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 “continued growth” and “growing rapidly”. 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.

Condensed Consolidated Balance Sheets

	September 30, 2003			December 31, 2002
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	6,678,300		$	7,193,500
Accounts receivable, net of allowance for doubtful accounts
of $175,700 and $175,700, respectively		4,736,300			2,475,700
Inventories		3,884,100			3,176,400
Prepaid expenses and other current assets		834,700			402,000
Deferred income taxes		528,800			528,800
Total Current Assets		16,662,200			13,776,400
Property and Equipment, net		1,805,600			2,026,800
Deposits and Other Assets		150,100			81,800
Investment in Unconsolidated Affiliate		586,600			784,700
	$	19,204,500		$	16,669,700
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable	$	1,204,300		$	942,400
Accounts payable to affiliate		608,500			757,900
Accrued expenses		2,044,600			1,689,700
Income taxes payable		630,300			1,726,200
Current portion of deferred revenue		50,800			149,700
Current portion of capital lease obligations		132,200			159,600
Total Current Liabilities		4,670,700			5,425,500
Deferred Revenue, net of current portion		84,500			--
Capital Leases Obligations, net of current portion		15,100			107,300
Deferred Income Taxes		277,200			277,200
Total Liabilities		5,047,500			5,810,000
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value; 200,000,000 shares authorized;
46,591,721 and 45,516,675 shares issued and outstanding, respectively		46,600			45,500
Additional paid-in capital		18,437,500			17,955,800
Deferred compensation		--			(516,600	)
Cumulative other comprehensive income		3,300			--
Accumulated deficit		(4,330,400	)		(6,625,000	)
Total Shareholders' Equity		14,157,000			10,859,700
	$	19,204,500		$	16,669,700

RAE Systems Inc.

Condensed Consolidated Statements of Operations

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net Sales	$	7,969,300		$	5,869,100		$	22,767,800		$	15,581,700
Cost of Sales		3,283,600			2,401,700			8,812,100			6,577,900
Gross Margin		4,685,700			3,467,400			13,955,700			9,003,800
Operating Expenses:
Sales and marketing		1,681,200			1,431,600			5,062,800			3,971,200
Research and development		716,900			741,600			2,179,900			1,946,900
General and administrative		1,282,400			515,000			3,630,400			3,311,600
Legal fees and settlement costs		39,500			331,100			130,000			575,100
Merger costs		--			--			--			8,734,700
Total Operating Expenses		3,720,000			3,019,300			11,003,100			18,539,500
Operating Income (Loss)		965,700			448,100			2,952,600			(9,535,700	)
Other Income (Expense):
Interest income		7,200			14,400			23,900			46,400
Interest expense		(5,600	)		(10,100	)		(19,800	)		(110,200	)
Other, net		(37,000	)		14,300			(14,000	)		(1,600	)
Equity in loss of unconsolidated affiliate		(65,000	)		(77,800	)		(198,100	)		(198,400	)
Total Other Income (Expense)		(100,400	)		(59,200	)		(208,000	)		(263,800	)
Income (Loss) Before Income Taxes		865,300			388,900			2,744,600			(9,799,500	)
Income Taxes		140,500			28,600			450,000			36,400
Net Income (Loss)	$	724,800		$	360,300		$	2,294,600		$	(9,835,900	)
Basic Earnings (Loss) Per Common Share	$	0.02		$	0.01		$	0.05		$	(0.26	)
Diluted Earnings (Loss) Per Common Share	$	0.01		$	0.01		$	0.05		$	(0.26	)
Weighted-average common shares outstanding		46,246,408			45,153,990			45,914,155			37,976,136
Stock options		4,566,384			--			3,995,622			--
Diluted weighted-average common shares
outstanding		50,812,792			45,153,990			49,909,777			37,976,136