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):

December 22, 2004

RAE Systems Inc.

(Exact name of registrant as specified in its charter)

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

1339 Moffett Park Drive

Sunnyvale, California 94089

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(408) 752-0723

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:

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

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

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

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

Item 1.01 Entry into a Material Definitive Agreement.

On December 22, 2004, RAE Systems Inc. (the “Company”) entered into an Employment Offer Letter (the “Agreement”) with Mr. Donald W. Morgan whereby Mr. Morgan shall serve as the Company’s Vice President and Chief Financial Officer commencing January 1, 2005. Under the Agreement, Mr. Morgan will receive: (i) an annual salary of $200,000, (ii) a grant of an option to purchase 100,000 shares of the Company’s common stock vesting over four years of continuous employment with a one year cliff and subject to the terms of the Company’s 2002 Stock Option Plan, (iii) a performance-based bonus to be determined by the Company’s Board of Directors and (iv) other compensation as set forth in the Agreement attached as Exhibit 99.1 to this Current Report.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

(b) On December 22, 2004, Mr. Donald W. Morgan replaced Mr. Joseph Ng as Chief Financial Officer of the Company, as announced in the Company’s press release attached as Exhibit 99.1 to this Current Report. After a transition period, Mr. Ng will be leaving the Company to pursue other opportunities.

(c) On December 22, 2004, the Company’s Board of Directors appointed Mr. Morgan to serve as the Company’s Vice President and Chief Financial Officer, as announced in the Company’s press release attached as Exhibit 99.1 to this Current Report, replacing Mr. Ng as Chief Financial Officer.

From 1999 until its eventual sale in 2004, Mr. Morgan was Vice President and Chief Financial Officer of Larscom, Inc., a manufacturer and marketer of high-speed network-access products for telecommunication service providers and corporate enterprise users. From 1998 to 1999 Mr. Morgan was an independent financial and tax consultant to a NASDAQ-listed software company. Mr. Morgan received a B.S. in Finance from University of Illinois, Champaign, and a M.S. in Business Administration from Northeastern University. Mr. Morgan is 59 years old.

See disclosure under Item 1.01 above for the material terms of Mr. Morgan’s employment agreement.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits.

Exhibit No.	Description
99.1	Employment Offer Letter dated December 22, 2004 from RAE Systems Inc. to Mr. Donald W. Morgan
99.2	Press Release dated December 22, 2004

SIGNATURES

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

Date: December 23, 2004

RAE SYSTEMS INC.
By:	/s/ Robert I. Chen
Name:	Robert I. Chen
Title:	President, Chairman and
	Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Employment Offer Letter dated December 22, 2004 from RAE Systems Inc. to Mr. Donald W. Morgan
99.2	Press Release dated December 22, 2004

EX-99.1

Exhibit 99.1

Donald W. Morgan	December 22, 2004
10791 Inspiration Circle
Dublin, CA 94568

Dear Donald:

I am pleased to extend an offer of employment as Vice President & Chief Financial Officer of RAE Systems Inc. Your salary will be $7692.30 biweekly, or $200,000 if annualized. In addition, you will be eligible to participate in an executive incentive plan that may provide additional cash compensation. For 2005, your on-target bonus will be 25% of base salary. Your actual bonus will be proportional to performance against individual and corporate objectives, to be agreed upon by January 31, 2005. For future years, you will be eligible for whatever incentive-based executive compensations plans are approved by the Board for the Company’s senior executives.

As a regular employee, you will be eligible for the standard employee benefits accorded to other regular employees. Your start date will be a January 1, 2005.

Subject to the approval of the Board of Directors, you will be granted the option to purchase 100,000 shares of company stock at the Fair Market Value (FMV) on the date of Board approval. The terms of this grant, which are specified in the Company’s stock option plan, include a vesting period of four years beginning with the date of hire, with one-fourth of the shares subject to the option vesting twelve months from the date of hire and the remaining shares vesting ratably at the rate of 1/48 for each full month of your service.

This position and all other positions at the company are intended to be “at will” positions under California law and can be terminated with or without cause and with or without notice at any time by either you or the company.

Under Federal law, employers are required to verify within 3 days a new employee’s identity and authorization to work in the United States. When a start date is determined, please bring documents that will enable the company to comply with this legal requirement. We will also expect you to sign the Company’s standard confidentiality and non-disclosure agreements.

If you have any questions, please feel free to contact me at 408 585 3501, or Kate Lee, RAE Systems’ Director of Human Resources, at 408 585 3517.

Sincerely.

/s/ Robert I. Chen

Robert I. Chen

President & Chief Executive Officer

Accepted /s/ Donald M. Morgan Date December 22, 2004

EX-99.2

Exhibit 99.2

RAE Systems Appoints New Chief Financial Officer

Donald W. Morgan replaces Joseph Ng

SUNNYVALE, Calif.—(BUSINESS WIRE)—Dec. 22, 2004—RAE Systems Inc. (AMEX:RAE - News), a leading global developer and manufacturer of rapidly-deployable, multi-sensor chemical and radiation detection monitors and networks for homeland security and industrial applications, today announced the appointment of Donald W. Morgan as vice president and chief financial officer. Mr. Morgan replaces Joseph Ng, the company’s former chief financial officer, After a transition period, Mr. Ng will be leaving to pursue other opportunities. Mr. Morgan, who will start on January 1, 2005, will be responsible for the company’s worldwide finance and accounting functions.

“With public-company CFO experience and a strong background in the Fortune 500, Don brings a wealth of relevant expertise to this role,” said Robert I. Chen, RAE Systems’ chief executive officer. “As we continue to execute on our growth plans, I am delighted to have an executive of Don’s caliber join the RAE Systems team.”

Morgan was most recently CFO of Larscom Incorporated (formerly Nasdaq: LARS), which merged with Verilink Corporation in July of 2004. He began his career at Unisys Corporation (NYSE: UIS - News), and his professional experience includes financial management roles at various technology companies. Morgan holds a B.S. degree in Business Administration from Northeastern University and an M.S. degree in Finance from the University of Illinois.

About RAE Systems

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 enable the military and first responders such as firefighters, law enforcement and other emergency management personnel to detect and provide early warning of 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 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.

Contact:

RAE Systems Inc.

Bob Durstenfeld, 408-585-3534

bdurstenfeld@raesystems.com

Source: RAE Systems Inc.