SC 13D/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D/A

Under the Securities Exchange Act of 1934

(Amendment No. 3)*

RAE Systems Inc.

(Name of Issuer)

Common Stock

(Title of Class of Securities)

75061P 10 2

(CUSIP Number)

Robert I. Chen	Robert T. Ishii
c/o RAE Systems, Inc.	Wilson Sonsini Goodrich & Rosati,
3775 North First Street	Professional Corporation
San Jose, California 95134	One Market Street, Spear Tower Suite 3300
	San Francisco, California 94105
(408) 952-8200	(650) 947-2000

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

September 19, 2010

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box.  ¨

Note:  Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

1	NAMES OF REPORTING PERSONS:             Robert I. Chen
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             United States of America

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                  0
	8    SHARED VOTING POWER:                  15,768,275
	9    SOLE DISPOSITIVE POWER:                  204,166
	10    SHARED DISPOSITIVE POWER:                  15,564,109

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:              15,768,275*
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):              26.5%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

* Includes options to purchase 204,166 shares of common stock of issuer exercisable within 60 days.

2

1	NAMES OF REPORTING PERSONS:             Lien Q. Chen
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             United States of America

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                 0
	8    SHARED VOTING POWER:                 15,564,109
	9    SOLE DISPOSITIVE POWER:                 0
	10    SHARED DISPOSITIVE POWER:                 15,564,109

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:             15,564,109
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):              26.2%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

3

1	NAMES OF REPORTING PERSONS:             Chen Revocable Trust DTD 5/8/2001
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             California

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                 0
	8    SHARED VOTING POWER:                  15,382,849
	9    SOLE DISPOSITIVE POWER:                 0
	10    SHARED DISPOSITIVE POWER:                  15,382,849

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):              25.9%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

4

1	NAMES OF REPORTING PERSONS:             Chen Family Foundation
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             California

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                  0
	8    SHARED VOTING POWER:                  181,260
	9    SOLE DISPOSITIVE POWER:                 0
	10    SHARED DISPOSITIVE POWER:                 181,260

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:             181,260
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):              0.3%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

5

1	NAMES OF REPORTING PERSONS:             Peter Hsi
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             United States of America

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                 0
	8    SHARED VOTING POWER:                 2,741,332
	9    SOLE DISPOSITIVE POWER:                 50,000
	10    SHARED DISPOSITIVE POWER:                 2,691,332

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:             2,741,332*
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):             4.6%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

* Includes options to purchase 50,000 shares of common stock of issuer exercisable within 60 days.

6

1	NAMES OF REPORTING PERSONS:             Sandy Hsi
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             United States of America

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                  0
	8    SHARED VOTING POWER:                 2,691,332
	9    SOLE DISPOSITIVE POWER:                 0
	10    SHARED DISPOSITIVE POWER:                 2,691,332

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:             2,691,332
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):             4.5%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

7

1	NAMES OF REPORTING PERSONS:             Hsi Family Trust
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  ¨ (b)  x
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS):             OO
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):              ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION:             California

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	7    SOLE VOTING POWER:                  0
	8    SHARED VOTING POWER:                 2,691,332
	9    SOLE DISPOSITIVE POWER:                 0
	10    SHARED DISPOSITIVE POWER:                 2,691,332

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:             2,691,332
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):              x             (See Item 6)
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):              4.5%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):             OO

8

Item 1. Security and Issuer.

This Schedule 13D/A amends and restates a Schedule 13D/A filed on March 4, 2005, with the Securities and Exchange Commission and related to shares of common stock, par value $0.001 per share (“Common Stock”) of RAE Systems Inc., a Delaware corporation (“RAE”). RAE’s principal executive offices are located at 3775 North First Street, San Jose, California 95134.

Item 2. Identity and Background.

This statement is being filed by each of the following persons (each, a “Reporting Person” and collectively, the “Reporting Persons”):

Robert I. Chen is the Chairman and Chief Executive Officer of RAE. Mr. Chen’s business address is 3775 North First Street, San Jose, California 95134. Mr. Chen is a citizen of the United States of America. Mrs. Lien Q. Chen is married to Mr. Robert I. Chen.

Lien Q. Chen is director of information technology and order administration of RAE. Mrs. Chen’s business address is 3775 North First Street, San Jose, California 95134. Mrs. Chen is a citizen of the United States of America. Mr. Robert I. Chen is married to Mrs. Lien Q. Chen.

Chen Revocable Trust DTD 5/8/2001 (the “RLC Trust”) is organized under the laws of the State of California for the purpose of holding assets of Robert I. and Lien Q. Chen in trust. Robert I. and Lien Q. Chen serve as the trustees of the RLC Trust. The business address of the RLC Trust is c/o Robert I. Chen, RAE Systems Inc., 3775 North First Street, San Jose, California 95134.

The Chen Family Foundation (the “Foundation”) is a corporation organized under the laws of the State of California to hold certain assets of Robert I. and Lien Q. Chen for estate planning purposes. Robert I. and Lien Q. Chen serve as directors of the Foundation. The business address of the Foundation is c/o Robert I. Chen, RAE Systems Inc., 3775 North First Street, San Jose, California 95134.

Peter Hsi is the Chief Technology Officer of RAE. Mr. Hsi’s business address is 3775 North First Street, San Jose, California 95134. Mr. Hsi is a citizen of the United States of America. Mrs. Sandy Hsi is married to Mr. Peter Hsi.

Sandy Hsi is a trustee of the Hsi Family Trust. Mrs. Hsi’s business address is c/o Peter Hsi, RAE Systems Inc., 3775 North First Street, San Jose, California 95134. Mrs. Hsi is a citizen of the United States of America. Mr. Peter Hsi is married to Mrs. Sandy Hsi.

Hsi Family Trust (the “Hsi Family Trust”) is organized under the laws of the State of California for the purpose of holding assets of Peter and Sandy Chen in trust. Peter and Sandy Hsi serve as the trustees of the Hsi Family Trust. The business address of the Hsi Family Trust is c/o Peter Hsi, RAE Systems Inc., 3775 North First Street, San Jose, California 95134.

During the last five years, none of the Reporting Persons has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), nor was any Reporting Person a party to a civil proceeding of a judicial or administrative body of competent jurisdiction that resulted in a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration.

Not applicable.

9

Item 4. Purpose of Transaction.

On September 19, 2010, RAE entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rudy Acquisition Corp. (“Purchaser”) and Rudy Merger Sub Corp. (“Merger Sub”), a wholly owned subsidiary of Purchaser. Purchaser and Merger Sub are each affiliates of Battery Ventures VIII, L.P and Battery Ventures VIII Side Fund, L.P. (together with Battery Ventures VIII, L.P., “Battery”) Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into the Company and the Company will continue as the surviving corporation and a wholly-owned subsidiary of Purchaser (the “Merger”).

At the effective time of the Merger (the “Effective Time”), each share of RAE’s common stock (the “Shares”) outstanding immediately prior to the Effective Time will be converted into the right to receive $1.60 in cash, without interest (the “Merger Consideration”), other than the Exchange Shares (defined below), which will be exchanged for shares of Purchaser representing 30% of the outstanding capital stock of Purchaser as of immediately following the Effective Time.

Concurrently with the execution of the Merger Agreement, each of the RLC Trust, the Foundation, Robert I. Chen, the Hsi Family Trust and Peter Hsi (each, a “Voting Party” and collectively, the “Voting Parties”) entered into a Voting Agreement with Purchaser, in the form attached hereto as Exhibit 1, dated as of September 19, 2010 (each, a “Voting Agreement”), pursuant to which, among other things, the Voting Parties agreed to vote all the shares of Common Stock beneficially owned by such stockholders in favor of the Merger and against any other acquisition proposal at any meeting of RAE’s stockholders until termination of the Merger Agreement. Pursuant to the Voting Agreements, each Voting Party irrevocably appointed Purchaser and Battery as its true and lawful proxy and attorney-in-fact, with full power of substitution, to (x) vote their Common Stock for the matters expressly provided for in the Voting Agreement and (y) execute and deliver all written consents, conveyances and other instruments or documents appropriate or necessary to effect the matters expressly provided for in the Voting Agreement. Each Voting Party further agreed not to sell any shares of Common Stock that are subject to the Voting Agreements until the earlier of the effective time of the Merger or the termination of the Merger Agreement on its terms and agreed that any additional shares of Common Stock acquired would automatically become subject to the Voting Agreement.

Concurrently with the execution of the Merger Agreement, each of the RLC Trust and the Hsi Family Trust (collectively, the “Rollover Shareholders”) entered into a Rollover Agreement with Purchaser, in the form attached hereto as Exhibit 2, dated as of September 19, 2010 (each, a “Rollover Agreement”) pursuant to which (1) the RLC Trust agreed to surrender 10,701,525 shares of Common Stock (the “RLC Exchange Shares”) in exchange for 17,122,440 shares of common stock of Purchaser and 16,951 shares of preferred stock of Purchaser, and (2) the Hsi Family Trust agreed to surrender 2,691,332 shares of Common Stock (the “Hsi Exchange Shares” and together with the RLC Exchange Shares, the “Exchange Shares”) in exchange for 4,306,131 shares of common stock and 4,263 shares of preferred stock of Purchaser, in each case immediately prior to the Effective Time. In addition, pursuant to the terms of the Rollover Agreements, the RLC Trust and the Hsi Family Trust have agreed not to sell, pledge, encumber, grant an option with respect to, transfer or dispose of the Exchange Shares through the Effective Time (including by means of entering into a swap or similar transaction that transfers the economic consequences of ownership of the Exchange Shares), and, in connection therewith, have granted Purchaser a first priority lien upon and security interest in the Rollover Shareholders’ respective rights and interest in the Exchange Shares. The Rollover Agreements will terminate upon termination of the Merger Agreement in accordance with its terms. Copies of the Rollover Agreements are attached hereto as Exhibit 4 and Exhibit 5 hereto.

References to, and descriptions of, the merger, the Merger Agreement, the Voting Agreements and the Rollover Agreements throughout this statement are qualified in their entirety by reference to the Merger Agreement included as Exhibit 2.1 to RAE’s current report on Form 8-K dated September 20, 2010, the Form of Voting Agreement included as Exhibit 1 to this statement, and the Form of Rollover Agreement included as Exhibit 2 to this statement. These agreements are incorporated into this statement where such references and descriptions appear.

Item 5. Interest in Securities of the Issuer.

(a)

(i) The RLC Trust owns 15,382,849 shares of Common Stock representing 25.9% of all of the outstanding shares of Common Stock.

10

(ii) The Foundation owns 181,260 shares of Common Stock representing 0.3% of the all of the outstanding shares of Common Stock.

(iii) Each of Robert I. Chen and Lien Q. Chen may be deemed to be the beneficial owner of the 15,382,849 shares of Common Stock beneficially owned by the RLC Trust, and of the 181,260 shares of Common Stock beneficially owned by the Foundation, representing in the aggregate 26.2% of all of the outstanding shares of Common Stock.

(iv) Robert I. Chen is the beneficial owner of 204,166 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement, representing 0.3% of all of the outstanding shares of Common Stock.

(v) The Hsi Family Trust owns 2,691,332 shares of Common Stock representing 4.5% of all of the outstanding shares of Common Stock.

(vi) Each of Peter Hsi and Sandy Hsi may be deemed to be the beneficial owner of the 2,691,332 shares of Common Stock beneficially owned by the Hsi Family Trust representing 4.5% of all of the outstanding shares of Common Stock.

(vii) Peter Hsi is the beneficial owner of 50,000 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement, representing 0.1% of all of the outstanding shares of Common Stock.

As a result of the matters described in Item 4 above, the Reporting Persons may be deemed to constitute a “group”, within the meaning of Section 13(d)(3) of the Exchange Act, with Purchaser and Battery. The Reporting Persons expressly disclaim being such a group with Purchaser and Battery, and neither the filing of this statement not any of its content will be deemed to constitute an admission that any of the Reporting Persons are the beneficial owners of any shares of equity securities owned by Purchaser or Battery or any of their affiliates for purposes of Section 13(d) of the Exchange Act or for any other purpose, and such beneficial ownership is expressly disclaimed.

As a result of the execution, delivery and performance by the RLC Trust and the Hsi Family Trust of the Rollover Agreements described in Item 4 of this statement, and pursuant to Rule 13d-5(b)(1) promulgated under the Exchange Act, the Hsi Family Trust, together with Peter Hsi and Sandy Hsi, may be deemed to have acquired beneficial ownership of the shares of Common Stock beneficially owned by the RLC Trust, Robert I. Chen and Lien Q. Chen, and the RLC Trust, together with Robert I. Chen and Lien Q. Chen, may be deemed to have acquired beneficial ownership of the shares of Common Stock beneficially owned by the Hsi Family Trust, Peter Hsi and Sandy Hsi. The RLC Trust, the Foundation, Robert I. Chen and Lien Q. Chen hereby disclaim beneficial ownership of any shares of Common Stock that may be beneficially owned by the Hsi Family Trust, Peter Hsi and Sandy Hsi. The Hsi Family Trust, Peter Hsi and Sandy Hsi hereby disclaim beneficial ownership of any shares of Common Stock that may be beneficially owned by the RLC Trust, the Foundation, Robert I. Chen and Lien Q. Chen.

All of the percentages set forth in this Item 5(a) and in the cover pages of this statement have been calculated based on a total of 59,415,976 shares, which is the number of shares of RAE’s common stock outstanding as of September 19, 2010, as disclosed in the Merger Agreement.

(b)

(i) The RLC Fund, Robert I. Chen and Lien Q. Chen have shared power to vote or direct the vote of, and to dispose or direct the disposition of, the 15,382,849 shares of Common Stock held by the RLC Fund.

(ii) The Foundation, Robert. I Chen and Lien Q. Chen have shared power to vote or direct the vote of, and to dispose or direct the disposition of, the 181,260 shares of Common Stock held by the Foundation.

11

(iii) Robert I. Chen has the sole power to dispose or direct the disposition of the 200,000 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement. As a result of the Voting Agreement to which he is a party, Robert I. Chen may be deemed to have shared voting powers with respect to the 200,000 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement.

(iv) The Hsi Family Trust, Peter Hsi and Sandy Hsi have shared power to vote or direct the vote of, and to dispose or direct the disposition of, the 2,691,332 shares of Common Stock held by the Hsi Family Trust.

(v) Peter Hsi has the sole power to dispose or direct the disposition of the 50,000 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement. As a result of the Voting Agreement to which he is a party, Peter Hsi may be deemed to have shared voting powers with respect to the 50,000 shares of Common Stock that are subject to options held by him that are exercisable within 60 days of the date of this statement.

(c) None of the Reporting Persons has made any purchase, sale or other transaction in the Common Stock during the 60 days preceding the date of this statement.

(d) No other person has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, any shares of Common Stock beneficially owned by the Reporting Persons as of the date hereof.

(e) Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.

See Item 4 of this statement for a description of the Voting Agreements entered into by the RLC Trust, the Foundation, the Hsi Family Trust, Robert I. Chen and Peter Hsi, and the Rollover Agreements entered into by the RLC Trust and the Hsi Family Trust.

Item 7. Materials to be Filed as Exhibits.

The following documents are incorporated by reference as exhibits:

Exhibit No.	Title
1	Form of Voting Agreement dated as of September 19, 2010, entered into between Purchaser and each of the RLC Trust, the Foundation, Robert I. Chen, the Hsi Family Trust and Peter Hsi (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by RAE on September 20, 2010)
2	Form of Rollover Agreement dated as of September 19, 2010, entered into between Purchaser and each of the RLC Trust, the Foundation and the Hsi Family Trust
3	Joint Filing Agreement

12

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Dated: September 29, 2010
CHEN REVOCABLE TRUST DTD 5/8/2001		CHEN FAMILY FOUNDATION
By:	/S/    ROBERT I. CHEN	By:	/S/    ROBERT I. CHEN
	Robert I. Chen		Robert I. Chen
	Trustee
By:	/S/    LIEN Q. CHEN	By:	/S/    LIEN Q. CHEN
	Lien Q. Chen		Lien Q. Chen
	Trustee
ROBERT I. CHEN		LIEN Q. CHEN
By:	/S/    ROBERT I. CHEN	By:	/S/    LIEN Q. CHEN
HSI FAMILY TRUST		PETER HSI
By:	/S/    PETER C. HSI	By:	/S/    PETER C. HSI
	Peter Hsi
	Trustee
		SANDY HSI
By:	/S/    SANDY HSI	By:	/S/    SANDY HSI
	Sandy Hsi
	Trustee

13

EXHIBIT INDEX

Exhibit No.	Title
1	Form of Voting Agreement dated as of September 19, 2010, entered into between Purchaser and each of the RLC Trust, the Foundation, Robert I. Chen, the Hsi Family Trust and Peter Hsi (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by RAE on September 20, 2010)
2	Form of Rollover Agreement dated as of September 19, 2010, entered into between Purchaser and each of the RLC Trust, the Foundation and the Hsi Family Trust
3	Joint Filing Agreement

EX-2

Exhibit 2

FORM OF ROLLOVER AGREEMENT

THIS ROLLOVER AGREEMENT (this “Agreement”) is made and entered into as of September 19, 2010 by and between RUDY ACQUISITION CORP., a Delaware corporation (the “Company”), and «INVESTOR_NAME_ROLLOVER» (the “Investor”). Certain definitions are set forth in Section 7 of this Agreement. Certain capitalized terms used in this Agreement, not otherwise defined herein, shall have the meanings set forth in the Merger Agreement (as defined below). Subject to Section 10 hereof, this Agreement shall be a binding obligation of the parties on the date hereof, but the Rollover (as defined below) shall become effective immediately prior to the Effective Time upon the Closing Date.

RECITALS:

A. The Investor is currently a stockholder of RAE SYSTEMS, INC., a Delaware corporation (“Target”), and is the owner of «Number_of_Shares_Voting» shares of common stock, par value $0.001 per share, of Target (the “Target Common Stock”).

B. The Company has entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of the date hereof, by and among the Company, RUDY MERGER SUB CORP., a Delaware corporation and the wholly-owned subsidiary of the Company (“Merger Sub”), and Target pursuant to which Merger Sub shall merge with and into Target with Target as the surviving corporation (the “Merger”).

C. In connection with the transactions contemplated by the Merger Agreement (the “Contemplated Transactions”), the Investor desires, immediately prior to the consummation of the Merger on the Closing Date, to contribute to the Company that number of shares of Target Common Stock as set forth on Exhibit A attached hereto (the “Exchange Shares”) having a per share purchase price as set forth on Exhibit A attached hereto (the aggregate purchase price for the shares of Target Common Stock to be exchanged by the Investor shall be referred to herein as the “Rollover Amount”).

D. Company desires to issue to the Investor the Rollover Shares in exchange for the Investor’s contribution to the Company of the Exchange Shares.

E. The Investor believes that it is in its best interests to enter into this Agreement and consummate the transactions contemplated hereby and by the Merger Agreement.

NOW, THEREFORE, the parties hereto hereby agree as follows:

1. Acquisition of Rollover Shares.

(a) Immediately prior to the Effective Time (as such term is defined in the Merger Agreement), the Investor shall surrender to the Company the Investor’s Exchange Shares (and the certificate(s) representing such Exchange Shares accompanied by duly executed stock powers), free and clear of all Encumbrances and, simultaneously with such surrender, the Company shall issue to the Investor a certain number of shares of the Company’s Preferred Stock and Common Stock (as further defined in Section 7(f), the “Rollover Shares”), as set forth opposite the Investor’s name on Exhibit A attached hereto (the “Rollover”). Such Rollover Shares issued to the Investor shall have an aggregate value equal to the Rollover Amount. The allocations of shares of Preferred Stock and Common Stock as set forth on Exhibit A will be in the same relative proportion as the allocation of the shares of Preferred Stock and Common Stock issued to the Sponsors pursuant to the Purchase Agreement, and immediately following the Effective Time, there shall not be outstanding any stock of the Company or securities convertible or exchangeable for any shares of the Company’s capital stock other than the Preferred Stock and Common Stock issued to the Investor, the other Rollover Holders and the Sponsors as set forth on the capitalization table attached hereto as Exhibit F.

1.

(b) In connection with the acquisition of the Rollover Shares hereunder, and the execution, delivery and performance of this Agreement and the other Transaction Documents to which the Investor is a party, the Investor represents and warrants to the Company that:

(i) The Investor is acquiring the Rollover Shares for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. The Investor understands that the offer and sale of the Rollover Shares have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor’s representations as expressed herein. The Investor is an “accredited investor” within the meaning of Regulation D, Rule 501(a), promulgated by the Securities and Exchange Commission.

(ii) The Investor has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Rollover Shares and has had full access to such other information concerning the Company as he has requested.

(iii) The Investor has had the opportunity to consult its own tax advisors with respect to the tax consequences to himself of the purchase, receipt or ownership of the Rollover Shares, including the tax consequences under federal, state, local, and other income tax laws of the United States or any other country and the possible effects of changes in such tax laws. The Investor acknowledges that none of the Company, its subsidiaries, Affiliates, successors, beneficiaries, heirs and assigns and its and their past and present directors, officers, employees, and agents (including, without limitation, their attorneys) makes or has made any representations or warranties to the Investor regarding the tax consequences to the Investor of the purchase, receipt or ownership of the Rollover Shares, including the tax consequences under federal, state, local and other tax laws of the United States or any other country and the possible effects of changes in such tax laws, except as set forth herein and in the Stockholders Agreement (as defined in Section 7 below).

(iv) The Investor is the legal and beneficial owner of the Exchange Shares as set forth opposite its name on Exhibit A attached hereto, free and clear of any Encumbrances.

2.

(v) This Agreement constitutes the legal, valid and binding obligation of the Investor, enforceable in accordance with its terms (except as enforceability may be limited by principles of public policy, applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights and remedies generally or general principles of equity (regardless of whether considered and applied in a proceeding at law or in equity)), and the execution, delivery and performance of this Agreement by the Investor does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Investor is a party or any judgment, order or decree to which the Investor is subject, except for such conflicts, violations or breaches which would not, individually or in the aggregate, adversely effect the ability of the Investor to fully perform its covenants and obligations hereunder.

(vi) The Investor is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Rollover Shares.

(vii) The Investor acknowledges that none of the Company or any of its officers, directors, representatives or Affiliates has given the Investor any investment advice, credit information, or opinion on whether the contribution of the Exchange Shares in exchange for the Rollover Shares is prudent. The Investor has not relied on the Company to furnish or make available any documents or other information regarding the credit, affairs, financial condition or business of the Company, or any other matter concerning the Company. Except as set forth herein, the Company acknowledges none of the Company or any of its officers, directors, representatives or Affiliates has made any representation or warranty to the Investor.

(viii) The Investor is a resident of the State of California.

(c) As an inducement to the Company to issue the Rollover Shares to the Investor, and as a condition thereto, the Investor acknowledges and agrees that neither the issuance of the Rollover Shares to the Investor nor any provision contained herein shall entitle the Investor to remain in the employment of the Company or any of its Subsidiaries or affect the right of the Company or any such Subsidiary to terminate the Investor’s employment at any time for any reason.

(d) Upon execution of this Agreement by the Investor, the Investor’s spouse, if any, shall execute the Spousal Consent in the form of Exhibit B attached hereto.

(e) Conditions to the Obligations of the Investor Hereunder. The obligations of the Investor to consummate the transactions contemplated by this Section 1 of this Agreement shall be subject to and conditioned upon the following: (i) the representations and warranties of the Company set forth in this Agreement being true and correct in all material respects at and as of the Closing as if made at and as of the Closing, (ii) the Company’s compliance in all material respects with its obligations hereunder, (iii) the absence of any prohibition against the consummation of the transactions contemplated hereby by any applicable law, statute, rule, regulation, judgment or order of any governmental authority of competent jurisdiction, (iv) the filing by the Company of the Certificate of Incorporation of the Surviving Corporation (which Certificate shall provide that it is to be effective upon filing), (v) the furnishing of funds by the Sponsors to the Company in satisfaction of their obligations to the Company under the Purchase Agreement and the execution by the Sponsors of the Stockholders Agreement; and (vi) the satisfaction or waiver by the Company and/or the Target, as applicable, of all of the conditions to the consummation of the Merger (as set forth in the Merger Agreement). Investor shall use its commercially reasonable efforts to cause the conditions above to be satisfied, and in no event may Investor rely on any condition set forth above to be satisfied if such failure was caused by Investor’s failure to use its commercially reasonable efforts to so cause the applicable condition to be satisfied.

3.

2. Restrictions on Transfer of Exchange Shares and Rollover Shares.

(a) Restriction on Transfer of Exchange Shares. During the period from the date of this Agreement through the Effective Time, Investor shall not, directly or indirectly, cause or permit any Transfer of any of the Exchange Shares to be effected. Copies of the certificate(s) representing the Exchange Shares are attached hereto as Exhibit G. The Investor hereby grants to the Company a first priority lien upon and security interest in Investor’s rights and interest in the Exchange Shares.

(b) Legend. If requested by the Company, the certificates representing the Exchange Shares will bear a legend in substantially the following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A ROLLOVER AGREEMENT BETWEEN RUDY ACQUISITION CORP. AND A STOCKHOLDER OF RAE SYSTEMS, INC. DATED AS OF SEPTEMBER 19, 2010. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT RUDY ACQUISITION CORP.’S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.”

(c) Restriction on Transfer of Rollover Shares. From and after the Effective Time, the Transfer of the Rollover Shares shall be governed by the terms and conditions of the Stockholders Agreement.

3. Representations and Warranties of the Company. As a material inducement to the Investor to enter into this Agreement and acquire the Rollover Shares, the Company hereby represents and warrants to the Investor that:

(a) Organization and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has the absolute and unrestricted right, power and authority to perform its obligations under this Agreement. The copies of the Company’s certificate of incorporation and bylaws which have been furnished to the Investor’s counsel reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete.

4.

(b) Capital Stock and Related Matters.

(i) As of immediately prior to the Effective Time, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features (except for 2 shares of Common Stock owned by the Sponsors, which shall be cancelled at the Effective Time), nor shall it have outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans other than pursuant to and as contemplated by this Agreement, the other Rollover Agreements (as such term is defined in the Stockholders Agreement), the Purchase Agreement, the Stockholders Agreement and the Company’s certificate of incorporation. As of the Closing, the Company shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except pursuant to this Agreement, the other Rollover Agreements, the Purchase Agreement, the Stockholders Agreement and the Company’s certificate of incorporation. As of the Closing, all of the outstanding shares of the Company’s capital stock (including the Rollover Shares) shall be duly authorized, validly issued, fully paid and nonassessable, and the Rollover Shares shall be free and clear of any Encumbrances (except as set forth in the Stockholders Agreement and the Registration Rights Agreement). As of immediately after the Effective Time, the capitalization of the Company shall be as set forth on Exhibit F hereto.

(ii) There are no statutory or, to the Company’s knowledge, contractual stockholders’ preemptive rights or rights of refusal with respect to the issuance of the Rollover Shares hereunder, except as expressly contemplated in the Stockholders Agreement or provided in the Purchase Agreement. Based in part on the investment representations of the Sponsors in Section 2 of the Purchase Agreement and of the Investor in Section 1(b) hereof, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock, and the offer, sale and issuance of the Rollover Shares hereunder do not and will not require registration under the Securities Act or any applicable state securities laws. To the Company’s knowledge, there are no agreements between the Company’s stockholders with respect to the voting or transfer of the Company’s capital stock or with respect to any other aspect of the Company’s affairs, except for this Agreement, the other Rollover Agreements, the Stockholders Agreement, the Purchase Agreement, and the Registration Rights Agreement.

(c) Authorization; No Breach. The execution, delivery and performance by the Company of the Transaction Documents to which the Company is a party have been duly authorized by any necessary action on the Company and its Board. Each Transaction Document and the Company’s certificate of incorporation constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to: (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. The execution and delivery of the Transaction Documents by the Company; the offering, sale and issuance of the Rollover Shares hereunder; and the fulfillment of and compliance with the respective terms hereof and thereof by the Company do not and will not will: (1) conflict with or result in any breach of the certificate of incorporation or bylaws of the Company; (2) result in a material default by the Company under any contract to which the Company is a party, or (3) result in a material violation by the Company of any Legal Requirement or any order, writ, injunction, judgment or decree to which the Company is subject.

5.

(d) Section 351. The Company has no current plan or intention to reacquire any of the Rollover Shares or shares issued to the Sponsor pursuant to the Purchase Agreement. The Company will not issue voting or nonvoting stock of the Company in exchange for any consideration other than cash or other property in a manner and at a time that is reasonably likely to prevent the stock issuances to Investor and the other Rollover Holders contemplated by this Agreement from qualifying as tax-free exchanges under Section 351 of the Code; provided, however, that the Company shall not be prohibited from taking any action that is permitted by or required by this Agreement or any other agreement referenced herein.

Assuming (A) the Investor satisfies its obligations with respect to the Rollover, (B) the other Rollover Holder satisfies its obligations with respect to the rollover of its shares of Target Common Stock pursuant to the Rollover Agreement between the Company and such other Rollover Shareholder, and (C) the Sponsors funds their respective obligations pursuant to the Purchase Agreement, in each case at or prior to the Effective Time, the Sponsors, the other Rollover Shareholder and the Investor, when taken together, shall hold at least 80% of the voting stock of the Company and at least 80% of each class of nonvoting stock, if any, at the Effective Time.

4. Newly Formed Entity. The Company was organized solely for the purpose of effecting the transactions contemplated by the Merger Agreement and the other Transaction Documents, as of the Effective Time will have engaged in no activity other than in connection with such transactions. Investor recognizes that the Company was only recently formed and, accordingly, has no financial or operating history and that its investment in the Company is extremely speculative and involves a high degree of risk.

5. Consent and Waiver. Investor hereby waives any and all rights to contest or object to the execution and delivery of the Merger Agreement, the actions of the Board of Directors of Target (or the Special Committee) in approving and recommending the Merger, the consummation of the Merger and the other transactions provided for in the Merger Agreement, or to seek damages or other legal or equitable relief in connection therewith. If the Merger is consummated, then Investors’ right to the Rollover Shares on the terms and subject to the conditions set forth herein and in the Merger Agreement shall constitute Investor’s sole and exclusive right against the Company, Merger Sub and/or the Sponsors in respect of Investors’ ownership of the Exchange Shares or status as a stockholder of the Target in respect of the Exchange Shares or any agreement or instrument with Target pertaining to the Exchange Shares or Investor’s status as a stockholder of the Target in respect of the Exchanges Shares. Furthermore, Investor hereby represents and warrants to the Company that (a) he is not aware of any claims or causes of action that he may have against Target or any other Acquired Corporation for any period up to and through the date hereof, except for its right to be paid wages and expense reimbursements in the ordinary course of Target’s business; and (b) he has no present intention to pursue any Legal Proceeding against Target or any Acquired Corporation.

6. Support of the Transaction. The Investor and the Company shall use commercially reasonable efforts to assemble, prepare and file any information (and, as needed, to supplement such information) as may be reasonably necessary to obtain as promptly as practicable all governmental and regulatory consents required to be obtained in connection with the Rollover.

6.

7. Definitions.

(a) “Board” means the Company’s board of directors.

(b) “Public Offering” means the sale in an underwritten public offering registered under the Securities Act of shares of the Company’s Common Stock approved by the Board and managed by a nationally-recognized investment banking firm.

(c) “Public Sale” means (i) any sale pursuant to a registered public offering under the Securities Act or (ii) any sale to the public pursuant to Rule 144 promulgated under the Securities Act affected through a broker, dealer or market maker (other than pursuant to Rule 144 prior to a Public Offering).

(d) “Purchase Agreement” means that certain Purchase Agreement in the form of Exhibit C attached hereto between the Company and the Sponsors.

(e) “Registration Rights Agreement” means that certain Registration Rights Agreement of even date herewith in the form of Exhibit D attached hereto among the Company and certain of its stockholders, as amended from time to time pursuant to its terms.

(f) “Rollover Shares” includes all shares of Series A Perpetual Preferred Stock, par value $0.001 per share of the Company (the “Preferred Stock”) and all shares of Common Stock, par value $0.001 per share of the Company (the “Common Stock”) acquired by the Investor. Rollover Shares will continue to be Rollover Shares in the hands of any holder other than the Investor (except for the Company and any Sponsor and except for transferees in a Public Sale), and except as otherwise provided herein, each such other holder of Rollover Shares will succeed to all rights and obligations attributable to the Investor as a holder of Rollover Shares hereunder. Rollover Shares will also include equity of the Company (or a corporate successor to the Company) issued with respect to Rollover Shares (i) by way of a stock split, stock dividend, conversion, or other recapitalization or (ii) by way of reorganization or recapitalization of the Company in connection with the incorporation of a corporate successor prior to a Public Offering.

(g) “Securities Act” means the Securities Act of 1933, as amended from time to time.

(h) “Sponsors” means, collectively, Battery Ventures VIII, L.P. and Battery Ventures VIII Side Fund, L.P. and each individually is a “Sponsor.”

(i) “Stockholders Agreement” means that certain Stockholders Agreement of even date herewith in the form of Exhibit E attached hereto among the Company and certain of its stockholders, as amended from time to time pursuant to its terms.

(j) “Transaction Documents” means this Agreement, the Stockholders Agreement, the Registration Rights Agreement, the Purchase Agreement and each of the other agreements contemplated hereby and thereby.

7.

(k) A Person shall be deemed to have a effected a “Transfer” of a security if such Person directly or indirectly: (i) sells, pledges, encumbers, grants an option with respect to, transfers or disposes of such security or any interest in such security to any Person other than the Company; (ii) enters into an agreement or commitment contemplating the possible sale of, pledge of, encumbrance of, grant of an option with respect to, transfer of or disposition of such security or any interest therein to any Person other than the Company; (iii) enters into a swap or similar transaction that transfers the economic consequences of ownership of such security; or (iv) reduces such Person’s beneficial ownership of, interest in or risk relating to such security.

8. Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered by hand, by registered mail, by courier or express delivery service or by facsimile to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):

If to the Company:
	Rudy Acquisition Corp.
	c/o Battery Ventures
	930 Winter Street, Suite 2500
	Waltham, MA 02451
	Attention: Morgan Jones
	Facsimile: 781-478-6601
with a copy to:
(which shall not constitute notice to the Company)
	Cooley LLP
	500 Boylston Street
	Boston, MA 02116
	Attention: Alfred L. Browne III
	Facsimile: 617-937-2400
If to the Investor:
	«Name_and_Address_Rollover»
with a copy to:
(which shall not constitute notice to the Investor)
	Wilson Sonsini Goodrich & Rosati
	One Market Street, Spear Tower Suite 3300
	San Francisco, CA 94105
	Facsimile: 415-947-2099
	Attention: Robert T. Ishii
If to Sponsors:
	Battery Ventures VIII, L.P.
	Reservoir Woods
	930 Winter Street, Suite 2500
	Waltham, MA 02451

8.

with a copy to:
(which shall not constitute notice to Sponsors)
	Cooley LLP
	500 Boylston Street
	Boston, MA 02116
	Attention: Alfred L. Browne III
	Facsimile: 617-937-2400

9. General Provisions.

(a) Tax Treatment. Each of the parties hereto intends that the transactions contemplated by Section 1 qualify as part of an exchange of property for stock under Section 351 of the Code and agrees to report the transactions contemplated by this Agreement in a manner consistent with the intent of the parties hereto, and to not take a position inconsistent herewith. Each of the parties hereto shall prepare and file all tax returns in a manner consistent with such treatment, including filing the statements required by Treasury Regulation §1.351-3 with its federal income tax return filed for the taxable year in which includes the date of the Closing, and to comply with the record keeping requirements of Treasury Regulation §1.351-3.

(b) Agreements Unchanged. Nothing in this Agreement shall amend, modify, alter or change any of the parties’ rights or obligations under the Merger Agreement, including, without limitation, the Investor’s indemnification obligations hereunder, under the Merger Agreement or under any other agreements pursuant to which he is a party. For purposes of clarity, the Investor reaffirms the representations and warranties being made in the Merger Agreement with respect to the Company Common Stock, which includes the Exchange Shares.

(c) Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

(d) Complete Agreement. This Agreement, the Transaction Documents, the Merger Agreement, and other documents of even date herewith executed in connection with the Merger Agreement embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

(e) Counterparts. This Agreement may be executed in separate counterparts (including by means of facsimile or portable document file (.pdf)), each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

9.

(f) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Investor, the Company, the Sponsors and their respective successors and assigns (including subsequent holders of Rollover Shares).

(g) Applicable Law; Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws. In any action or suit between any of the parties arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement: (i) each of the parties irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the state and federal courts located in the State of Delaware; and (ii) each of the parties irrevocably waives the right to trial by jury.

(h) Remedies. Each of the parties to this Agreement (and the Sponsors, as third-party beneficiaries) will be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including attorneys’ fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. Without limiting the generality of the foregoing, in connection with the consummation of the Merger, the Sponsors and the Company shall have the right to specifically enforce the Rollover. The parties hereto agree and acknowledge that money damages will not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction in the State of Delaware (as set forth above) (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement.

(i) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company (through its Board), the Investor and the Sponsors.

(j) No Inducement. The Investor hereby represents and warrants that he has not been induced to agree to and execute this Agreement by any statement, act or representation of any kind or character by anyone, except as contained herein. The Investor further represents that he has fully reviewed this Agreement and has full knowledge of its terms, and executes this Agreement of its own choice and free will, after having received the advice of its attorney(s).

(k) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the state in which the Company’s chief executive office is located, the time period shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday.

(l) Code § 409A Amendment. The Company and the Investor agree to cooperate to amend this Agreement to the extent reasonably necessary to avoid imposition of any additional tax or income recognition prior to actual payment to the Investor under Code §409A and any temporary or final treasury regulations and Internal Revenue Service guidance thereunder, but only to the extent such amendment would not (and could not) have an adverse effect on the Company and would not provide the Investor with any additional rights, in each case as determined by the Company in its sole discretion.

10.

(m) Adjustments of Numbers. All numbers set forth herein that refer to share prices or amounts will be appropriately adjusted to reflect stock splits, stock dividends, combinations of shares and other recapitalizations affecting the subject class of stock.

(n) Fees and Expenses. (i) Subject to Section 9(n)(ii), the Expenses incurred by each party hereto will be borne by the party incurring such Expenses. (ii) The Company shall reimburse the Investor and the other Rollover Holders for their reasonable out-of-pocket Expenses (or directly pay such Expenses to the extent not paid by the Investor as of the Effective Time), up to a maximum of $250,000 in the aggregate for the Investor and all of the other Rollover Holders; provided, that the Company shall have no obligation under this Section 9(n)(ii) to the Investor in the event the Rollover is not effected. (iii) For purposes of this Agreement, “Expenses” shall mean, with respect to a party, the reasonable fees and expenses incurred by that party in connection with the authorization, preparation, negotiation, execution and performance of this Agreement, the Transaction Documents, any related agreements and transactions contemplated hereby and thereby (including the fees and expenses of counsel, accountants, investment bankers, financial sources and consultants). The Investor shall cause any third party for whom it will seek reimbursement of Expenses hereunder to provide the Company, promptly upon request, such updates and related information related to the Expenses incurred (including billing accruals) as the Company may reasonably request.

10. Effectiveness. This Agreement shall be a binding obligation of the parties as of the date it is executed but not effective until immediately prior to the Effective Time; provided that (a) in the event that the Merger Agreement is terminated prior to the Closing Date, this Agreement shall be deemed void and of no further force and effect and (b) in connection with the Merger, the Company and the Sponsors shall have the right to enforce this Agreement with respect to the Rollover (as set forth above).

SIGNATURE PAGE FOLLOWS

11.

IN WITNESS WHEREOF, the parties have executed this Rollover Agreement as of the date first written above.

RUDY ACQUISITION CORP.
By:
	Name:
	Title:

IN WITNESS WHEREOF, the parties have executed this Rollover Agreement as of the date first written above.

INVESTOR:

«Investor_Name_Rollover»

By:

By:

EX-3

Exhibit 3

Joint Filing Agreement

The undersigned hereby agree that the statement on Schedule 13D with respect to the common stock of RAE Systems, Inc. dated as of September 19, 2010 is, and any further amendments thereto signed by each of the undersigned shall be, filed on behalf of each of the undersigned pursuant to an in accordance with the provisions of Rule 13d-1(k) under the Securities Exchange Act of 1934, as amended.

Dated: September 29, 2010
CHEN REVOCABLE TRUST DTD 5/8/2001		CHEN FAMILY FOUNDATION
By:	/s/ Robert I. Chen	By:	/s/ Robert I. Chen
Robert I. Chen		Robert I. Chen
Trustee
By:	/s/ Lien Q. Chen	By:	/s/ Lien Q. Chen
Lien Q. Chen		Lien Q. Chen
Trustee
ROBERT I. CHEN		LIEN Q. CHEN
By:	/s/ Robert I. Chen	By:	/s/ Lien Q. Chen
HSI FAMILY TRUST		PETER HSI
By:	/s/ Peter C. Hsi	By:	/s/ Peter C. Hsi
Peter Hsi
Trustee
		SANDY HSI
By:	/s/ Sandy Hsi	By:	/s/ Sandy Hsi
Sandy Hsi
Trustee