UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934
(Amendment No. 1)*

RAE Systems Inc.

(Name of Issuer)

Common Stock, $.001 Par Value Per Share
(Title of Class of Securities)

75061P102
(CUSIP Number)

Ray Holding Corporation		With a copy to:
Ray Merger Sub Corporation Vector Capital III, L.P. Vector Entrepreneur Fund III, L.P. Vector Capital IV, L.P. Vector Capital Partners III, L.P. Vector Capital Partners IV, LP. Vector Capital, L.L.C. Alexander R. Slusky c/o Vector Capital Corporation One Market Street, Steuart Tower, 23rd Floor San Francisco, CA 94105 Telephone: (415) 293-5000 Attn: David Baylor		Shearman & Sterling LLP 525 Market Street, 15th Floor San Francisco, CA 94105 Telephone: (415) 616-1100 Attn: Steve L. Camahort

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

May 17, 2011
(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. o

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 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).

 

 

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

CUSIP No.		75061P102

     This Amendment No. 1 (this “Amendment No. 1”) to the statement on Schedule 13D filed with the Securities and Exchange Commission on behalf of (i) Ray Holding Corporation, a Delaware Corporation, (“Ray”), (ii) Ray Merger Sub Corporation, a Delaware corporation (“Merger Sub”), (iii) Vector Capital III, L.P., a Delaware limited partnership (“VC III LP”), (iv) Vector Entrepreneur Fund III, L.P., a Delaware limited partnership (“VEF III LP”), (v) Vector Capital IV, L.P., a Delaware limited partnership (“VC IV LP”), (vi) Vector Capital Partners III, L.P., an exempted Cayman limited partnership (“VCP III LP”), (vii) Vector Capital Partners IV, L.P., an exempted Cayman limited partnership (“VCP IV LP”), (viii) Vector Capital, L.L.C., a Delaware limited liability company (“VC LLC”, and together with VC III LP, VEF III LP, VC IV LP, VCP III LP and VCP IV LP, “Vector”), and (ix) Alexander R. Slusky, an individual (“Mr. Slusky,” and together with Ray, Merger Sub and Vector, the “Reporting Persons”) on January 28, 2011 (the “Schedule 13D”) is being filed pursuant to Rule 13d-2 of the Securities Exchange Act, as amended, on behalf of the Reporting Persons to amend certain information set forth below to the items indicated. Unless otherwise stated herein, all capitalized terms used in this Amendment No. 1 have the same meanings as those set forth in the Schedule 13D.

Item 3. Source Amount of Funds or Other Consideration

Item 3 of the Schedule 13D is hereby amended and supplemented by adding the following:

     On May 17, 2011, Ray, Merger Sub and the Company entered into Amendment No. 2 to the Merger Agreement (“Amendment No. 2 to the Merger Agreement”), which was previously amended by Amendment No. 1 dated April 3, 2011 (“Amendment No. 1 to the Merger Agreement”), pursuant to which, among other things, the Merger Consideration was increased to $2.00 per share, payable in cash, without interest.

     Concurrently with the execution of Amendment No. 2 to the Merger Agreement, the Voting Parties entered into consents and agreements with Ray (collectively, the “Consents and Agreements”), pursuant to which, among other things, the Voting Parties and Ray agreed to terminate the Voting Agreements.

     The total value of the Merger transaction, including the amount of funds required by Ray to pay the aggregate consideration pursuant to the Merger Agreement, as amended by Amendment No. 2 to the Merger Agreement, and the transactions contemplated thereby, and pay fees and expenses relating to the Merger, as well as the assumption or repayment of indebtedness, has increased to approximately $131.2 million.

     Concurrently with the execution of Amendment No. 2 to the Merger Agreement, VC III LP, VC IV LP and the Company entered into Amendment No. 2 to the Vector Guarantee (“Amendment No. 2 to the Vector Guarantee”), which was previously amended by Amendment No. 1 dated April 3, 2011 (“Amendment No. 1 to the Vector Guarantee”), pursuant to which the limitation on monetary damages payable by VC III LP and VC IV LLP was increased to an amount equal to (x) $95.210 million minus an amount equal to (A) the “Transferable Shares” (as defined in Item 4 below) times (B) the Merger Consideration.

     The foregoing descriptions of Amendment No. 1 to the Merger Agreement, Amendment No. 2 to the Merger Agreement, the Consents and Agreements, Amendment No. 1 to the Vector Guarantee and Amendment No. 2 to the Vector Guarantee are qualified in their entirety by reference to Amendment No. 1 to the Merger Agreement, Amendment No. 2 to the Merger Agreement, the Form of Consent and Agreement, Amendment No. 1 to the Vector Guarantee and Amendment No. 2 to the Vector Guarantee, which are filed as Exhibits 99.7, 99.8, 99.9, 99.10 and 99.11 hereto, respectively, and which are incorporated herein by reference.

Item 4. Purpose of Transaction

     (a) - (j)

     Item 4 of the Schedule 13D is hereby amended and supplemented by adding the following:

     Parent, Merger Sub and the Company entered into Amendment No. 2 to the Merger Agreement in order to, among other things, (i) increase the Merger Consideration to $2.00 per share, payable in cash, without interest, (ii) increase the termination fee payable by the Company in certain circumstances to $4.27 million, (iii) delete all references to the Voting Agreements, (iv) make clear that the fact that any bona fide written offer by a third party includes as a term thereof the

entry by the Company and such third party of a stock purchase agreement or a stock option agreement issuing to such third party, or providing such third party an option to purchase, newly issued shares of Company common stock representing no more than 19.9% of the total number of shares of Company common stock issued and outstanding as of the date of the grant of such shares or option would not (x) in and of itself, be cause for the Company’s Board of Directors or the Special Committee of the Company’s Board of Directors to determine that such offer does not constitute, or (y) be considered in determining whether such offer is, a “Superior Offer” (as defined in the Merger Agreement), and (v) increase the number of RLC Exchange Shares by an amount equal to (a) (x) (A) the Merger Consideration minus (B) $1.75 times (y) (A) the number of shares of Company common stock owned by the RLC Trust on the closing date of the Merger minus (B) 10,701,525 divided by (b) the Merger Consideration (the “Transferable Shares”).

     Concurrently with the execution of Amendment No. 2 to the Merger Agreement, the Voting Parties entered into the Consents and Agreements, pursuant to which, among other things, the Voting Parties and Ray agreed to terminate the Voting Agreements.

     Concurrently with the execution of Amendment No. 2 to the Merger Agreement, the RLC Trust entered into Amendment No. 1 to its Rollover Agreement (“Amendment No. 1 to the RLC Rollover Agreement”) with Ray which has the effect that, with the Merger Consideration equal to $2.00 per share, the RLC Trust is contributing approximately 585,166 Transferable Shares (worth approximately $1.2 million at $2.00 per share) to Ray for no consideration. To the extent that the Merger Consideration increases after the date hereof, the number of Transferable Shares (and the value of the Merger Consideration associated with them) would correspondingly increase.

     The foregoing descriptions of Amendment No. 2 to the Merger Agreement, the Consents and Agreements, and Amendment No. 1 to the RLC Rollover Agreement are qualified in their entirety by reference to Amendment No. 2 to the Merger Agreement, the Form of Consent and Agreement, and Amendment No. 1 to the RLC Rollover Agreement which are filed as Exhibit 99.8, 99.9, and 99.12 hereto, respectively, and which are incorporated herein by reference.

     Except as set forth in this Item 4, none of the Reporting Persons has any plans or proposals which relate to or would result in any of the actions specified in clauses (a) through (j) of Item 4 of Schedule 13D.

Item 5. Interest in Securities of the Issuer

     Item 5 of the Schedule 13D is hereby amended and restated in its entirety as follows:

     (a) Each of the Reporting Persons’ current ownership in the Issuer and the Issuer’s Common Stock is set forth on the cover pages to this Schedule 13D and is incorporated by reference herein. The ownership percentage appearing on such pages has been calculated based on a total of 59,512,064 shares, which is the number of shares of Issuer’s Common Stock outstanding as of April 30, 2011, as disclosed in the Issuer’s Form 10-Q for the quarter ended March 31, 2011. As a result of the Consents and Agreements discussed in Item 4 above, the Reporting Persons no longer may be deemed to constitute a “group” within the meaning of Section 13(d)(3) of the Exchange Act, with the Voting Parties, and therefore, are no longer required to file statements on Schedule 13D with the Securities and Exchange Commission. The Reporting Persons disclaim membership in any “group” with any person other than the Reporting Persons. The filing of this Schedule 13D by the Reporting Persons shall not be considered an admission that such Reporting Persons, for the purpose of Section 13(d) of the Exchange Act, are the beneficial owners of any of the shares of Common Stock covered in this report, and the Reporting Persons expressly disclaim such beneficial ownership.

     (b) The number of shares of Common Stock of the Issuer that may be deemed to be beneficially owned by each of the Reporting Persons with respect to which there is (i) sole voting power, (ii) shared voting power, (iii) sole dispositive power, and (iv) shared dispositive power is as set forth below.

		Ray				Merger Sub				VC III LP				VEF III LP				VC IV LP				VCP III LP				VCP IV LP				VC LLC				Mr. Slusky
Sole Power to Vote/Direct Vote			0				0				0				0				0				0				0				0				0
Shared Power to Vote/Direct Vote			0				0				1,432,600				34,800				1,432,600				1,467,400				1,432,600				2,900,000				2,900,000
Sole Power to Dispose/Direct Disposition			0				0				0				0				0				0				0				0				0
Shared Power to Dispose/Direct Disposition			0				0				1,432,600				34,800				1,432,600				1,467,400				1,432,600				2,900,000				2,900,000

     (c) Other than as described in Items 3 and 4 above, there have been no transactions in the Issuer’s Common Stock that were effected during the past sixty days by any of the Reporting Persons.

     (d) To the knowledge of the Reporting Persons, no person other than the Reporting Persons has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Shares.

     (e) Not applicable.

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

     Item 6 of the Schedule 13D is hereby amended and supplemented by adding the following:

     The information set forth in Items 3, 4 and 5 above is incorporated herein by reference in its entirety into this Item 6.

Item 7. Material to Be Filed as Exhibits.

Exhibit
Number		Document
99.7		Amendment No. 1 to Agreement and Plan of Merger, dated as of January 18, 2011, by and among RAE Systems Inc., Ray Holding Corporation and Ray Merger Sub Corporation, dated as of April 3, 2011 (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on April 4, 2011).
99.8		Amendment No. 2 to Agreement and Plan of Merger, dated as of January 18, 2011, as amended by Amendment No. 1 dated as of April 3, 2011, by and among RAE Systems Inc., Ray Holding Corporation and Ray Merger Sub Corporation, dated as of May 17, 2011 (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on May 18, 2011).
99.9		Form of Consent and Agreement, by and between Ray Holding Corporation and each of Robert Chen and Peter Hsi, respectively, dated as of May 17, 2011. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on May 18, 2011
99.10		Amendment No. 1 to Guarantee, dated as of January 18, 2011, by and among RAE Systems Inc., Vector Capital III, L.P. and Vector Capital IV, L.P., dated as of April 3, 2011. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on April 4, 2011).
99.11		Amendment No. 2 to Guarantee, dated as of January 18, 2011, as amended by Amendment No. 1 dated as of April 3, 2011, by and among RAE Systems Inc., Vector Capital III, L.P. and Vector Capital IV, L.P., dated as of May 17, 2011. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on May 18, 2011).
99.12		Amendment No. 1 to Rollover Agreement, dated as of January 18, 2011, by and between the Company and Chen Revocable Trust DTD 5/8/2001, dated as of May 17, 2011.

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 May 18, 2011.

Exhibit 99.12

AMENDMENT NO. 1 TO ROLLOVER AGREEMENT

     This Amendment No. 1 (this “Amendment No. 1”) to that certain Rollover Agreement, dated as of January 18, 2011 (the “Rollover Agreement”), by and between Ray Holding Corporation, a Delaware corporation (the “Company”) and Chen Revocable Trust DTD 5/8/2011 (the “Investor”), is made and entered into as of May 17, 2011 by and between the Company and the Investor. All capitalized terms that are used in this Amendment No. 1 but not defined in this Amendment No. 1 shall have the respective meanings ascribed thereto in the Rollover Agreement.

     A. On May 17, 2011, Parent, Merger Sub and the Company entered into Amendment No. 2 to the Merger Agreement (“Amendment No. 2 to the Merger Agreement”).

     B. In connection with Amendment No. 2 to the Merger Agreement, the Investor and the Company desire to enter into this Amendment No. 1, and the Investor believes it is in its best interests to enter into this Amendment No. 1 and consummate the transactions contemplated hereby, by the Rollover Agreement and by the Merger Agreement.

     Now, Therefore, the parties hereto hereby agree as follows:

     1. Rollover Amount.

          (a) Recital C of the Rollover Agreement is hereby amended and restated in its entirety as set forth below:

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 (i) 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 equal to the Merger Consideration (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”) and (ii) the Transferable Shares.

          (b) Section 1(a) of the Rollover Agreement is hereby amended and restated in its entirety as set forth below:

(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 Transferable Shares (and the certificate(s) representing such Exchange Shares and such Transferable 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”) (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 will be in accordance with the Investor’s, the other Rollover Holders’ and the Sponsors’ pro rata portion set forth on Exhibit F, and for the avoidance of doubt, with respect to the Investor, shall be the same relative proportion as the allocation of the shares of Preferred Stock and Common Stock issued to the Sponsors pursuant to the Subscription Agreement. 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. For purposes of illustration only, Exhibit F sets forth an example of the capitalization table based on the assumed total outstanding equity required to be funded to Parent at Closing.

     2. Fees and Expenses. Section 9(n) of the Rollover Agreement is hereby amended and restated in its entirety as set forth below:

(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 $400,000 in the aggregate for the Investor and all of the other Rollover Holders; provided, if the Investor and the other Rollover Holders provide reasonable advance notice to the Company that they have incurred Expenses in excess of $400,000, the Company may consent to the payment of such additional Expenses, which consent will not be unreasonably withheld; provided, further, 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. Nothing in this Agreement limits in any manner the rights of the Investor or its Affiliates to indemnification pursuant to any instrument, document or applicable law.

     3. Rollover Agreement References. The parties hereto hereby agree that all references to the “Agreement” set forth in the Rollover Agreement (including, without limitation, in the representations and warranties of the parties set forth therein) shall be deemed to be references to the Rollover Agreement as amended by this Amendment No. 1.

     4. Full Force and Effect. Except as expressly amended or modified hereby, the Rollover Agreement and the agreements, documents, instruments and certificates among the parties hereto as contemplated by, or referred to, in the Rollover Agreement shall remain in full force and effect without any amendment or other modification thereto.

     5. Counterparts. This Amendment No. 1 may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Amendment No. 1 (in counterparts or otherwise) by facsimile shall be sufficient to bind the parties to the terms and conditions of this Amendment No. 1.

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In Witness Whereof, the parties have executed this Amendment No. 1 as of the date first written above.

Amendment No. 1 Signature Page