SC 13D

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

[Rule 13d-101]

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

RAE Systems Inc.

(Name of Issuer)

Common Stock, $.001 Par Value Per Share

(Title of Class of Securities)

75061P102

(CUSIP Number)

Ray Holding Corporation
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, L.P.
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

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

January 18, 2011

(Date of Event which Requires Filing of this Statement)

With a copy to:

Shearman & Sterling LLP
525 Market Street, 15^th Floor
San Francisco, CA 94105
Telephone: (415) 616-1100
Attn: Steve L. Camahort

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 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).

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Ray Holding Corporation
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			18,551,772
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			-0-
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	18,551,772
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	31.2%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	CO

2

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Ray Merger Sub Corporation
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			18,551,772
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			-0-
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	18,551,772
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	31.2%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	CO

3

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Capital III, L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			19,984,372
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			1,432,600
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	19,984,372
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	33.6%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	PN

4

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Entrepreneur Fund III, L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			18,586,572
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			34,800
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	18,586,572
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	31.2%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	PN

5

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Capital IV, L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			19,984,372
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			1,432,600
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	19,984,372
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	33.6%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	PN

6

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Capital Partners III, L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			20,019,172
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			1,467,400
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	20,019,172
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	33.6%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	OO

7

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Capital Partners IV, L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			19,984,372
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			1,432,600
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	19,984,372
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	33.6%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	OO

8

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Vector Capital, L.L.C.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	Delaware
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			21,451,772
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			2,900,000
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	21,451,772
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	36.0%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	OO

CUSIP No. 75061P102 

1.	NAMES OF REPORTING PERSONS: Alexander R. Slusky
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)*
	(a)   o
	(b)   o
3.	SEC USE ONLY
4.	SOURCE OF FUNDS (SEE INSTRUCTIONS)*
	AF
5.	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e)
	o
6.	CITIZENSHIP OR PLACE OF ORGANIZATION
	United States
		7.	SOLE VOTING POWER
NUMBER OF			-0-
SHARES		8.	SHARED VOTING POWER
BENEFICIALLY
OWNED BY			21,451,772
EACH		9.	SOLE DISPOSITIVE POWER
REPORTING
PERSON			-0-
WITH		10.	SHARED DISPOSITIVE POWER
			2,900,000
11.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
	21,451,772
12.	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
	o
13.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
	36.0%
14.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
	IN

9

This statement on Schedule 13D (this “Schedule 13D”) relates to the Agreement and Plan of Merger, dated as of January 18, 2011 (as it may be amended from time to time, the “Merger Agreement”), by and among Ray Holding Corporation, a Delaware corporation (“Ray”), Ray Merger Sub Corporation, a Delaware corporation (“Merger Sub”), and RAE Systems Inc., a Delaware corporation (the “Issuer” or “Company”). 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 Ray (the “Merger”).

The information set forth in response to each separate Item below shall be deemed to be a response to all Items where such information is relevant. The information set forth in the Exhibits and Schedule attached hereto is expressly incorporated herein by reference and the response to each item of this Schedule 13D is qualified in its entirety by the provisions of such Exhibits and Schedule.

Concurrently with the execution of the Merger Agreement, Robert Chen and Peter Hsi (together, the “Voting Parties”) entered into voting agreements with Ray (collectively, as they may be amended from time to time, the “Voting Agreements”) pursuant to which, among other things, the Voting Parties agreed to vote all of the shares of common stock, $0.001 par value per share, of the Issuer (the “Common Stock”) beneficially owned by the Voting Parties, representing approximately 31% of the Company’s issued and outstanding Common Stock in the aggregate, in favor of the Merger and against any other acquisition proposal at any meeting of the Company’s stockholders until termination of the Merger Agreement. Mr. Chen, the Issuer’s Chief Executive Officer, beneficially owns 15,801,608 shares of Common Stock (which includes 237,499 options to purchase Common Stock exercisable within 60 days of the date of this Schedule 13D), or approximately 26.6% of the outstanding Common Stock and Mr. Hsi, the Issuer’s Vice President, Chief Technology Officer, beneficially owns 2,750,164 shares of Common Stock (which includes 58,832 options to purchase Common Stock exercisable within 60 days of the date of this Schedule 13D) or approximately 4.6% of the outstanding Common Stock.

The summary of the Merger Agreement and the Voting Agreements are qualified in their entirety by the terms and conditions of the Merger Agreement and the Form of Voting Agreement, which are filed as Exhibits 99.1 and 99.2 hereto, respectively, and are incorporated herein by reference.

Item 1. Security and Issuer.

     The class of equity securities to which this Schedule 13D relates is the Common Stock of the Issuer. The address of the principal executive offices of the Issuer is 3775 North First Street, San Jose, California 95134.

Item 2. Identity and Background.

     (a) This statement on Schedule 13D is being filed jointly on behalf of the following persons (collectively, the “Reporting Persons”): (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 IV LP and VCP III LP, “Vector”), and (ix) Alexander R. Slusky, an individual (“Mr. Slusky”). Mr. Slusky is the Managing Member of VC LLC. VC LLC is the sole general partner of each of VCP III LP and VCP IV LP. VCP III LP is the sole General Partner of each of VC III LP and VEF III LP. VCP IV LP is the sole General Partner of VC IV LP. VC III LP and VC IV LP own 100% of Ray, and Ray is the sole shareholder of Merger Sub.

          The agreement among the Reporting Persons relating to the joint filing of this statement is attached to this statement on Schedule 13D as Exhibit 1.

     (b) The business address for the Reporting Persons is One Market Street, Steuart Tower, 23rd Floor, San Francisco, CA 94105.

     (c) The principal businesses of Ray and Merger Sub are each to enter into the Merger Agreement.

10

The business of Vector is that of a private limited partnership (in the case of VC III LP, VEF III LP, VC IV LP, VCP III LP and VCP IV LP) or a private limited liability company (in the case of VC LLC), engaged in making investments in securities of public and private companies for its own account. The principal employment of Mr. Slusky is as the sole Director and President of Vector Capital Corporation, a Delaware corporation, which is principally engaged in the business of managing a portfolio of funds, including Vector.

     The name and principal occupation of each director and executive officer of Ray, and the Managing Member of Vector, is as follows:

• Alexander Slusky is a director of Ray and Merger Sub, and Managing Member of VC LLC. His principal occupation is as Managing Partner of Vector Capital Corporation.

• David Fishman is a director of Ray and Merger Sub. His principal occupation is as a Partner of Vector Capital Corporation.

• Andrew Fishman is a director of Ray and Merger Sub. His principal occupation is as a Vice President of Vector Capital Corporation.

• David Baylor is the President of Ray and Merger Sub. His principal occupation is as Chief Operating Officer of Vector Capital Corporation.

• Roy Kelvin is the Secretary of Ray and Merger Sub. His principal occupation is as Chief Financial Officer of Vector Capital Corporation.

     (d) None of the Reporting Persons have, during the last five years, been convicted in a criminal proceeding.

     (e) None of the Reporting Persons have, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to 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.

     (f) Mr. Slusky is a United States citizen.

Item 3. Source Amount of Funds or Other Consideration

     2,900,000 of the shares of Common Stock beneficially owned by the Reporting Person were acquired in open market transactions on September 21 and 22, 2010 for a net investment cost of $4,631,412. The source of funds for this consideration was the available capital of Vector, which may, at any given time, include margin loans made by brokerage firms or unsecured borrowings under a working capital credit line, each in the ordinary course of business.

     No funds were required in connection with the execution and delivery of the Merger Agreement and 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 and the transactions contemplated thereby, and pay fees and expenses relating to the Merger, as well as the assumption or repayment of indebtedness, will be approximately $119.57 million. Ray currently intends to obtain all of such funds through a combination of (i) debt financing to be provided by one or more groups of lenders, (ii) equity financing to be provided by Vector, its co-investor, Profit Spring Investments Limited (“PSIL”), an affiliate of CITIC Capital MB Investment Limited, pursuant to equity commitment letters described below and certain rollover investors, and (iii) available cash balances of the Company.

     In letters dated January 18, 2011, each of VC IV LP, VEF III LP, and VC III LP, (the “Vector Equity Commitment Letter”) and PSIL (the “PSIL Equity Commitment Letter”) agreed, subject to certain conditions, to contribute an aggregate of approximately $60 million (subject to adjustment) in cash to Ray in exchange for a portion of the equity of Ray, which financing will be used solely for the purpose of funding the merger consideration pursuant to the Merger Agreement and to

11

pay certain expenses. This summary of the Vector Equity Commitment Letter and the PSIL Equity Commitment Letter does not purport to be complete and is qualified in its entirety by reference to the Vector Equity Commitment Letter, which is attached hereto as Exhibit 99.3, and the PSIL Equity Commitment Letter, which is attached hereto as Exhibit 99.4, both of which are incorporated by reference in their entirety into this Item 3.

     CITIC Capital MB Investment Limited has, pursuant to a Guarantee, dated as of January 18, 2011 (the “CITIC Guarantee”), unconditionally and irrevocably guaranteed all obligations of PSIL under the PSIL Equity Commitment Letter, subject to the limitations contained therein. The CITIC Guarantee will terminate upon either the satisfaction of PSIL’s obligations under, or the termination of, the PSIL Equity Commitment Letter.

     VC III LP and VC IV LP have, pursuant to a Guarantee, dated as of January 18, 2011 (the “Vector Guarantee”), unconditionally and irrevocably guaranteed all payment obligations of Ray and Merger Sub under the Merger Agreement, including any monetary damages payable to the Company under Section 9.7(b) of the Merger Agreement for Ray’s or Merger Sub’s failure to consummate the Merger under the circumstances described in said Section 9.7(b), but (in all events) subject to the limitations of the Merger Agreement. VC III LP’s and VC IV LP’s maximum liability under the Guarantee is limited to monetary damages not in excess of $82,850,000. The Vector Guarantee will terminate upon earlier of the effective time of the Merger or the termination of the Merger Agreement. The foregoing description of the Vector Guarantee is qualified in its entirety by reference to the Vector Guarantee, which is filed as Exhibit 99.5 hereto, and is incorporated herein by reference.

     CITIC Capital MB Investment Limited and Vector have, pursuant to an expense sharing letter, dated January 18, 2011 (the “Expense Sharing Letter”), agreed, in the event the Merger is not consummated, to share in expenses (including, without limitation, any money damages Vector or any of its affiliates is obligated to pay to the Company) arising as a result of pursuing the Merger, and any payments to Vector in the event that the Merger is not consummated.

Item 4. Purpose of Transaction

     (a) - (j) The Reporting Persons acquired 2,900,000 shares of Common Stock reported herein as an initial step in connection with their objective of acquiring the Company.

     On January 18, 2011, Ray, Merger Sub and Issuer entered into the Merger Agreement, pursuant to which 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 Ray.

     At the effective time of the Merger (the “Effective Time”), each share of the Company’s Common Stock (the “Shares”) outstanding immediately prior to the Effective Time will be converted into the right to receive $1.75 in cash, without interest (the “Merger Consideration”), other than 13,392,857 shares beneficially owned by Mr. Chen and Dr. Hsi which will be exchanged for approximately 28% of the capital stock of Ray (which exchange shares are discussed in more detail below). In addition, at the Effective Time, each then-outstanding option to purchase Common Stock of the Company (the “Company Options”) will become fully vested and will be cancelled in exchange for a cash payment per share equal to the excess, if any, of the Merger Consideration over the exercise price of such Company Option. The Merger remains subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, including obtaining approval of the shareholders of the Company. This summary of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 99.1 and is incorporated by reference in its entirety into this Item 4.

     Concurrently with the execution of the Merger Agreement, the Voting Parties entered into the Voting Agreements with Ray, in the form attached hereto as Exhibit 99.2, dated as of January 18, 2011, 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 the Company’s stockholders until the earlier of the consummation of the Merger, an amendment to the Merger Agreement reducing the consideration paid therein, or termination of the Merger Agreement. Pursuant to the Voting Agreements, each Voting Party irrevocably appointed each of Ray and Vector as its true and

12

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 consummation of the Merger, an amendment to the Merger Agreement reducing the consideration paid therein, or termination of the Merger Agreement 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 Hsi Family Trust and the Chen Revocable Trust DTD 5/8/2001 (the “RLC Trust”, and together with the Hsi Family Trust, collectively, the “Rollover Stockholders”) entered into a Rollover Agreement with Ray, in the form attached hereto as Exhibit 99.6, dated as of January 18, 2011 (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 common and preferred stock of Ray, 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 common and preferred stock of Ray, 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 Ray a first priority lien upon and security interest in the Rollover Stockholders’ respective rights and interest in the Exchange Shares. The Rollover Agreements terminate if the Merger Agreement is amended to reduce the consideration paid therein, or the Merger Agreement terminates in advance of the consummation of the Merger.

     The foregoing descriptions of the Merger Agreement, Voting Agreements, and Rollover Agreements are qualified in their entirety by reference to the Merger Agreement, the Form of Voting Agreement, and Form of Rollover Agreement which are filed as Exhibit 99.1, 99.2, and 99.6 hereto, respectively, and are incorporated herein by reference.

     Vector intends to raise approximately $30 million in debt. Assuming the full amount is borrowed in connection with the Merger and is used to purchase Common Stock, then the post-closing equity value of Ray after the Merger will be approximately $83.49 million (determined based on the pre-Merger equity value of the Company’s Common Stock and options and transaction expenses reduced by the amount of the debt incurred by Ray in connection with the Merger (net of expected costs at closing)) and the enterprise value will be approximately $97.06 million. Based on the above assumptions, to fund a portion of the merger consideration, Vector and PSIL would invest approximately $52.1 million and approximately $8.0 million, respectively, in cash in Ray in the form of an equity contribution (consisting of a combination of preferred stock and common stock). The Rollover Stockholders’ contribution and Vector’s and PSIL’s investment in Ray will be made at the same valuation. As a result, immediately after the merger, (i) the Rollover Stockholders would hold equity in Ray valued at approximately $23.4 million (or approximately 28.1 percent of the total equity value of approximately $83.49 million), (ii) Vector would hold equity in Ray valued at approximately $52.1 million (or approximately 62.4 percent of the total equity value of $83.49 million), and (iii) PSIL would hold equity in Purchaser valued at approximately $8.0 million (or approximately 9.6 percent of the total equity value of $83.49 million). The remainder of the capitalization of Ray would consist of $30 million in debt, which will not exist prior to the closing of the Merger, and which would be arranged by Vector.

     It is anticipated that, after the closing of the merger, Ray will authorize and reserve an equity pool representing approximately 10 percent of the then-outstanding common stock of Ray. Of this common stock equity pool, Mr. Chen and Dr. Hsi will have the right to acquire restricted common stock pursuant to a customary restricted stock purchase agreement representing one percent and 1.5 percent, respectively, of the outstanding common stock of Ray on customary terms and conditions, including vesting. The common stock equity pool will otherwise dilute the ownership of the Rollover Stockholders, Vector and PSIL on a pro rata basis.

     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

     (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

13

as of January 17, 2011, as disclosed in the Merger Agreement. As a result of the matters discussed 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, among others, the Voting Parties. 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		18,551,772		18,551,772		19,984,372		18,586,572		19,984,372		20,019,172		19,984,372		21,451,772		21,451,772
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 Voting Parties has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the 18,551,772 Shares (Includes options to purchase 296,331 shares of common stock of issuer exercisable within 60 days).

     (e) Not applicable.

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

     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
1	Joint Filing Agreement dated January 28, 2011, by and among Ray Holding Corporation, 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, L.P., Vector Capital, L.L.C. and Alexander R. Slusky.
99.1	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. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission) (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on January 19, 2011).

14

Exhibit
Number	Document
99.2	Form of Voting Agreement, dated as of January 18, 2011, by and between Ray Holding Corporation and each of Robert Chen and Peter Hsi, respectively. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on January 19, 2011).
99.3	Equity Commitment Letter, dated January 18, 2011, by and among Ray Holding Corporation , Ray Merger Sub Corporation, Vector Capital III, L.P., Vector Entrepreneur Fund III, L.P. and Vector Capital IV, L.P.
99.4	Equity Commitment Letter, dated January 18, 2011, by and among Ray Holding Corporation , Ray Merger Sub Corporation and Profit Spring Investments Limited.
99.5	Guarantee, dated as of January 18, 2011, by and among RAE Systems Inc., Vector Capital III, L.P. and Vector Capital IV, L.P. (Incorporated by reference to Exhibit C of Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on January 19, 2011).
99.6	Form of Rollover Agreement, dated as of January 18, 2011, by and between the Company and each of Chen Revocable Trust DTD 5/8/2001 and Hsi Family Trust, respectively.

15

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 January 28, 2011.

RAY HOLDING CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President
RAY MERGER SUB CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President
VECTOR CAPITAL III, L.P.
By:	Vector Capital Partners III, L.P., its General Partner
By:	Vector Capital L.L.C., its General Partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
VECTOR ENTREPRENEUR FUND III, L.P.
By:	Vector Capital Partners III, L.P., its General Partner
By:	Vector Capital, L.L.C., its General Partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
VECTOR CAPITAL IV, L.P.
By:	Vector Capital Partners IV, L.P., its General Partner
By:	Vector Capital, L.L.C., its General Partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
VECTOR CAPITAL PARTNERS III, L.P.
By:	Vector Capital, L.L.C., its General Partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
VECTOR CAPITAL PARTNERS IV, L.P.
By:	Vector Capital, L.L.C., its General Partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
VECTOR CAPITAL, L.L.C.
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
ALEXANDER R. SLUSKY
/s/ Alexander R. Slusky
Alexander R. Slusky

16

Exhibit 1

JOINT FILING AGREEMENT

     This agreement is made pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, as amended (the “Act”) by and among the parties listed below, each referred to herein as a “Joint Filer.” The Joint Filers agree that a statement of beneficial ownership as required by Section 13(d) of the Act and the Rules thereunder may be filed on each of their behalf on Schedule 13D or Schedule 13G, as appropriate, and that said joint filing may thereafter be amended by further joint filings. The Joint Filers state that they each satisfy the requirements for making a joint filing under Rule 13d-1.

     Dated: January 28, 2011

RAY HOLDING CORPORATION			VECTOR CAPITAL IV, L.P.
By:	/s/ David Baylor		By:	Vector Capital Partners IV, L.P.,
	Name:	David Baylor		its General Partner
	Title:	President	By:	Vector Capital, L.L.C., its General Partner
			By:	/s/ Alexander R. Slusky
RAY MERGER SUB CORPORATION				Name: Title:	Alexander R. Slusky Managing Member
By:	/s/ David Baylor
	Name:	David Baylor	VECTOR CAPITAL PARTNERS III, L.P.
	Title:	President	By:	Vector Capital, L.L.C., its General Partner
			By:	/s/ Alexander R. Slusky
VECTOR CAPITAL III, L.P.				Name:	Alexander R. Slusky
				Title:	Managing Member
By:	Vector Capital Partners III, L.P., its General Partner		VECTOR CAPITAL PARTNERS IV, L.P.
By:	Vector Capital, L.L.C., its General Partner		By:	Vector Capital, L.L.C., its General Partner
By:	/s/ Alexander R. Slusky		By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky		Name:	Alexander R. Slusky
	Title:	Managing Member		Title:	Managing Member
VECTOR ENTREPRENEUR FUND III, L.P.			VECTOR CAPITAL, L.L.C.
By:	Vector Capital Partners III, L.P., its General Partner		By:	/s/ Alexander R. Slusky
By:	Vector Capital, L.L.C., its General Partner			Name: Title:	Alexander R. Slusky Managing Member
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member	ALEXANDER R. SLUSKY
			/s/ Alexander R. Slusky
			Alexander R. Slusky

17

EX-99.3

Exhibit 99.3

January 18, 2011

CONFIDENTIAL

To:	Ray Holding Corporation c/o Vector Capital Corporation One Market Street Steuart Tower, 23rd Floor San Francisco, California 94105
To:	Ray Merger Sub Corporation c/o Vector Capital Corporation One Market Street Steuart Tower, 23rd Floor San Francisco, California 94105

Re: Equity Commitment

Ladies and Gentlemen:

     Reference is made to the Agreement and Plan of Merger, dated as of the date hereof (as it may be amended from time to time, the “Merger Agreement”), by and among Ray Holding Corporation, a Delaware corporation (“Parent”), Ray Merger Sub Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”) and RAE Systems Inc., a Delaware corporation (the “Company”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). Capitalized terms used but not defined herein have the meanings ascribed to them in the Merger Agreement. The parties listed on Schedule A attached hereto are collectively referred to herein as the “Investors.” This letter agreement is being delivered to Parent in connection with the execution of the Merger Agreement by Parent, Merger Sub and the Company.

     This letter agreement confirms the commitment of the undersigned, subject to the conditions set forth herein, to purchase, or cause an assignee permitted by the fourth paragraph of this letter agreement to purchase, a portion of the equity of Parent (or, in the event Vector Capital IV, L.P. (“Vector”) determines that the Investors should instead purchase equity of a direct or indirect parent entity of Parent (so long as such parent entity and any subsidiaries of such parent entity that are also direct or indirect parent entities of Parent each commit to provide the proceeds of such equity purchase downstream to Parent and provided Parent is a wholly-owned direct or indirect subsidiary of such parent entity) (the “Holdco”), of Holdco) as of the

Closing Date (the “Subject Equity Securities”) in an amount equal to the total equity required to be funded to Parent, as determined by Vector (and provided by Vector to the other Investors no less than three (3) Business Days prior to the Closing) (the “Total Outstanding Closing Equity”), multiplied by the percentage amount set forth next to the undersigned’s name on Schedule A (the “Pro Rata Portion”), provided that the undersigned shall not, under any circumstances, be obligated to contribute to Parent (directly or indirectly, as applicable) more than the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity. The obligation of each of the Investors to fund such Investor’s Pro Rata Portion of the Total Outstanding Closing Equity is subject to each other Investor simultaneously funding their respective Pro Rata Portion of the Total Outstanding Closing Equity under the corresponding letter agreements delivered by each of the other Investors as of the date hereof (without any modification or amendment thereto not approved by the undersigned) and the other terms hereof. Parent and Merger Sub shall use the proceeds from the undersigned’s purchase of equity securities to fund the aggregate Merger Consideration and related expenses pursuant to, and in accordance with, the Merger (including Parent’s and Merger Sub’s obligations under Sections 1.5 and 1.6 of the Merger Agreement) and for no other purpose. The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity is also subject to (x) the execution and delivery of the Merger Agreement, (y) the contribution of the Rollover Shares to Parent by the Rollover Holders pursuant to the Rollover Agreements and (z) the satisfaction of the conditions set forth in Section 6 of the Merger Agreement or waiver of such conditions by Parent and the terms of this letter agreement, and will occur contemporaneous with the Closing and the simultaneous issuance to the undersigned of the Subject Equity Securities. For purposes of illustration only, Schedule A also sets forth an example of the calculation of the Total Outstanding Closing Equity and the Pro Rata Portions for each Investors, based on the assumptions set forth in Schedule A.

     The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity will terminate automatically and immediately upon the earliest to occur of (a) full funding of the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity at the closing of the Merger and (b) the termination of the Merger Agreement in accordance with its terms.

     The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity may not be assigned, except with the prior written consent of Parent; provided, that the undersigned may assign the undersigned’s obligation to fund all or a portion of the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity to an Affiliate of the undersigned.

     This letter agreement shall be binding solely on, and inure solely to the benefit of, the undersigned and Parent and their respective successors and permitted assigns, and nothing set forth in this letter agreement shall be construed to confer upon or give to any person other than the undersigned and Parent and their respective successors and permitted assigns any benefits, rights or remedies under or by reason of, or any rights to enforce or cause Parent to enforce, the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity or any provisions of this letter agreement.

     Notwithstanding anything that may be expressed or implied in this letter agreement, Parent, by its acceptance of the benefits of this equity commitment, covenants, agrees and acknowledges that no person other than the undersigned and its successors and permitted assigns shall have any obligation hereunder and that, notwithstanding that the undersigned or any of its successors or permitted assigns may be a partnership or limited liability company, no recourse hereunder or under any documents or instruments delivered in connection herewith shall be had against any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of the undersigned or any Affiliate thereof or any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of any of the foregoing, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable Law, it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise be incurred by any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of the undersigned or any Affiliate thereof or any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of any of the foregoing, as such, for any obligations of the undersigned or any of its successors or permitted assigns under this letter agreement or any documents or instrument delivered in connection herewith or for any claim based on, in respect of, or by reason of such obligation or their creation.

     This letter agreement may only be enforced by Parent at the direction of Vector in its sole discretion. Parent shall have no right to enforce this letter agreement unless directed to do so by Vector in its sole discretion. Parent’s creditors shall have no right to enforce this letter agreement or to cause Parent to enforce this letter agreement.

     Nothing in this letter agreement, express or implied, is intended to or shall confer upon any Person (including, without limitation, the Company), other than Parent and the undersigned, any right, benefit or remedy of any nature whatsoever under or by reason of this letter agreement or any document or instrument delivered in connection herewith.

     This letter agreement may be executed in counterparts. This letter agreement, and all claims or causes of action (whether in contract or tort) that may be based upon, arise out of or relate to this letter agreement or the negotiation, execution or performance of this letter agreement (including any claim or cause of action based upon, arising out of or related to any representation or warranty made in or in connection with this letter agreement or as an inducement to enter into this letter agreement) shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the State of Delaware, without regard to conflict of laws principles. Any legal action, suit or proceeding arising out of or relating to this letter agreement or the transactions contemplated hereby shall be heard and determined exclusively in the Delaware Court of Chancery and any state appellate courts therefrom within the State of Delaware (or if the Delaware Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware). Each party hereto hereby irrevocably (i) submits to the exclusive jurisdiction of the State of Delaware (or if the Delaware

Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware) in respect of any legal action, suit or proceeding arising out of or relating to this letter agreement and (ii) waives, and agrees not to assert, as a defense in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this letter agreement or the transactions contemplated hereby may not be enforced in or by such courts.

     The undersigned represents and warrants that: (i) the undersigned has the requisite power, capacity and authority to execute and deliver this letter agreement and to fulfill and perform its obligations hereunder; (ii) this letter agreement has been duly and validly executed and delivered by the undersigned and constitutes a legal, valid and binding agreement of the undersigned enforceable by the addressees against the undersigned in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equitable principles whether considered in a proceeding in law or in equity); (iii) the execution, delivery and performance of this letter agreement by the undersigned has been duly and validly authorized and approved by all necessary corporate, limited partnership or similar action by such party; (iv) the undersigned has available, unrestricted cash (or the unrestricted right (subject only to the giving of any required notices) to obtain the funds necessary) sufficient to pay and perform in full its obligations under this letter agreement; and (v) all funds necessary for the undersigned to fulfill its obligations under this letter agreement shall be available to the undersigned for so long as this letter agreement shall remain in effect.

     EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

     This letter agreement may not be amended or otherwise modified without the prior written consent of Parent and the undersigned.

[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

Sincerely, Vector Capital IV, L.P.
By:	Vector Capital Partners IV, L.P.,
	its general partner
By:	Vector Capital, L.L.C.,
	its general partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
Vector Entrepreneur Fund III, L.P.
By:	Vector Capital Partners III, L.P.,
	its general partner
By:	Vector Capital, L.L.C.,
	its general partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member
Vector Capital III, L.P.
By:	Vector Capital Partners III, L.P.,
	its general partner
By:	Vector Capital, L.L.C.,
	its general partner
By:	/s/ Alexander R. Slusky
	Name:	Alexander R. Slusky
	Title:	Managing Member

[Signature page to Equity Commitment Letter]

Accepted and Agreed to as of the date first above written.

RAY HOLDING CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President
RAY MERGER SUB CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President

[Signature page to Equity Commitment Letter]

Schedule A

Investors; Pro Rata Portion

Investor	Pro Rata Portion
Vector Capital IV, L.P.	TBD1
Vector Capital III, L.P.	TBD2
Vector Capital Entrepreneur Fund III, L.P.	TBD3
Profit Spring Investments Limited		9.58	%
Chen Family Trust DTD 5/8/2001	TBD4
Hsi Family Trust	TBD5

The following illustrative example assumes the following sources and uses:

	Sources and Uses
	(in millions)
Purchase Price	$	106.29
Plus: Company Debt At Close		1.86
Less: Cash At Close		(11.08	)
Enterprise Value		97.06
Plus: Cash on Company Balance Sheet	$	5.0
Plus: Total Fees		11.43
Less: Borrowed Debt		(30.00	)
Total Outstanding Closing Equity	$	83.49

Illustrative example of Pro Rata Portion and Total Outstanding Closing Equity:

1	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 49.4%.
2	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 49.4%.
3	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 1.2%.
4	To equal the percentage obtained by dividing (a) an amount equal to the product of (i) the per share purchase price in the Merger multiplied by 10,701,525 shares of common stock, by (b) the Total Outstanding Closing Equity.
5	To equal the percentage obtained by dividing (a) an amount equal to the product of (i) the per share purchase price in the Merger multiplied by 2,691,332 shares of common stock, by (b) the Total Outstanding Closing Equity.

				Total Outstanding
				Closing Equity
	Pro Rata Portion			(in millions)
Vector Capital IV, L.P.		30.80	%	$	25.71
Vector Capital III, L.P.		30.80	%	$	25.71
Vector Capital Entrepreneur Fund III, L.P.		0.75	%	$	0.62
Profit Spring Investments Limited		9.58	%	$	8.0
Chen Family Trust DTD 5/8/2001		22.43	%	$	18.73
Hsi Family Trust		5.64	%	$	4.71
Total Outstanding Closing Equity Needed		100.00	%	$	83.49

EX-99.4

Exhibit 99.4

January 18, 2011

CONFIDENTIAL

To:	Ray Holding Corporation c/o Vector Capital Corporation One Market Street Steuart Tower, 23rd Floor San Francisco, California 94105
To:	Ray Merger Sub Corporation c/o Vector Capital Corporation One Market Street Steuart Tower, 23rd Floor San Francisco, California 94105

Re: Equity Commitment

Ladies and Gentlemen:

     Reference is made to the Agreement and Plan of Merger, dated as of the date hereof (as it may be amended from time to time, the “Merger Agreement”), by and among Ray Holding Corporation, a Delaware corporation (“Parent”), Ray Merger Sub Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”) and RAE Systems Inc., a Delaware corporation (the “Company”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). Capitalized terms used but not defined herein have the meanings ascribed to them in the Merger Agreement. The parties listed on Schedule A attached hereto are collectively referred to herein as the “Investors.” This letter agreement is being delivered to Parent in connection with the execution of the Merger Agreement by Parent, Merger Sub and the Company.

     This letter agreement confirms the commitment of the undersigned, subject to the conditions set forth herein, to purchase, or cause an assignee permitted by the fourth paragraph of this letter agreement to purchase, a portion of the equity of Parent (or, in the event Vector Capital IV, L.P. (“Vector”) determines that the Investors should instead purchase equity of a direct or indirect parent entity of Parent (so long as such parent entity and any subsidiaries of such parent entity that are also direct or indirect parent entities of Parent each commit to provide the proceeds of such equity purchase downstream to Parent and provided Parent is a wholly-owned direct or indirect subsidiary of such parent entity) (the “Holdco”), of Holdco) as of the

Closing Date (the “Subject Equity Securities”) in an amount equal to the total equity required to be funded to Parent, as determined by Vector (and provided by Vector to the other Investors no less than three (3) Business Days prior to the Closing) (the “Total Outstanding Closing Equity”), multiplied by the percentage amount set forth next to the undersigned’s name on Schedule A (the “Pro Rata Portion”), provided that the undersigned shall not, under any circumstances, be obligated to contribute to Parent (directly or indirectly, as applicable) more than the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity. The obligation of each of the Investors to fund such Investor’s Pro Rata Portion of the Total Outstanding Closing Equity is subject to each other Investor simultaneously funding their respective Pro Rata Portion of the Total Outstanding Closing Equity under the corresponding letter agreements delivered by each of the other Investors as of the date hereof (without any modification or amendment thereto not approved by the undersigned) and the other terms hereof. Parent and Merger Sub shall use the proceeds from the undersigned’s purchase of equity securities to fund the aggregate Merger Consideration and related expenses pursuant to, and in accordance with, the Merger (including Parent’s and Merger Sub’s obligations under Sections 1.5 and 1.6 of the Merger Agreement) and for no other purpose. The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity is also subject to (x) the execution and delivery of the Merger Agreement, (y) the contribution of the Rollover Shares to Parent by the Rollover Holders pursuant to the Rollover Agreements and (z) the satisfaction of the conditions set forth in Section 6 of the Merger Agreement or waiver of such conditions by Parent and the terms of this letter agreement, and will occur contemporaneous with the Closing and the simultaneous issuance to the undersigned of the Subject Equity Securities. For purposes of illustration only, Schedule A also sets forth an example of the calculation of the Total Outstanding Closing Equity and the Pro Rata Portions for each Investors, based on the assumptions set forth in Schedule A.

     The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity will terminate automatically and immediately upon the earliest to occur of (a) full funding of the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity at the closing of the Merger and (b) the termination of the Merger Agreement in accordance with its terms.

     The undersigned’s obligation to fund the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity may not be assigned, except with the prior written consent of Parent; provided, that the undersigned may assign the undersigned’s obligation to fund all or a portion of the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity to an Affiliate of the undersigned.

     This letter agreement shall be binding solely on, and inure solely to the benefit of, the undersigned and Parent and their respective successors and permitted assigns, and nothing set forth in this letter agreement shall be construed to confer upon or give to any person other than the undersigned and Parent and their respective successors and permitted assigns any benefits, rights or remedies under or by reason of, or any rights to enforce or cause Parent to enforce, the undersigned’s Pro Rata Portion of the Total Outstanding Closing Equity or any provisions of this letter agreement.

     Notwithstanding anything that may be expressed or implied in this letter agreement, Parent, by its acceptance of the benefits of this equity commitment, covenants, agrees and acknowledges that no person other than the undersigned and its successors and permitted assigns shall have any obligation hereunder and that, notwithstanding that the undersigned or any of its successors or permitted assigns may be a partnership or limited liability company, no recourse hereunder or under any documents or instruments delivered in connection herewith shall be had against any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of the undersigned or any Affiliate thereof or any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of any of the foregoing, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable Law, it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise be incurred by any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of the undersigned or any Affiliate thereof or any former, current or future director, officer, agent, Affiliate, employee, general or limited partner, member, manager, stockholder, other equity holder, controlling person or assignee of any of the foregoing, as such, for any obligations of the undersigned or any of its successors or permitted assigns under this letter agreement or any documents or instrument delivered in connection herewith or for any claim based on, in respect of, or by reason of such obligation or their creation.

     This letter agreement may only be enforced by Parent at the direction of Vector in its sole discretion. Parent shall have no right to enforce this letter agreement unless directed to do so by Vector in its sole discretion. Parent’s creditors shall have no right to enforce this letter agreement or to cause Parent to enforce this letter agreement.

     Nothing in this letter agreement, express or implied, is intended to or shall confer upon any Person (including, without limitation, the Company), other than Parent and the undersigned, any right, benefit or remedy of any nature whatsoever under or by reason of this letter agreement or any document or instrument delivered in connection herewith.

     This letter agreement may be executed in counterparts. This letter agreement, and all claims or causes of action (whether in contract or tort) that may be based upon, arise out of or relate to this letter agreement or the negotiation, execution or performance of this letter agreement (including any claim or cause of action based upon, arising out of or related to any representation or warranty made in or in connection with this letter agreement or as an inducement to enter into this letter agreement) shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the State of Delaware, without regard to conflict of laws principles. Any legal action, suit or proceeding arising out of or relating to this letter agreement or the transactions contemplated hereby shall be heard and determined exclusively in the Delaware Court of Chancery and any state appellate courts therefrom within the State of Delaware (or if the Delaware Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware). Each party hereto hereby irrevocably (i) submits to the exclusive jurisdiction of the State of Delaware (or if the Delaware

Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware) in respect of any legal action, suit or proceeding arising out of or relating to this letter agreement and (ii) waives, and agrees not to assert, as a defense in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this letter agreement or the transactions contemplated hereby may not be enforced in or by such courts.

     The undersigned represents and warrants that: (i) the undersigned has the requisite power, capacity and authority to execute and deliver this letter agreement and to fulfill and perform its obligations hereunder; (ii) this letter agreement has been duly and validly executed and delivered by the undersigned and constitutes a legal, valid and binding agreement of the undersigned enforceable by the addressees against the undersigned in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equitable principles whether considered in a proceeding in law or in equity); (iii) the execution, delivery and performance of this letter agreement by the undersigned has been duly and validly authorized and approved by all necessary corporate, limited partnership or similar action by such party; (iv) the undersigned has available, unrestricted cash (or the unrestricted right (subject only to the giving of any required notices) to obtain from its investors the funds necessary) sufficient to pay and perform in full its obligations under this letter agreement; and (v) all funds necessary for the undersigned to fulfill its obligations under this letter agreement shall be available to the undersigned for so long as this letter agreement shall remain in effect.

     EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

     This letter agreement may not be amended or otherwise modified without the prior written consent of Parent and the undersigned.

[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

Sincerely, Profit Spring Investments Limited
By:	/s/ Boon Lian Chew
	Name:	Boon Lian CHEW
	Title:	Authorized Person

[Signature page to Equity Commitment Letter]

Accepted and Agreed to as of the date first above written.

RAY HOLDING CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President
RAY MERGER SUB CORPORATION
By:	/s/ David Baylor
	Name:	David Baylor
	Title:	President

[Signature page to Equity Commitment Letter]

Schedule A

Investors; Pro Rata Portion

Investor	Pro Rata Portion
Vector Capital IV, L.P.	TBD1
Vector Capital III, L.P.	TBD2
Vector Capital Entrepreneur Fund III, L.P.	TBD3
Profit Spring Investments Limited		9.58	%
Chen Family Trust DTD 5/8/2001	TBD4
Hsi Family Trust	TBD5

The following illustrative example assumes the following sources and uses:

	Sources and Uses
	(in millions)
Purchase Price	$	106.29
Plus: Company Debt At Close		1.86
Less: Cash At Close		(11.08	)
Enterprise Value		97.06
Plus: Cash on Company Balance Sheet	$	5.0
Plus: Total Fees		11.43
Less: Borrowed Debt		(30.00	)
Total Outstanding Closing Equity	$	83.49

Illustrative example of Pro Rata Portion and Total Outstanding Closing Equity:

1	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 49.4%.
2	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 49.4%.
3	To equal the percentage obtained by multiplying (a) the amount obtained by dividing (i) an amount equal to the Total Outstanding Closing Equity minus the sum of (A) $23.4M, representing the aggregate value of the Rollover Shares, and (B) 9.58% of the Total Outstanding Closing Equity, representing the value of PFIL’s investment, by (ii) the Total Outstanding Closing Equity and (b) 1.2%.
4	To equal the percentage obtained by dividing (a) an amount equal to the product of (i) the per share purchase price in the Merger multiplied by 10,701,525 shares of common stock, by (b) the Total Outstanding Closing Equity.
5	To equal the percentage obtained by dividing (a) an amount equal to the product of (i) the per share purchase price in the Merger multiplied by 2,691,332 shares of common stock, by (b) the Total Outstanding Closing Equity.

				Total Outstanding
				Closing Equity
	Pro Rata Portion			(in millions)
Vector Capital IV, L.P.		30.80	%	$	25.71
Vector Capital III, L.P.		30.80	%	$	25.71
Vector Capital Entrepreneur Fund III, L.P.		0.75	%	$	0.62
Profit Spring Investments Limited		9.58	%	$	8.0
Chen Family Trust DTD 5/8/2001		22.43	%	$	18.73
Hsi Family Trust		5.64	%	$	4.71
Total Outstanding Closing Equity Needed		100.00	%	$	83.49

EX-99.6

Exhibit 99.6

ROLLOVER AGREEMENT

     This Rollover Agreement (this “Agreement”) is made and entered into as of January 18, 2011 by and between Ray Holding Corporation, a Delaware corporation (the “Company”), and _________ (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 _________ 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 (as it may be amended from time to time, the “Merger Agreement”), dated as of January 18, 2011, by and among the Company, Ray Merger Sub Corporation, 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 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”).

     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”) (the

1.

“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.

          (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 except for (a) 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 and (b) as set forth on Schedule 1(b)(v) hereto.

               (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 of Incorporation shall provide that it is to be effective upon

3.

filing), (v) the furnishing of funds by the Sponsors to the Company in satisfaction of their obligations to the Company under the Subscription Agreement and the execution by the Sponsors of the Stockholders Agreement; (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) and (vii) the filing by the Company of the Company’s Amended and Restated Certificate of Incorporation. 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.

     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 RAY HOLDING CORPORATION AND A STOCKHOLDER OF RAE SYSTEMS, INC. DATED AS OF JANUARY 18, 2011. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT RAY HOLDING CORPORATION’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 Subscription 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 Subscription 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).

               (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 Subscription Agreement. Based in part on the investment representations of the Sponsors in Section 2 of the Subscription 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 Subscription 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)

5.

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.

          (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 Subscription 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 Subscription 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

6.

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.

     7. Definitions.

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

          (b) “Company’s Amended and Restated Certificate of Incorporation” means the amended and restated certificate of incorporation of the Company in the form set forth as Exhibit H hereto.

          (c) “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.

          (d) “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).

          (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 $0.01 per share of the Company (the “Preferred Stock”) and all shares of Common Stock, par value $0.01 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, Vector Capital IV, L.P., Vector Capital III, L.P. and Profit Spring Investments Limited 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.

7.

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

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

          (l) 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:

Ray Holding Corporaiton
c/o Vector Capital Corporation
One Market Street
Steuart Tower, 23rd Floor
San Francisco, CA 94105
Attention: Chief Operating Officer
Facsimile: (415) 293-5100

with a copy to:
(which shall not constitute notice to the Company)

Shearman & Sterling LLP
525 Market Street, Suite 1500
San Francisco, CA 94105
Attention: Steve L. Camahort
Facsimile: (415) 616-1199

          If to the Investor:

Investor

8.

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:

Vector Capital IV, L.P.
Vector Capital III, L.P.
One Market Street
Steuart Tower, 23rd Floor
San Francisco, CA 94105
Attention: Chief Operating Officer
Facsimile: (415) 293-5100

with a copy to:
(which shall not constitute notice to such Sponsors)

Shearman & Sterling LLP
525 Market Street, Suite 1500
San Francisco, CA 94105
Attention: Steve L. Camahort
Facsimile: (415) 616-1199

          and

Profit Spring Investments Limited
Scotia Centre, 4^th Floor
P.O. Box 2804
George Town, Grand Cayman
KY1-1112, Cayman Islands
Attention: Boon Lian Chew

with a copy to:
(which shall not constitute notice to such Sponsor)

Morrison Cohen LLP
909 Third Avenue
New York, NY 10022
Attention: David Scherl
Facsimile: (212) 735-8608

9.

     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.

          (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

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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.

          (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 $300,000 in the aggregate for the Investor and all of the other

11.

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 $300,000, 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.

     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) (i) in the event the Merger Agreement is amended to provide for a decrease in the Merger Consideration or (ii) 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); provided, further, that the parties agree, effective as of the date this Agreement is executed, to use commercially reasonable efforts to assess whether there is a mutually agreeable alternative holdco structure that replicates to the greatest extent practicable the terms contemplated hereby while providing enhanced tax benefits for the Company (or an applicable alternative direct or indirect parent company thereof), and if so, to use commercially reasonable efforts to negotiate and enter into definitive agreements implementing such alternative holdco structure.

Signature Page Follows

12.

     In Witness Whereof, the parties have executed this Rollover Agreement as of the date first written above.

Ray Holding Corporation
By:
	Name:
	Title:

     In Witness Whereof, the parties have executed this Rollover Agreement as of the date first written above.

INVESTOR:
 

By: