Exhibit 10.7
 
RAE SYSTEMS INC.
RESTRICTED STOCK PURCHASE AGREEMENT
 
This Restricted Stock Purchase Agreement is dated as of December             ,
2001 (the “Effective Date”) by and between RAE Systems Inc., a California
corporation (the “Company”), and each of Neil W. Flanzraich and Dr. Phillip
Frost (collectively, the “Purchasers”).
 
WHEREAS, the Company desires to engage the Purchasers to identify and evaluate
potential partners acceptable to the Company with respect to a contemplated
merger of the Company with a publicly-listed company.
 
WHEREAS, in connection with such engagement, the Company desires to issue shares
of restricted common stock pursuant to the terms hereto.
 
NOW THEREFORE, in consideration of the covenants, promises and representations
set forth herein, and for other good and valuable consideration, the parties
agree as follows:
 
1.    Number of Shares and Price Per Share.    Each Purchaser hereby agrees to
purchase from the Company and the Company agrees to sell to each Purchaser such
number of shares of Common Stock of the Company, par value $.01 per share (the
“Stock”), as is set forth on such Purchaser’s signature page hereto for a
purchase price of $.125 per share. The closing of the purchase and sale
described above shall occur immediately upon execution of this Agreement.
 
2.    Share Repurchase Option.    At any time after March 31, 2002 (the “Target
Date”), the Company shall have the option (the “Repurchase Option”) to reacquire
any shares purchased pursuant to this Agreement which have not been released to
the Purchaser pursuant to subsection 2(a) (the “Unreleased Shares”) under the
terms set forth in this Section 2; provided, however, that if a definitive
agreement to consummate a Qualifying Transaction (as defined below) has been
entered into by the Company and is still in full force and effect as of March
31, 2002, such Target Date shall be the earlier of: (i) the closing of the
Qualifying Transaction contemplated by such definitive agreement; (ii)
termination of such definitive agreement; or (iii) September 30, 2002.
 
(a)    Release of Shares from Repurchase Option.    All of the Stock purchased
hereunder shall be released from the Company’s Repurchase Option upon the
closing of: (i) a direct or indirect sale or exchange by the shareholders of the
Company of all or substantially all of the stock of the Company; (ii) merger; or
(iii) sale, exchange, or transfer of all or substantially all of the Company’s
assets, whereby such sale, exchange, merger or transfer set forth in (i), (ii)
or (iii) is with a publicly-traded corporation ((i), (ii) and (iii), a
“Qualifying Transaction”); provided, however, that no transaction shall
constitute a Qualifying Transaction unless the participating public corporation
initially contacted Purchasers or was contacted by Purchasers with respect to
such Qualifying Transaction (i.e., Qualifying Transactions shall not be deemed
to include transactions pursuant to which such participating entity initially
contacts the Company or is contacted by the Company or one of the Company’s
agents (excluding Purchasers) with respect to such transaction independently of
Purchasers). At all times the Company shall have the right to accept or reject
any proposed transaction,

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including any which may qualify as a Qualifying Transaction, and to approve or
disapprove any terms and conditions of any proposed transaction, including any
which may qualify as a Qualifying Transaction. Notwithstanding the foregoing, if
the Company enters into a letter or intent or definitive agreement for a
Qualifying Transaction and such Qualifying Transaction does not close, fifty
percent (50%) of the shares purchased pursuant to this Agreement shall be deemed
to be not subject to the Repurchase Option if and only if the Company
consummates a sale, exchange, merger or transfer set forth in (i), (ii) or (iii)
above within six (6) months of the entry into such letter of intent or
definitive agreement, and such letter of intent or definitive agreement is
successfully used by the Company in its negotiations for such sale, exchange,
merger or transfer to obtain terms more advantageous to the Company than would
otherwise be obtainable without such letter or intent or definitive agreement
(with Purchasers bearing the burden of proof with respect to the foregoing); in
such event, any repurchase of shares by the Company which may have already
occurred pursuant to this Agreement shall be deemed effective only with respect
to the remaining 50% of the shares purchased pursuant to this Agreement upon the
return by Purchasers of payments with respect thereto.
 
(b)    Exercise of Unvested Share Repurchase Option.    If the Transaction has
not occurred by the Target Date, or if the Purchaser or the Purchaser’s legal
representative attempts to dispose of any Unreleased Shares other than as
allowed in this Agreement, the Company may exercise the Repurchase Option by
written notice to the Escrow Agent (as defined in Section 7) and to the
Purchaser or the Purchaser’s legal representative within 30 days after the
Target Date or within 90 days after the Company has received notice of the
attempted disposition.
 
(c)     Payment for Shares and Return of Shares.    Payment by the Company to
the Escrow Agent on behalf of the Purchaser or the Purchaser’s legal
representative shall be made in cash within 30 days after the date of the
mailing of the written notice of exercise of the Unvested Share Repurchase
Option. The purchase price per share being purchased by the Company pursuant to
the Repurchase Option shall be $0.125 per share, adjusted appropriately to
reflect any stock split, stock dividend, recapitalization, etc. Within 30 days
after payment by the Company, the Escrow Agent shall give the shares which the
Company has purchased to the Company and shall give the payment received from
the Company to the Purchaser.
 
(d)    Transfer Restriction.    Except for the escrow described in Section 7 or
the transfer of Stock to the Company or its assignees contemplated by this
Agreement, none of the Stock or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Stock from the Company’s Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent or
distribution.
 
(e)    Assignment of Unvested Share Repurchase Option.    The Company may assign
the Repurchase Option to one or more persons, who shall have the right to
exercise the Repurchase Option in his or her own name for his or her own
account.
 
3.    Stock Dividends, etc.    If, from time to time, there is any stock
dividend, stock split or other change in the character or amount of any of the
outstanding stock of the Company, then in such event any and all new substituted
or additional securities to which Purchaser is entitled by reason of Purchaser’s
ownership of Unreleased Shares or Stock shall be immediately subject to the
Repurchase Option with the same force and effect as the Unreleased Shares or
Stock.

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4.    Consent of Spouse.    If the Purchaser is married on the date of this
Agreement and if community property laws govern Purchaser’s ownership of the
Stock, the Purchaser’s spouse shall execute a Consent of Spouse in the form of
Exhibit A hereto, effective on the date hereof. Such consent shall not be deemed
to confer or convey to the spouse any rights in the Stock that do not otherwise
exist by operation of law or the agreement of the parties. If such Purchaser
should marry or remarry subsequent to the date of this Agreement and the
foregoing applies, the Purchaser shall within thirty (30) days thereafter obtain
his or her new spouse’s acknowledgment of and consent to the existence and
binding effect of all restrictions contained in this Agreement by signing an
additional Consent of Spouse in the form of Exhibit A.
 
5.    Legends.    All certificates representing any shares of Stock subject to
the provisions of this Agreement shall have endorsed thereon the following
legends:
 
(a)    “THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REPURCHASE
OPTION IN FAVOR OF THE COMPANY OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN
THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS COMPANY.
 
(b)    “THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH
RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”
 
(c)    Any legend required to be placed thereon by the federal or state
securities authorities.
 
6.    Warranties and Representations.    In connection with the proposed
purchase of the Stock, the Purchaser hereby agrees, represents and warrants as
follows:
 
(a)    The Purchaser is purchasing the Stock solely for his own account for
investment and not with a view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities Act of 1933 as amended
(the “Act”). The Purchaser further represents that he or she does not have any
present intention of selling, offering to sell or otherwise disposing of or
distributing the Stock or any portion thereof; and that the entire legal and
beneficial interest of the Stock he or she is purchasing is being purchased for,
and will be held for the account of, the Purchaser only and neither in whole nor
in part for any other person.
 
(b)    The Purchaser is aware of the Company’s business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and

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knowledgeable decision to acquire the Stock. The Purchaser further represents
and warrants that he or she has discussed the Company and its plans, operations
and financial condition with its officers, has received all such information as
he or she deems necessary and appropriate to enable him or her to evaluate the
financial risk inherent in making an investment in the Stock and has received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof.
 
(c)    The Purchaser realizes that his or her purchase of the Stock will be a
highly speculative investment, and he is able, without impairing his financial
condition, to hold the Stock for an indefinite period of time and to suffer a
complete loss on his investment.
 
(d)    The Company has disclosed to the Purchaser that:
 
(i) The sale of the Stock has not been registered under the Act, and the Stock
must be held indefinitely unless a transfer of it is subsequently registered
under the Act or an exemption from such registration is available, and that the
Company is under no obligation to register the Stock;
 
(ii) The Company will make a notation in its records of the aforementioned
restrictions on transfer and legends.
 
7.    Escrow.    As security for his faithful performance of the terms of this
Agreement and to ensure the availability for delivery of the Stock upon exercise
of the Repurchase Option herein provided for, the Purchaser agrees to deliver to
and deposit with Gray Cary Ware & Freidenrich LLP (the “Escrow Agent”), as
Escrow Agent in this transaction, a Stock Assignment duly endorsed (with date
and number of shares blank) in the form attached hereto as Exhibit B, together
with the certificate or certificates evidencing the Stock. Such documents shall
be held by the Escrow Agent pursuant to the Joint Escrow Instructions of the
Company and the Purchaser set forth in Exhibit C attached hereto and
incorporated by this reference, which instructions shall also be delivered to
the Escrow Agent at the closing hereunder.
 
8.    Transfers in Violation of Agreement.    The Company shall not be required
(i) to transfer on its books any shares of Stock of the Company which shall have
been sold or transferred in violation of any of the provisions set forth in this
Agreement or (ii) to treat as owner of such shares or to accord the right to
vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so transferred.
 
9.    Rights as Shareholder.    Subject to the provisions of this Agreement, the
Purchaser shall exercise all rights and privileges of a shareholder of the
Company with respect to the Stock deposited in escrow.
 
10.    Further Instruments. The parties agree to execute such further
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
 
11.    Information/Confidentiality.    The Company will cooperate with, and make
available to, Purchasers all information which Purchasers reasonably request in
connection with the performance of its services, including all information
concerning the business, assets, operations

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or financial condition of the Company. Except as contemplated by this Agreement,
the Purchasers shall keep confidential all non-public information provided to it
by the Company, including the fact of a possible Qualifying Transaction, and
shall not disclose such information to any third party without the prior consent
of the Company.
 
12.    Expenses.    All costs and expenses incurred by or in connection with the
services to be rendered by Purchasers relating to the identification and
evaluation of potential partners with respect a Qualifying Transaction shall be
costs and expenses of Purchasers and shall not be reimbursed by the Company.
 
13.    Lock Up Agreement.    Each Purchaser shall, upon the request of the
Company or upon the request of the entity with which the Company may participate
in a sale, exchange, merger or transfer described in Section 2(a) above (the
“Surviving Corporation”) or underwriters managing any underwritten offering of
the Company’s securities or securities of the Surviving Corporation, agree not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of (each, a “Transfer”) any shares of Common Stock of the
Company or the Surviving Corporation owned by such Purchaser as a result of this
Agreement without the prior written consent of the Company, the Surviving
Corporation or such underwriters, as the case may be, for such period of time
(not to exceed one year) from the effective date of the closing of the
transaction or any such registration thereafter, as the case may be, as the
Company, the Surviving Corporation or such underwriters may reasonably request;
provided, however, that if Robert I. Chen or Joseph Ng Transfers any shares of
Common Stock of the Company or the Surviving Corporation owned by them after the
effective date of the closing of the transaction or any such registration
thereafter, this paragraph shall not restrict Purchasers with respect to a
proportionate amount of shares sold to them pursuant to this Agreement. For
purposes of the foregoing sentence, proportionate amount of shares shall mean
the greater of any percentage (the ratio determined by dividing (a) the
aggregated number of shares Transferred by such person, by (b) the aggregate
number of shares of Common Stock held by such person) of shares of Common Stock
Transferred by either Mr. Chen or Mr. Ng; provided, further, that if the
proportionate amount Transferred by Mr. Chen is 10% or greater of the shares
held by Mr. Chen, this paragraph shall not restrict Purchasers with respect to
any of their shares sold to them pursuant to this Agreement.
 
14.    Notice.    Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery, upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, or upon delivery to an overnight courier service
addressed to the other party at the address hereinafter shown below his
signature or at such other address as such party may designate by ten (10) days’
advance written notice to the other party.
 
15.    Successors and Assigns.    This Agreement shall inure to the benefit of,
and be binding upon, the successors and assigns of each party, including,
without limitation, in the case of the Purchaser, Purchaser’s heirs, executors,
administrators, successors and assigns.
 
16.    Entire Agreement; Amendments.    This Agreement, together with the
Exhibits hereto, shall be construed under the laws of the State of California
(as it applies to agreements between

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California residents, entered into and to be performed entirely within
California), and constitutes the entire agreement of the parties with respect to
the subject matter hereof superseding all prior written or oral agreements, and
no amendment or addition hereto shall be deemed effective unless agreed to in
writing by the parties.
 
17.    Right to Specific Performance.    The Purchaser agrees that the Company
shall be entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
 
18.    Separability.    If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
 
19.    Tax Consequences and Tax Election Notification.
 
(a)    The Purchaser understands that Section 83 of the Internal Revenue Code of
1986, as amended (the “Code”) taxes as ordinary income the difference between
the amount paid for the Stock and the fair market value of the Stock as of the
date any restrictions on the Stock lapse. In this context, “restriction” means
the right of the Company to buy back the stock pursuant to the Repurchase
Option. The Purchaser understands that he or she may elect to be taxed at the
time the Stock is purchased rather than when and as the Repurchase Option
expires by filing an election under Section 83(b) of the Code with the Internal
Revenue Service (the “IRS”) within 30 days from the date of purchase. Even if
the fair market value of the Stock equals the amount paid for the Stock, the
election must be made to avoid adverse tax consequences in the future. The
Purchaser understands that failure to make this filing timely will result in the
recognition of ordinary income by the Purchaser, as the Repurchase Option
lapses, on the difference between the purchase price and the fair market value
of the Stock at the time such restriction lapses.
 
(b)    The Purchaser understands that the purchase price of the Stock has been
set by the Board of Directors and that the Company believes this valuation is a
fair attempt to appraise it. The Purchaser understands, however, that if the
Purchaser files a Section 83(b) election, the Company can give no assurances
that the purchase price will be accepted as the fair market value of the Stock
by the IRS, and that the IRS could assert that the value of the Stock on the
date of purchase was substantially greater than the purchase price.
 
If the IRS were to successfully argue in a tax determination that the Stock had
a value greater than the price paid by the Purchaser, and the Purchaser has
filed a Section 83(b) election, the additional value would constitute ordinary
income as of the date of its receipt. The additional taxes (and interest) due
would be payable by the Purchaser. There is no provision for the Company to
reimburse the Purchaser for any potential tax liability, and the Purchaser
assumes all responsibility for any such liability. If the additional value
attributed to the Stock was more than 25 percent of the Purchaser’s gross income
for the year in which that value was taxable, the IRS would have six years from
the due date for filing of the Purchaser’s the return (or the actual filing date
of the return if filed thereafter) within which to assess the additional tax and
interest.

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THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER’S SOLE RESPONSIBILITY AND
NOT THE COMPANY’S RESPONSIBILITY TO FILE TIMELY THE ELECTION UNDER SECTION
83(B), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER’S BEHALF. THE PURCHASER FURTHER UNDERSTANDS THAT
ANY PURPORTED ELECTION PURSUANT TO SECTION 83(B) MUST COMPLY WITH THE PROVISIONS
OF TREASURY REGULATION SECTION 1.83-2. PURCHASER ACKNOWLEDGES THAT HE HAS BEEN
ADVISED BY THE COMPANY TO SEEK THE ASSISTANCE OF A TAX ADVISOR IN THIS MATTER.
 
(c)    The Purchaser shall notify the Company in writing if Purchaser files an
election pursuant to Section 83(b) of the Code. The Company intends, in the
event it does not receive from Purchaser evidence of such filing, to claim a tax
deduction for any amount which would be taxable to Purchaser in the absence of
such an election.
 
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IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Purchase Agreement as of the day and year first above written.
 
“PURCHASER”
 
“COMPANY”
     
Neil W. Flanzraich
 
RAE Systems Inc.
300,000 shares of Company Common Stock
               
/s/    NEIL W. FLANZRAICH

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/s/    ROBERT I. CHEN

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Neil W. Flanzraich
 
By:
   
Title:
           
Address of Purchaser:
 
Address of the Company:
10 Tahiti Beach Isle Drive
 
1339 Moffett Park Drive
Coral Gables, Florida 33143
 
Sunnyvale, California 94089

 

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IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Purchase Agreement as of the day and year first above written.
 
“PURCHASER”
  
“COMPANY”
Dr. Phillip Frost
  
RAE Systems Inc.
200,000 shares of Company Common Stock
    
/s/    DR. PHILLIP FROST

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Dr. Phillip Frost
  
By:
    
Title:
Address of Purchaser:
    
400 Biscayne Blvd.
  
Address of the Company:
Miami, FL 33137
  
1339 Moffett Park Drive
    
Sunnyvale, California 94089

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EXHIBIT A
 
CONSENT OF SPOUSE
 
I,                     , spouse of                     , acknowledge that I have
read the Restricted Stock Purchase Agreement dated as of December     , 2001, to
which this Consent is attached as Exhibit A (the “Agreement”) and that I know
its contents. I am aware that by its provisions the Company has the option to
purchase certain shares of Stock of the Company which my spouse owns pursuant to
the Agreement including any interest I might have therein, upon termination of
his employment under circumstances set forth in the Agreement, and that certain
other restrictions are imposed upon the sale or other disposition of the Stock
during my spouse’s lifetime and in the event of his death.
 
I agree that my interest, if any, in the Stock subject to the Agreement shall be
bound by the Agreement and further understand and agree that any community
property interest I may have in the Stock shall be similarly bound by the
Agreement.
 
Dated: December     , 2001
  

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        (Print Name)

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EXHIBIT B
 
ASSIGNMENT SEPARATE FROM CERTIFICATE
 
FOR VALUE RECEIVED,                      hereby sells, assigns and transfers
unto                                       (            ) shares of the Common
Stock of RAE Systems Inc., a California corporation, standing in the
undersigned’s name on the books of said corporation represented by Certificate
No.              herewith, and do hereby irrevocably constitute and appoint
                 attorney to transfer the said stock on the books of the said
corporation with full power of substitution in the premises.
 
Date:                                               
         

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EXHIBIT C
 
JOINT ESCROW INSTRUCTIONS
 
December             , 2001
 
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301
 
Ladies and Gentlemen:
 
As Escrow Agent for both RAE Systems Inc., a California corporation (“Company”),
and the undersigned purchaser of stock (the “Stock”) of the Company
(“Purchaser”), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement (“Agreement”), dated as of the date hereof, to which a copy of these
Joint Escrow Instructions is attached as Exhibit C, in accordance with the
following instructions:
 
1.    In the event the Company and/or any assignee of the Company (referred to
collectively for convenience herein as the “Company”) shall elect to exercise
the Repurchase Option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of Stock to
be repurchased, the purchase price, and the time for closing the repurchase.
Subject to paragraph 14 below, Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of the notice.
 
2.    At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares of
Stock being transferred, and (c) to deliver same, together with the certificates
evidencing the shares of Stock to be transferred, to the Company against the
simultaneous delivery to you of the purchase price (by check) or cancellation of
indebtedness for the number of shares of Stock being purchased pursuant to the
exercise of the Repurchase Option.
 
3.    Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of Stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as his or her
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all stock certificates, stock assignments, or other documents
necessary or appropriate to make such securities negotiable and complete any
transaction herein contemplated, including, but not limited to, the filing with
the Department of Corporations of the State of California of an Application for
Consent to Transfer Securities Subject to Legend or Escrow Condition Pursuant to
Section 25151 of the California Corporate Securities Law of 1968

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as presently in existence or any successor form. Subject to the provisions of
this paragraph 3, Purchaser shall exercise all rights and privileges of a
shareholder of the Company while the Stock is held by you.
 
4.    This escrow shall terminate at such time as there are no longer any shares
of stock subject to the Repurchase Option.
 
5.    If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of same to Purchaser and shall be discharged of all
further obligations hereunder.
 
6.    Your duties hereunder may be altered, amended, modified or revoked only by
a writing signed by all of the parties hereto.
 
7.    You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and
in the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence to
such good faith.
 
8.    You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
 
9.    You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
 
10.    You shall not be liable for the outlawing of any rights under the statute
of limitations with respect to these Joint Escrow Instructions or any documents
deposited with you.
 
11.    You shall be entitled to employ such legal counsel and other experts as
you may deem necessary or proper to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
 
12.    Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be counsel to the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint a successor Escrow Agent.

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13.    If you reasonably require other or further instructions in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
 
14.    It is understood and agreed that should any dispute arise with respect to
the delivery and/or ownership or rights of possession of the securities held by
you hereunder, you are authorized and directed to retain in your possession
without liability to any one all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
 
15.    Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the
United States Post Office, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days’ advance written notice to each of the other parties hereto.
 
                                COMPANY:
  
RAE Systems Inc.
    
1339 Moffett Park Drive
    
Sunnyvale, CA 94089
    
Attn: President
                                PURCHASER:
  
Neil W. Flanzraich
    
10 Tahiti Beach Isle Drive
    
Coral Gables, Florida 33143
    
Dr. Phillip Frost
    
4400 Biscayne Blvd.
    
Miami, FL 33137
                                ESCROW AGENT:
  
Gray Cary Ware & Freidenrich LLP
    
400 Hamilton Avenue
    
Palo Alto, California 94301
    
Attn: Gregory M. Gallo, Esq.

 
16.    By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

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17.    This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
 
Very truly yours,
COMPANY:
RAE Systems Inc.,
a California corporation
 

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By:
Title:

 
PURCHASER:

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Neil W. Flanzraich
Agreed to and accepted as of the date set forth above

 
PURCHASER:

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Dr. Phillip Frost
Agreed to and accepted as of the date set forth above

 
ESCROW AGENT:
Gray Cary Ware & Freidenrich LLP
By:
 

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Gregory M. Gallo

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