**Exhibit 10.4**

**RAE SYSTEMS INC.**

**STOCK OPTION AGREEMENT**

RAE Systems Inc. has granted to the individual (the *“****Optionee****”*) named in the *Notice of Grant of Stock Option*(the *“****Notice****”*) to which this Stock Option Agreement (the *“****Option Agreement****”*) is attached an option (the *“****Option****”*) to purchase certainshares of Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all respects be subject to the terms and conditions of the RAE Systems Inc. 2002 Stock Option Plan(the *“****Plan****”*), as amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Optionee: (a) represents that the Optionee has received copiesof, and has read and is familiar with the terms and conditions of, the Notice, the Plan, this Option Agreement, and a prospectus for the Plan in the form most recently registered with the Securities an Exchange Commission (the “PlanProspectus”) (b) accepts the Option subject to all of the terms and conditions of the Notice, the Plan and this Option Agreement, and (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Boardupon any questions arising under the Notice, the Plan or this Option Agreement. 

1. **DEFINITIONSANDCONSTRUCTION**. 

1.1 **Definitions*****.*** Unless otherwise defined herein,capitalized terms shall have the meanings assigned to such terms in the Notice or the Plan. 

1.2 **Construction*****.***Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and theplural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise. 

2. **TAX CONSEQUENCES**. 

2.1 **Tax Status ofOption*****.*** This Option is intended to have the tax status designated in the Notice. 

(a) ***Incentive StockOption*****.** If the Notice so designates, this Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. TheOptionee should consult with the Optionee’s own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to,holding period requirements. (NOTE TO OPTIONEE: If the Option is exercised more than three (3) months after the date on which you cease to be an Employee (other than by reason of your death or permanent and total disability as defined inSection 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) 

 

1 

(b) ***Nonstatutory Stock Option.*** If the Notice so designates, this Option is intended to bea Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 

2.2 **ISO Fair Market Value Limitation.***If the Notice designates this Option as an Incentive Stock Option,* then to the extent that the Option (together with all Incentive Stock Options granted to the Optionee under all stockoption plans of the Participating Company Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of suchoptions which exceeds such amount will be treated as Nonstatutory Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in which they were granted, and the Fair MarketValue of stock is determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be deemedincorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in thisSection 2.2, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separatecertificates representing each such portion shall be issued upon the exercise of the Option. (NOTE TO OPTIONEE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregateexercise price of any other Incentive Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than $100,000, you should contact the Chief Financial Officer of theCompany to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 

3.**ADMINISTRATION**. 

All questions of interpretation concerning this Option Agreementshall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right,obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or election. 

4. **EXERCISEOFTHE OPTION**. 

4.1 **Right to Exercise*****.*** Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date andprior to the termination of the Option (as provided in Section 6) in an amount not to exceed the number of Vested Shares less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable formore shares than the Number of Option Shares. 

4.2 **Method of Exercise*****.*** Exercise of the Option shall be by writtennotice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as 

 

2 

to the Optionee’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The writtennotice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officerof the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares ofStock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price. 

4.3 **Payment of Exercise Price**. 

(a) ***Forms of Consideration Authorized*****.** Exceptas otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company, orattestation to the ownership, of whole shares of Stock owned by the Optionee having a Fair Market Value not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(b), or (iv) by anycombination of the foregoing. 

(b) ***Limitations on Forms of Consideration***. 

(i) **Tender of Stock.** Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or attestation to the ownership, ofshares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required by the Company, the Option may not beexercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or such other period, if any, required by the Company and not usedfor another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company. 

(ii)**Cashless Exercise.** A *“****Cashless Exercise****”* means the delivery of a properly executed notice together with irrevocable instructions to a broker in a form acceptable to the Company providing for theassignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation,through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole andabsolute discretion, to decline to approve or terminate any such program or procedure. 

4.4 **Tax Withholding*****.*** At thetime the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequateprovision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax 

 

3 

withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligationsarising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputationof interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied.Accordingly, the Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating Company Group have been satisfied by the Optionee. 

4.5 **Certificate Registration*****.*** Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate forthe shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 

4.6 **Restrictions on Grant of the Option and Issuance of Shares*****.*** The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with allapplicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreignsecurities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under theSecurities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option maybe issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY,THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counselto be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation orwarranty with respect thereto as may be requested by the Company. 

4.7 **Fractional Shares*****.*** The Company shall not berequired to issue fractional shares upon the exercise of the Option. 

5. **NONTRANSFERABILITYOFTHE OPTION**. 

The Option may be exercised during the lifetime of theOptionee only by the Optionee or the Optionee’s guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, tothe extent provided in Section 7, may be exercised by the Optionee’s legal representative or by any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

 

4 

6. **TERMINATIONOFTHEOPTION**. 

The Option shall terminate and may no longer be exercised after the first tooccur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee’s Service as described in Section 7, or (c) a Change in Control to the extent provided inSection 8. 

7. **EFFECTOF TERMINATIONOFSERVICE**. 

7.1 **Option Exercisability**. 

(a) ***Disability*****.** If the Optionee’s Service terminates because of the Disability of the Optionee, the Option, to the extentunexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s guardian or legal representative) at any time prior to the expiration of twelve (12) months afterthe date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date. 

(b)***Death*****.** If the Optionee’s Service terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by theOptionee’s legal representative or other person who acquired the right to exercise the Option by reason of the Optionee’s death at any time prior to the expiration of twelve (12) months after the date on which the Optionee’sService terminated, but in any event no later than the Option Expiration Date. The Optionee’s Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee’s terminationof Service. 

(c) ***Other Termination of Service*****.** If the Optionee’s Service terminates for any reason, exceptDisability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee’s Service terminated, may be exercised by the Optionee at any time prior to the expiration of three (3) monthsafter the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date. 

7.2**Extension if Exercise Prevented by Law*****.*** Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Optionshall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 

7.3 **Extension if Optionee Subject to Section 16(b).** Notwithstanding the foregoing, if a sale within the applicable time periods set forth inSection 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth(10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee’s termination of Service, or (iii) theOption Expiration Date. 

 

5 

8. **CHANGEINCONTROL**. 

8.1 **Definitions**. 

(a) An “***Ownership Change Event***” shall be deemed to have occurred if any of the following occurs with respect to the Company:(i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in whichthe Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 

(b) A “***Change in Control***” shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a“***Transaction***”) wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of theCompany’s voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of aTransaction described in Section 8.1(a)(iii), the corporation or other business entity to which the assets of the Company were transferred (the “***Transferee***”), as the case may be. For purposes of the preceding sentence,indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, eitherdirectly or through one or more subsidiary corporations or other business entities. The Board shall have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events arerelated, and its determination shall be final, binding and conclusive. 

8.2 **Effect of Change in Control on Option*****.*** Inthe event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the *“****Acquiring Corporation****”*), may, without theconsent of the Optionee, either assume the Company’s rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation’s stock. The Option shall terminate and cease to beoutstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change inControl. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to allapplicable provisions of the Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described inSection 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held byanother 

 

6 

corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a)of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its discretion. For the purposes of this Section 8.2, the Option shall be considered assumedif, for every share of Stock subject thereto immediately prior to the Change in Control, the Optionee has the right, following the Change in Control, to acquire in accordance with the terms and conditions of the assumed Option the consideration(whether stock, cash or other securities or property) received in the Change in Control transaction by holders of shares of Stock for each share held immediately prior to such transaction (and if holders were offered a choice of consideration, thetype of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration received in the Change in Control transaction was not solely common stock of the Acquiring Corporation, theBoard may, with the consent of the Acquiring Corporation, provide for the consideration to be acquired to be solely common stock of the Acquiring Corporation equal in Fair Market Value to the per share consideration received by holders of Stock inthe Change in Control transaction. 

9. **ADJUSTMENTSFOR CHANGESINCAPITAL STRUCTURE**. 

Subject to any required action by the stockholdersof the Company, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stocksplit, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of theCompany in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number, Exercise Price and class of sharessubject to the Option, in order to prevent dilution or enlargement of the Optionee’s rights under the Option. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected withoutreceipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price of the Option be decreased toan amount less than the par value, if any, of the stock subject to the Option. Such adjustments shall be determined by the Board, and its determination shall be final, binding and conclusive. 

10. **RIGHTSASA SHAREHOLDER, EMPLOYEEORCONSULTANT**. 

The Optionee shall have no rights as a shareholder with respect to anyshares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of theCompany). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optioneeunderstands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee’s employment is “at will” and is for no specified term. Nothingin this Option Agreement shall confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee’s Service as an Employeeor Consultant, as the case may be, at any time. 

 

7 

11. **NOTICEOF SALES UPONDISQUALIFYING DISPOSITION**. 

The Optionee shall dispose of the sharesacquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, *if the Notice designates this Option as an Incentive Stock Option,* the Optionee shall (a) promptly notify the Chief FinancialOfficer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grantand (b) provide the Company with a description of the circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expresslyauthorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee’s name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-yearperiod immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agentfor the Company’s stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to thepreceding sentence. 

12. **LEGENDS**. 

The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificatesrepresenting shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in thepossession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 

“THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION ASDEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (“ISO”). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [*INSERT DISQUALIFYING DISPOSITIONDATE HERE*]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARESPURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.” 

 

8 

13. **MISCELLANEOUS PROVISIONS**.

13.1 **Binding Effect.** Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit ofand be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 

13.2 **Terminationor Amendment.** The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect theOption or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an IncentiveStock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 

13.3 **Notices.** Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only uponactual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party’ssignature or at such other address as such party may designate in writing from time to time to the other party. 

13.4 **IntegratedAgreement.** The Notice, this Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes anyprior agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extentcontemplated herein or therein, the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 

13.5 **Applicable Law.** This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirelywithin the State of California. 

13.6 **Counterparts.** The Notice may be executed in counterparts, each of which shall be deemed anoriginal, but all of which together shall constitute one and the same instrument. 

 

9 

TM Incentive Stock Option
  Optionee:                                  
TM Nonstatutory Stock Option
      Date:                      
**STOCK OPTION EXERCISE NOTICE**

RAE Systems Inc. 

Attention: Chief Financial Officer 

3775 North First Street 

San Jose, California 95134 

Ladies and Gentlemen: 

1. **Option.** I was granted an option (the*“****Option****”*) to purchase shares of the common stock (the *“****Shares****”*) of RAE Systems Inc. (the *“****Company****”*) pursuant to the Company’s 2002Stock Option Plan (the *“****Plan****”*), my Notice of Grant of Stock Option (the *“****Notice****”*) and my Stock Option Agreement (the *“****OptionAgreement****”*) as follows: 

 
Grant Number:  ______________Date of Option Grant:  ______________Number of Option Shares:  ______________Exercise Price per Share:  $______________
2. **Exercise of Option.** I hereby elect to exercise the Option to purchase thefollowing number of Shares, all of which are Vested Shares in accordance with the Notice and the Option Agreement: 

 
Total Shares Purchased:  ______________Total Exercise Price (Total Shares X Price per Share)  $______________
3. **Payments.** I enclose payment in full of the total exercise price for the Shares inthe following form(s), as authorized by my Option Agreement: 

 
TM Cash:  $______________TM Check:  $______________TM Tender of Company Stock:  Contact Plan Administrator
4. **Tax Withholding.** I authorize payroll withholding and otherwise will make adequateprovision for the federal, state, local and foreign tax withholding obligations of the Company, if any, in connection with the Option. If I am exercising a Nonstatutory Stock Option, I enclose payment in full of my withholding taxes, if any, asfollows: 

**(Contact Plan Administrator for amount of tax due.)**

 
TM Cash:  $______________TM Check:  $______________
 

1 

5. Optionee Information. 

 
My address is: 
 
 
 

 
My Social Security Number is: 
 

6. **Notice of Disqualifying Disposition.** If the Option is an Incentive Stock Option,I agree that I will promptly notify the Chief Financial Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two (2) years of the Date of Option Grant.

7. **Binding Effect.** I agree that the Shares are being acquired in accordance with and subject to the terms, provisions andconditions of the Option Agreement, including the Right of First Refusal set forth therein, to all of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon my heirs, executors, administrators, successorsand assigns. 

 

2 

I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement,copies of which I have received and carefully read and understand. 

 
Very truly yours,
 

(Signature)

Receipt of the above is hereby acknowledged. 

RAE Systems Inc. 

 
By: 
 
Name: Title: 
Dated: 

 

3