Exhibit 10.18
 Settlement Agreement
 Agreement)
 (1)
    
    RAE Coal Mine Safety Instruments (Fushun) Co., Ltd., a company
incorporated and existing under the laws of the Peoples Republic of China, with its legal
address at No. 3, Binhe Road, Fushun Economic Development Zone, Liaoning Province, PRC
(the Debtor) ;(2)
    
    Shenyang Research Institute of China Coal Research Institute, an entity incorporated and
existing under the laws of the Peoples Republic of China, with
its legal address at No. 11,
Binhe Road, Fushun Economic Development Zone, Fushun City (the Guarantor) ;(3)
    
    RAE-KLH (Beijing) Technologies Co., Ltd., a company incorporated and existing under
the laws of the Peoples Republic of China, with its legal address at RAE-KLH Plaza, No. 7
Fengxian Middle Road, Yongfeng Industrial Base, Haidian District, Beijing (RAE Beijing) ;(4)
    
    RAE Systems (Shanghai) Co., Ltd., a company incorporated and existing under the laws of the
Peoples Republic of China, with its legal address at 788 Zhaoxian Road, Jiading
District, Shanghai (RAE Shanghai) ; and(5)
    
    RAE Systems, a company incorporated and existing under the laws of the USA, with its legal
address at 3775 North First Street, San Jose, CA 95134 (RAE Systems).
  WHEREAS:
 (A)
    
    The Debtor is a Sino-foreign joint venture enterprise jointly established by Liaoning
Coal Industry Group Co., Ltd. (Liaoning Coal Group)and RAE Systems (Asia) Ltd. (RAE
Asia), in which Liaoning Coal Group and RAE Asia respectively holds 30% and 70% equity
interests;(B)
    
    The Guarantor and RAE Asia entered into an Equity Transfer Contract (the ETC ) dated as of
January 12, 2011, pursuant to which, RAE Asia, shall transfer to the Guarantor 70% of the
equity interests held by it in the Debtor; and(C)
    
    As of the date hereof, the Debtor has not paid the relevant debts and/or
service fees owed by it to RAE Beijing, RAE Shanghai and RAE Systems.
   1.1
    
    The Parties acknowledge that, as of the date of this Agreement, the relevant outstanding
debts owed by the Debtor to the Creditors are as follows:
 (1)
    
    The debts owed to RAE Beijing by
the Debtor that have become due but




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have not yet been paid shall be RMB 6, 538, 976, consisting of trade payables
of RMB 145, and other payables of RMB 6, 538, 831 (Debts to RAE Beijing);(2)
    
    The debts owed to RAE Shanghai by the Debtor that have become due but have not
yet been paid shall be RMB 6, 071, 260, consisting of trade payables of RMB 5,014,188
and other payables of RMB 1,057,072 (Debts to RAE Shanghai) ; and(3)
    
    The service fee owed to RAE Systems by the Debtor that has
become due but has
not yet been paid shall be RMB 5,090,000 (Service Fee to RAE Systems).
 1.2
    
    In case the amounts due and payable by the Debtor to RAE Beijing and/or RAE Shanghai as of
December 31, 2010 as set forth in the audit report to be issued by an accounting firm engaged
by the Guarantor (the Audit Report)are not
consistent with the amounts specified in (1)
and/or (2) above, the Debts to RAE Beijing and the Debts to RAE Shanghai shall be the amounts
set forth in the Audit Report; provided, however,that,
 (1)
    
    the Guarantor shall provide a
true and complete copy of the Audit Report to
RAE Systems immediately upon the issuance thereof;(2)
    
    within three (3) days following its receipt of the said copy of the Audit Report
specified in (1) above, RAE Systems shall have the right to submit to the Guarantor a
written dispute about the amounts set forth in the Audit Report; and(3)
    
    in the event that (a) RAE Systems submits any written dispute in accordance with
(2) above and (b) RAE Systems and the Guarantor fail to reach an agreement with respect
to the disputed items within ten (10) days, RAE Systems and the Guarantor shall
immediately and jointly appoint an accounting firm to issue a report on the disputed
items, which report shall be binding upon each Party.
  2.1
    
    With respect to the Debts to RAE Beijing, the Debtor shall repay to RAE Beijing: (1) RMB
1,000,000 on the date hereof, (2) RMB 1,000,000 each calendar month from February 2011 (inclusive)
to June 2011 (inclusive) on or before the 15th calendar day of each month, and (3) on
or before July 15, 2011 all of the then outstanding amounts of the Debts to RAE Beijing.2.2
    
    With
respect to the Debts to RAE Shanghai, the Debtor shall repay to RAE Shanghai: (1) RMB 1,000,000 on
the date hereof, (2) RMB 1,000,000 each calendar month from February 2011 (inclusive) to June 2011
(inclusive) on or before the 15th calendar day of each month, and (3) on or before July
15, 2011 all of the then outstanding amounts of the Debts to RAE Shanghai.2.3
    
    RAE Systems agrees
to release the Debtor from its obligation to pay the
Service Fee to RAE Systems.2.4
    
    With respect to the debt repayment obligations under Article 2.1 to Article 2.2, if the
Debtor delays in repaying any amount of debt, the Debtor shall be liable to pay a delay
penalty ___ to the relevant




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Creditor in the amount of 0.1% of the delayed amount of debt per day from the date on
which such debt becomes due and payable.
    4.1
    
    Each of the Debtor and the Guarantor, on its own behalf and on behalf of its affiliates,
directors and employees (collectively, in each case, the
Releasors), effective on the date
hereof, unconditionally and irrevocably releases RAE Systems, RAE Asia, RAE Beijing, RAE Shanghai,
their affiliates, directors and employees (collectively, in each
case, the Releasees) of and
from any and all obligations, claims and causes of action of every nature, regardless of whether
presently known or unknown, pending or future, certain or contingent, that the relevant Releasors
had, now have or hereinafter may have against the relevant Releasees, arising out of or in
connection with any circumstance, agreement, activity, event or matter occurring or existing on or
prior to the date of this Agreement. For the avoidance of doubt, the Parties confirm that the
Releasors are not hereby releasing RAE Asia from its obligations to indemnify the Debtor against
the Non-disclosed Liabilities pursuant to Section 4.3 of the ETC.4.2
    
    The Parties hereby agree and
confirm that each of the agreements set forth in Appendix 2 hereto is and shall be terminated on
the date hereof.
  5.1
    
    Notwithstanding any other provision of this Agreement, in the case that any of the following
events occurs, the relevant Creditor shall have the right to deliver a written notice to the
Debtor and require the Debtor to prepay the relevant amount of debts within the time limit as
requested under such written notice:
 (1)
    
    The occurrence of any event to the Debtor that may affect its financial
condition or its ability to perform its obligations hereunder, including, without
limitation, any ongoing or contemplated de-merger, merger, reorganization,
restructuring, contemplated listing at a stock exchange or any other change to the
operation methods of the Debtor, reduction of its registered capital, transfer of
its material assets or equity, assumption of any material liability, creation of
any new material liability over the mortgaged properties, the dissolution or
cancellation of registration of the Debtor or filing for bankruptcy by (against)
the Debtor, its involvement in any material lawsuit or arbitration, or its
encounter of




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any difficulty in the operation or any deterioration in its financial status;(2)
    
    The
Guarantor fails to perform its obligations under the letter of
guarantee specified in Article 3 hereof; or(3)
    
    The Guarantor fails to perform its
obligation under the ETC.
 5.2
    
    The Debtor and the Guarantor shall notify all Creditors in writing upon the occurrence or
threatened occurrence of any of the events set out in the above Article 5.1(1) in a timely
manner.5.3
    
    Upon the occurrence of events under Article 5.1, the relevant Creditor will be entitled to
require the Debtor to repay: (1) all or part of the Debts to RAE Beijing and Debts to RAE
Shanghai that have not yet been repaid by the Debtor; (2) interest accrued on the above
outstanding debts as from the date hereof and to be calculated based on the then applicable
lending interest rate of the Bank of China; and (3) delay
penalty calculated in accordance
with Article 2.4 hereof (if applicable).
  6.1
    
    The provisions of this Agreement, the debt settlement stipulated herein, the negotiations
prior to this Agreement and any other instruments entered into pursuant to this Agreement
shall be confidential information and will only be disclosed to those employees, directors,
contractors, representatives, attorneys, financial advisers and consultants of the Parties or
actual or prospective acquirers, lenders or investors, who, by virtue of their respective
duties or positions or a contract obligation requirement, have a need to know and then only
to the extent needed for the purpose of this Agreement.6.2
    
    The foregoing obligations of confidentiality and non-disclosure shall not apply to the
information which either Party is required to disclose by any applicable law, legal process
or an order or requirement of a court of competent jurisdiction or other competent
governmental authority, or by the published rules or any mandatory requirements of any stock
exchange on which securities of the relevant Party or its holding companies are listed (or by
any law applicable to such securities).
  7.1
    
    This Agreement shall be governed and construed in accordance with the laws of the PRC.7.2
    
    The Parties agree that, any dispute or discrepancy arising out of or in connection with the
execution and performance of this Agreement shall be resolved by the Parties through
consultations. If the dispute is not resolved through consultations within thirty (30) days
after either Party has served a written notice on the other Party requesting the commencement
of consultations, then the Party delivering such notice may submit the dispute to the China
International Economic and Trade Arbitration Commission for arbitration in Beijing in
accordance with its then applicable rules. The arbitration shall be conducted on a
confidential




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basis and shall be binging upon the Parties. The Parties further agree that, the
Parties to the arbitration shall bear their respective costs and expenses in connection
with the arbitration (including, without limitation, the attorneys fees).7.3
    
    The arbitration tribunal shall consist of three (3) arbitrators, of which, one (1) shall be
appointed by the claimant, one (1) shall be appointed by the respondent, and the third
arbitrator shall be jointly elected by the above two (2) arbitrators. All proceedings in any
such arbitration shall be conducted in both Chinese and English. The Parties hereby agree
that, the arbitration award shall be final and binding upon all the Parties.7.4
    
    When any dispute is being resolved in accordance with this Article 7, except for the matters
under dispute, the Parties shall continue to fulfill their respective obligations under this
Agreement.
  8.1
    
    Without the prior consent of the other Parties, none of the Parties may assign this
Agreement or its rights and obligations under this Agreement.8.2
    
    To the extent permitted by the PRC laws, the failure or delay of any Party hereto to exercise
its rights under this Agreement shall not operate as a waiver thereof, nor shall any single or
partial exercise of a right preclude any other future exercise thereof.8.3
    
    Unless otherwise provided in this Agreement or in any other agreement or contract referred
to herein, this Agreement and the appendix hereto shall constitute the entire agreement
between the Parties with respect to the subject matter hereof, supersede any prior expression
of intent or understanding relating hereto and may only be modified or amended by a written
instrument signed by the authorized representatives of the Parties.8.4
    
    If any term of this Agreement is held invalid, illegal or unenforceable under any law or
public policy, all other terms of this Agreement shall nevertheless remain in full force and
effect for so long as the economic or legal substance of the transactions contemplated by
this Agreement is not affected in any manner materially adverse to either Party. Upon such
determination that any term is invalid, illegal or unenforceable, the Parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner in order that the transactions
contemplated by this Agreement are consummated as originally contemplated to the greatest
extent possible.8.5
    
    This Agreement shall be made in both Chinese and English. Both versions shall be equally
authentic.8.6
    
    This Agreement shall be effective on the date hereof.8.7
    
    Any notice or written communication from any Party to the other Parties under this Agreement
shall be made in Chinese or English, and sent by courier service or by facsimile. The date of
receipt of a notice or communication hereunder shall be deemed to be seven (7) days after the
letter is given to the courier service and two (2) days after sending in the case of a
facsimile




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evidenced by a transmission report. All notices and communications shall be
sent to the appropriate address set forth below, until the same is changed by
notice given in writing to the other Parties.
 To the Debtor:Address:
    
    No. 3, Binhe Road, Fushun Economic Development
Zone, Liaoning ProvinceFacsimile No:
    
    0413-7676559Attention:To the Guarantor:Address:
    
    No. 11, Binhe Road, Fushun Economic Development Zone,
Fushun CityFacsimile No:
    
    0413-6616900Attention:
    
    Liu BinTo RAE Beijing:Address:
    
    RAE-KLH Plaza, No. 7 Fengxian Middle Road, Yongfeng
Industrial Base, Haidian District, BeijingFacsimile No:
    
    010-58717568Attention:
    
    Li WangTo RAE Shanghai:Address:
    
    788 Zhaoxian Road, Jiading District,ShanghaiFacsimile No:
    
    021-69522623Attention:
    
    Bernice BaoTo RAE Systems:Address:
    
    3775 North First Street, San Jose, CA 95134Facsimile No:
    
    001-408-952-8480Attention:
    
    Fei Shen




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IN WITNESS WHEREOF,
 RAE Coal Mine Safety Instruments (Fushun) Co., Ltd.Authorized representative:Signature:             
             
(SIGNATURE)Name:Title:
    
    (STAMP)(GRAPHIC)RAE Systems (Asia) Ltd.Authorized
representative:Signature: /s/ Fei ShenName: Fei ShenTitle: DirectorRAE-KLH (Beijing) Technologies Co., Ltd.(GRAPHIC)
 
 8




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RAE Systems (Shanghai) Co., Ltd.Authorized representative:Signature: /s/ Ming Ching Tang

Name:Title:RAE SystemsAuthorized representative:Signature:
/s/ Robert I. ChenName: Robert I. ChenTitle: President and CEO
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Appendix 1 Unconditional and Irrevocable Letter of Guarantee
 Guarantor:
 Registered address:
 Legal representative:
 Beneficiary A
 Registered address:
 Legal representative Yizhi
 Beneficiary B
 Registered address
 Legal representative Chen Yizhi
  1.
    
    The Guarantor hereby unconditionally and irrevocably guarantees that, it will bear joint and
several guarantee liability for the payment of the Debts to RAE Beijing and the Debts to RAE
Shanghai, both as defined in the Settlement Agreement, and any and all interests and penalties that
may accrue in connection there with pursuant to the Settlement Agreement. If for any reason the
Debtor fails to fully repay the relevant amount on time in accordance with the Settlement
Agreement, the Guarantor shall first pay such relevant amount, and will assume all payment
liabilities of the Debtor. The Guarantor guarantees that, within seven (7) business days after its
receipt of a written demand from any Beneficiary hereunder, it will forth with fully repay the
secured amount to such Beneficiary subject to the scope of guarantee of this letter of guarantee.2.
    
    During the term of guarantee under this letter of guarantee, the guarantee liability of the
Guarantor shall remain unconditional and irrevocable, and the content or validity thereof shall not
be affected as a result of any of the following events:
 (1)
    
    the extension of the term of performance of the Settlement Agreement, or any change to other
provisions of the Settlement Agreement; or




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(2)
    
    any change to the form of organization or legal status (including without limitation, change of
corporate name, or change of shareholders, or split-off or merger) or status of assets of any party
hereto; or any proposed change to the form of organization or legal status of the Guarantor, in
which case, the Guarantor shall notify each Beneficiary 20 days in advance; or any split-off of the
Guarantor, in which case, all the liabilities hereunder shall be assumed by the entity resulting
from such split-off;(3)
    
    any agreement by and between the Guarantor or either Beneficiary on one hand and any other
entity on the other hand;(4)
    
    the bankruptcy or dissolution of the Debtor or failure or inability of the
Debtor to perform its payment obligation under the Settlement Agreement.
 3.
    
    The Guarantor hereby warrants and undertakes to the Beneficiaries that:
 (1)
    
    it will comply with and perform all obligations hereunder;(2)
    
    it waives the claim and defense for not performing all of its obligations;(3)
    
    it is validly existing in accordance with the laws of the Peoples Republic of China, and has
full right and authority to own and legally owns its assets, and has full capacity required for
the performance of the guarantee obligation hereunder;(4)
    
    its issuance of this letter of guarantee does not violate any law or regulation, or its
articles of association, or any contract to which it is a party;(5)
    
    all approvals or authorizations provided by the relevant laws, regulations and its articles of
association have been obtained by it for providing the guarantee under this letter of guarantee;
and(6)
    
    it is not currently in any default, or is or will be a subject to any
litigation at any court, governmental or administrative authority
or arbitration institution, or involved in any event that may
affect its performance of its guarantee obligation.
 4.
    
    After this letter of guarantee comes into force, the Guarantor shall furnish
to the Beneficiaries its financial information as may be requested by any
Beneficiary.5.
    
    Without the written consent of the Beneficiaries, the Guarantor may not
assign its guarantee obligation to any other party.6.
    
    This letter of guarantee shall come into force after it is affixed with the common seal of the
Guarantor and signed by the legal or authorized representative of the Guarantor, and shall be
terminated after the amount payable under the Settlement Agreement is paid up.




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Beneficiary A: RAE-KLH (Beijing) Technologies Co., Ltd.
 
 Beneficiary B: RAE Systems (Shanghai) Co., Ltd.
  /s/ Ming Ching Tang




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Appendix 2