Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     Founded in 1991, RAE Systems Inc. (the “Company” or “RAE Systems”), a Delaware company, develops and manufactures rapidly-deployable, multi-sensor chemical and radiation detection monitors and networks for oil and gas, hazardous material management, industrial safety, civil defense and environmental remediation applications. The Company’s products are based on proprietary sensor technology, and include personal, breathing zone, portable, wireless and fixed chemical detection monitors and radiation detectors.

     As a result of an independent investigation conducted by the Audit Committee of the Board of Directors during fiscal year 2008, the Company made a voluntary disclosure to the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) that the companyCompany may have violated the United States Foreign Corrupt Practices Act (“FCPA”). The Company is cooperatingcooperated with the DOJ and the SEC in connection with their review of the matter. In December 2010, the Company settled all outstanding issues with regard to this matter in separate agreements with the DOJ and the SEC. Pursuant to these agreements; the Company paid a $1.7 million criminal penalty to the DOJ and $1.3 million in restitution and interest to the SEC. The Company also agreed to advise the DOJ and the SEC periodically until December 2013 on its ongoing efforts to ensure continued compliance with the FCPA.

     On September 19, 2010, the Company signed a definitive agreement to be acquired by an affiliate of Battery Ventures (the “Battery Merger Agreement”) for $1.60 in cash per share (other than certain shares held by our founders, Robert Chen, Peter Hsi and affiliated entities). Subsequently, on January 12, 2011, the Company received an offer from an affiliate of Vector Capital to acquire the outstanding shares of our common stock for $1.75 per share in cash (other than certain shares held by Robert Chen, Peter Hsi and affiliated entities). The Company terminated the Battery Merger Agreement on January 18, 2011, paid a termination fee of $3.39 million to Battery Ventures in accordance with the terms of the Battery Merger Agreement, and signed a Merger Agreement with the affiliate of Vector Capital (the “Vector Merger Agreement”) on the terms described above. On April 2, 2011, we received an offer from an affiliate of Battery Ventures to acquire all of our outstanding capital stock for $1.90 per share in cash, and on April 3, 2011, we entered into an amendment to the Vector Merger Agreement increasing the per share cash price to be paid for the outstanding shares of our common stock (other than certain shares held by Robert Chen, Peter Hsi and affiliated entities) to $1.88. This transaction is actively engagedsubject to customary closing conditions, including the approval of RAE Systems’ shareholders.

     In connection with the acquisition agreements, eleven lawsuits have been filed against the Company and members of its Board of Directors. These suits were filed in settlement discussions. AlthoughState Courts in California and Delaware and in the Federal District Court in California. In summary, the suits allege violations of federal securities laws and that the individual defendants breached their fiduciary duties by conducting an unfair sales process and agreeing to an unfair price, are receiving improper personal benefits, and were aided and abetted by the other defendants. The Company believes the claims in these lawsuits are without merit and intends to vigorously defend against them. However, there can be no assurances can be given as to whether the matter will settle oroutcome of the amount of any settlement, the Company accrued $3.5 million in the third quarter of 2009litigation. See “Note 6. Commitments and Contingencies” for the potential settlement of this matter.more detail.

     The financial information presented in this Form 10-Q is unaudited and is not necessarily indicative of the future consolidated financial position, results of operations or cash flows of RAE Systems. The unaudited condensed consolidated financial statements contained in this Form 10-Q have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position at the date of the interim balance sheets, and its results of operations and its cash flows for the stated periods, in conformity with the accounting principles generally accepted in the United States of America. The consolidated balances at December

31, 2009,2010, were derived from the audited consolidated financial statements included in the Company’s Annual Report (“Annual Report”) on Form 10-K for the year ended December 31, 2009.2010. The condensed consolidated financial statements included in this report should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009,2010, included in the Annual Report.

     The condensed consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. The ownership of other interest holders of consolidated subsidiaries is reflected as noncontrolling interest.

     The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable based on available information. Actual results may differ materially from these estimates and assumptions.

     The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. A provision for estimated product returns is established at the time of sale based

     The following is a summary of options (in thousands, except weighted-average exercise price):

the three month periods ended March 31, 20102011 and 2009,2010, respectively, and no stock-based compensation expense remains to be recorded related to thesenon-plan options.

     Non-Plan Restricted Stock

     In August 2006, the Company granted 536,000 shares of restricted stock to four individuals at a weighted-average grant date fair value of $2.81 per share as an inducement to join the Company. Twenty five percent of this restricted stock or 134,000 shares vested in July 2007 with the remainder vesting pro-rata quarterly over the following three years subject to accelerated vesting in certain circumstances.

     The fair market value of the Company’s common shares on the datesdate the awards were granted represents unrecognized stock-based compensation which is beingwas amortized on a straight-line basisratably over the vesting period of the underlying stock awards. Vesting was completed during the third quarter of 2010. As such, no unvested restricted stock remained outstanding at March 31, 2011 and December 31, 2010, respectively. As of March 31, 2010, $49,000 of estimated2011, no stock-based compensation expense related to restricted stock awards remains to be recorded. That cost is expectedremained to be recorded during the second quarter of 2010.

     RAE France had total sales of $724,000$948,000 and $632,000$724,000 in the three months ended March 31, 20102011 and 2009,2010, respectively. The carrying amounts of the major classes of RAE France assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets were as follows:

     In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (amendments to FASB ASC Topic 350, Intangibles — Goodwill and Other). The requirementobjective of this ASU is to separately disclose purchases, sales, issuances and settlementsaddress diversity in practice in the application of recurring Level 3 measurementsgoodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim and annual reporting periods beginning after December 15, 2010.January 1, 2011. The Company does not expect the adoption of the remaining provisions of this ASU todid not have a material impact on the Company’s condensed consolidated financial statements.

     Inventories are stated at the lower of standard cost, which approximates actual cost computed on a first-in, first-out basis, or market and include material, labor and manufacturing overhead costs. The components of inventories were as follows:

planning strategies. The Company regularly monitors the assumptions used in estimating its annual effective tax rate and adjusts its estimates accordingly. If actual results differ from its estimates, future income tax expense could be materially affected.

proposed acquisition, and were aided and abetted by the other defendants. Plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, an injunction against the proposed merger, rescission of the Merger Agreement, a directive that the defendants exercise their fiduciary duties to implement a process to secure the best possible consideration for stockholders, imposition of a constructive trust on allegedly improper benefits, and fees and costs. Four other lawsuits making similar allegations have also been filed in the Superior Court of the State of California, County of Santa Clara against the Company, its Board of Directors and Battery Ventures or its affiliates:Polimaster Ltd. et al.Angles v. RAE Systems Inc., United States District Court foret al., No. 110CV183606;Greenbaum v. Chen, et al., No. 110CV183814;AC Photonics, Inc. v. RAE Systems Inc., et al., No. 110CV183942; andMann v. RAE Systems Inc., et al., No. 110CV183960. On October 28, 2010 the Northern District of California court consolidated all five California actions under the captionIn re RAE Systems, Inc. Shareholder Litigation, Lead Case No. 05-CV-01887-JF, United States110CV182985. On December 15, 2010, plaintiffs Mann and Angles filed an amended complaint continuing to set forth the claims set forth above and including additional disclosure claims based on allegations that the Company’s proxy filings contain materially false statements and fail to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the FCPA investigation, communications with Battery Ventures and other potential bidders, and the work performed by UBS and data underlying its analyses. On December 17, 2010, the California court issued an order staying all proceedings in California state court in favor of litigation pending in Delaware.

     Polimaster Ltd.In addition to the California state court actions, four putative class action suits with similar allegations have been filed in Delaware Chancery Court:Nelson v. RAE Systems Inc., et al., C.A. No. 5848-VCS;Venton v. RAE Systems Inc., et al., C.A. No. 5854-VCS;Quintanilla v. RAE Systems Inc., et al., C.A. No. 5872;Villeneuve v. RAE Systems Inc., et al., C.A. No. 5877. The Delaware actions have been consolidated under the captionIn re RAE Systems, Inc. Shareholder Litigation, Consolidated C.A. No. 5848-VCS, and Na&Se Trading Company, Ltd. (“Polimaster”)plaintiffs filed a Verified Consolidated Amended Class Action Complaint on or about October 28, 2010. In this pleading, plaintiffs continued to assert the claims set forth above, and in addition they alleged that the Company’s Preliminary Proxy Statement, filed with the SEC on October 21, 2010, contained materially false statements or failed to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the FCPA investigation, communications with Battery Ventures and other potential bidders, and the work performed by UBS and data underlying its analyses. Plaintiffs requested various forms of injunctive relief, as well as money damages allegedly suffered or to be suffered by the putative class. On December 17, 2010, two of the plaintiffs from the stayed California action (Mann and Angles) also filed a complaint in Delaware Chancery Court making essentially the same allegations as in their amended California complaint described above. Plaintiffs Mann and Angles subsequently voluntarily dismissed their Delaware complaint.

     On February 24, 2011, the remaining Delaware plaintiffs filed a motion requesting leave to file a Supplemental and Amended Verified Class Action Complaint. The Delaware Chancery Court granted plaintiffs’ leave to amend their complaint on March 2, 2011. The Supplemental Amended Verified Class Action Complaint asserts claims against the Company, members of its Board of Directors, and entities affiliated with Vector Capital, and alleges in summary that, in connection with the proposed acquisition of the Company by an affiliate of Vector Capital, the individual defendants breached their fiduciary duties by conducting an unfair sale process and agreeing to an unfair price, are purportedly receiving improper personal benefits, and were aided and abetted by the other defendants. The complaint also alleges that the Company’s Preliminary Proxy Statement, filed with the SEC on May 9, 2005,February 22, 2011, contains materially false statements or fails to disclose material facts regarding, among other things, the Special Committee, the holders of the Rollover Shares, the process and events leading up to the proposed acquisition, the work performed by UBS and data underlying its analyses, and communications with Battery Ventures, Vector Capital, and other potential bidders. Plaintiffs request various forms of injunctive relief, as well as money damages allegedly suffered or to be suffered by the putative class. On March 7, 2011, the Delaware plaintiffs filed a motion seeking to preliminarily enjoin the proposed acquisition of the Company by an affiliate of Vector Capital. On April 4, 2011, the Delaware Chancery Court held a conference regarding the Delaware plaintiffs’ motion for preliminary injunction. Following that conference, the Company postponed the shareholder vote on the proposed acquisition.

     Two other actions have been filed in the United States District Court for the Northern District of California in a case titled Polimaster Ltd., et al. v. RAE Systems Inc. (Case No. 05-CV-01887-JF). The complaint alleges, among other things, thatagainst the Company, breachedmembers of its contract with PolimasterBoard of Directors, the Company’s Chief Financial Officer, and/or Battery Ventures, Rudy Merger Sub Corp. and infringed upon Polimaster’s intellectual property rights. The dispute was subject to a contractual arbitration agreement, although the federal court retained jurisdiction over the matter pending completion of the arbitration. The arbitration was conducted in the spring of 2007.

     The Company and its subsidiaries lease certain manufacturing, warehousing and other facilities under operating leases. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property. Total rent expense for the three months ended March 31, 2011 and 2010, was $345,000 and 2009, was $347,000 and $375,000,$340,000, respectively. Future minimum annual payments under non-cancellable leases were as follows as of March 31, 20102011(in thousands):

     In December 2008, the Company invested approximately $1.2 million for land use rights in Shanghai, China to construct a new manufacturing, engineering and administrative facility. Construction began during the first quarter of 2010. The estimated cost to complete this project is approximately $5.3$1.8 million with the work scheduled to be completed during the first quarterhalf of 2011. Upon completion of construction, the Company intends to vacate its existing leased facility in Shanghai. Based on discussions with Shanghai government officials, the landlord of the existing Company facility, the Company believes it will be able to terminate the lease without penalty. However, no assurance can be given at this time that the Company will not be subject to a lease termination penalty.

     During the quarterthree months ended March 31, 2011 and 2010, zero and $51,000, respectively, of interest expense was capitalized for construction of the Company’s new facility in Shanghai.

     The Company is permitted under Delaware law and required under RAE Systems’ Certificate of Incorporation and Bylaws to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the officer is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer Insurance Policy that limits its exposure and enables it to recover a portion of any future amounts paid. To date the Company has not incurred any losses under these agreements.

     The Company typically agrees to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amounts to settle claims or defend lawsuits.

     In China,On March 28, 2011, the Company generally maintains one or more unsecured revolving linesamended the credit facility to allow borrowings of creditup to provide working capital. Borrowings under these credit facilities are generally$2 million on a non-formula basis. Interest on non-formula advances accrues at the current marketfloating prime bank lending rate for fixedplus 400 basis points subject to a minimum total rate loans of the amount and duration requested, up to one year. The maturity dates of such fixed rate loans may extend beyond the renewal date of the line of credit arrangement, which governs the advance of new loans. The availability of new loans under the Company’s current line of credit will expire for annual renewal on September 20, 2010. The following table presents the Company’s total lines of credit in China for working capital and8%. No non-formula loan balances drawn against eachwere outstanding as of March 31, 2010 and December 31, 2009(in millions):2011.

     The Company accounts for its 40% ownership in Renex Technologies Ltd. (“Renex”), a Hong Kong company following the equity method. The Company’s total investment in Renex at March 31, 20102011 and December 31, 20092010 was $288,000$119,000 and $339,000,$166,000, respectively. The Company recorded losses of $51,000$46,000 and $67,000$51,000 on its equity interest in Renex for the three months ended March 31, 20102011 and 2009,2010, respectively.

     In conjunction with the Company’s investment in RAE Beijing, unsecured notes payable were established for the previous RAE Beijing shareholders as part of the purchase price agreement in July 2006. Although these notes bear a stated interest rate of 3% per annum, the notes were discounted using a market interest rate of 6.48%. As of March 31, 20102011 and December 31, 2009, $380,0002010, $286,000 and $370,000,$278,000, respectively, was included in current notes payable to related parties in the Company’s Condensed Consolidated Balance Sheets and $361,000 and $363,000, respectively, was included in long term notes payable to related parties.Sheets. The remainingfinal scheduled annual paymentspayment of principal and accrued interest under thesethe notes from 2010 throughat maturity in 2011 are $380,000 and $361,000, respectively.

     In addition to its 40% ownership in Renex, the Company has investments in three distributors of RAE Systems products, RAE Australia, RAE Benelux and RAE Spain. The Company owns 19%, 10% and 19% of RAE Australia, RAE Benelux and RAE Spain, respectively. These investments are accounted for under the cost method.

     Intangible assets, net: The fair value is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

     The existing authoritative guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

     Level 1: Quoted market prices in active markets for identical assets or liabilities.

     Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

     Level 3: Unobservable inputs that are not corroborated by market data.

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those stated herein. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. For further information, refer to the sections entitled “Risk Factors” in “Part II Item 1A” of thisForm 10-Q. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in thisForm 10-Q.

     We are a leader in delivering innovative sensor solutions to serve industrial, energy, environmental and government safety markets worldwide. In addition, we offer a full line of portable single and multi-sensor chemical and radiation detection products. The market for our products has evolved from being strictly focused on environmental and industrial monitoring to now encompassing the public safety and energy markets. We have expanded our presence to include the broader global energy exploration and refining safety equipment market. With the formation of RAE Fushun, we are serving the coal mine safety equipment market in China.

     In 2006, we made two significant business investments in China. First in July 2006, we increased our ownership in RAE Beijing to 96%. RAE Beijing produces, sells and distributes safety and security solutions for the chemical, oil and gas, metals and energy sectors in China. Second, inIn December 2006 we formed RAE Fushun a joint venture with Fushun Anyi, a former state owned company servingto serve the coal mine safety market.market in China. This joint venture was formed30% owned by Fushun Anyi and 70% owned by RAE Systems. On January 12, 2011, we entered into a definitive agreement to capitalize on China’s growing reliance on coal based energy.sell our 70 percent ownership of RAE Fushun manufacturesto the Shenyang Research Institute of China Coal Research Institute. The agreement is expected to close within 180 days of signing the definitive agreement and sells coal mine safety equipment. RAE Systems owns 70% of the joint venture.

     We offer a complete line of products to meet the requirements of the various global markets that we serve. Products range from breathing zone single sensor products for specific toxic chemicals (ToxiRAE 3) to belt worn multi-gas monitors (QRAE 2) to handheld instruments (MiniRAE 3000, ppbRAE 3000 and UltraRAE) to measure total and specific volatile organic compounds, to wireless monitors for industrial and public safety applications (AreaRAE Steel)Steel and MeshGuard).

     We have expanded our wireless product offering with the introduction of MeshGuard, a single-gas, mesh radio-based monitor designed to replace single-gas fixed monitors in industrial environments that include steel mills, oil and gas exploration and chemical processing. We continue to improve our product offerings through advances in sensors and wireless networking technologies, including the RAELink 3, a wireless modem with integrated GPS and Bluetooth radio technologytechnologies that provides a data bridge for our products, and complementary products such as chemical warfare agents and particle counters. We updated several of our fixed gas monitors to meet the needs of the China market. We received an additional sensor patent for a new gamma radiation detector/dosimeter, and this was deployed in our GammaRAE II R product.

     In all of our markets we will continue to explore and develop strategic value added partnerships, to leverage our product and market expertise.

     In 2008, we introduced eight new products. We now offer a complete line of products to serve the personnel safety, regulated worker safety and detection needs of the global energy market. Products range from breathing zone single sensor products for specific toxic chemicals (ToxiRAE 3 and AutoRAE Lite Calibration Station) to belt worn multi-gas monitors (QRAE II with AutoRAE Lite Calibration Station, and MultiRAE Plus) to handheld instruments (MiniRAE 3000, MiniRAE Lite, ppbRAE 3000 and UltraRAE) to measure total and specific volatile organic compounds, to wireless monitors for wireless industrial and public safety applications

the energy sector. Our China operation continues to sell to state run steel mills, energy markets, including downstream oil processing, petrochemicals and electric utilities. Our Europe, Middle East, and Asia Pacific region generate sales primarily from the Middle East and Asia Pacific oil producers. All of our sales regions are driving adoption of our wireless sensor solutions for applications in both safety and security. Our global markets continue to be impacted by the effects of the 2009 global recession. In each of our markets we will continue to explore and develop strategic value added partnerships, to leverage our product and market expertise. In the first quarter of 2011, RAE Systems products again provided public venue security at the National Football League Super Bowl.

     On September 19, 2010, the Company signed a definitive agreement to be acquired by an affiliate of Battery Ventures (the “Battery Merger Agreement”) for $1.60 in cash per share (other than certain shares held by our founders, Robert Chen, Peter Hsi and affiliated entities). Subsequently, on January 12, 2011, the Company received an offer from an affiliate of Vector Capital to acquire the outstanding shares of our common stock for $1.75 per share in cash (other than certain shares held by Robert Chen, Peter Hsi and affiliated entities). The Company remains actively engagedterminated the Battery Merger Agreement on January 18, 2011, paid a termination fee of $3.39 million to Battery Ventures in discussionsaccordance with the Departmentterms of Justicethe Battery Merger Agreement, and signed a Merger Agreement with the Securitiesaffiliate of Vector Capital (the “Vector Merger Agreement”) on the terms described above. On April 2, 2011, we received an offer from an affiliate of Battery Ventures to acquire all of our outstanding capital stock for $1.90 per share in cash, and Exchange Commissionon April 3, 2011, we entered into an amendment to settlethe Vector Merger Agreement increasing the per share cash price to be paid for the outstanding joint investigation intoshares of our common stock (other than certain shares held by Robert Chen, Peter Hsi and affiliated entities) to $1.88. This transaction is subject to customary closing conditions, including the Company’s allegedapproval of RAE Systems’ shareholders.

     In connection with the acquisition agreements, eleven lawsuits have been filed against the Company and members of its Board of Directors. These suits were filed in State Courts in California and Delaware and in the Federal District Court in California. In summary, the suits allege violations of federal securities laws and that the FCPA.individual defendants breached their fiduciary duties by conducting an unfair sales process and agreeing to an unfair price, are receiving improper personal benefits, and were aided and abetted by the other defendants. The Company believes the claims in these lawsuits are without merit and intends to vigorously defend against them. However, there can be no assurances as to the outcome of the litigation. See “Note 6. Commitments and Contingencies” for more detail.

     We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. A provision for estimated product returns is established at the time of sale based upon historical return rates adjusted for current economic conditions. Historically, we have experienced an insignificant amount of sales returns. We generally recognize revenue upon shipment to our distributors in accordance with standard contract terms that pass title of all goods upon delivery to a common carrier (FOB factory) and provide for sales returns under standard product warranty provisions. For non-standard contract terms, where title to goods passes upon delivery to the customer (FOB destination), revenue is recognized after we have established proof of delivery. Revenue related to services performed under our extended warranty program is recognized as earned based upon contract terms, generally ratably over the term of service. We record project installation work in Asia using the percentage-of-completion method. Net sales also include amounts billed to customers for shipping and handling. Our shipping costs are included in cost of sales. Net sales do not include sales tax.

     We grant credit to our customers after undertaking an investigation of credit risk for significant amounts. An allowance for doubtful accounts is provided for estimated credit losses at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. The allowance is based on reviews of loss, adjustments history, of adjustments, current economic conditions and other factors that deserve recognition in estimating potential losses. We generally do not require collateral for sales on credit. While management uses the best information available in making our determination, the ultimate recovery of recorded accounts receivable is also dependent upon future economic and other conditions that may be beyond management’s control. If there was a deterioration of a major customer’s credit-worthiness or if actual defaults were higher than what have been experienced historically, additional allowances would be required.

     We are not able to predict changes in the financial stability of our customers. Any material change in the financial status of any one or a group of customers could have a material adverse effect on our results of operations and financial condition.

Trade notes receivable are presented to us from some of our customers in China as a payment against the outstanding trade receivables. These notes receivable are bank guarantee promissory notes which are non-interest bearing and generally mature within ninesix months.