Exhibit
10.12





EMPLOYMENT
AGREEMENT





AGREEMENT,
dated as of the 30th day of January, 2006, by and between Cyalume Technologies,
Inc., a Delaware corporation with principal executive offices at 96 Windsor
Street, West Springfield, Massachusetts 01089 (the “Company”), and Thomas
C. McCarthy, residing at 58 Falmouth, Longmeadow, MA  01106 (“Employee”).




WHEREAS
the Company is presently engaged in the business of developing, manufacturing
and selling luminescent chemical devices and materials for sale primarily to
customers in the government, military and commercial safety fields of use
worldwide (the “Business”);
and




WHEREAS
the Employee, who shall serve as Vice President and General Manager, Worldwide
Government & Safety Division of the Company, and the Company are desirous of
formalizing their understanding for Employee’s employment, all upon the terms
and subject to the conditions hereinafter provided.




NOW,
THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto, intending to be legally bound, agree as
follows:




1.
            Employment.




The
Company agrees to employ Employee, and Employee agrees to be employed by the
Company, upon the terms and subject to the conditions of this
Agreement.




2.
            Term.




The term
of this Agreement shall be for a period of three (3) years commencing on the
date hereof (the “Commencement Date”) and continuing automatically for
successive one (1) year periods thereafter unless terminated by the Company no
less than six (6) months prior to the third anniversary hereof or the end of any
subsequent period (the “Term”).




3.
            Duties; Best Efforts;
      Indemnification.




(a)           Employee
shall serve as Vice President and General Manager, Worldwide Government &
Safety Division of the Company, and shall report directly to the President of
the Company and to such person or persons as may be designated by the Board of
Directors of the Company (the “Board”).  Employee shall be responsible
for managing and growing worldwide sales and marketing of products to military
and government customers, establishing strategies and goals related to such
sales, managing relationships with existing military/government customers and
establishing relationships with new military/ government customers, coordinating
with the Company’s research and development department to develop new products
for military/government customers and launching such new products, coordinating
orders for military/government customers and managing, hiring and firing members
of sales and marketing team for military/government customers.  During
the Term, Employee shall also have such other powers and duties as may be from
time to time prescribed by the Board or its designees which are consistent with
Employee’s position and duties hereunder.





(b)           Employee
shall perform his duties, responsibilities and functions to the Company to the
best of his abilities and in a manner consistent with the office of a Vice
President and General Manager, Worldwide Government & Safety Division, and
shall comply with the lawful policies and procedures of the
Company.  In performing his duties and exercising his authority under
this Agreement, Employee shall support and implement the lawful business and
strategic plans approved from time to time by the Board and shall support and
cooperate with the Company’s efforts to expand its businesses and operate
profitably and in conformity with law and the business and strategic plans
approved by the Board.  Employee shall devote all of his business
time, attention and energies, on a full time and exclusive basis, to the
business and affairs of the Company and shall not during the Term be engaged in
any other business activities, whether or not such business activities are
pursued for gain, profit or other pecuniary advantage, without Board consent;
provided,
however, that, it shall not be a violation of this Agreement for Employee
to (i) serve on corporate, civic or charitable boards or committees or (ii)
manage passive personal investments, in either case so long as any such
activities do not interfere with the performance of his responsibilities as an
employee of the Company in accordance with this Agreement or adversely affect or
negatively reflect upon the Company.




(c)           The
Company shall indemnify and hold harmless the Employee for all actions taken in
the course of his employment which are taken in accordance with paragraph 3
above.




4.
            Compensation and
      Benefits.




(a)           The
Company shall pay to Employee a base salary (the “Base Salary”) at a rate of
$150,000 per annum, payable in accordance with the Company’s payroll practices
for its executive employees.  The Board will review the Base Salary
for possible increase not less than annually during the Term, but the Employee
shall be entitled to receive at least the amount of any cost-of-living increases
granted to the Company’s employees in general.




(b)           Employee
will be granted stock options, share appreciation rights or bonuses under plans
adopted by the Board for the benefit of the executives and key management
personnel of the Company.  The employee will be granted stock options
in an amount and under terms specified in the attached letter (Exhibit
A).  In the event that the Employee does not receive such stock
options according to the terms of the attached letter, prior to March 1, 2006,
this agreement will be null and void.




(c)           In
addition to the Base Salary, the Employee shall be entitled to payment of the
following annual bonus compensation, paid after the final closing of each fiscal
year during the Term and verification of the financial results for such fiscal
year by the Board of Directors of the Company:




i.      If
the Company achieves at least 85% but less than 100% of its budgeted EBITDA, the
amount of such bonus shall be 4.5% of the Employee’s Base Salary.  If
the Company achieves at least 100% but less than 120% of its budgeted EBITDA,
the amount of such bonus shall be 9.0% of the Employee’s Base
Salary.




ii.     If
the Company achieves at least 120% of its budgeted EBITDA, the amount of such
bonus shall be 13.5% of the Employee’s Base Salary.







iii.    If
the Company achieves percentages of its budgeted EBITDA between those levels
listed above, the bonus amount will be adjusted proportionately.




(d)           In
addition to a base salary, the Employee shall also be entitled to payment of the
following annual bonus compensation based on the Company’s Worldwide Government
& Safety Division performance, paid after the final closing of the fiscal
year and verification of the financial results by the Board:




i.      If
the Worldwide Government & Safety Division achieves at least 85% but less
than 100% of its budgeted EBITDA, the amount of such bonus shall be 10.5% of the
Employee’s Base Salary.




ii.     If
the Worldwide Government & Safety Division achieves at least 100% but less
than 120% of its budgeted EBITDA, the amount of such bonus shall be 21.0% of the
Employee’s Base Salary.




iii.    If
the Worldwide Government & Safety Division achieves at least 120% of its
budgeted EBITDA, the amount of such bonus shall be 13.5% of the Employee’s Base
Salary.




iv.    If
the Worldwide Government & Safety Division achieves percentages of its
budgeted EBITDA between those levels listed above, the bonus amount will be
adjusted proportionately.




For purposes of this Agreement,
“EBITDA” shall mean for each applicable fiscal year, (a) the net income of the
Company (as a whole) or the Company’s military/government segment, as
applicable; plus, (b) in each case, to the extent deducted in determining net
income for such period, the Company’s, or the military/government segment’s
portion of the Company’s (i) taxes, (ii) interest expenses and (iii)
amortization and depreciation, as calculated by the Company’s Chief Financial
Officer based on the amounts as set forth in the Company’s annual audited
consolidated financial statements prepared by the Company’s independent
certified public accountants.




(e)           Employee
shall be entitled to participate in or receive benefits under any pension plan,
health, dental, long term disability, and accident plan or any other employee
benefit plan or arrangement made available now to the senior managers of the
Company or in the future as determined by the Board.  In the event
that the Employee elects not to participate in the Company health plan, the
Company will reimburse the Employee for the cost of a similar plan from another
source, provided that such reimbursement does not exceed the cost which the
Company would have paid for similar coverage had the Employee remained in the
Company health plan.




(f)           The
Company shall promptly pay to Employee the approved reasonable expenses incurred
by him in the performance of his duties hereunder in accordance with the
Company’s policies in effect from time to time, including, without limitation,
those incurred in connection with business related travel or entertainment, or
if such expenses are paid directly by Employee, shall promptly reimburse him for
such payment, provided that Employee provides proper documentation thereof in
accordance with the Company’s policy.





(g)           Employee
shall be entitled to paid vacation days in each calendar year determined by the
Company from time to time, but not less than twenty (20) days in any calendar
year, subject to the Company’s vacation policies for its key management
personnel.  Vacation shall be prorated in any calendar year of the
Term during which Employee is employed hereunder for less than an entire year in
accordance with the number of days in such year during which he is so
employed.  Employee shall also be entitled to carry over unused
vacation for a maximum accrual of 20 days.  Employee is also entitled
to all paid holidays given by the Company to its key management
employees.




(h)           The
Company may, at its discretion, subscribe for and maintain, on behalf of the
Company, life insurance, key-man insurance and long-term disability insurance
with respect to Employee, in such amount and upon such terms or conditions as
the Company may deem reasonable.  Employee shall cooperate with the
Company in connection with the obtaining of any such policies, including the
submission to physical examination and blood testing.




5.
            Termination




Employee’s
employment hereunder shall be terminated upon Employee’s death or Disability or
Employee’s voluntarily leaving the employ of the Company, and may be terminated
by the Company as follows:




(a)           For
Cause.  The Company shall have the right to terminate
Employee’s employment for “Cause.”  A termination for “Cause” is a
termination evidenced by a resolution adopted by the Board finding that Employee
has:




i.      breached
or failed to comply with any of the material terms of this Agreement, including,
without limitation, Sections 3, 7, 8, 9 or 12 of this Agreement;




ii.     failed
to perform his duties under this Agreement, including refusing to carry out the
instructions of the Board or its designees, or disregarding the lawful
instructions from the Board or its designees, in any case which instructions are
consistent with the responsibilities and duties of Employee contemplated by this
Agreement;




iii.    engaged
in gross negligence or gross misconduct in connection with or arising out of the
performance of his duties hereunder;




iv.    been
under the influence of drugs (other than prescription medicine or other
medically-related drugs to the extent that they are taken in accordance with
their directions) or alcohol during the performance of his duties under this
Agreement, or while under the influence of drugs or alcohol, engages in
inappropriate conduct during the conduct of business.




v.     engaged
in behavior that would constitute grounds for liability for sexual harassment
(as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines,
the Massachusetts Commission Against Discrimination and/or any other applicable
state regulatory body) or, in the reasonable opinion of the Board, other
egregious conduct violative of laws governing the workplace; or


vi.    committed
any act of fraud, larceny, misappropriation of funds or embezzlement or been
convicted of a felony or a crime of moral depravity;









provided, however,
that any act or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Board or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by
Employee in good faith and in the best interests of the Company.




(b)           For
Disability.  The Company shall have the right to terminate
Employee’s employment as a result of Employee’s “Disability.”  For
purposes of this Agreement, a termination for “Disability” shall
occur:




i.      immediately
after the Board has provided a written termination notice to Employee supported
by a written statement from a reputable independent physician selected by the
Company to the effect that Employee shall have become so incapacitated as to be
unable to resume, within 90 days, his employment hereunder by reason of physical
or mental illness or injury, or




ii.     upon
rendering of a written termination notice by the Company after Employee has been
unable to substantially perform his duties hereunder for 90 consecutive days or
for 90 days in any 360 day period by reason of any physical or mental illness or
injury.




(c)           Employee
agrees to make himself available and to cooperate in any reasonable examination
by a reputable independent physician selected by the Company for the purpose of
determining disability pursuant to Section 5(b)(i).




6.
            Effect of
      Termination




(a)           Death or
Disability.  In the event of the termination of Employee’s
employment as a result of his death or Disability, the Company
shall:




i.      pay
to Employee or his estate, as the case may be, the Base Salary plus accrued and
unpaid bonus, if any, in accordance with Section 4(b) through the date of his
death or Disability (pro rated for any partial month);




ii.     assign
rights to Employee or his estate, as the case may be, to all of Employee’s
vested stock options; and




iii.    reimburse
Employee, or his estate, as the case may be, for any expenses pursuant to
Section 4(d) (the amounts payable pursuant to the foregoing clauses (i) and (ii)
are hereafter referred to as the “Accrued Obligations”).




(b)           For Cause by the Company, by
Employee voluntarily or upon expiration of the Term.  In the
event that Employee’s employment is terminated by the Company for Cause or by
Employee voluntarily (other than as a result of the Company’s material breach of
this Agreement) or upon expiration of the Term, the Company shall pay to
Employee the Accrued Obligations and Employee shall have no further entitlement
to any other compensation or benefits from the Company, except as set forth
herein.




(c)           Other than as a result of
Employee’s death or Disability, or by the Company otherwise than for
Cause.  In the event that Employee’s employment is terminated
other than by reason of his death or Disability  or is terminated by
the Company otherwise than for Cause, then, subject to receipt of a release of
the Company and its directors, officers and employees and their respective
successors and assigns of claims of Employee against them arising out of or by
reason of his termination of employment hereunder, the Company
shall:





i.
            Provide
      six months notice of such
termination




ii.
            pay
      to Employee the Accrued Obligations;
and




iii
              continue
      to pay Employee the Base Salary plus benefits in accordance with Section
      4(c), for six months after
termination.




(d)           This
Section 6 sets forth the only obligations of the Company with respect to the
termination of Employee’s employment with the Company, and Employee acknowledges
that upon the termination of his employment, he shall not be entitled to any
payments or benefits which are not explicitly provided in this
Agreement.  Any and all Accrued Obligations shall be paid within
fifteen (15) days of the termination of Employee’s employment.




7.
            Covenant Regarding
      Innovations and Copyrights.




(a)           Employee
hereby acknowledges that all Innovations (as defined below) created by Employee
(either working alone or as part of a group) that are used, useful or useable in
connection with the Business or future business of the Company which (i) were or
will be made using equipment, supplies, facilities or trade secret information
of the Company, or (ii) were or will be developed at least in part on the
Company’s time, or (iii) relate at the time of conception or reduction to
practice thereof either to the Business or the future business of the Company or
to the Company’s actual or demonstrably anticipated research or development, or
(iv) result from any work that Employee performs or performed for the Company,
were created at the request of the Company pursuant to this Agreement or other
arrangement (written or unwritten) between the Company and
Employee.  The term “Innovations” shall include all of the results and
proceeds of Employee’s services under this Agreement, including without
limitation, all right, title and interest in any inventions, know-how,
discoveries, improvements, original works of authorship, designs, software,
source code, object code, programs, formulas, processes, developments, trade
secrets, trademarks, copyrights, service marks, logos and related proprietary
information and materials, whether patentable, copyrightable, subject to
trademark registration, or not, and all drafts, prototypes, proposals, sketches,
revisions and demonstration and “beta” versions thereof, written, created,
developed or produced or to be written, created, developed or produced, by
Employee (either working alone or as part of a group) in connection
therewith.









(b)           Employee
hereby acknowledges that the Innovations were specifically ordered or
commissioned by the Company.  Employee hereby irrevocably assigns to
the Company all right, title and interest in and to all Innovations and all
right, title and interest in and to all patents, domain names, trade secrets,
trademarks and other intellectual property derived therefrom, such assignment to
be effective when first capable of being so assigned, transferred or
vested.  All Innovations shall be delivered to the Company as required
herein or on termination or completion of the Agreement, whichever is earlier,
unless the Company requests otherwise.  To the extent that any
Innovation is or shall be a copyrightable work, Employee agrees that such
Innovation constitutes and shall constitute a work-made-for-hire as defined in
the United States Copyright Act of 1976; that the Company is and shall be the
author of said work-made-for-hire and the owner of all rights in and to such
Innovation throughout the universe, in perpetuity and in all languages, for all
now known or hereafter existing uses, media and forms, including, without
limitation, the copyrights therein and thereto throughout the universe for the
initial term and any and all extensions and renewls thereof; and that the
Company or its designees shall have the right to make such changes therein and
such uses thereof as it may deem necessary or desirable.  To the
extent that such copyrightable Innovation is not recognized as a
work-made-for-hire, Employee hereby irrevocably assigns, transfers and conveys
to the Company or its designees, without reservation, all of his right, title
and interest throughout the universe in perpetuity in such Innovation,
including, without limitation, all rights of copyright and copyright renewal in
such Innovation or any part thereof, and all rights to exclusively or
non-exclusively license or sublicense the foregoing.


(c)           Employee
hereby waives all rights of “droit moral” or “moral rights of authors” or any
similar rights or principles of law which Employee may now or later have in the
Innovations.  Employee warrants and represents that each Innovation is
and shall be new and original with Employee and not an imitation or copy of any
other material, and that each of the Innovations does not and shall not violate
or infringe upon any common law or statutory right of any party including,
without limitation, contractual rights, copyrights, trademarks, patents, service
marks and rights of privacy, publicity, or any other right of any person or
entity and is not the subject of any litigation or claim that might give rise to
litigation.




(d)           By
execution hereof, Employee hereby irrevocably constitutes and appoints the
Company or its designee with full power of substitution, to be Employee’s true
and lawful attorney to execute, acknowledge, swear and file all instruments and
documents, and to take any action which shall be deemed necessary, appropriate
or desirable to effectuate the terms of this Section 7.  The powers of
attorney granted herein shall be deemed to be coupled with an interest and shall
be irrevocable and survive the occurrence of Employee’s death, disability or
bankruptcy.




8.
            Protection of
      Confidential Information.




Employee
acknowledges that he has been and will be provided with information about, and
his employment by the Company will, throughout the Term, bring him into close
contact with, many confidential affairs of the Company, including proprietary
information about costs, profits, customers, suppliers, vendors, advertisers,
markets, sales, products, key personnel, pricing policies, operational methods,
technical processes and other business affairs and methods, plans for future
developments and other information not readily available to the public,
regardless of whether obtained or known by Employee prior to the date of this
Agreement (“Confidential Information”), all of which are highly confidential and
proprietary and all of which were or will be developed by the Company at great
effort and expense.  Employee further acknowledges that the services
to be performed by him under this Agreement are of a special unique, unusual,
extraordinary and intellectual character, that the Business will be conducted
throughout the world (the “Territory”), that the Company’s services and products
will be marketed throughout the Territory, that the Company competes and will
compete in nearly all of its business activities with other entities which are
located in nearly any part of the Territory and that the nature of the
relationship of Employee with the Company is such that Employee is capable of
competing with the Company from nearly any location in the
Territory.  In recognition of the foregoing, Employee covenants and
agrees during and after the Term he will:





i.      keep
secret all Confidential Information and not divulge or disclose any Confidential
Information to anyone outside of the Company, either during or after the Term,
except with the Company’s prior written consent;




ii.     not
make use of any of such Confidential Information for his own purposes or the
benefit of anyone other than the Company; and




iii.    deliver
promptly to the Company or its designees on termination of this Agreement, or at
any time the Company may so request, all confidential memoranda, notes, records,
reports and other confidential documents (and all copies thereof) relating to
the Confidential Information and/or business of the Company, which he may then
possess or have under his control.




Notwithstanding the foregoing, the term
“Confidential Information” shall not include any information (i) which is
already known by Employee (other than by virtue of his previous employment by
the Company) or which is or becomes publicly known through no wrongful act of
Employee, (ii) which is rightfully received by Employee from any third party,
provided that such third party was not known by Employee after due inquiry to be
bound by a confidentiality agreement with or other contractual, legal or
fiduciary obligation of confidentiality with respect to such information, (iii)
which is disclosed by the Company to any third party without similar
restriction, or (iv) which is disclosed by Employee pursuant to applicable law
or the order of any court of competent jurisdiction.




9.
            Restriction of
      Competition; Interference; and
  Non-Solicitation.




a)           As
a significant inducement to the Company to enter into and perform its
obligations under this Agreement, during the Term and until the first
anniversary of the termination or expiration of the Term or any extension
hereof, for any reason, Employee will not, either directly or indirectly, alone
or in association with others:




i.      solicit,
or permit any person or entity directly or indirectly to solicit, any individual
who at the time of the solicitation is, or who within the one (1) year period
prior to such solicitation was, an employee of the Company to leave the employ
of the Company or terminate his or her employment relationship with the Company,
or hire or attempt to hire or induce, any employee or employees of the Company
to terminate their employment with, or otherwise cease their relationship with,
the Company;




ii.     solicit,
divert or take away, or attempt to divert or to take away, the business or
patronage of any of the clients, customers, vendors or accounts, or prospective
clients, customers, vendors or accounts of the Company;




iii.    engage
or assist others in organizing or engaging any place in the world in any
business which develops, manufactures, promotes or distributes (i) products that
are competitive with the Company, (ii) products or services which are marketed
or under active development by the Company (iii) products with trade dress of or
confusingly similar to products of the Company or (iv) products intended for end
user markets of the Company (or essentially equivalent products) (a “Competing
Business”), whether such engagement shall be as a director, officer, employee,
consultant, advisor, agent, lender, guarantor, surety, investor, promoter,
stockholder, shareholder, partner, member or other owner, affiliate or other
participant in, or otherwise exercising control over, any Competing Business, or
allow Employee’s name to be used in connection with a Competing Business;
provided that Employee shall not be deemed to engage in a Competing Business
solely by reason of passive ownership of less than 5% of the outstanding stock
of any publicly traded entity;





iv.    assist
others in organizing or engaging in any Competing Business in any capacity or
manner described in clause (iii) above;




v.     induce
any client, customer, vendor, agent or other person or entity with whom or which
the Company has a business relationship, contractual or otherwise, to terminate
or alter such business relationship; or




vi.    take
any action reasonably likely to cause injury to the relationship between the
Company or any of its respective employees and any client, lessor, lessee,
vendor, supplier, customer, distributor, employee, consultant or other business
associate of the Company or any of its affiliates as such relationship relates
to the Company’s conduct of business.




b)           In
addition, neither during the Term nor at any time thereafter shall Employee
disparage the Company, any director, officer, employee or shareholder of the
Company, or any affiliate of any such director, officer, employee or shareholder
of the Company by making (or causing others to make) any oral or written
statements or representations that could reasonably be construed to be a false
and misleading statement of fact or a libelous, slanderous or disparaging
statement of or concerning any of the aforementioned persons.




10.
            Specific
      Remedies.




a)           It
is understood by Employee and the Company that the covenants contained in this
Section 10 and in Sections 7, 8, and 9 hereof are essential elements of this
Agreement and that, but for the agreement of Employee to comply with such
covenants, the Company would not have agreed to enter into this Agreement or
consummate the transactions contemplated by the Stock Purchase
Agreement.  The Company and Employee have independently consulted with
their respective counsel and have been advised concerning the reasonableness and
propriety of such covenants with specific regard to the nature of the business
conducted by the Company and all interests of the Company and its
stockholders.  Employee agrees that the covenants of Sections 7, 8 and
9 are reasonable and valid.  If Employee commits a breach of any of
the provisions of Sections 7, 8, or 9 hereof, such breach shall be deemed to be
grounds for termination for Cause.  In addition, notwithstanding the
provisions of Sections 8 and 9, Employee acknowledges that the Company will have
no adequate remedy at law if he violates any of the terms
hereof.  Employee therefore understands and agrees that the Company
shall have without prejudice as to any other remedies:




i.      the
right upon application to any court of proper jurisdiction to a temporary
restraining order, preliminary injunction, injunction, specific performance or
other equitable relief; and





ii.     the
right apply to any court of proper jurisdiction, to require Employee to account
for and pay over all compensation, profits, monies, accruals, increments and
other benefits (collectively the “Benefits”) derived or received by Employee as
a result of any transaction constituting a breach of any of the provisions or
Sections 8 or 9, and, if a court so orders, Employee hereby agrees to account
for and pay over such Benefits to the Company.




11.
            Independence;
      Severability and
Non-Exclusivity.




Each of
the rights enumerated in Sections 7, 8, or 9 hereof and the remedies enumerated
in Section 10 hereof shall be independent of the others and shall be in addition
to and not in lieu of any other rights and remedies available to the Company at
law or in equity.  If any provision of this Agreement, or any part of
any of them, is hereafter construed or adjudicated to be invalid or
unenforceable, the same shall not affect the remainder of the covenants or
rights or remedies which shall be given full effect without regard to the
invalid portions.  If any covenant set forth herein is held to be
invalid or unenforceable because of the duration of such provision or the area
covered thereby, the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of such provision and in
its reduced form said provision shall then be enforceable.  No such
holding of invalidity or unenforceability in one jurisdiction shall bar or in
any way affect the Company’s right to the relief provided in Section 10 or
otherwise in the court of any other state or jurisdiction within the
geographical scope of such covenants as to breaches of such covenants in such
other respective states or jurisdictions, such covenants being, for this
purpose, severable into diverse and independent covenants.




12.
            Conflicting
      Agreements.




Employee
hereby represents that he is not bound by the terms of any agreement with any
previous employer, or with any other party, that would impair his right or
ability to enter the employ of the Company or perform fully his obligations
pursuant to this Agreement.  Employee further represents and warrants
that his performance of all the terms of this Agreement and as an executive of
the Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.




13.
            Successors; Binding
      Agreement.




This
Agreement is personal to Employee and without the prior written consent of the
Company shall not be assignable by Employee otherwise than by will or the laws
of descent and distribution.  The Company shall be permitted to freely
assign its rights, interests and obligations to any parent, subsidiary or
affiliate, or to any other third party, which acquires all or substantially all
of the stock or assets of the Company.  This Agreement shall inure to
the benefit of and be enforceable by Employee’s legal
representatives.




14.
            Notices.




Any
notice or other communications required or permitted hereunder shall be in
writing and shall be deemed effective (i) upon personal delivery, if delivered
by hand and followed by notice by mail or facsimile transmission, (ii) three (3)
days after the date of deposit in the mails, if mailed by certified or
registered mail (return receipt requested), or (iii) on the next business day,
if mailed by an overnight mail service to the parties or sent by facsimile
transmission,





To the
Company:




Cyalume
Technologies, Inc.


96
Windsor Street


West
Springfield, Massachusetts 01089


Attention:  ____________________


Facsmile
No:  _________________





with
copies to:





Katten
Muchin Rosenman LLP


575
Madison Avenue


New York,
New York 10022-2585


Attention:  Murray
D. Schwartz, Esq.


Facsimile
No:  (212) 940-8776





To
Employee:




Thomas C.
McCarthy


58
Falmouth


Longmeadow,
MA  01106


Attention:  ____________________


Facsmile
No:  _________________





or at
such other address or telecopy number (or other similar number) as either party
may from time to time specify to the other.  Any notice, consent or
other communication required or permitted to be given hereunder shall have been
deemed to be given on the date of mailing, personal delivery or telecopy or
other similar means (provided the appropriate answer back is received) thereof
and shall be conclusively presumed to have been received on the second business
day following the date of mailing or, in the case of personal delivery or
telecopy or other similar means, the day of delivery thereof, except that a
change of address shall not be effective until actually received.





15.
            Headings.




The
headings of this Agreement are for convenience of reference only and shall not
affect in any manner any of the terms and conditions thereof.




16.
            Acts and
      Documents.




The
parties agree to do, sign and execute all acts, deeds, documents and corporate
proceedings necessary or desirable to give full force and effect to this
Agreement.




17.
            Counterparts.




This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
agreement.





18.
            Modifications and
      Waivers.




No term,
provision or condition of this Agreement may be modified or discharged unless
such modification or discharge is authorized by the Board of Directors of the
Company and is agreed to in writing and signed by Employee.  No waiver
by either party hereto of any breach by the other party hereto of any term,
provision or condition of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.




19.
            Entire
      Agreement.




This
Agreement constitutes the entire agreement between the parties with respect to
the subject matter herein and supersedes all prior agreements, negotiations and
discussions between the parties hereto, there being no extraneous
agreements.  This Agreement may be amended only in writing executed by
the parties hereto affected by such amendment.




20.
            Law
      Governing.




Except as
otherwise explicitly noted, this Agreement shall be governed by and construed in
accordance with the laws of the State of New York (without giving effect to the
principles of conflicts of law).




IN
WITNESS WHEREOF, the parties hereto have executed this Employment Agreement on
the day and year set forth above.




/s/
      Thomas C. McCarthyThomas
      C. McCarthyCYALUME TECHNOLOGIES, INC.By:
                  /s/
      Michael BielonkoName:
                  Michael
      BielonkoTitle:
                  Chief
      Financial Officer