UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K / A


(Amendment
No. 1)




x
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
              For
      the fiscal year ended December 31,
2008




or




 ̈
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
              For
      the transition period from – to -





Cyalume Technologies
      Holdings, Inc.(Exact name of
      registrant as specified in its
charter)





Delaware
            
            000-52247
            
            20-3200738(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (Commission
      File Number)
            
            (I.R.S.
      Employer
              Identification
      No.)




96
Windsor Street, West Springfield, Massachusetts 01089


(address
of principal executive offices)  (Zip Code)




Registrant’s telephone
number, including area code:(413)
858-2500




Securities registered
pursuant to Section 12(b) of the Act: None


Securities registered
pursuant to Section 12(g) of the Act:




Title of each class
            Name of each exchange on which
      registeredCommon
      Stock, $0.001 par
      value
            Over-the-Counter
      Bulletin BoardCommon Stock Purchase
      Warrants
            Over-the-Counter
      Bulletin BoardUnits consisting of one
      share of Common Stock and one Common Stock Purchase
      Warrant
            Over-the-Counter
      Bulletin Board




Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.     Yes ̈Nox




Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.  Yes ̈Nox




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.                                             YesxNo ̈




1




Indicate by check mark if
disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈




Indicate by check mark if 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.





Large Accelerated
      Filer ̈
            
            
            Accelerated
      Filer   ̈Non-Accelerated Filer ̈
            
            
            Smaller
      reporting company  x(Do
      not check if a smaller reporting company)




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




Yes ̈       Nox





The aggregate market value of Common
Stock held by non-affiliates of the registrant (7,312,500 shares) based on
the last reported sale price of the registrant’s Common Stock on the OTCBB on
June 30, 2008, which was the last business day of the registrant’s most recently
completed second fiscal quarter, was $55,209,375. For purposes of this
computation, all officers, directors, and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
to be an admission that such officers, directors, or 10% beneficial owners are,
in fact, affiliates of the registrant.




As of April 13, 2009, there were
outstanding 15,302,774 shares of the registrant’s Common Stock, par value $.001
per share.





DOCUMENTS
INCORPORATED BY REFERENCE:





Portions
of the Registrant’s proxy statement for the 2009 Annual Meeting of Shareholders,
which is to be filed subsequent to the date hereof, are incorporated by
reference into Items 10 through 13 of this Form 10-K.





2





EXPLANATORY
NOTE





This
Amendment No. 1 (the “Amendment”) on Form 10-K/A to the Annual Report on Form
10-K (the “Initial Filing”) of Cyalume Technologies Holdings, Inc. (“Cyalume”)
for the year ended December 31, 2008, which was filed with the Securities and
Exchange Commission on  March 30, 2009, is being filed solely for the
limited purpose of making technical corrections to the dates included in the
opinions of our independent registered accounting firm, CCR LLP, to include the
CCR LLP office location in the opinions found on pages F-2, F-3, S-1, S-2 and in
Exhibit 23.1 of this filing and to correct the number of stock options
authorized by the Board of Directors in Footnote 25.





Pursuant
to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), we have filed the certifications required by Rule 13a-14(a) or
15d-14(a) of the Exchange Act.





Except as
contained herein, this Amendment does not modify or update disclosures contained
in the Initial Filing. This Amendment should be read in conjunction with
Cyalume’s other filings made with the Securities and Exchange Commission
subsequent to the date of the Initial Filing.







ITEM 8.    FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





Selected Quarterly Financial
Data





As a smaller reporting company, we are
not required to provide information typically disclosed under this
item.





Financial
Statements





The information required by this item
may be found beginning on page F-1 of this
Form 10-K/A.








ITEM 15.    EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES





Financial Statements




a(1) Financial statements filed as part
      of this report
              
              Page
  ·
              Consolidated Statements of Income
      for the years ended December 31, 2008 and 2007
              F-5·
              Predecessor Statements of Income
      for the period ended December 19, 2008 and the year ended December 31,
      2007
              F-5·
              Consolidated Balance Sheets at
      December 31, 2008 and 2007
              F-6·
              Predecessor Balance Sheet at
      December 31, 2007
              F-6·
              Consolidated Statements of Changes
      in Stockholders’ Equity and Comprehensive Income for the years ended
      December 31,  2008 and 2007
              F-7·
              Consolidated Statements of Cash
      Flows for the years ended December 31, 2008 and
2007
              F-8·
              Predecessor Statements of Cash
      Flows for the period ended December 19, 2008 and the year ended December
      31, 2007
              F-8




Financial Statement
Schedules


a(2) Schedule II - Valuation and
      Qualifying Accounts
                
                S-3





3




Exhibits




Exhibit
      Number
            
            Description2.1
            
            Stock
      Purchase Agreement dated February 14, 2008 by and among Vector Intersect
      Acquisition Corporation, as the Parent, Cyalume Acquisition Corp., a
      Delaware corporation, as the Purchaser, Cyalume Technologies, Inc. and GMS
      Acquisition Partners Holdings, LLC (1)2.2
            
            Amendment
      No. 1 to Stock Purchase Agreement, dated October 22, 2008
    (2)2.3
            
            Amendment
      No. 2 to Stock Purchase Agreement, dated December 17, 2008
    (3)2.4
            
            Amendment
      No. 3 to Stock Purchase Agreement, dated December 18, 2008
    (3)3.1
            
            Fifth
      Amended and Restated Certificate of Incorporation (3)3.2
            
            By-laws
      (4)4.1
            
            Specimen
      Common Stock Certificate (4)4.2
            
            Specimen Unit Certificate
      (4)4.3
            
            Specimen Warrant Certificate
      (4)4.4
            
            Form of Unit Purchase Option to be
      granted to the representative(4)10.1
            
            Form
      of Stock Escrow Agreement among the Registrant, American Stock Transfer
      & Trust Company and the Initial Stockholders (4)10.2
            
            Form
      of Registration Rights Agreement among the Registrant, the Initial
      Stockholders and the Private Placement Purchasers (4)10.3
            
            Centurion
      Credit Group Master Fund L.P. Note Purchase Agreement dated December 10,
      2008 (5)10.4
            
            Centurion
      Credit Group Master Fund L.P. Letter Agreement dated December 10, 2008
      (5)10.5
            
            Centurion
      Credit Group Master Fund L.P. Escrow Agreement dated December 10, 2008
      (5)10.6
            
            Warrant
      issued to Centurion Credit Group Master Fund L.P. dated December 10, 2008
      (5)10.7
            
            Subscription
      Agreement with Catalyst Equity Management dated September 5, 2008
      (5)10.8
            
            Form
      of Warrant Agreement in favor of Catalyst Private Equity Partners (Israel)
      II, LP (6)10.9
            
            Letter
      Agreement by and between the Registrant and Vector Investment Fund LLC
      dated December 10, 2008 (5)10.10
            
            Employment
      Agreement with Derek Dunaway dated April 1, 2008 (7)10.11
            
            Employment
      Agreement with Michael Bielonko dated January 23, 2006
  (7)10.12
            
            Employment
      Agreement with Thomas McCarthy dated January 23, 2006
  (7)10.13
            
            Employment
      Agreement with Earl Cranor dated January 23, 2006 (7)10.14
            
            TD
      Bank Revolving Credit and Term Loan Agreement dated December 19, 2008
      (7)10.15
            
            TD
      Bank Security and Pledge Agreement dated December 19, 2008
    (7)10.16
            
            TD
      Bank Mortgage, Assignment of Leases and Rents and Security Agreement dated
      December 19, 2008 (7)21.1
            *
            Subsidiaries
      of the Registrant23.1
            *
            Consent
      of CCR LLP, independent registered public accounting
  firm23.2
            *
            Consent
      of Miller, Ellin & Company, LLP, independent registered public
      accounting firm31.1
            *
            Certification of Principal
      Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            *
            Certification of Principal
      Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            *
            Certification of Principal Executive Officer and
      Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002




(1)
            Incorporated by reference to the
      Current Report on Form 8-K dated February 14, 2008 and filed with the
      Commission February 21,
2008.


(2)
            Incorporated by reference to the
      Current Report on Form 8-K dated October 22, 2008 and filed with the
      Commission November 4, 2008.


(3)
            Incorporated by reference to the
      Current Report on Form 8-K dated December 17, 2008 and filed with the
      Commission December 23,
2008.


(4)
            Incorporated by reference to the
      Registration Statement on Form S-1 (File No. 333-127644) filed August 18,
      2005.


(5)
            Incorporated by reference to the
      Current Report on Form 8-K dated December 10, 2008 and filed with the
      Commission on December 16,
2008.


(6)
            Incorporated by reference to the
      Registration Statement on Form S-1 (File No. 333-157827) filed March 11,
      2009


(7)
            Previously
      filed





*
            Filed
    herewith.





4





SIGNATURES




Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




Cyalume
      Technologies Holdings, Inc.Date: April 16,
      2009
              By:
              /s/
      Derek DunawayDerek
      Dunaway, Chief Executive Officer(Principal Executive
      Officer)
  5





INDEX TO FINANCIAL
STATEMENTS


Cyalume Technologies Holdings,
Inc.


Years ended December 31, 2008
and 2007




PageReport
      of Independent Registered Public Accounting Firm
              F-2Report
      of Independent Registered Public Accounting Firm
              F-3Report
      of Independent Registered Public Accounting Firm
              F-4Consolidated
      Financial StatementsConsolidated
      Statements of Income
              F-5Consolidated
      Balance Sheets
              F-6Consolidated
      Statements of Changes in Stockholders' Equity and Comprehensive
      Income
              F-7Consolidated
      Statements of Cash Flows
              F-8Notes
      to Consolidated Financial Statements
              F-9Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule
              S-1Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule
              S-2Schedule II—Valuation
      and Qualifying Accounts
              S-3




F -
1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and




Stockholders
of Cyalume Technologies Holdings, Inc.




We have
audited the accompanying consolidated balance sheet of Cyalume Technologies
Holdings, Inc. (the “Company”) as of December 31, 2008, and the related
consolidated statements of income, stockholders’ equity and comprehensive
income, and cash flows for the year then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cyalume Technologies
Holdings, Inc. as of December 31, 2008, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.







/s/ CCR
LLP


Glastonbury,
Connecticut


March 27,
2009





F -
2




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and




Stockholder
of Cyalume Technologies, Inc. and Subsidiary




We have
audited the accompanying consolidated balance sheet of Cyalume Technologies,
Inc. and Subsidiary (the “Company”) as of December 31, 2007, and the related
consolidated statements of income, and cash flows for the period January 1, 2008
to December 19, 2008 and the year ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cyalume Technologies,
Inc. and Subsidiary as of December 31, 2007, and the consolidated results of
their operations and their cash flows for the period January 1, 2008 to December
19, 2008 and the year ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America.







/s/ CCR
LLP


Glastonbury,
Connecticut


March 27,
2009





F -
3




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Vector
Intersect Security Acquisition Corp.





We have
audited the accompanying balance sheet of Vector Intersect Security Acquisition
Corp. (a corporation in the development stage) as of December 31, 2007 and the
related statements of income, stockholders’ equity and cash flows for the year
ended December 31, 2007 and the period from July 19, 2005 (inception) to
December 31, 2007. These financial statements are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. The Corporation is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Vector Intersect Security
Acquisition Corp. as of December 31, 2007 and the results of its operations and
its cash flows for the year ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.






/s/
Miller Ellin & Company, LLP


April 10,
2008





F -
4




Cyalume
Technologies Holdings, Inc.


(Formerly
Vector Intersect Security Acquisition Corporation)


Consolidated
Statements of Income


(in
thousands, except shares and per share information)




PredecessorFor
      the Period
            
            
            PredecessorFor
      the Year
            
            
            For
      the Year
            
            
            January
      1, 2008
            
            
            For
      theEnded
            
            
            Ended
            
            
            to
            
            
            Year
      EndedDecember
      31,
            
            
            December
      31,
            
            
            December
      19,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
            
            $
            316
            
            
            $
            —
            
            
            $
            40,441
            
            
            $
            39,026Cost
      of goods sold
            
            
            89
            
            
            
            —
            
            
            
            20,389
            
            
            
            19,072Gross
      profit
            
            
            227
            
            
            
            —
            
            
            
            20,052
            
            
            
            19,954Other
      expenses (income):Sales
      and marketing
            
            
            72
            
            
            
            —
            
            
            
            2,922
            
            
            
            3,412General
      and administrative
            
            
            942
            
            
            
            448
            
            
            
            4,072
            
            
            
            6,397Research
      and development
            
            
            43
            
            
            
            —
            
            
            
            1,251
            
            
            
            1,417Interest
      expense (income), net
            
            
            (968
            )
            
            
            (1,347
            )
            
            
            4,788
            
            
            
            6,366Interest
      expense – related party
            
            
            8
            
            
            
            15
            
            
            
            —
            
            
            
            —Amortization
      of intangible assets
            
            
            131
            
            
            
            —
            
            
            
            2,543
            
            
            
            2,612Other
      loss (income), net
            
            
            23
            
            
            
            —
            
            
            
            (1,146
            )
            
            
            (543
            )Total
      other expenses (income)
            
            
            251
            
            
            
            (884
            )
            
            
            14,430
            
            
            
            19,661Income
      (loss) before income taxes
            
            
            (24
            )
            
            
            884
            
            
            
            5,622
            
            
            
            293Provision
      for (benefit from) income taxes
            
            
            (600
            )
            
            
            87
            
            
            
            2,216
            
            
            
            270Net
      income
            
            $
            576
            
            
            $
            797
            
            
            $
            3,406
            
            
            $
            23Net
      income per common share:Basic
            
            $
            0.06
            
            
            $
            0.11Diluted
            
            $
            0.05
            
            
            $
            0.09Weighted
      average shares used to compute net
              income
      per common share:Basic
            
            
            9,550,362
            
            
            
            6,912,329Diluted
            
            
            12,001,471
            
            
            
            8,530,207




The
accompanying notes are an integral part of these consolidated financial
statements.





F -
5




Cyalume
Technologies Holdings, Inc.


(Formerly
Vector Intersect Security Acquisition Corporation)


Consolidated
Balance Sheets


(in
thousands, except shares and per share information)




December 31,
            
            
            December 31,
            
            
            Predecessor
              December 31,2008
            
            
            2007
            
            
            2007AssetsCurrent
      assets:Cash
            
            $
            3,952
            
            
            $
            570
            
            
            $
            5,743Cash
      held in trust
            
            
            —
            
            
            
            58,309
            
            
            
            —Accounts
      receivable, net of allowance for doubtful accounts of $452, $0 and $596 at
      December 31, 2008, 2007 and 2007, respectively
            
            
            3,508
            
            
            
            —
            
            
            
            3,329Inventories,
      net
            
            
            11,447
            
            
            
            —
            
            
            
            8,743Income
      taxes refundable
            
            
            701
            
            
            
            —
            
            
            
            —Deferred
      income taxes
            
            
            317
            
            
            
            —
            
            
            
            553Prepaid
      expenses and other current assets
            
            
            195
            
            
            
            94
            
            
            
            440Totalcurrent
      assets
            
            
            20,120
            
            
            
            58,973
            
            
            
            18,808Property,
      plant and equipment, net
            
            
            7,882
            
            
            
            —
            
            
            
            9,974Goodwill
            
            
            60,896
            
            
            
            —
            
            
            
            24,419Other
      intangible assets, net
            
            
            49,426
            
            
            
            —
            
            
            
            31,805Other
      noncurrent assets
            
            
            188
            
            
            
            —
            
            
            
            385Total
      assets
            
            $
            138,512
            
            
            $
            58,973
            
            
            $
            85,391Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Lines
      of credit
            
            $
            3,500
            
            
            $
            —
            
            
            $
            —Current
      portion of notes payable
            
            
            3,621
            
            
            
            —
            
            
            
            3,152Accounts
      payable
            
            
            3,230
            
            
            
            —
            
            
            
            2,603Deferred
      underwriting costs
            
            
            —
            
            
            
            2,340
            
            
            
            —Accrued
      expenses
            
            
            2,550
            
            
            
            88
            
            
            
            3,592Common
      stock subject to mandatory redemption
            
            
            1,123
            
            
            
            —
            
            
            
            —Notes
      payable and advance due to related parties
            
            
            64
            
            
            
            214
            
            
            
            —Income
      tax payable
            
            
            5
            
            
            
            85
            
            
            
            1,305Total
      current liabilities
            
            
            14,093
            
            
            
            2,727
            
            
            
            10,652Notes
      payable, net of current portion
            
            
            25,581
            
            
            
            —
            
            
            
            37,737Notes
      payable due to related parties, net of current
    portion
            
            
            1,000
            
            
            
            —
            
            
            
            —Deferred
      income taxes
            
            
            9,237
            
            
            
            —
            
            
            
            4,949Derivatives
            
            
            163
            
            
            
            —
            
            
            
            —Asset
      retirement obligation, net of current portion
            
            
            128
            
            
            
            —
            
            
            
            166Total
      liabilities
            
            
            50,202
            
            
            
            2,727
            
            
            
            53,504Common
      stock, subject to possible redemption
            
            
            —
            
            
            
            11,144
            
            
            
            —Commitments
      and contingencies
            
            
            —
            
            
            
            —
            
            
            
            —Stockholders'
      equityPreferred
      stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or
      outstanding
            
            
            —
            
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value; 50,000,000 authorized; 13,719,035 and 9,375,000
      issued and outstanding at December 31, 2008 and 2007, respectively
      (including 1,462,449 shares subject to possible redemption at December 31,
      2007)
            
            
            14
            
            
            
            9
            
            
            
            —Predecessor
      common stock, $.0001 par value; 30,000,000 authorized, issued and
      outstanding 11,555,331 at December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            1Additional
      paid-in capital
            
            
            87,348
            
            
            
            44,440
            
            
            
            34,134Retained
      earnings (accumulated deficit)
            
            
            1,229
            
            
            
            653
            
            
            
            (3,496
            )Accumulated
      other comprehensive income (loss)
            
            
            (281
            )
            
            
            —
            
            
            
            1,248Total
      stockholders’ equity
            
            
            88,310
            
            
            
            45,102
            
            
            
            31,887Total
      liabilities and stockholders' equity
            
            $
            138,512
            
            
            $
            58,973
            
            
            $
            85,391




The
accompanying notes are an integral part of these consolidated financial
statements.




F -
6




Cyalume
Technologies Holdings, Inc.


(Formerly
Vector Intersect Security Acquisition Corporation)


Consolidated
Statements of Changes in Stockholders' Equity and Comprehensive
Income


(in
thousands, except shares)




Common
      Stock
            
            
            Additional
            
            
            Retained Earnings
            
            
            Accumulated Other
            
            
            TotalNumber
      of Shares
            
            
            Amount
            
            
            Paid-In
              Capital
            
            
            (Accumulated
      Deficit)
            
            
            Comprehensive
      Loss
            
            
            Stockholders’
      Equity
            
            
            Comprehensive
      Income (Loss)Balance
      at December 31, 2006
            
            
            1,875,000
            
            
            $
            2
            
            
            $
            23
            
            
            $
            (144
            )
            
            $
            —
            
            
            $
            (119
            )
            
            
            —Issuance
      of common stock -  private placement
            
            
            187,500
            
            
            
            —
            
            
            
            1,500
            
            
            
            —
            
            
            
            —
            
            
            
            1,500
            
            
            
            —Issuance
      of common stock
            
            
            7,312,500
            
            
            
            7
            
            
            
            58,493
            
            
            
            —
            
            
            
            —
            
            
            
            58,500
            
            
            
            —Expenses
      of June 30, 2007 common stock issuance
            
            
            —
            
            
            
            —
            
            
            
            (4,432
            )
            
            
            —
            
            
            
            —
            
            
            
            (4,432
            )
            
            
            —Less:
      proceeds subject to possible redemption of 1,462,499 shares of common
      stock and associated deferred interest
            
            
            —
            
            
            
            —
            
            
            
            (11,144
            )
            
            
            —
            
            
            
            —
            
            
            
            (11,144
            )
            
            
            —Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            797
            
            
            
            —
            
            
            
            797
            
            
            
            797Comprehensive
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            797Balance
      at December 31, 2007
            
            
            9,375,000
            
            
            
            9
            
            
            
            44,440
            
            
            
            653
            
            
            
            —
            
            
            
            45,102Adjustment
      of common stock subject to redemption
            
            
            —
            
            
            
            —
            
            
            
            11,144
            
            
            
            —
            
            
            
            —
            
            
            
            11,144
            
            
            
            —Issuance
      of common stock
            
            
            7,308,428
            
            
            
            8
            
            
            
            56,114
            
            
            
            —
            
            
            
            —
            
            
            
            56,122
            
            
            
            —Issuance
      of warrants in conjunction with Acquisition
            
            
            —
            
            
            
            —
            
            
            
            33
            
            
            
            —
            
            
            
            —
            
            
            
            33
            
            
            
            —Exchange
      of note payable for common stock
            
            
            (93,750
            )
            
            
            —
            
            
            
            (750
            )
            
            
            —
            
            
            
            —
            
            
            
            (750
            )
            
            
            —Estimated
      Acquisition purchase price adjustment (see Note 2)
            
            
            138,165
            
            
            
            —
            
            
            
            1,056
            
            
            
            —
            
            
            
            —
            
            
            
            1,056
            
            
            
            —Exercise
      of warrants
            
            
            79,839
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Common
      stock repurchased
            
            
            (2,948,797
            )
            
            
            (3
            )
            
            
            (23,566
            )
            
            
            —
            
            
            
            —
            
            
            
            (23,569
            )
            
            
            —Common
      stock mandatorily redeemable due to the Acquisition
            
            
            (139,850
            )
            
            
            —
            
            
            
            (1,123
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,123
            )
            
            
            —Foreign
      currency translation adjustments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (179
            )
            
            
            (179
            )
            
            
            (179
            )Unrealized
      loss on cash flow hedges, net of taxes of $61
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (102
            )
            
            
            (102
            )
            
            
            (102
            )Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            576
            
            
            
            —
            
            
            
            576
            
            
            
            576Comprehensive
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            295Balance
      at December 31, 2008
            
            
            13,719,035
            
            
            $
            14
            
            
            $
            87,348
            
            
            $
            1,229
            
            
            $
            (281
            )
            
            $
            88,310




The
accompanying notes are an integral part of these consolidated financial
statements.




F -
7





Cyalume
Technologies Holdings, Inc.


(Formerly
Vector Intersect Security
Acquisition Corporation)


Consolidated
Statements of Cash Flows


(in
thousands, except shares)




PredecessorFor
      the Period
            
            
            PredecessorFor
      the Year
            
            
            For
      the Year
            
            
            January
      1, 2008
            
            
            For
      the YearEnded
            
            
            Ended
            
            
            to
            
            
            EndedDecember
      31,
            
            
            December
      31,
            
            
            December
      19,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Cash
      flows for operating activities:Net
      income
            
            $
            576
            
            
            $
            797
            
            
            $
            3,406
            
            
            $
            23Adjustments
      to reconcile net income to net cash
              provided
      by operating activities:Depreciation
      of property, plant and equipment
            
            
            23
            
            
            
            —
            
            
            
            848
            
            
            
            610Amortization
            
            
            147
            
            
            
            —
            
            
            
            2,865
            
            
            
            2,948Provision
      for deferred income taxes
            
            
            (592
            )
            
            
            —
            
            
            
            1,370
            
            
            
            (1,673
            )Other
      non-cash expenses
            
            
            61
            
            
            
            —
            
            
            
            809
            
            
            
            1,463Changes
      in operating assets and liabilities, net of effect of
              acquisition:Accounts
      receivable
            
            
            936
            
            
            
            —
            
            
            
            (1,201
            )
            
            
            (1,083
            )Inventories
            
            
            (309
            )
            
            
            —
            
            
            
            (1,526
            )
            
            
            (1,648
            )Prepaid
      expenses and other current assets
            
            
            113
            
            
            
            (94
            )
            
            
            224
            
            
            
            (70
            )Restricted
      cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            617Due
      from Vector
            
            
            —
            
            
            
            —
            
            
            
            (995
            )
            
            
            —Accounts
      payable and accrued liabilities
            
            
            (226
            )
            
            
            (114
            )
            
            
            (1,901
            )
            
            
            652Income
      taxes payable, net
            
            
            (87
            )
            
            
            85
            
            
            
            (2,028
            )
            
            
            493Accrued
      interest on notes payable to stockholders
            
            
            18
            
            
            
            6
            
            
            
            —
            
            
            
            —Net
      cash provided by operating activities
            
            
            660
            
            
            
            680
            
            
            
            1,871
            
            
            
            2,332Cash
      flows for investing activities:Payments
      from (to) trust account
            
            
            58,309
            
            
            
            (58,309
            )
            
            
            —
            
            
            
            —Purchases
      of long-lived assets
            
            
            (11
            )
            
            
            —
            
            
            
            (1,508
            )
            
            
            (1,828
            )Remediation
      costs paid relating to asset retirement obligation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (44
            )Purchase
      of CTI common stock, net of cash purchased
            
            
            (28,668
            )
            
            
            —
            
            
            
            —
            
            
            
            —Net
      cash provided by (used in) investing activities
            
            
            29,630
            
            
            
            (58,309
            )
            
            
            (1,508
            )
            
            
            (1,872
            )Cash
      flows from financing activities:Repayment
      of advances from and notes payable to related
    parties
            
            
            (150
            )
            
            
            (167
            )
            
            
            —
            
            
            
            —Proceeds
      from private placement
            
            
            —
            
            
            
            1,500
            
            
            
            —
            
            
            
            —Proceeds
      from initial public offering
            
            
            —
            
            
            
            58,500
            
            
            
            —
            
            
            
            —Payment
      of expenses of offering
            
            
            —
            
            
            
            (1,659
            )
            
            
            —
            
            
            
            —Net
      proceeds from line of credit
            
            
            3,500
            
            
            
            —
            
            
            
            —
            
            
            
            —Payments
      of Predecessor notes payable
            
            
            (40,346
            )
            
            
            —
            
            
            
            (3,495
            )
            
            
            (10,803
            )Proceeds
      from long-term notes payable
            
            
            28,000
            
            
            
            —
            
            
            
            —
            
            
            
            —Proceeds
      from related party notes payable
            
            
            1,000
            
            
            
            —
            
            
            
            —
            
            
            
            —Proceeds
      from issuance of common stock
            
            
            4,750
            
            
            
            —
            
            
            
            —
            
            
            
            —Payments
      to reacquire and retire common stock
            
            
            (23,569
            )
            
            
            —
            
            
            
            —
            
            
            
            —Payment
      of debt issue costs
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (268
            )Investment
      by GMS Acquisition Partners Holdings LLC
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            13,000Net
      cash provided by (used in) financing activities
            
            
            (26,815
            )
            
            
            58,174
            
            
            
            (3,495
            )
            
            
            1,929Effect
      of exchange rate changes on cash
            
            
            (93
            )
            
            
            —
            
            
            
            26
            
            
            
            314Net
      increase (decrease) in cash and cash equivalents
            
            
            3,382
            
            
            
            545
            
            
            
            (3,106
            )
            
            
            2,703Cash,
      beginning of year
            
            
            570
            
            
            
            25
            
            
            
            5,743
            
            
            
            3,040Cash,
      end of year
            
            $
            3,952
            
            
            $
            570
            
            
            $
            2,637
            
            
            $
            5,743




The
accompanying notes are an integral part of these consolidated financial
statements.





F -
8





Cyalume Technologies Holdings,
Inc.


(Formerly
Vector Intersect Security Acquisition Corporation)


Notes to Consolidated Financial
Statements




1.
            BACKGROUND
      AND DESCRIPTION OF BUSINESS





Before
December 19, 2008, we conducted business under the name Vector Intersect
Security Acquisition Corporation (‘‘Vector’’). Vector was a blank check
development stage company, as it had no principal operations. Its objective was
to acquire through merger, capital stock exchange, asset acquisition or
otherwise one or more businesses in the homeland security, national security
and/or command and control industries.





On
December 19, 2008, Vector acquired all of the outstanding ownership units of
Cyalume Technologies, Inc (“CTI”) from GMS Acquisition Partners Holdings, LLC
(“GMS”) (the “Acquisition”). GMS was the sole stockholder in CTI, which also had
a wholly-owned subsidiary (Cyalume Technologies, S.A. or “CTSA”). The
Acquisition is discussed in detail in Note 2. At the Acquisition date, Vector
changed its name to Cyalume Technologies Holdings, Inc (“Cyalume”). In these
financial statements and footnotes Cyalume’s operating results include the
operations of the former Vector for 2007 and 2008 and CTI’s operations after the
Acquisition date. CTI’s operations prior to the Acquisition date are presented
as Predecessor.





CTI
manufactures and sells chemiluminescent products and reflective and
photoluminescent materials to military, commercial and public safety markets.
CTSA is geographically located in France and represents us in certain
international markets, primarily Europe and Asia.





The
accompanying consolidated financial statements include the accounts of Cyalume,
CTI and CTSA and are prepared in accordance with accounting principles generally
accepted in the United States of America.  All significant
intercompany balances and transactions have been eliminated in
consolidation.





2.
            ACQUISITION





Accounting
for the Acquisition follows the requirements of Statement of Financial
Accounting Standards No. 141, Business Combinations(‘‘SFAS
No. 141’’), which requires that purchase accounting treatment of the Acquisition
be reflected as a new basis of accounting, resulting in the adjustment of all
assets and liabilities to their respective fair values as of the acquisition
date. That adjustment to fair value has been determined using the guidance in
SFAS No. 141, whereby the purchase price, including assumed liabilities,
deferred financing and other transaction costs, has been allocated to the fair
value of the tangible and identifiable intangible assets acquired and
liabilities assumed, with the excess allocated to goodwill. The factors that
contributed to a purchase price that resulted in the recognition of goodwill
include (a) CTI’s strong core business position, (b) CTI’s long-term contracts
with significant customers (c) the considerable upside of CTI’s ammunition
business and (d) valuation analyses and metrics compiled independently by
consultants.





The
consideration for the Acquisition consisted of the following (all amounts in
thousands):





Consideration
            
            
            Cash
      Acquired
            
            
            Cash Paid,
      Net of Cash AcquiredCyalume
      equity issued to acquire CTI equity
            
            $
            52,460Cash
      paid for CTI equity and closing costs
            
            
            31,305
            
            
            $
            2,637
            
            
            $
            28,668Assumption
      of debt
            
            
            40,346Liabilities
      incurred for closing costs
            
            
            1,058Total
      consideration
            
            $
            125,169





F -
9




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)




The preliminary allocation of the fair
value of the assets acquired and liabilities assumed in the Acquisition are as
follows (all amounts in thousands):





Cyalume
      Technologies, Inc. (“CTI”)
            
            
            Cyalume
      Technologies, S.A. (“CTSA”)
            
            
            Eliminations
            
            
            TotalCash
            
            $
            2,567
            
            
            $
            70
            
            
            $
            —
            
            
            $
            2,637Accounts
      receivable, net
            
            
            3,730
            
            
            
            1,272
            
            
            
            (450
            )
            
            
            4,552Inventories,
      net
            
            
            9,246
            
            
            
            2,053
            
            
            
            —
            
            
            
            11,299Other
      current assets
            
            
            126
            
            
            
            91
            
            
            
            —
            
            
            
            217Deferred
      income taxes
            
            
            281
            
            
            
            707
            
            
            
            —
            
            
            
            988Property,
      plant and equipment
            
            
            6,214
            
            
            
            1,715
            
            
            
            —
            
            
            
            7,929Developed
      technologies, including patents
            
            
            10,810
            
            
            
            —
            
            
            
            —
            
            
            
            10,810Trade
      name / trademarks
            
            
            7,390
            
            
            
            —
            
            
            
            —
            
            
            
            7,390Customer
      relationships
            
            
            28,870
            
            
            
            2,246
            
            
            
            —
            
            
            
            31,116Non-compete
      agreements
            
            
            293
            
            
            
            —
            
            
            
            —
            
            
            
            293Investment
      in CTSA
            
            
            11,420
            
            
            
            —
            
            
            
            (11,420
            )
            
            
            —Debt
      issue costs, net
            
            
            808
            
            
            
            —
            
            
            
            —
            
            
            
            808Goodwill
            
            
            56,288
            
            
            
            4,535
            
            
            
            —
            
            
            
            60,823Total
      assets
            
            
            138,043
            
            
            
            12,689
            
            
            
            (11,870
            )
            
            
            138,862Accounts
      payable
            
            
            1,615
            
            
            
            919
            
            
            
            (450
            )
            
            
            2,084Accrued
      expenses
            
            
            1,232
            
            
            
            350
            
            
            
            —
            
            
            
            1,582Deferred
      income taxes
            
            
            9,852
            
            
            
            —
            
            
            
            —
            
            
            
            9,852Asset
      retirement obligation
            
            
            175
            
            
            
            —
            
            
            
            —
            
            
            
            175Total
      liabilities
            
            
            12,874
            
            
            
            1,269
            
            
            
            (450
            )
            
            
            13,693Net
      assets
            
            $
            125,169
            
            
            $
            11,420
            
            
            $
            (11,420
            )
            
            $
            125,169





The stock
purchase agreement dated February 14, 2008, as amended, provided for a purchase
price adjustment based on the net amount of our current assets and current
liabilities as of December 19, 2008. We have provided for an additional 138,165
shares of our common stock that is due to the former owners of CTI in the total
consideration of the Acquisition.





The above
purchase price allocation has not been finalized because the valuation of the
intangible assets acquired has not yet been finalized. Any differences between
the amounts reported herein as of December 31, 2008 for developed technologies,
trade name / trademarks, customer relationships and non-compete agreements and
the finalized valuations thereof are not expected to be material.





Pro Forma Financial Summary
(Unaudited)





The following unaudited pro forma
financial summary is presented as if the Acquisition was completed as of January
1, 2007. The pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the Acquisition been consummated on
that date, or of the future operations of the combined entities. The pro forma
results include adjustments for depreciation, intangible asset amortization,
inventory step-up amortization, interest expense, interest income and certain
allowable restructuring costs. The pro-forma results do not exclude significant
nonrecurring items such as the $1.1 million restructuring charge incurred by the
Predecessor in 2008 (see Note 20) and the $2.8 million arbitration award
received by the Predecessor in 2008 (see Note 17).




F -
10




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)





Year
      Ended December 31,2008
            
            
            2007Revenues
      (in thousands)
            
            $
            40,757
            
            
            $
            39,026Net
      income (in thousands)
            
            $
            4,882
            
            
            $
            920Net income per common
      share:Basic
            
            $
            0.51
            
            
            $
            .10Diluted
            
            $
            0.41
            
            
            $
            .08Weighted average shares used to
      compute net income per common share:Basic
            
            
            9,550,362
            
            
            
            9,550,362Diluted
            
            
            12,001,471
            
            
            
            12,001,471





3.
            SIGNIFICANT
      ACCOUNTING POLICIES





Foreign Operations





Accounts of CTSA are translated using
the local currency as the functional currency. Translation gains and losses are
recorded as a separate component of stockholders’ equity. Gains and losses
resulting from transactions which are denominated in other than the functional
currencies are classified as foreign currency gains and losses in the
accompanying consolidated statements of income.




Comprehensive Income





Comprehensive income, as defined by SFAS
No. 130,Reporting
Comprehensive Income,accounts for changes in stockholders’
equity resulting from non-stockholder sources.  All transactions that
would cause comprehensive income to differ from net income have been recorded
and disclosed and relate to (i) the translation of the accounts of our foreignsubsidiary and (ii) the effective portion of hedging
activities.





Use of Estimates





The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.  Estimates are used when accounting for certain items such as
reserves for inventory, accounts receivable and deferred tax assets; assessing
the carrying value of intangible assets including goodwill; determining the
useful lives of property, plant and equipment and intangible assets; and in
determining asset retirement obligations.  Estimates are based on
historical experience, where applicable, and assumptions that we believe are
reasonable under the circumstances.  Due to the inherent uncertainty
involved with estimates, actual results may differ.




Fair Value of Financial
Instruments





Effective
January 1, 2008, we adopted Statement of Financial Accounting Standard No. 157,
Fair Value
Measurements, (“SFAS No. 157”), which establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements.  SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, except as it relates to nonrecurring fair value
measurements of nonfinancial assets and liabilities for which the standard is
effective for fiscal years beginning after November 15, 2008.  SFAS
No. 157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. SFAS No. 157 also requires disclosure
about how fair value is determined for assets and liabilities and establishes a
hierarchy for which these assets and liabilities must be grouped, based on
significant levels of inputs.





Based on
the three hierarchical levels of categorization defined by SFAS No. 157, we have
one financial instrument (interest rate swaps) that requires disclosure under
SFAS No. 157.  As a result, to the extent the adoption of SFAS No. 157 is
required; it did not have a material impact on our consolidated financial
statements.  In addition, we are evaluating the impact of SFAS No. 157
for measuring non-financial assets and liabilities on future results of
operations and financial position.




In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS No. 159”), which
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected would be reported in earnings. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. We have not elected to measure any financial assets or
liabilities at fair value, and therefore, our consolidated financial statements
were not affected by adoption of SFAS No. 159.




F -
11




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


See Note
22 for more information, including a listing of our assets and liabilities
required to be measured at fair value on a recurring basis and where they are
classified within the hierarchy as of December 31, 2008. We have other financial instruments,
such as cash, accounts receivable, accounts payable, accrued expenses and
long-term debt, whose carrying amounts approximate fair
value.





Accounts Receivable





Accounts receivable are recorded at the
aggregate unpaid amount less any allowance for doubtful accounts.  The
allowance is based on historical bad debt experience and the specific
identification of accounts deemed uncollectible. We determine an account
receivable’s delinquency status based on its contractual terms. Interest is not
charged on outstanding balances.  Accounts are written-off only when
all methods of recovery have been exhausted. We control credit risk through
initial credit evaluations and approvals, credit limits, and monitoring
procedures. We perform ongoing credit evaluations of our customers, but do not
require collateral to support accounts receivable.





Inventories





Inventories are stated at the lower of
cost (on a first-in first-out (“FIFO”) method) or net realizable
value.  We periodically review the realizability of our inventory.
Provisions are established for potential obsolescence. Determining adequate
reserves for inventory obsolescence requires management’s judgment. Conditions
impacting the realizability of our inventory could cause actual asset write-offs
to be materially different than the inventory reserve balances as of
year-end.




Property, Plant and
Equipment





Property, plant and equipment are stated
at cost.  Depreciation is computed under the straight-line method over
the estimated useful lives of four to seven years for equipment and 15 to 30
years for buildings and improvements.




Goodwill





We apply the provisions of SFAS No. 142,Goodwill and Other
Intangible Assetsto
goodwill. Goodwill is deemed to have an indefinite life and accordingly, is not
subject to annual amortization.  Goodwill is subject to annual
impairment reviews, and, if conditions warrant, interim reviews based upon its
estimated fair value.  Impairment charges, if any, are recorded in the
period in which the impairment is determined.





Debt Issue Costs





As
required by Accounting Principles Board Opinion No. 21, Interest on Receivables and
Payables, costs paid to lenders to obtain original financing are
presented as discounts on the related debt and are amortized to interest expense
over the term of the related financing, using the effective interest method
(unless the financing is a line of credit, in which case the straight-line
method is used). Such costs paid to third parties are presented as assets and
are amortized to interest expense in the same manner as costs paid to
lenders.





F -
12


Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)





Intangible Assets





Intangible
assets are amortized over their estimated useful lives.  Costs associated
with renewing or extending the terms associated with the intangible assets are
expensed as incurred.  The useful lives used for amortization of the
intangible assets are as follows:




Patents
      and developed technologies
              9
      yearsPurchased
      customer relationships
              12
      -13 yearsNon-compete
      agreements
              2
      years


Trademarks
and trade names have an indefinite life.  The Predecessor amortized these
assets over useful lives ranging from 10 -18 years.





Long-Lived
Assets





Following
the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(“SFAS No. 144”), long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Such reviews are
based on a comparison of the asset’s undiscounted cash flows to the recorded
carrying value for the asset. If the asset’s recorded carrying value exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset, the asset is written-down to its estimated fair value.
To estimate that fair value, we will use the most appropriate valuation
technique for the circumstances and for which sufficient data is
available.





Impairment
charges, if any, are recorded in the period in which the impairment is
determined. Identifiable assets will continue to be amortized over their useful
lives and be reviewed for impairment in accordance with SFAS No.
144.





Derivatives





Derivatives are recorded at their fair
value as of the balance sheet date. On the consolidated statement of cash flows,
cash flows from derivative instruments accounted for as cash flow hedges are
classified in the same category as the cash flows from the items being
hedged.





Common
Stock Purchase Warrants





Pursuant
to Emerging Issues Task Force Issue 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock(“EITF 00-19”), common stock purchase warrants issued by us and currently
outstanding are recorded at initial fair value and reported in stockholders’
equity as increases to additional paid-in capital. These warrants are reported
as equity, rather than liabilities, since they meet EITF 00-19’s
equity-classification requirements, such as (i) the warrants may not be net-cash
settled, (ii) the warrant contract limits the number of shares to be delivered
in a net-share settlement and (iii) we have sufficient unissued common shares
available to settle outstanding warrants. Subsequent changes in fair value from
the warrants’ initial fair value are not recognized as long as the warrants
continue to merit classification as equity.





Revenue
Recognition





Revenue
from the sale of products is recognized when the earnings process is complete
and the risks and rewards of ownership have transferred to the customer. Costs
and related expenses to manufacture the products are recorded as costs of goods
sold when the related revenue is recognized.





We have several significant contracts
providing for the sale of indefinite quantities of items at fixed per unit
prices, subject to adjustment for certain economic factors. Revenue under these
contracts is recognized when goods ordered under the contracts are received by
the customer. Whenever costs change, we review the pricing under these contracts
to determine whether they require the sale of products at a loss. To date, we
have no loss contracts which would require the accrual of future losses in the
current financial statements.





F -
13




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)





Taxes
Collected from Customers





Sales
taxes collected from customers are not considered revenue and are included in
accounts payable and accrued liabilities until remitted to the taxing
authorities.





Shipping and Handling
Costs





Outbound shipping and handling costs are
included in selling expenses in the accompanying consolidated statements of
income.  These costs were $5,000 and nil for the years ended December
31, 2008 and 2007, respectively.  The Predecessor’s shipping and
handling costs for the period ended December 19, 2008 and the year ended
December 31, 2007 were $514,000 and $647,000, respectively.





Advertising
Costs





Advertising costs are expensed as
incurred and are primarily included in selling expenses in the accompanying
consolidated statements of income. Advertising expense was $2,000 and nil for
the year ended December 31, 2008 and 2007, respectively.The Predecessor’s advertising costs for
the period ended December 19, 2008 and the year ended December 31, 2007 were
$83,000 and $129,000, respectively.





Income
Taxes





Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes.  Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to
reverse.  Deferred tax assets are recognized when, based upon
available evidence, realization of the assets is more likely than
not.





We
adopted the provisions of FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) on January
1, 2007.  There were no unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a result of
adopting FIN 48. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.





Our 2005
through 2008 tax years remain subject to examination by the federal and New
Jersey tax authorities.  CTI’s tax years 2005 through 2008 remain
subject to examination by federal and various state tax jurisdictions. CTSA’s
tax years 2006 and 2007 remain subject to examination as the French tax
authorities have completed audits of CTSA’s 2004 and 2005 tax
years.





We
classify interest on tax deficiencies as interest expense and income tax
penalties as other miscellaneous expenses.  For the years ended December
31, 2008 and 2007, interest expense and penalties relating to tax deficiencies
were not significant.





Net Income Per Common
Share





We account for and disclose net income
per common share in accordance with SFAS No. 128,Earnings per
Share. Basic net income per
common share is computed by dividing net income by the weighted average number
of common shares outstanding. Diluted net income per common share is computed by
dividing net income by the weighted average number of common shares and dilutive
potential common share equivalents then outstanding. Potential common shares
consist of shares issuable upon the exercise of warrants (using the treasury
stock method).





F -
14




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


Year Ended December
      31,2008
            
            
            2007Basic:Net income (in
      thousands)
            
            $
            576
            
            
            $
            797Weighted average
      shares
            
            
            9,550,362
            
            
            
            6,912,329Basic income per common
      share
            
            $
            0.06
            
            
            $
            0.11Diluted:Net income (in
      thousands)
            
            $
            576
            
            
            $
            797Weighted average
      shares
            
            
            9,550,362
            
            
            
            6,912,329Effect of dilutive
      warrants
            
            
            2,451,109
            
            
            
            1,617,878Weighted average shares, as
      adjusted
            
            
            12,001,471
            
            
            
            8,530,207Diluted income per common
      share
            
            $
            0.05
            
            
            $
            0.09





The following potentially dilutive
common shares were excluded from the calculation of diluted net income per
common share because their effect was antidilutive for each of the periods
presented:




Year Ended December
      31,2008
            
            2007Warrants
      Issued for Acquisition-Related Costs (see Note 18)
            
            
            100,000
            
            —Other
      Warrants Sold (see Note 18)
            
            
            118,750
            
            —Options(see Note
      18)
            
            
            1,462,500
            
            1,462,500





The
dilutive effect of outstanding warrants as of December 31, 2008 was considered
in computing diluted income per common share. After December 31, 2008, 3,273,494
warrants were exercised, resulting in 1,635,171 common shares being
issued.





Reclassifications





Certain
amounts in the prior year have been reclassified to conform to the 2008
presentation.





Segments





We operate in a single segment as
defined under SFAS No. 131,Disclosures About
Segments of an Enterprise and Related Information.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. We anticipate that the adoption of SFAS
No. 160 will not have a significant impact on our consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133. (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about
an entity’s derivative instruments and hedging activities with a view toward
improving the transparency of financial reporting and is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. SFAS No. 161 encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
Due to our minimal hedging activities and investments in derivatives, we
anticipate that the adoption of SFAS No. 161 will not have a significant impact
on our consolidated financial statements.





In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized asset under SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”). The objective of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other accounting principles generally accepted in
the United States of America. This FSP applies to all intangible assets, whether
acquired in a business combination or otherwise; and shall be effective for
financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years and applied prospectively to
intangible assets acquired after the effective date. Early adoption is
prohibited. We are currently evaluating this new FSP and anticipate that it will
not have a significant impact on our consolidated financial
statements.




F -
15




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


4.
            INVENTORIES





Inventories consist of the
following (all amounts in thousands):




Year Ended December
      31,2008
            
            
            2007
            
            
            (Predecessor)
              2007Raw
    materials
            
            $
            5,822
            
            
            $
            —
            
            
            $
            4,753Work-in-process
            
            
            3,484
            
            
            
            —
            
            
            
            2,316Finished
    goods
            
            
            2,141
            
            
            
            —
            
            
            
            1,674$
            11,447
            
            
            $
            —
            
            
            $
            8,743





Provision
for potential obsolescence was $(2,000) and nil for the years ended December 31,
2008 and 2007, respectively. The Predecessor’s provision for potential
obsolescence was $71,000 and $883,000 for the period ended December 19, 2008 and
for the year ended December 31, 2007, respectively. Such provisions are reported
as adjustments to our cost of goods sold in the accompanying consolidated
statements of income.





5.
            PREPAID
      EXPENSES AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets consist of the following (all amounts in
thousands):




Year Ended December
      31,2008
            
            
            2007
            
            
            (Predecessor)
              2007Value added taxes
      receivable
            
            $
            60
            
            
            $
            —
            
            
            $
            281Prepaid
      expenses
            
            
            127
            
            
            
            94
            
            
            
            131Other
            
            
            8
            
            
            
            —
            
            
            
            28$
            195
            
            
            $
            94
            
            
            $
            440





6.
            PROPERTY, PLANT AND
      EQUIPMENT





Property, plant and equipment consist of
the following (all amounts in thousands):




Year Ended December
      31,2008
            
            
            2007
            
            
            (Predecessor)
              2007Land
            
            $
            1,042
            
            
            $
            —
            
            
            $
            1,382Building and
      improvements
            
            
            3,427
            
            
            
            —
            
            
            
            5,330Machinery and
      equipment
            
            
            3,430
            
            
            
            —
            
            
            
            4,3097,899
            
            
            
            —
            
            
            
            11,021Less: Accumulated
      depreciation
            
            
            17
            
            
            
            —
            
            
            
            1,047$
            7,882
            
            
            $
            —
            
            
            $
            9,974





7.
            GOODWILL





Goodwill
represents the excess of the cost of acquiring CTI over the net fair value
assigned to assets acquired and liabilities assumed. No goodwill existed as of
December 31, 2007.The
Predecessor’s goodwill as of
December 31, 2007 of$24.4
million was due to a previous business combination.




Our
goodwill was not impaired as of December 31, 2008 pursuant to SFAS No. 142,
Goodwill and Other Intangible
Assets due to the December 19, 2008 valuation of goodwill in connection
with the Acquisition.




F -
16




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


8.
            OTHER INTANGIBLE
      ASSETS





Intangible assets as of December 31,
2008 consist of the following (all amounts in thousands):




Cost
            
            
            Accumulated
      Amortization
            
            
            Net Book
    ValueDeveloped technologies, including
      patents
            
            $
            10,810
            
            
            $
            40
            
            
            $
            10,770Trademarks and trade
      names
            
            
            7,390
            
            
            
            —
            
            
            
            7,390Purchased customer
      relationships
            
            
            31,063
            
            
            
            85
            
            
            
            30,978Non-compete
      agreements
            
            
            293
            
            
            
            5
            
            
            
            288$
            49,556
            
            
            $
            130
            
            
            $
            49,426





Trademarks
and trade names have indefinite lives and therefore, they are not amortized. The
Predecessor amortized trademarks over estimated lives of 10-18 years. All other
intangible assets have similar lives to those used by the
Predecessor.





Trademarks
can be renewed without substantial cost. On average, our trademarks renew in
approximately 7 years.





Amortization
of intangible assets was $131,000 and nil for the years ended December 31, 2008
and 2007, respectively. We do not consider any of our intangible assets to have
residual value.We did not have
any intangible assets as of December 31, 2007.





As
required by SFAS No. 144, we reviewed events and circumstances for indications
of possible impairment of the above intangible assets and determined that
testing for possible impairment was not necessary at December 31, 2008 due to
the December 19, 2008 valuation of the assets in connection with the
Acquisition.





The
Predecessor’s intangible assets as of December 31, 2007 consisted of the
following (all amounts in thousands):




Cost
            
            
            Accumulated
      Amortization
            
            
            Net Book
    ValueDeveloped technologies, including
      patents
            
            $
            8,009
            
            
            $
            1,393
            
            
            $
            6,616Trademarks and trade
      names
            
            
            4,255
            
            
            
            453
            
            
            
            3,802Purchased customer
      relationships
            
            
            23,670
            
            
            
            2,829
            
            
            
            20,841Non-compete
      agreements
            
            
            885
            
            
            
            339
            
            
            
            546$
            36,819
            
            
            $
            5,014
            
            
            $
            31,805





The Predecessor’s amortization of
intangible assets was $2.5 million and $2.6 million for the period ended
December 19, 2008 and for the year ended December 31, 2007,
respectively.





The
future amortization expense relating to intangible assets for the next five
years and beyond is estimated at December 31, 2008 to be (all amounts in
thousands):




Year Ending December
      31,2009
            
            $
            3,9222010
            
            
            3,9182011
            
            
            3,7762012
            
            
            3,7762013
            
            
            3,776Thereafter
            
            
            22,868$
            42,036





9.
            OTHER NONCURRENT
      ASSETS





Other noncurrent assets of $188,000
primarily consist of unamortized costs paid to third parties to obtain our
long-term debt and lines of credit (“capitalized debt issue costs”). Such costs
were $185,000 and nil as of December 31, 2008 and 2007, respectively. As of
December 31, 2007, the Predecessor’s unamortized capitalized debt issue costswere $385,000.




Amortization of capitalized debt issue
costs was $2,000 and nil for the years ended December 31, 2008 and 2007,
respectively. The Predecessor’s amortization of capitalized debt issue costs was
$97,000 and $99,000 for the period ended December 19, 2008 and for the year
ended December 31, 2007, respectively.




F -
17




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


The future amortization expense for each
of the five succeeding years and beyond relating to capitalized debt issue costs
is estimated at December 31, 2008 to be (all amounts in thousands):





Year Ending December
      31,2009
            
            $
            532010
            
            
            492011
            
            
            422012
            
            
            252013
            
            
            16$
            185





10.
            LINES
      OF CREDIT




We have a
line of credit with a maximum borrowing capacity of $5.0 million with TD Bank
N.A (“TD Bank”).  Interest is payable monthly and is determined, at
our discretion, based on (i) the Prime Rate, plus 3% (not to be less than 6% in
total) or (ii) an adjusted LIBOR rate (subject to a 3% interest rate floor),
plus a margin percentage that is based on financial performance.  The
line of credit’s interest rate at December 31, 2008 was 6.25%. The line of
credit expires on December 19, 2011. This line of credit is subject to (i) the
same restrictive covenants imposed on and (ii) the same collateral and
guarantees as the Term A Note and Term B Note described in Note 11. At December
31, 2008, there was a $3.5 million outstanding borrowing on this line of
credit.





On May 1,
2007, we entered into a $500,000 revolving credit agreement with SCP Private
Equity Management Company, LLC, (“SCP”), which owns stock in Cyalume and of
which three of our Directors are members. Any amounts outstanding under the
revolving credit agreement bear interest at a rate of 5.5% per year. Any funds
outstanding under the revolving credit agreement were due and payable upon our
consummation of a business combination. We have never borrowed funds under this
revolving credit agreement which expired on the date of the
Acquisition.





CTSA has
lines of credit with a combined maximum borrowing capacity of €1.1 million ($1.5
million as of December 31, 2008), under which there were no outstanding
borrowings at December 31, 2008 and 2007. The lines’ interest rates are
variable, based on the Euro Overnight Index Average and the 3-month Euro
Interbank Offered Rate. The lines are collateralized by substantially all
business assets of CTSA. The lines have indefinite termination dates, but can be
renegotiated periodically.





As of
December 31, 2007, CTI had a line of credit with a maximum borrowing capacity of
$2.0 million.  Interest was determined using the same methodology used to
determine interest on the Predecessor’s Senior Tranche A Note (see Note 11). The
line of credit was collateralized by substantially all assets of CTI. No
borrowings were ever made on this line of credit and it was terminated due to
and on the date of the Acquisition.





11.
            NOTES
      PAYABLE





CTI has
two notes payable to TD Bank; a $25.5 million Term A Note and a $2.5 million
Term B Note, that were entered into in conjunction with the
Acquisition.





The Term
A Note is payable in monthly principal installments ranging from $319,000 to
$468,000, plus monthly interest payments as described below, that commence on
February 1, 2009, with a final principal payment of $2.8 million at maturity
(December 19, 2013). Interest payments on the 60% of the Term A Note’s principal
balance are hedged using a pay-fixed, receive-variable interest rate swap to
reduce exposure to changes in cash payments caused by changes in interest rates
on the Term A Note.  See Note 15 for details on the interest rate
swap. Interest on 60% interest rate-swapped portion of the Term A Note is
payable monthly and determined based on 1-month LIBOR, plus a margin percentage
that is based on financial performance. At December 31, 2008, interest on that
portion of the Term A Note was 5.08%, before considering the effect of the
interest rate hedging relationship. Interest on the remaining 40% of the Term A
Note is also payable monthly and is determined based on 1-month LIBOR (subject
to a 3% interest rate floor) plus a margin percentage that is based on our
financial performance. At December 31, 2008, that portion of the Term A Note was
7.5%. The Term A Note is collateralized by all of the assets of CTI (except
CTI’s equity interests in CTSA, of which only 65% are collateral of the Term A
Note) and is guaranteed by Cyalume. The Term A Notes require various restrictive
financial and nonfinancial covenants, such as maximum leverage ratios and
limitations on capital expenditures and dividends. Outstanding principal on the
Term A Note is $25.5 million at December 31, 2008.




F -
18


Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


The Term
B Note is payable in monthly principal installments of $10,000, plus monthly
interest payments as described below, that commence on February 1, 2009, with a
final principal payment of $1.9 million at maturity (December 19, 2013).
Interest payments on the Term B Note’s principal balance are hedged using a
pay-fixed, receive-variable interest rate swap to reduce our exposure to changes
in cash payments caused by changes in interest rates on the Term B
Note.  See Note 15 for details on the interest rate swap. Interest is
payable monthly and is determined based on 1-month LIBOR plus a margin
percentage that is based on our financial performance. The Term B Note’s
interest rate at December 31, 2008 was 5.08% before considering the effect of
the interest rate hedging relationship discussed in Note 15. The Term B Note is
collateralized by all of the assets of CTI (except CTI’s equity interests in
CTSA, of which only 65% are collateral of the Term B Note) and is guaranteed by
Cyalume. The Term B Notes require various restrictive financial and nonfinancial
covenants, such as such as maximum leverage ratios and limitations on capital
expenditures and dividends.  Outstanding principal on the Term B Note
is $2.5 million at December 31, 2008.





The Term
A Note, Term B Note and the TD Bank line of credit described in Note 10 are
senior in payment priority to all of our other notes payable described here and
in Note 10.





We have a
$1.8 million note payable to our underwriter that was entered into in
conjunction with the Acquisition. The note bears an interest rate of 8%, which
is paid-in-kind (added to the unpaid principal balance of the note) quarterly.
The note is unsecured and all principal and accrued interest is payable at
maturity (June 30, 2014).  Outstanding principal on this note is $1.8
million at December 31, 2008.  See Note 12 for further discussion of
this note.





As of
December 31, 2008, future minimum payments due for long-term debt for each of
the five succeeding years and beyond are as follows (all amounts in
thousands):




Year Ending December
      31,2009
            
            $
            3,6212010
            
            
            4,1842011
            
            
            4,6732012
            
            
            5,1822013
            
            
            10,340Thereafter
            
            
            1,81829,818Less: unamortized debt
      discount
            
            
            (616
            )$
            29,202





Amortization
of the debt discount was $4,000 and nil for the years ended December 31, 2008 and 2007,
respectively. The Predecessor’s amortization of debt discount was $225,000 and
$237,000 for the period ended December 19, 2008 and for the year ended December
31, 2007, respectively.





CTSA had
a mortgage loan with a bank, which was due in monthly installments of €7,000
($10,000), including interest. The loan bore interest at a fixed rate of 5.95%
per year. The mortgage loan was collateralized by the real property of
CTSA.  The loan was repaid in full during 2008.





In 2006,
we issued two notes with an aggregate principal amount of $144,000 to
SCP.  The notes bore interest at a rate of 5.5% per annum, with
principal and accrued interest due no later than April 24, 2008 (the first
anniversary of the initial public offering). We repaid these notes in full
during 2007.





Before
the Acquisition, CTI had notes payable to various lenders with a total original
principal amount of $53.0 million. These notes payable consisted of $27.5
million Senior Tranche A Notes, $12.5 million Senior Tranche B Notes and $13.0
million Subordinated Notes.  The Senior Tranche A Notes were senior in
payment priority to the Senior Tranche B Notes, which were all senior in payment
priority to the Subordinate Notes. All of these notes were paid in full in
conjunction with the Acquisition.




The
Senior Tranche A Notes were payable in quarterly principal installments of
$700,000, which commenced on April 23, 2006 and were scheduled to end on October
23, 2010 (except for (a) April 23, 2007, on which a $10.0 million principal
payment was required and (b) July 23 and October 23, 2007 and January 23, 2008,
on which no principal payments were required) with one final payment of $7.0
million due on January 23, 2011. Outstanding principal was $14.7 million at
December 31, 2007. Interest was also payable quarterly and was determined based
on the unpaid principal balance at a margin percentage that was based on
financial performance, plus either (a) the greater of (i) the Prime Rate or (ii)
the Federal Funds Effective Rate, plus 0.5% or (b) the average British Bankers
Association Interest Settlement Rate (adjusted for certain Federal Reserve
System reserves) until the note was repaid in full.  The interest rate
charged as of December 31, 2007 was 8.80%. The Senior Tranche A Notes were
collateralized by substantially all assets of CTI and required various
restrictive financial and nonfinancial covenants, such as minimum EBITDA
thresholds, maximum leverage ratios and a restriction on dividends. In January
2008, CTI reached an arbitration settlement with the Sellers (see Note 17)
pursuant to which CTI received $3.0 million in cash. A provision of the debt
agreements required CTI to make an additional one-time principal payment equal
to the amount of any settlement received, less direct third-party costs incurred
in pursuit of the settlement. Accordingly, in May 2008 a principal payment of
$950,000 was made on the Senior Tranche A Notes in addition to the principal
payments described above.




F -
19




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)




TheSenior Tranche B Notes were
originally payable in one principal installment of $12.5 million on July 23,
2011. Interest was payable quarterly andwas determined based on the unpaid
principal balance at a margin percentage that was based on CTI’s financial
performance plus either (a) the greater of (i) the Prime Rate or (ii) the
Federal Funds Effective Rate, plus 0.5% or (b) the average British Bankers
Association Interest Settlement Rate (adjusted for certain Federal Reserve
System reserves) until the notes were repaid in full. The interest rate charged
as of December 31, 2007 was 13.9%. The Senior Tranche B Notes were
collateralized by substantially all assets of CTI and required various
restrictive financial and nonfinancial covenants, such as minimum EBITDA
thresholds, maximum leverage ratios and a restriction on
dividends.




The
Subordinated Notes bore interest at 15.5% (11% of which was payable quarterly in
cash, while the remaining 4.5% was paid-in-kind (added to the unpaid principal
balance of the Subordinated Notes) and was determined based on the unpaid
principal balance. The Subordinated Notes were originally payable in one
principal installment of $13.0 million plus all paid-in-kind interest on January
23, 2012.  Outstanding principal, including paid-in-kind interest, was
$14.1 million at December 31, 2007. The Subordinated Notes were collateralized
by substantially all assets of CTI.





12.
            DEFERRED
      UNDERWRITING COSTS





On April
25, 2007, we completed a private placement (the ‘‘Private Placement’’) and
received gross proceeds of $1.5 million. On May 1, 2007, we consummated our
initial public offering and received gross proceeds of $58.5 million. Of the
combined gross proceeds of $60.0 million, $2.3 million would be paid for
deferred underwriting compensation fees to Rodman & Renshaw, LLC (“Rodman”)
if, and only if, we acquired a target business and 100% of the shares voted
approved the acquisition. On December 19, 2008, we acquired CTI with less than
100% of shares  voting to approve the Acquisition (as discussed in
Note 2) and therefore $2.1 million of these fees became payable to Rodman.
Before December 19, 2008, however, as full payment of these costs, Rodman
accepted a cash payment of $250,000, $1.1 million in deferred underwriting fees
and 93,750 shares of our common stock.  On December 30, 2008, Rodman
exchanged the deferred underwriting fee obligation and the 93,750 shares in
exchange for the $1.8 million note payable described in Note 11.





13.
            ACCRUED
      EXPENSES





Accrued expenses consist of the
following (all amounts in thousands):




Year Ended December
      31,2008
            
            
            2007
            
            
            (Predecessor)
              2007Payroll
            
            $
            1,649
            
            
            $
            —
            
            
            $
            1,260Interest
            
            
            107
            
            
            
            —
            
            
            
            918Professional
      fees
            
            
            357
            
            
            
            —
            
            
            
            598Other
            
            
            437
            
            
            
            88
            
            
            
            816$
            2,550
            
            
            $
            88
            
            
            $
            3,592




F -
20





14.
            NOTES
      PAYABLE AND ADVANCE DUE TO RELATED
PARTIES





There are
seven unsecured notes payable to six stockholders at December 31,
2008.





Four of
these notes were entered into December 19, 2008, and are payable to Messrs.
Yaron Eitan, Winston Churchill, Thomas Rebar and Wayne Weisman (partners of SCP)
in principal amounts of $150,000, $650,000, $100,000 and $100,000,
respectively.  Each note bears interest at 6%, which is calculated
quarterly and paid in-kind (added to the unpaid principal balance). These notes
are payable in one combined installment of $1.0 million, plus all paid-in-kind
interest on June 19, 2014. At December 31, 2008, outstanding principal on these
notes totaled $1.0 million.





The
remaining three notes are payable to two stockholders (Messrs. Isaac Applbaum
and Marc Abramowitz) in original principal amounts totaling $118,000 and
$87,000, respectively. Each note bears interest at 4% and is calculated on an
annual basis.  These three notes were due to be paid in 2006, but
under mutually satisfactory arrangement, remain unpaid.  At December
31, 2008 the total outstanding balance on these notes is $55,000.





In 2006,
a stockholder advanced us a total of $32,000 to pay operating expenses. We
repaid $23,000 to the stockholder in 2007. The amount outstanding at December
31, 2008 of $9,000 is non-interest bearing and due on demand.





15.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





Simultaneous
with the Acquisition and the incurrence of the Term A Note and Term B Note
discussed in Note 11, we entered into two pay-fixed, receive-variable, interest
rate swaps to reduce exposure to changes in cash payments caused by changes in
interest rates on the Term A Note and the Term B Note. Both relationships are
designated as cash flow hedges and meet the criteria for the shortcut method for
assessing hedge effectiveness; therefore, the hedge is assumed to be 100%
effective and all changes in the fair value of the interest rate swaps are
recorded in consolidated other comprehensive income. See Note 18 for a
description of changes in accumulated other comprehensive income due to
derivatives and hedging activities. Such changes were due to unrealized losses
on the interest rate swaps. These unrealized losses must be reclassified in
whole or in part into earnings if, and when, a comparison of the swap(s) and the
related hedged cash flows demonstrates that the shortcut method is no longer
applicable. We expect these hedges to meet the criteria of the shortcut method
for the duration of the hedging relationship and therefore we do not expect to
reclassify any portion of these unrealized losses from consolidated other
comprehensive income to earnings in the future.





The fair
value of these interest rate swaps at December 31, 2008 is $(163,000) and is
presented as a liability on our consolidated balance sheet. The fair values of
the swaps were determined by discounting the estimated cash flows to be received
and paid due to the swaps over the swap’s contractual life using an estimated
risk-free rate for each swap settlement date.





We did
not hold any derivative instruments before the Acquisition and have not engaged
in any other hedging activities.





16.
            ASSET
      RETIREMENT OBLIGATION





As part
of the Acquisition, we assumed CTI’s asset retirement obligation associated with
remediation of certain known occurrences of asbestos at the manufacturing
facility in West Springfield, Massachusetts.





The
significant assumptions used to estimate the obligation are:





Annual inflation
      rate
            
            
            5.01
            %Credit-adjusted risk-free
      rate
            
            
            5.37
            %


Range of estimated remediation
      completion dates
            September 30, 2007 to September
      30, 2015


Initial estimated remediation
      costs (undiscounted and not adjusted for inflation)
            
            $
            200,000





F -
21




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


The
following is a reconciliation of the beginning and ending aggregate carrying
amounts of asset retirement obligation for the years ended December 31, 2008 and
2007 (all amounts in thousands):




Year Ended December
      31,
            
            
            (Predecessor)
              For
      the Period2008
            
            
            2007
            
            
            (Predecessor)
              2007
            
            
            January
      1, 2008 to December 19, 2008Balance,
      beginning
            
            $
            —
            
            
            $
            —
            
            
            $
            200
            
            
            $
            166Liability assumed at
      Acquisition
            
            
            175
            
            
            
            —
            
            
            
            —
            
            
            
            —Additional liabilities
      incurred
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Liabilities
      settled
            
            
            —
            
            
            
            —
            
            
            
            (44
            )
            
            
            —Accretion
      expense
            
            
            1
            
            
            
            —
            
            
            
            10
            
            
            
            9Revisions in estimated cash
      flows
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Balance,
    ending
            
            $
            176
            
            
            $
            —
            
            
            $
            166
            
            
            $
            175





Accretion
expense on the asset retirement obligation is included in general and
administrative expenses in the accompanying consolidated statements of
income.





As of
December 31, 2008, future settlement payments for each of the five succeeding
years and beyond are estimated to be as follows (all amounts in
thousands):




Year Ending December
      31,2009
            
            $
            482010
            
            
            —2011
            
            
            522012
            
            
            —2013
            
            
            58Thereafter
            
            
            64Total estimated undiscounted
      payments (adjusted for estimated inflation)
            
            $
            222





The
$48,000 expected to be paid in 2009 per the above table is reported as accrued
expenses in our consolidated balance sheet as of December 31, 2008.





The
difference between the $176,000 liability as of December 31, 2008 and the
estimated undiscounted future payments of $222,000 is the time value of money at
the credit-adjusted risk-free rate of 5.37%.




F -
22




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


17.
            COMMITMENTS
      AND CONTINGENCIES





Operating
Leases with Third Parties





We lease
certain equipment, automobiles and other assets under cancelable and
non-cancelable operating leases.  Expenses associated with these
leases total $3,000 in 2008. There was no expense in 2007.The Predecessor’s lease
expense for such equipment, automobiles and other assets for the period ended
December 19, 2008 and the year ended December 31, 2007 was $52,000 and $14,000,
respectively. Future minimum lease payments under non-cancelable lease
obligations at December 31, 2008 are as follows (all amounts in
thousands):





Year Ending December
      31,2009
            
            $
            362010
            
            
            222011
            
            
            112012
            
            
            92013
            
            
            7Thereafter
            
            
            —$
            85




Operating
Leases with Related Parties





We
previously occupied office space provided by SCP, which had agreed that, until
we acquired a target business, it would make such office space, as well as
certain accounting, office and secretarial services, available to us. We agreed
to pay SCP $8,000 per month for such services commencing April 25, 2007.
Payments made under this agreement were $90,000 for the years ended December 31,
2008 and 2007. Use of this office space and these services ceased in 2008, after
the Acquisition of CTI.





Legal





We do not
expect that the various legal proceedings we are involved in, including those
discussed in the following paragraph, will have a material adverse effect on our
future financial position, operating results, or cash flows.





As
discussed in Note 2, we acquired CTI on December 19, 2008. As part of the
Acquisition we acquired CTI’s exposure to litigation that existed at the
acquisition date. On January 23, 2006, GMS acquired all of the outstanding
capital stock of Omniglow Corporation (the “Transaction”) and changed the name
of the company to Cyalume Technologies, Inc. (CTI). Prior to, or substantially
simultaneously with, the Transaction, CTI sold certain assets and liabilities
related to Omniglow Corporation’s novelty and retail business to certain former
Omniglow Corporation stockholders and management (“the Omniglow
Buyers”).  This was done because CTI sought to retain only the
Omniglow Corporation assets and current liabilities associated with its
government, military and safety business. During 2006, CTI and the Omniglow
Buyers commenced litigation and arbitration proceedings against one another.
Claims include breaches of a lease and breaches of various other agreements
between CTI and the Omniglow Buyers.  The Omniglow Buyers seek
compensatory damages of $1.4 million, to be trebled, and recovery of costs and
legal fees. We have filed for damages of $368,000 against the Omniglow
Buyers.  We continue to rigorously defend our position on these
matters, as we believe the Omniglow Buyers’ claims to be without
merit.





During
2006, CTI and the former stockholders of Omniglow (“Sellers”) commenced
arbitration proceedings against one another that are separate and distinct from
those discussed in the previous paragraph. These arbitration proceedings
included claims with respect to certain representations, warranties, contracts,
covenants and other agreements in connection with the transaction and a number
of other unrelated items.  In January 2008, CTI reached settlement with the
Sellers on all matters, which resulted in CTI receiving $3.0 million in cash.
The terms of the settlement, which was reached to minimize the parties' risk,
time and cost of further litigation, gave no explicit consideration as to
whether the disputes being resolved arose in the purchase process or pursuant to
subsequent events. As a result, CTI followed the guidance in SFAS No. 141, Business Combinations and
SFAS No. 16, Prior Period
Adjustments and reflected the settlement as a gain in 2008, rather than
an adjustment to the purchase price. The net gain of $2.8 million is included in
other income on the accompanying consolidated financial statements of the
Predecessor for the period ended December 19, 2008.





F -
23




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)





Other
Commitments





On April
25, 2007, we had engaged the representative of the underwriters of our initial
public offering, on a non-exclusive basis for five years, as an agent for the
solicitation of an acquisition target. We agreed to pay the representative of
the underwriters a cash transaction fee equal to 3% of the aggregate
consideration paid in such an acquisition with a target business the
representative of the underwriters introduced to us, if the acquisition was
consummated within twenty-four months of the introduction.





On April
25, 2007, we engaged the representative of the underwriters of our initial
public offering, on a non-exclusive basis for five years, as our agent for the
solicitation of the exercise of our common stock purchase warrants (see Note 18
for a description of those warrants). To the extent not inconsistent with the
guidelines of the NASD and the rules and regulations of the Securities and
Exchange Commission, we agreed to pay the representative of the underwriter for
bona fide services rendered a commission equal to 3% of the exercise price for
each common stock purchase warrant exercised more than one year after April 25,
2007 (the effective date of our initial public offering) if the exercise was
solicited by the representative. In addition to soliciting, either orally or in
writing, the exercise of the common stock purchase warrants, the
representative’s services may also include disseminating information, either
orally or in writing, to warrant holders about our Company or the market for our
securities, and assisting in the processing of the exercise of the warrants. No
compensation will be paid to the representative upon the exercise of the
warrants if:





•
            The
      market price of the underlying shares of common stock is lower than the
      exercise price;


•
            The
      holder of the warrants has not confirmed in writing that the
      representative solicited the
exercise;


•
            The
      warrants are held in a discretionary
account;


•
            The
      warrants are exercised in an unsolicited transaction;
  or


•
            The
      representative has not provided to the holder of the warrants solicited
      for exercise, a copy of the prospectus with respect to the shares of
      common stock underlying the
warrants.





There is
no compensation due under this agreement.





On June
19, 2007, we entered into a consulting agreement with Derek Dunaway prior to Mr.
Dunaway becoming our CEO. Mr. Dunaway’s duties were to assist our officers with
our reporting obligations and in our search for a target business to acquire.
Pursuant to the consulting agreement, Mr. Dunaway received $10,000 per month
(including retroactive compensation to May 2, 2007) and the agreement could have
been terminated by either party on 15 days prior written notice to the other
party. Under the agreement, if we consummated a business combination, we were
required to (i) pay Mr. Dunaway $10,000 for each month he performed as a
consultant for us and (ii) issue Mr. Dunaway warrants to purchase 100,000 shares
of our common stock, exercisable at $5.00 per share.  In February 2008
Mr. Dunaway became CEO of CTI and ceased being a consultant for us. Therefore,
we discontinued the $10,000 monthly consulting payments to him.





Mr.
Dunaway is still owed the $10,000 per month fee due upon successful completion
of a business combination. On December 19, 2008, we consummated such a business
combination when we acquired CTI (as discussed in Note 2). This obligation has
been included in G&A expense for 2008 and is an accrued expense at December
31, 2008. Mr. Dunaway has declined the warrants and therefore none were issued
to him and no expense has been accrued for them.





18.
            STOCKHOLDERS’
      EQUITY





Preferred
Stock





We are
authorized to issue 1,000,000 shares of preferred stock with such designations,
voting and other rights and preferences as may be determined from time to time
by our Board of Directors. No preferred stock was issued or outstanding as of
December 31, 2008 or 2007.





Common
Stock





We are
authorized to issue 50,000,000 shares of common stock. Stockholders are entitled
to one vote for each share held of record on all matters to be voted on by
stockholders. Stockholders have no conversion, preemptive or other subscription
rights and there are no sinking fund or redemption provisions applicable to the
common stock.




F -
24




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


At
December 31, 2007, 1,462,499 (or 19.99%) of the 7,312,500 common stock shares
issued in our initial public offering were subject to possible redemption.
Holders of common stock that voted against our acquisition of CTI had the right
to demand redemption of their common stock for a pro rata portion of the cash
and cash equivalents held in trust. That pro rata share at December 31, 2007 was
estimated to be $7.62 per common share or $11.1 million. After the December 19,
2008 approval of the Acquisition of CTI, holders of common stock who voted
against the Acquisition were owed $8.03 per common share, or $7.9 million, of
which $6.8 million was paid in 2008 and $1.1 million was still payable as of
December 31, 2008.





Common
Stock Purchase Warrants





As of
December 31, 2008, we had 7,468,750 common stock purchase warrants (“warrants”)
outstanding, of which 7,062,500 were sold in a public offering, 187,500 were
sold in a private placement, 100,000 were issued as payment of
Acquisition-related costs and 118,750 were sold to a third party.





Public
Offering Warrants





On May 1,
2007 we sold 7,312,500 units in our initial public offering for $58.5 million,
or $8.00 per unit.  Each unit consisted of one share of our common
stock and one common stock purchase warrant.  Each warrant entitles
the holder to purchase one share of common stock at an exercise price of $5.00
per share. These warrants may be exercised now that, among other things, we have
completed the acquisition of a business (which occurred on December 19, 2008).
These warrants expire April 25, 2012 unless earlier redeemed. These warrants are
redeemable by us at a price of $0.01 per warrant upon 30 days notice, only in
the event that the last sales price of the common stock is at least $11.50 per
share for any 20 trading days within a 30- trading-day period ending on the
third business day prior to date on which notice of redemption is given. 225,000
of these warrants were exercised in December 2008. See Note 25 for information
on exercises in 2009.





Holders
of warrants (a) sold in a public offering and (b) included as part of the units
underlying the option sold (see below) will be able to receive shares upon
exercise of the warrants only if (i) a current registration statement under the
Securities Act of 1933 relating to the shares of common stock underlying the
warrants is then effective and a current prospectus is then available or such
shares are exempt from registration and (ii) such shares are qualified for sale
or exempt from qualification under the applicable securities laws of the states
in which the various holders of warrants reside. Such a registration became
effective on February 9, 2009.





Private
Placement Warrants





On April
25, 2007 we sold 187,500 units in a private placement to two current Directors,
Yaron Eitan, Chief Executive Officer at that time, and Winston Churchill,
Chairman of the Board at that time, for $1.5 million.  Each unit
consisted of one share of common stock and one common stock purchase
warrant.  Each warrant entitled the holder to purchase one share of
common stock at an exercise price of $5.00 per share. These warrants may be
exercised now that we have completed an acquisition of a business (which
occurred on December 19, 2008). These warrants expire April 25, 2012 unless
earlier redeemed. These warrants are redeemable by us at a price of $0.01 per
warrant upon 30 days notice after the warrant becomes exercisable, only in the
event that the last sales price of the common stock is at least $11.50 per share
for any 20 trading days within a 30- trading-day period ending on the third
business day prior to date on which notice of redemption is given. These
warrants were exercised in February 2009.





Warrants
Issued for Acquisition-Related Costs





On
December 10, 2008, we issued 100,000 common stock purchase warrants as payment
for Acquisition-related costs. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $8.00 per share. These warrants
expire three years from the date of the Acquisition (December 19, 2011) unless
earlier redeemed. We estimated, based upon a Black-Scholes model, that the fair
value of the purchase option, on the date of sale is $0.33 per share (or $33,000
in the aggregate), using an expected life of 3 years, volatility of 27.14%, and
a risk-free rate of 1.21%. However, because our common stock did not have a
trading history that was representative of an operating company as of December
10, 2008, the volatility assumption was derived using historical data of another
public company operating in our industry. We believe the volatility estimate
calculated from that company is a reasonable benchmark to use in estimating the
expected volatility of our common stock; however, that estimated volatility may
not necessarily be representative of the volatility of the underlying securities
in the future.





F -
25




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)





Warrants
Sold to a Third Party





On
October 15, 2008, we sold 118,750 common stock purchase warrants and 593,750
shares of common stock for a combined price of $4.8 million. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $8.00 per share. These warrants expire three years from the date of the
Acquisition (December 19, 2011) unless earlier redeemed.





Options





In
connection with our initial public offering on April 25, 2007, we sold to the
representative of the underwriter an option to purchase up to a total of 731,250
units for $100.  Each unit consists of one share of common stock and
one common stock purchase warrant.  Each warrant entitles the holder
to purchase one share of common stock at an exercise price of $5.50 per share,
which may be exercised on a cashless basis. This option is exercisable at $8.80
per unit upon the completion of an acquisition of a business (which occurred on
December 19, 2008). This option expires five years from the date of our initial
public offering (April 25, 2012).





We
accounted for this purchase option as a cost of raising capital and have
included the instrument as equity in the financial statements. Accordingly,
there was no net impact on our financial position or results of operations,
except for the recording of the proceeds from the sale. We estimated, based upon
a Black-Scholes model, that the fair value of the purchase option, on the date
of sale is $3.40 per unit (or $2.5 million in the aggregate), using an expected
life of 5 years, volatility of 44%, and a risk-free rate of 5%. However, because
these units did not have a trading history, the volatility assumption was based
on information then available to management. The volatility estimate was derived
using historical data of public companies in the proposed industry. We believe
the volatility estimate calculated from these companies is a reasonable
benchmark to use in estimating the expected volatility of our units; however,
the use of an index to estimate volatility may not necessarily be representative
of the volatility of the underlying securities.





Accumulated
Other Comprehensive Income (Loss)





The
ending accumulated balances for each item in accumulated other comprehensive
income and loss are as follows (all amounts in thousands):




Year Ended December
      31,2008
            
            2007
            
            (Predecessor)
              2007Foreign currency translation
      adjustments
            
            $
            (179
            )
            
            $
            —
            
            
            $
            1,248Unrealized gain (loss) on cash
      flow hedges, net of taxes
            
            
            (102
            )
            
            
            —
            
            
            
            —$
            (281
            )
            
            $
            —
            
            
            $
            1,248





Changes
in accumulated other comprehensive income due to derivatives and hedging
activities are as follows (all amounts in thousands):





Balance December 31,
      2007
            
            $
            —Unrealized losses on interest rate
      swaps
            
            
            (102
            )Unrealized losses (gains)
      reclassified to current period earnings
            
            
            —Balance, December 31,
      2008
            
            $
            (102
            )





Changes
in accumulated other comprehensive income due to currency translation
adjustments (all amounts in thousands):





Balance December 31,
      2007
            
            $
            —Adjustments due to translation of
      CTSA financial statements from Euros into U.S.
    Dollars
            
            
            (179
            )Reclassifications to current
      period earnings
            
            
            —Balance, December 31,
      2008
            
            $
            (179
            )




F -
26




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


19.
            INCOME
  TAXES





Income taxes consisted of the
following (all amounts in thousands):




Year Ended December
      31,
            
            
            Predecessor2008
            
            
            2007
            
            
            For
      the Period January 1, 2008 to December 19, 2008
            
            
            For Year Ended December 31,
      2007Current:Federal
            
            $
            —
            
            
            $
            87
            
            
            $
            —
            
            
            $
            —State
            
            
            5
            
            
            
            —
            
            
            
            —
            
            
            
            —Foreign
            
            
            (13
            )
            
            
            —
            
            
            
            846
            
            
            
            1,943Deferred:Federal
            
            
            (575
            )
            
            
            —
            
            
            
            980
            
            
            
            (1,343
            )State
            
            
            (17
            )
            
            
            —
            
            
            
            390
            
            
            
            (330
            )Foreign
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Provision for (benefit from)
      income taxes
            
            $
            (600
            )
            
            $
            87
            
            
            $
            2,216
            
            
            $
            270





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  The principal sources of
these differences include the carrying value of inventories, fixed asset
depreciation, debt issue costs and certain accruals and reserves for financial
statement purposes which are not deductible for tax
purposes.





Deferred income tax assets and
liabilities consist of the following(all amounts in
thousands):




December 31,
      2008
            
            
            December 31,
      2007
            
            
            (Predecessor)
              December31, 2007Current
            
            
            Non-current
            
            
            Current
            
            
            Non-current
            
            
            Current
            
            
            Non-currentDeferred tax
      assets:Federal
            
            $
            477
            
            
            $
            6,730
            
            
            $
            —
            
            
            $
            —
            
            
            $
            465
            
            
            $
            6,734State
            
            
            112
            
            
            
            1,056
            
            
            
            —
            
            
            
            —
            
            
            
            109
            
            
            
            1,586Foreign
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Less: valuation
      allowance
            
            
            —
            
            
            
            (1,068
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —589
            
            
            
            6,718
            
            
            
            —
            
            
            
            —
            
            
            
            574
            
            
            
            8,320Deferred tax
      liabilities:Federal
            
            
            (220
            )
            
            
            (12,931
            )
            
            
            —
            
            
            
            —
            
            
            
            (16
            )
            
            
            (10,753
            )State
            
            
            (52
            )
            
            
            (3,024
            )
            
            
            —
            
            
            
            —
            
            
            
            (5
            )
            
            
            (2,516
            )Foreign
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —(272
            )
            
            
            (15,955
            )
            
            
            —
            
            
            
            —
            
            
            
            (21
            )
            
            
            (13,269
            )Deferred tax assets
      (liabilities)
            
            $
            317
            
            
            $
            (9,237
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            553
            
            
            $
            (4,949
            )




F -
27




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


Principal components of our net
liability representing deferred income tax balances are as follows(all
amounts in thousands):




Year Ended December
      31,2008
            
            
            2007
            
            
            (Predecessor)
              2007Intangible
      assets
            
            $
            (15,856
            )
            
            $
            —
            
            
            $
            (12,293
            )Property, plant and
      equipment
            
            
            (221
            )
            
            
            —
            
            
            
            (976
            )U.S. loss carryforwards and tax
      credits
            
            
            4,070
            
            
            
            —
            
            
            
            7,079Subsidiary dividend
      income
            
            
            2,107
            
            
            
            —
            
            
            
            646Provisions for
      expenses
            
            
            758
            
            
            
            —
            
            
            
            988Suspended capital loss on sale of
      subsidiary
            
            
            161
            
            
            
            —
            
            
            
            160Interest rate
      swaps
            
            
            61
            
            
            
            —
            
            
            
            —$
            (8,920
            )
            
            $
            —
            
            
            $
            (4,396
            )





Income
taxes computed using the federal statutory income tax rate differ from our
effective tax rate primarily due to the following (all amounts in thousands):




Year Ended December
      31,
            
            
            Predecessor2008
            
            
            2007
            
            
            For
      the Period January 1, 2008 to December 19, 2008
            
            
            For Year Ended December 31,
      2007Provision for federal income taxes
      expected at 34% statutory rate
            
            $
            (8
            )
            
            $
            301
            
            
            $
            1,911
            
            
            $
            100Increase (reduction) resulting
      from:Tax on global
      activities
            
            
            (15
            )
            
            
            —
            
            
            
            (38
            )
            
            
            376State income taxes, less federal
      income tax benefit
            
            
            (14
            )
            
            
            87
            
            
            
            257
            
            
            
            (218
            )Exempt interest
      income
            
            
            (358
            )
            
            
            (301
            )
            
            
            —
            
            
            
            —Change in valuation
      account
            
            
            (205
            )
            
            
            —
            
            
            
            —
            
            
            
            —Other
            
            
            —
            
            
            
            —
            
            
            
            86
            
            
            
            12Provision for (benefit from)income
taxes
            
            $
            (600
            )
            
            $
            87
            
            
            $
            2,216
            
            
            $
            270





The
majority of the deferred tax assets relate to domestic net operating loss
carryforwards that expire in 2025 through 2028. The realization of these assets
is based on estimates of future taxable income.





Deferred
income taxes on undistributed earnings of CTSA have not been recognized, since
such earnings are considered to be reinvested indefinitely.  If the
earnings, which were $4.1 million through December 31, 2008, were distributed in
the form of dividends, they would be subject, in certain cases, to both United
States income taxes and foreign withholding taxes. Because of the availability
of U.S. foreign tax credits, it is not practicable to determine the U.S. federal
income tax liability that would be payable if such earnings were not reinvested
indefinitely. Deferred taxes are provided for earnings of the subsidiary when we
plan to remit those earnings.




F -
28




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


20.
            RESTRUCTURING
      COSTS





During
the period ended December 19, 2008, the Predecessor underwent a corporate
restructuring pursuant to which the CEO and two Vice-Presidents left the
Company, resulting in a restructuring charge of $1.1 million.  The
following table summarizes restructuring cost activity from December 31, 2007
through December 31, 2008 (all amounts in thousands):




Balance
      on December 31, 2007 (Predecessor)
            
            $
            —Restructuring
      charges
            
            
            1,087Cash
      payments
            
            
            (830
            )Balance
      on December 19, 2008 assumed at the Acquisition
            
            
            257Cash
    payments
            
            
            (28
            )Balance
      on December 31, 2008
            
            $
            229





The
$229,000 of accrued and unpaid restructuring costs as of December 31, 2008 is
included in accrued liabilities on the accompanying consolidated balance sheet.
The $1.1 million of restructuring charges is included in the Predecessor’s consolidated statement of incomeas an other loss for the
period ended December 19, 2008.





21.
            EMPLOYEE BENEFIT
      PLANS





The CTI
Employee Savings and Retirement Plan (the “Plan”), is intended to be qualified
under Section 401(k) of the Internal Revenue Code.  Employees of CTI
who have reached the age of 18 are eligible for participation on the first entry
date after three months of service. Entry dates are the first day of January,
April, July and October. At December 31, 2007, employees of CTI who had reached
the age of 21 were eligible for participation after completing six months of
service. Employees may defer receiving compensation up to the maximum permitted
under the Internal Revenue Code. Matching contributions to the Plan
equal  (i) 3% of employee compensation plus (ii) 50% of between 3% and
5% of employee compensation. For the year ended December 31, 2008, employer
matching contributions were $7,000.  For the period ended December 19,
2008 and the year ended December 31, 2007, the Predecessor’s employer matching
contributions were $184,000 and $145,000, respectively.





22.
            FAIR
  VALUE





SFAS 157 (see Note 3) requires
disclosure about how fair value is determined for assets and liabilities and
establishes a hierarchy for which such assets and liabilities must be grouped,
based on significant levels of inputs as follows:





Level 1
            Quoted prices in active markets
      for identical assets or liabilities.Level 2
            Quoted prices in active markets
      for similar assets or liabilities and inputs that are observable for the
      asset or liability.Level 3
            Unobservable inputs for the asset
      or liability, such as discounted cash flow models or
      valuations.




F -
29




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


The determination of where assets and
liabilities fall within this hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. As of December 31, 2008, the
only liabilities required to be measured at fair value on a recurring basis were
the interest rate swaps described in Note 15, both of which are measured at fair
value using level 3 inputs and presented as derivatives on the December 31, 2008
consolidated balance sheet. The following table reflects their activity for the
year ended December 31, 2008(all amounts in thousands):




Interest Rate
      SwapsBalance as of December 31,
      2007
            
            $
            —Transfers into level 3 from level
      1 or level 2
            
            
            —Transfers out of level 3 into
      level 1 or level 2
            
            
            —Total gains or (losses), realized
      or unrealized:Included in
      earnings
            
            
            —Included in comprehensive
      income
            
            
            163Purchases, issuances and
      settlements, net
            
            
            —Balance as of December 31,
      2008
            
            $
            163





As discussed in the Recent Accounting
Pronouncements section of Note 3, SFAS 157 is does not apply to the nonrecurring
fair value measurements of our nonfinancial assets and liabilities, such as for
intangible assets and goodwill, until January 1, 2009.





23.
            CONCENTRATIONS





Our
business depends significantly on two key customers: the United States
Department of Defense (“US DOD”) and the N.A.T.O. Maintenance and Supply Agency
(“NAMSA”), which accounted for 34% of net revenues for the year ended December
31, 2008. These two key customers accounted for 68% and 69% of the Predecessor’s
net revenues in the period ended December 19, 2008 and the year ended December
31, 2007, respectively.





Three
customers, including the US DOD, account for 68% of net revenues for the year
ended December 31, 2008 and a different set of three customers, including the US
DOD, account for 55% of gross accounts receivable as of December 31, 2008 due to
the limited period for sales between the December 19, 2008 Acquisition of CTI
and December 31, 2008.  The US DOD accounted for 30% of the
Predecessor’s gross accounts receivable as of December 31, 2007. We did not have
any revenues during the year ended December 31, 2007 or accounts receivable at
December 31, 2007.





We sell
to customers located in the United States of America and in international
markets, including NAMSA.  Revenues to customers outside the United
States represent 10% of net revenues for the year ended December 31,
2008.  Revenues from the Predecessor’s customers outside the United
States represented 29% of net revenues for the period ended December 19, 2008
and 38% of net revenues for the year ended December 31, 2007.





We maintain cash in several different
financial institutions in amounts that typically exceed U.S. federally insured
limits and in financial institutions in international jurisdictions where
insurance is not provided. We have not experienced any losses in such accounts
and believe we are not exposed to significant credit risk.





24.
            SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





Cash Paid for Interest and Income
Taxes(all amounts in thousands):





Year Ended December
      31,
            
            
            Predecessor2008
            
            
            2007
            
            
            For
      the Period January 1, 2008 to December 19, 2008
            
            
            For Year Ended December 31,
      2007Interest
            
            $
            624
            
            
            $
            9
            
            
            $
            4,186
            
            
            $
            5,418Income
taxes
            
            $
            31
            
            
            $
            —
            
            
            $
            2,874
            
            
            $
            1,456





F -
30




Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Notes
to Consolidated Financial Statements (Continued)


Non-Cash Investing and Financing
Activities(all amounts in thousands):




Year Ended December
      31,
            
            
            Predecessor2008
            
            
            2007
            
            
            For
      the Period January 1, 2008 to December 19, 2008
            
            
            For Year Ended December 31,
      2007Accrual of deferred underwriting
      costs
            
            $
            —
            
            
            $
            2,340
            
            
            $
            —
            
            
            $
            —Change in estimate of deferred
      underwriting costs
            
            
            272
            
            
            
            —
            
            
            
            —
            
            
            
            —Payment of deferred underwriting
      costs via issuance of note payable
            
            
            1,818
            
            
            
            —
            
            
            
            —
            
            
            
            —Fair value of warrants issued in
      conjunction with the Acquisition
            
            
            33
            
            
            
            —
            
            
            
            —
            
            
            
            —Fair value of common stock issued
      in conjunction with the Acquisition
            
            
            52,460
            
            
            
            —
            
            
            
            —
            
            
            
            —Unpaid capitalized debt issuance
      costs
            
            
            154
            
            
            
            —
            
            
            
            —
            
            
            
            —Adjustment of property, plant and
      equipment to fair value due to the Acquisition
            
            
            (2,373
            )
            
            
            —
            
            
            
            —
            
            
            
            —Adjustment of inventory to fair
      value due to the Acquisition
            
            
            738
            
            
            
            —
            
            
            
            —
            
            
            
            —Adjustment of intangible assets to
      fair value due to the Acquisition
            
            
            20,192
            
            
            
            —
            
            
            
            —
            
            
            
            —





25.
            SUBSEQUENT
      EVENTS





During
the first quarter of 2009 we paid $1.1 million to repurchase 139,850 shares of
common stock from stockholders who voted against the Acquisition of
CTI.





On
February 9, 2009, we registered the issuance of shares of our common stock upon
exercise of warrants issued in our May 2007 initial public offering. Between
February 10, 2009 and February 17, 2009, 3,267,994 of those warrants were
exercised on a cashless basis into 1,629,671 common shares.





On March 3, 2009, our Board of Directors
adopted theCyalume Technologies Holdings, Inc. 2009 Omnibus Securities
and Incentive Plan (the “Plan”). The purpose of the Plan is to benefit our
stockholders by assisting us to attract, retain and provide incentives to key
management employees and non-employee directors of, and non-employee consultants
to, Cyalume Technologies Holdings, Inc. and its subsidiaries, and to align the
interests of such employees, non-employee directors and non-employee consultants
with those of our stockholders. Accordingly, the Plan provides for the granting
of Distribution Equivalent Rights, Incentive Stock Options, Non-Qualified Stock
Options, Performance Share Awards, Performance Unit Awards, Restricted Stock
Awards, Stock Appreciation Rights, Tandem Stock Appreciation Rights,
Unrestricted Stock Awards or any combination of the foregoing, as may be best
suited to the circumstances of the particular employee, director or consultant
as provided herein., Two million shares have been reserved under the Plan. On
March 3, 2009, the Board of Directors authorized the following (i) 30,000
restricted shares of common stock to non-employee consultants; (ii) 114,000
restricted shares of common stock and 200,000 restricted options to officers and
other management; and, (iii) a total of 82,500 options to
directors.  Subsequent to approval by shareholders at the 2009 Annual
Meeting of Shareholders, we expect to file Form S-8 with the SEC to register the
shares under the Plan.





F -
31





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE








To the
Board of Directors and


Stockholders
of Cyalume Technologies Holdings, Inc.








We have
audited the consolidated financial statements of Cyalume Technologies Holdings,
Inc. (the “Company”) as of December 31, 2008, and for year then ended, and have
issued our report thereon dated March 27, 2009. Such consolidated financial
statements and report thereon are included in the Company’s Form 10-K/A
(Amendment No. 1) filed with Securities and Exchange Commission for the year
ended December 31, 2008.  Our audit also included the consolidated
financial statement schedule for the year ended December 31, 2008 of the
Company, listed in Item 15. This consolidated financial statement schedule is
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on this consolidated financial statement schedule based on
our audit.  In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements as of December 31, 2008, and for the year then ended, taken as a
whole, presents fairly, in all material respects, the information set forth
therein.









/s/ CCR
LLP


Glastonbury,
Connecticut


March 27,
2009





S
-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE








To the
Board of Directors and


Stockholder
of Cyalume Technologies, Inc. and Subsidiary








We have
audited the consolidated financial statements of Cyalume Technologies, Inc. and
Subsidiary (the “Company”) as of December 31, 2007, and for the period from
January 1, 2008 to December 19, 2008 and the year ended December 31, 2007, and
have issued our report thereon dated March 27, 2009. Such consolidated financial
statements and report thereon are included in the Cyalume Technologies Holdings,
Inc. Form 10-K/A (Amendment No. 1) filed with the Securities and Exchange
Commission for the year ended December 31, 2008.  Our audits also
included the consolidated financial statement schedule for the period from
January 1, 2008 to December 19, 2008 and the year ended December 31, 2007 of the
Company, listed in Item 15.  This consolidated financial statement
schedule is the responsibility of the Company’s management.  Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.  In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements as of December 19, 2008 and December 31, 2007,
and for the period from January 1, 2008 to December 19, 2008 and the year ended
December 31, 2007, taken as a whole, presents fairly, in all material respects,
the information set forth therein.







/s/ CCR
LLP


Glastonbury,
Connecticut


March 27,
2009





S
-2


Cyalume
Technologies Holdings, Inc.
 (Formerly
Vector Intersect Security Acquisition Corporation)
 Consolidated
Financial Statement Schedule
 Schedule
II – Valuation and Qualifying Accounts


AdditionsDescription
            
            Balance at Beginning of
      Period
            
            Charged to costs and
      expenses
            
            Charged to other accounts
      (Describe)
            
            
            
            Deductions
      (Describe)
            
            
            
            Balance at End of
      PeriodYear ended December 31,
      2008Allowance for Doubtful
      Accounts
            
            $
            —
            
            $
            62
            
            $
            458
            
            (1)
            
            $
            (68
            )
            (2)
            
            $
            452Deferred Tax Asset Valuation
      Allowance
            
            
            —
            
            
            —
            
            
            1,068
            
            (1)
            
            
            —
            
            
            
            
            1,068Year ended December 31,
      2007Allowance for Doubtful
      Accounts
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            —
            
            
            
            
            —Deferred Tax Asset Valuation
      Allowance
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            —
            
            
            
            
            —





(1)Acquired as part of the acquisition of
Cyalume Technologies, Inc.





(2)Write-offs and currency
translation.







For
the Predecessor:




AdditionsDescription
            
            Balance at Beginning of
      Period
            
            Charged to costs and
      expenses
            
            Charged to other accounts
      (Describe)
            
            
            
            Deductions
      (Describe)
            
            
            
            Balance at End of
      PeriodPeriod ended December 19,
      2008Allowance for Doubtful
      Accounts
            
            $
            596
            
            $
            (26
            )
            $
            —
            
            
            
            $
            (112
            )
            (1)
            
            $
            458Deferred Tax Asset Valuation
      Allowance
            
            
            —
            
            
            1,068
            
            
            —
            
            
            
            
            —
            
            
            
            
            1,068Year ended December 31,
      2007Allowance for Doubtful
      Accounts
            
            
            646
            
            
            (76
            )
            
            26
            
            (2)
            
            
            —
            
            
            
            
            596Deferred Tax Asset Valuation
      Allowance
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            —
            
            
            
            
            —




(1)Write-offs and currency
translation.





(2)Currency
translation.





S
-3