UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
      One)





ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For
      the quarterly period ended March 31,
2010





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For
      the transition period
      from                             to





Commission
      File Number 000-52247





Cyalume Technologies
Holdings, Inc.


(Exact
name of registrant as specified in its charter)





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





96
      Windsor Street, West Springfield, Massachusetts
            
            01089(Address
      of principal executive offices)
            
            (Zip
      Code)





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





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. Yes xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o    No o





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





Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company ý





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





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of May 10, 2010, there were
outstanding 15,583,737 shares of the registrant’s Common Stock, par value $.001
per share.


Cyalume Technologies
Holdings, Inc.





FORM
10-Q





INDEX




PART
      I—FINANCIAL INFORMATIONItem 1.
            
            FinancialStatements


Condensed
      Consolidated Statements of Operations (unaudited) for the three months
      ended March 31, 2010 and 2009
            
            4Condensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and
      December 31, 2009
            
            5Condensed
      Consolidated Statements of Changes in Stockholders' Equity and
      Comprehensive Loss for the three months ended March 31, 2010
      (unaudited)
            
            6


Condensed
      Consolidated Statements of Cash Flows (unaudited) for the three months
      ended March 31, 2010 and 2009
            
            7Notes
      to Condensed Consolidated Financial Statements (unaudited)
            
            8Item 2.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            13Item 3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            15Item 4T.
            
            Controls
      and Procedures
            
            15PART
      II—OTHER INFORMATIONItem 1.
            
            Legal
      Proceedings
            
            16Item 1A.
            
            Risk
      Factors
            
            16Item 2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            16Item 3.
            
            Defaults
      Upon Senior Securities
            
            16Item 4.
            
            [Removed
      and Reserved]
            
            16Item 5.
            
            Other
      Information
            
            16Item 6.
            
            Exhibits
            
            17Signatures
            
            18




2





PART I—FINANCIAL INFORMATION





The
statements contained in this quarterly report on Form 10-Q, including under
the section titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other sections of this quarterly report, include
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
regarding our or our management's expectations, hopes, beliefs, intentions or
strategies regarding the future. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," "plan" and similar expressions may
identify forward-looking statements, but the absence of these words does not
mean that a statement is not forward-looking. The forward-looking statements
contained in this quarterly report are based on our current expectations and
beliefs concerning future developments and their potential effects on us. There
can be no assurance that future developments affecting us will be those that we
have anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our control) or other assumptions that
may cause actual results or performance to be materially different from those
expressed or implied by these forward-looking statements. Should one or more of
these risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may vary in material respects from those projected in
these forward-looking statements. We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities
laws.Unless the content
otherwise requires, all references to "we", "us", the “Company" or “Cyalume" in
this Quarterly Report on Form 10-Q refers to Cyalume Technologies Holdings,
Inc.




3




ITEM 1.
            Financial
      Statements





Cyalume
Technologies Holdings, Inc.


Condensed
Consolidated Statements of Operations


(in
thousands, except shares and per share information)


(Unaudited)





For
      the Three
            
            
            For the
      ThreeMonths
      Ended
            
            
            Months
      EndedMarch
      31,
            
            
            March
      31,2010
            
            
            2009Revenues
            
            $
            8,885
            
            
            $
            6,624Cost
      of goods sold
            
            
            4,602
            
            
            
            3,861Gross
      profit
            
            
            4,283
            
            
            
            2,763Other
      expenses (income):Sales
      and marketing
            
            
            788
            
            
            
            785General
      and administrative
            
            
            1,513
            
            
            
            1,225Research
      and development
            
            
            382
            
            
            
            393Interest
      expense, net
            
            
            665
            
            
            
            627Interest
      expense – related party
            
            
            16
            
            
            
            14Amortization
      of intangible assets
            
            
            456
            
            
            
            995Other
      expenses (income), net
            
            
            (10
            )
            
            
            44Total
      other expenses
            
            
            3,810
            
            
            
            4,083Income
      (loss) before income taxes
            
            
            473
            
            
            
            (1,320
            )Provision
      for (benefit from) income taxes
            
            
            312
            
            
            
            (547
            )Net
      income (loss)
            
            $
            161
            
            
            $
            (773
            )Net
      income (loss) per common share:Basic
            
            $
            0.01
            
            
            
            (0.05
            )Diluted
            
            $
            0.01
            
            
            
            (0.05
            )Weighted
      average shares used to compute net income (loss) per common
      share:Basic
            
            
            15,406,550
            
            
            
            14,564,234Diluted
            
            
            15,447,245
            
            
            
            14,564,234




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




4




Cyalume Technologies
Holdings, Inc.


CondensedConsolidated Balance
Sheets


(in
thousands, except shares and per share information)




March 31,2010
              (unaudited)
            
            
            December 31,
              2009AssetsCurrent
      assets:Cash
            
            $
            1,560
            
            
            $
            2,003Accounts
      receivable, net of allowance for doubtful accounts of $228 and $239 at
      March 31, 2010 and December 31, 2009, respectively
            
            
            4,113
            
            
            
            3,319Inventories,
      net
            
            
            9,524
            
            
            
            9,320Income
      taxes refundable
            
            
            274
            
            
            
            294Deferred
      income taxes
            
            
            847
            
            
            
            682Prepaid
      expenses and other current assets
            
            
            328
            
            
            
            382Total
      current assets
            
            
            16,646
            
            
            
            16,000Property,
      plant and equipment, net
            
            
            8,477
            
            
            
            8,384Goodwill
            
            
            51,244
            
            
            
            51,244Other
      intangible assets, net
            
            
            22,072
            
            
            
            22,548Other
      noncurrent assets
            
            
            57
            
            
            
            67Total
      assets
            
            $
            98,496
            
            
            $
            98,243Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Lines
      of credit
            
            $
            3,200
            
            
            $
            3,200Current
      portion of notes payable
            
            
            7,075
            
            
            
            6,940Accounts
      payable
            
            
            3,794
            
            
            
            3,222Accrued
      expenses and other current liabilities
            
            
            2,187
            
            
            
            2,069Advance
      due to related parties
            
            
            9
            
            
            
            9Total
      current liabilities
            
            
            16,265
            
            
            
            15,440Notes
      payable, net of current portion
            
            
            17,816
            
            
            
            18,874Notes
      payable due to related parties
            
            
            1,080
            
            
            
            1,065Deferred
      income taxes
            
            
            7,285
            
            
            
            7,105Derivatives
            
            
            189
            
            
            
            69Asset
      retirement obligation, net of current portion
            
            
            160
            
            
            
            158Total
      liabilities
            
            
            42,795
            
            
            
            42,711Commitments
      and contingencies
            
            
            —
            
            
            
            —Stockholders'
      equity:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or
      outstanding
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value; 50,000,000 shares authorized; 15,583,737 and
      15,405,570 shares issued and outstanding at March 31, 2010 and
      December 31, 2009, respectively
            
            
            16
            
            
            
            15Additional
      paid-in capital
            
            
            88,397
            
            
            
            87,926Accumulated
      deficit
            
            
            (32,232
            )
            
            
            (32,393
            )Accumulated
      other comprehensive loss
            
            
            (480
            )
            
            
            (16
            )Total
      stockholders’ equity
            
            
            55,701
            
            
            
            55,532Total
      liabilities and stockholders' equity
            
            $
            98,496
            
            
            $
            98,243




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




5




Cyalume Technologies Holdings, Inc.


Condensed
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Loss


(in
thousands, except shares)


(Unaudited)





AccumulatedCommon
      Stock
            
            
            Additional
            
            
            
            
            
            Other
            
            
            TotalNumber
      of
            
            
            
            
            
            Paid-In
            
            
            Accumulated
            
            
            Comprehensive
            
            
            Stockholders’
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Loss
            
            
            Equity
            
            
            LossBalance
      at December 31, 2009
            
            
            15,405,570
            
            
            $
            15
            
            
            $
            87,926
            
            
            $
            (32,393
            )
            
            $
            (16
            )
            
            $
            55,532
            
            
            $
            —Stock
      issued
            
            
            178,167
            
            
            
            1
            
            
            
            (1
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Stock-based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            472
            
            
            
            —
            
            
            
            —
            
            
            
            472
            
            
            
            —Foreign
      currency translation adjustments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (389
            )
            
            
            (389
            )
            
            
            (389
            )Unrealized
      loss on cash flow hedges, net of taxes of $45
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (75
            )
            
            
            (75
            )
            
            
            (75
            )Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            161
            
            
            
            —
            
            
            
            161
            
            
            
            161Comprehensive
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            (303
            )Balance
      at March 31, 2010
            
            
            15,583,737
            
            
            $
            16
            
            
            $
            88,397
            
            
            $
            (32,232
            )
            
            $
            (480
            )
            
            $
            55,701




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




6




Cyalume
Technologies Holdings, Inc.


Condensed
Consolidated Statements of Cash Flows


(in
thousands, except shares)


(Unaudited)





For
      the Three
            
            
            For
      the ThreeMonths
      Ended
            
            
            Months
      EndedMarch
      31,
            
            
            March
      31,2010
            
            
            2009Cash
      flows from operating activities:Net
      income (loss)
            
            $
            161
            
            
            $
            (773
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      of property, plant and equipment
            
            
            164
            
            
            
            158Amortization
            
            
            540
            
            
            
            1,312Provision
      for deferred income taxes
            
            
            109
            
            
            
            (642
            )Stock-based
      compensation expense
            
            
            472
            
            
            
            35Other
      non-cash expenses
            
            
            57
            
            
            
            92Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (867
            )
            
            
            83Inventories
            
            
            (314
            )
            
            
            (331
            )Prepaid
      expenses and other current assets
            
            
            44
            
            
            
            (166
            )Accounts
      payable and accrued liabilities
            
            
            723
            
            
            
            (137
            )Income
      taxes payable, net
            
            
            3
            
            
            
            (88
            )Accrued
      interest on notes payable to stockholders
            
            
            —
            
            
            
            (1
            )Net
      cash provided by (used in) operating activities
            
            
            1,092
            
            
            
            (458
            )Cash
      flows from investing activities:Purchases
      of long-lived assets
            
            
            (463
            )
            
            
            (111
            )Net
      cash used in investing activities
            
            
            (463
            )
            
            
            (111
            )Cash
      flows from financing activities:Payments
      for common stock subject to redemption
            
            
            —
            
            
            
            (1,123
            )Net
      repayment of line of credit
            
            
            —
            
            
            
            (200
            )Repayment
      of notes payable
            
            
            (1,030
            )
            
            
            (658
            )Payments
      to reacquire and retire common stock
            
            
            —
            
            
            
            (263
            )Refund
      of debt issue costs
            
            
            —
            
            
            
            10Proceeds
      from exercises of warrants
            
            
            —
            
            
            
            27Net
      cash used in financing activities
            
            
            (1,030
            )
            
            
            (2,207
            )Effect
      of exchange rate changes on cash
            
            
            (42
            )
            
            
            27Net
      decrease in cash
            
            
            (443
            )
            
            
            (2,749
            )Cash,
      beginning of period
            
            
            2,003
            
            
            
            3,952Cash,
      end of period
            
            $
            1,560
            
            
            $
            1,203




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




7


Cyalume
Technologies Holdings, Inc.
 Notes
to Condensed Consolidated Financial Statements





1.
            BASIS
      OF PRESENTATION




We have
prepared the accompanying unaudited interim condensed consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these
interim condensed consolidated financial statements do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements.




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period.




These
accompanying unaudited interim condensed consolidated financial statements
recognize the effects of all subsequent events that provide additional evidence
about conditions that existed at March 31, 2010, including the estimates
inherent in the process of preparing financial statements. Additionally, all
significant intercompany accounts and transactions have been eliminated in
consolidation.




Certain
amounts in prior periods have been reclassified to conform to the 2010
presentation. These reclassifications had no effect on our financial position or
operating results as previously reported.





We
believe all adjustments (consisting of normal, recurring adjustments) considered
necessary for a fair presentation have been included in these unaudited interim
condensed consolidated financial statements. Operating results for the
three-month periods presented are not necessarily indicative of the results that
may be expected for any other interim period or for the full year. The
consolidated balance sheet at December 31, 2009 has been derived from the
audited consolidated financial statements at that date. We suggest that these
unaudited interim condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and footnotes thereto in
our Annual Report on Form 10-K for the year ended December 31,
2009.





2.
            BACKGROUND
      AND DESCRIPTION OF BUSINESS





We have one subsidiary: Cyalume Technologies, Inc.
(“CTI”), whose headquarters are also located in West Springfield, MA. CTI has
one subsidiary, Cyalume Technologies, SAS (“CTSAS”), located in Aix-en-Provence,
France. Our products are manufactured at both the West Springfield and
Aix-en-Provence locations.





We
primarily produce products based on technologies whereby light is generated
through a chemi­cal reaction known as chemiluminescence. CTI manufactures
and sells such chemiluminescent products, in addition to reflective and
photoluminescent products, to military, commercial and public safety
markets.  Our base product is known as a ‘‘light stick’’ and is
typically 6 inches in length. A light stick is a translucent flexible plastic
tube that is partly filled with one chemical ingredient and also with a glass
container (‘‘ampoule’’) that contains a complementary reactive chemical. When
the tube is bent enough to break the glass ampoule, the chemicals contained
within the plastic tube mix and light is generated. Additionally, we manufacture
and sell a component of 40mm training ammunition; sales of these components have
been an increasing source of our revenues in recent years.  Also, we
produce reflective (patches) and reflective plus photoluminescent (fire tape)
products. Based on our customers’ specifications, our products are manufactured
in varying shapes, sizes and functions, and provide light in different colors,
intensity and durations.





3.
            NEW
      ACCOUNTING PRONOUNCEMENTS





The
following are recent accounting pronouncements that have affected our
consolidated financial statements or may affect them in the future.





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures about Fair
Value Measurements, to amend existing guidance in FASB Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and
Disclosures, to expand and clarify existing disclosures regarding
recurring and nonrecurring fair value measurements. The amendments in this ASU
were effective on January 1, 2010 for our interim and annual reporting. The
adoption of this ASU did not have an impact on these unaudited interim condensed
consolidated financial statements.




8


Cyalume
Technologies Holdings, Inc.
 Notes
to Condensed Consolidated Financial Statements


In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. The
amendments in this ASU remove the requirement for an SEC filer (such as us) to
disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. All of the amendments in this ASU were
effective for us upon the FASB’s issuance of ASU No. 2010-09.  The
only effect of our adoption of this ASU on these unaudited interim condensed
consolidated financial statements was to not disclose the date through which
subsequent events have been evaluated in preparing these consolidated financial
statements; for SEC filers, that evaluation date must be the date of issuance of
the financial statements.





4.
            INVENTORIES





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




March
      31,
              2010
            
            
            December
      31,
              2009Raw
      materials, net
            
            $
            4,981
            
            
            $
            4,548Work-in-process,
      net
            
            
            2,795
            
            
            
            2,973Finished
      goods, net
            
            
            1,748
            
            
            
            1,799$
            9,524
            
            
            $
            9,320





5.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





The
derivative liabilities as of March 31, 2010 in our condensed consolidated
balance sheet consist of the following (all amounts in thousands):




Derivative
      Instrument
            
            Balance
      Sheet Location
            
            Fair
      ValueInterest
      rate swaps
            
            Derivatives
      (noncurrent liabilities)
            
            $
            (189
            )Currency
      forward contract
            
            Accrued
      expenses and other current liabilities (current
    liabilities)
            
            
            (2
            )





We have
not held any other types of derivative instruments other than the derivatives
listed above.





Interest
Rate Swaps





In
December 2008, 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 our notes payable with TD Bank, N.A. 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 comprehensive income (loss). These unrealized gains and 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, which ends
upon maturity of the notes payable, and therefore we do not expect to reclassify
any portion of these unrealized losses from comprehensive income (loss) to
earnings in the future. The fair values of the swaps are determined by
discounting the estimated cash flows to be received and paid due to the swaps
over the swap’s contractual lives using an estimated risk-free interest rate for
each swap settlement date.





Currency
Forward Contracts





CTSAS’
functional currency is the Euro. Periodically, CTSAS purchases inventory from
CTI, which requires payment in U.S. dollars. Beginning in 2009 and only under
certain circumstances, we use currency forward contracts to mitigate CTSAS’
exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’ payment
to CTI for these inventory purchases.  Such currency forward contracts
typically have durations of less than six months. We report these currency
forward contracts at their fair value. This relationship has not been designated
as a hedge and therefore all changes in these currency forward contracts’ fair
value are recorded in other expenses (income) on our condensed consolidated
statement of operations. The fair value of these
contracts is determined by taking the difference between (a) the U.S. dollar
amount due on the contract at maturity and (b) the present value of estimated
cash flows developed using, among other data, expectations of future currency
exchange rates over the remaining term of the contract discounted at an
estimated risk-free interest rate.At March 31, 2010, we held three such
currency forward contracts.




9


Cyalume
Technologies Holdings, Inc.
 Notes
to Condensed Consolidated Financial Statements





Effect
of Derivatives on Statement of Operations





The
effect of derivative instruments (a) designated as cash flow hedges and (b) not
designated as hedging instruments on our condensed consolidated statement of
operations for the three months ended March 31, 2010 was as follows (all amounts
in thousands):




Gain
            
            
            Gain
            
            
            Gain(Loss)
            
            
            (Loss)
            
            
            (Loss)In
      AOCL(1)
            
            
            Reclassified(2)
            
            
            in
      Earnings(3)Derivatives
      in cash flow hedging relationships:Interest
      rate swaps
            
            $
            (75
            )
            
            $
            —
            
            
            $
            —Derivatives
      not designated as hedging instruments:Forward
      currency contracts
            
            $
            —
            
            
            $
            —
            
            
            $
            (24
            )





(1)
            Amount
      recognized in accumulated other comprehensive loss (AOCL) (effective
      portion and net of taxes) during the three months ended March 31,
      2010.


(2)
            Amount
      of gain (loss) originally recorded in AOCL but reclassified from AOCL into
      earnings during the three months ended March 31,
  2010.


(3)
            Amount
      of gain (loss) recognized in earnings on the derivative (ineffective
      portion and amount excluded from effectiveness testing) reported in other
      expenses (income), net on the condensed consolidated statement of
      operations for the three months ended March 31,
  2010.





6.
            INCOME
      TAXES





For the
three months ended March 31, 2010, the effective tax rate of 66% differed from
the statutory rate of 34% due to the valuation allowance on foreign tax credits
that were generated by unrepatriated earnings of CTSAS. For the three months
ended March 31, 2009, the effective tax rate of 41% differed from the statutory
rate of 34% due to state and foreign taxes.





7.
            NET
      INCOME (LOSS) PER COMMON SHARE





Basic net
income (loss) per common share is computed by dividing net income (loss) 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 and options (using the treasury stock method).




Three
      Months Ended March 31,2010
              
              
              2009Basic:Net
      income (loss) (in thousands)
              
              $
              161
              
              
              $
              (773
              )Weighted
      average shares
              
              
              15,406,550
              
              
              
              14,564,234Basic
      income (loss) per common share
              
              $
              0.01
              
              
              $
              (0.05
              )Diluted:Net
      income (loss) (in thousands)
              
              $
              161
              
              
              $
              (773
              )Weighted
      average shares
              
              
              15,406,550
              
              
              
              14,564,234Effect
      of dilutive potential common share equivalents
              
              
              40,695
              
              
              
              —
              (1)Weighted
      average shares, as adjusted
              
              
              15,447,245
              
              
              
              14,564,234Diluted
      income (loss) per common share
              
              $
              0.01
              
              
              $
              (0.05
              )


(1)
            Since
      we experienced a loss during the three months ended March 31, 2009, common
      shares issuable upon exercise of convertible securities were excluded from
      the loss per share calculation because the effect would be
      antidilutive.




10


Cyalume
Technologies Holdings, Inc.
 Notes
to Condensed Consolidated Financial Statements


The
following common shares issuable upon exercise of potential common share
equivalents were excluded from the calculation of diluted net income (loss) per
common share because their effect was antidilutive for each of the periods
presented:





Three
      Months Ended March 31,2010
            
            
            2009Warrants
            
            
            4,250,756
            
            
            
            4,220,256Options
            
            
            2,060,000
            
            
            
            1,462,500





8.
            COMMITMENTS
      AND CONTINGENCIES





Legal





We
acquired CTI on December 19, 2008. As part of that acquisition, we acquired
CTI’s exposure to litigation that existed at the acquisition date. On January
23, 2006, the former owners of CTI (from whom we purchased CTI) acquired all of
the outstanding capital stock of Omniglow Corporation (the “Transaction”) and
changed the name of the company to Cyalume Technologies, Inc. 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. We do
not expect this legal proceeding will have a material adverse effect on our
future consolidated financial position, operating results, or cash
flows.





Management
Agreement with Board Member





On
October 1, 2009, we entered into a Management Agreement with Selway Capital, LLC
(“Selway”) that provides for (but is not limited to) the following services to
be performed by Selway on our behalf:





·
            Strategic
      development and implementation as well as consultation to our chief
      executive officer on a regular basis as per his reasonable
      requests;


·
            Identifying
      strategic partners with companies with which Selway has relationships and
      access. In this connection, Selway will focus on building partnerships
      with companies in Israel, Singapore, India and Europe. The focus will be
      on the expansion of our munitions
business;


·
            Advise
      and support us on our investor relations
  strategy;


·
            Advise
      and support our future fund raising, including identifying sources of
      capital in the United States; and


·
            Support
      our mergers and acquisitions strategy and play an active role in our due
      diligence and analysis.





The
Management Agreement stipulates that these services will be performed by Yaron
Eitan, a member of our Board of Directors and an employee of Selway, with the
assistance as needed from other employees of Selway.  The Management
Agreement is retroactive to August 1, 2009, expires on October 1, 2012 and can
be terminated by either us or Selway upon 30-days’ written notice or upon our
default in payment or Selway’s failure to perform services under the Management
Agreement. Selway’s compensation for these services will be $41,667 per month
for the duration of the Management Agreement. However, we are only required to
pay $16,000 per month, with the balance of $25,667 per month remaining unpaid
until our senior lender consents to such payment. We will also reimburse Selway
for costs incurred specifically on our behalf for these services. Under the
Management Agreement, we indemnify Selway and Selway indemnifies us against
certain losses that may be incurred while carrying out its obligations under the
Management Agreement.




11





9.
            FAIR
      VALUE





Under
U.S. GAAP, we are required to record certain financial assets and liabilities at
fair value and may choose to record other financial assets and financial
liabilities at fair value as well. Also under U.S. GAAP, we are required to
record nonfinancial assets and liabilities at fair value due to events that may
or may not recur in the future, such as an impairment event. When we are
required to record such assets and liabilities at fair value, that fair value is
estimated using 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. That fair value is determined using inputs based on a fair
value hierarchy that is based on significant levels of inputs as
follows:





Level
      1
            Quoted
      prices for identical assets or liabilities in active markets to which we
      have access at the measurement date.Level
      2
            Inputs
      other than quoted prices included within Level 1 that are observable for
      the asset or liability, either directly or indirectly.Level
      3
            Unobservable
      inputs for the asset or liability.





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
March 31, 2010, our only assets and liabilities required to be reported at fair
value on a recurring basis were the interest rate swaps and currency forward
contracts described in Note 5, both of which are measured at fair value using
level 2 inputs.





We have
other non-derivative financial instruments, such as cash, accounts receivable,
accounts payable, accrued expenses and long-term debt, whose carrying amounts
approximate fair value.





10.
            SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





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




Three
      Months Ended March 31,2010
            
            
            2009Interest
            
            $
            628
            
            
            $
            434Income
      taxes
            
            $
            202
            
            
            $
            833





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




Three
      Months Ended March 31,2010
            
            
            2009Accrual
      of costs directly related to the acquisition of CTI recorded as
      goodwill
            
            $
            —
            
            
            $
            234








11.
            SUBSEQUENT
      EVENT





We
entered into a Second Amendment to Credit Agreement and Limited Waiver (the
“Second Loan Amendment”) with TD Bank, N.A. that became effective December 17,
2009 and amended our Revolving Credit and Term Loan Agreement with TD Bank, N.A.
(the “Original Credit Agreement”) dated as of December 19, 2008 and all previous
amendments to the Original Credit Agreement.  That Second Loan
Amendment, among other things, requires us to receive at least $3.0 million
in new subordinated debt or from an equity offering before April 30, 2010 and to
use the net proceeds from that subordinated debt or equity offering to reduce
the outstanding principal balance on our notes payable with TD Bank, N.A. TD
Bank, N.A. has agreed to extend that deadline to June 30, 2010. We are currently
negotiating a transaction that (i) will satisfy TD Bank, N.A.’s $3.0 million
requirement and (ii) is expected to be completed before the June 30, 2010
deadline. The cost of extending that deadline is not expected to be
material.




12





ITEM 2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




You
should read the following discussion of our financial condition and results of
operations in conjunction with our interim condensed consolidated financial
statements and the accompanying notes to those financial statements included
elsewhere in this Quarterly Report on Form 10-Q. This discussion contains
forward-looking statements that involve risks and uncertainties. Unless the
content otherwise requires, all references to "we", "us", the “Company" or
“Cyalume" in this Quarterly Report on Form 10-Q refers to Cyalume
Technologies Holdings, Inc.





Company
Overview





We
primarily produce products based on technologies whereby light is generated
through a chemical reaction known as chemiluminescence. CTI manufactures and
sells such chemiluminescent products, in addition to reflective and
photoluminescent products, to military, commercial and public safety
markets.  Our base product is known as a ‘‘light stick’’ and is
typically 6 inches in length. A light stick is a translucent flexible plastic
tube that is partly filled with one chemical ingredient and also with a glass
container (‘‘ampoule’’) that contains a complementary reactive chemical. When
the tube is bent enough to break the glass ampoule, the chemicals contained
within the plastic tube mix and light is generated. Additionally, we manufacture
and sell a component of 40mm training ammunition; sales of these components have
been an increasing source of our revenues in recent years.  Also, we
produce reflective (patches) and reflective plus photoluminescent (fire tape)
products. Based on our customers’ specifications, our products are manufactured
in varying shapes, sizes and functions, and provide light in different colors,
intensity and durations.





We have
one subsidiary: Cyalume Technologies, Inc. (“CTI”), whose headquarters are also
located in West Springfield, MA. CTI has one subsidiary, Cyalume Technologies,
SAS (“CTSAS”), located in Aix-en-Provence, France. Our products are manufactured
at both the West Springfield and Aix-en-Provence locations.




Material
Changes in Results of Operations – 3 Months Ended March 31, 2010 versus the 3
Months Ended March 31, 2009




Revenues:
 For the three-month period ended March 31, 2010, our sales were higher
than our sales for the comparable period in 2009. This increase in sales is due
primarily to the volume of units sold. Price increases provided some of the
additional revenues and product mix remained relatively unchanged between the
two periods.




Cost of
goods sold: For the three-months ended March 31, 2010, our cost of sales was
significantly higher than our cost of sales for the comparable period in 2009
due to the increase in units sold discussed above.  Our gross margin
for the three months ended March 31, 2010 was 48.2% compared to our 41.7% gross
margin for the comparable prior-year period. 2010 margin improved partially due
to price increases implemented in late 2009. Gross margin in the three months
ended March 31, 2009 was depressed due to lower-than-normal sales of high margin
chemical light sticks to the U.S. Military, the cost of a March 2009 workforce
reduction and the amortization of $262,000 of the inventory step-up to fair
market value arising from our acquisition of CTI in December 2008.




General
and administrative expenses increased primarily due to expense related to the
accrual of share-based awards in 2010, which were not accrued in the first
quarter of 2009, and management fees relating to our management agreement with
Selway Capital, LLC, which had not yet been entered into as of March 31, 2009.




Amortization
of intangible assets: In December 2009, we recorded significant impairments on
our trademark and customer relationship intangible assets that significantly
reduced our amortization of intangible assets in the three months ended March
31, 2010 versus the three months ended March 31, 2009.




Provision
for (benefit from) income taxes increased significantly for the three months
ended March 31, 2010 as compared to the three months ended March 31,
2009 due to our generation of net income during the three months ended March 31,
2010 and operating losses during the three months ended March 31,
2009.




Material
Changes in Financial Condition – March 31, 2010 versus December 31,
2009




Neither
total assets nor total liabilities changed significantly from December 31, 2009
to March 31, 2010, however the following components of total assets and total
liabilities did change significantly during that time period.




Our
accounts receivable increased significantly due to higher sales during the three
months ending March 31, 2010 versus the three months ending December 31,
2009.  Due to these increased sales, we purchased a higher than usual
amount of raw material inventory during the three months ending March 31, 2010,
causing total inventory to increase from amounts on hand at December 31, 2009.
This caused our accounts payable and accrued liabilities to increase during this
time period as well. Our notes payable decreased significantly due to scheduled
principal payments made during the first three months of 2010. Our derivatives
liability increased significantly since December 31, 2009 primarily due to a
decrease in estimated future LIBOR rates used to estimate the fair value of our
pay fixed/receive LIBOR interest rate swaps. Our deferred tax liability
increased since December 31, 2009 due to (i) amortization of identified
intangible assets for U.S. GAAP purposes which is not allowed for income tax
purposes; (ii) various changes in the reserve accounts, including increases in
unvested stock-based compensation awards; (iii) utilization of net operating
losses during the three months ended March 31, 2010; and (iv) unrepatriated
earnings of our foreign subsidiary (CTSAS).




13




Liquidity
and Capital Resources




As of
March 31, 2010 and December 31, 2009, we had $1.6 million and $2.0 million,
respectively, in cash on hand. The major sources and uses of cash during the
three months ended March 31, 2010 were all in the normal course of
business.




Before
June 30, 2010, we expect to receive proceeds from a subordinated debt offering
or an equity offering. The terms of that transaction are currently being
negotiated and therefore the full effects of that transaction on our liquidity
and capital resources cannot be determined.  In addition to providing
us with working capital, this transaction will allow us to satisfy the
requirement imposed by our senior lender, TD Bank, N.A., to receive at least
$3.0 million from new subordinated debt or an equity offering before June 30,
2010 and to use the proceeds thereof to reduce the outstanding principal balance
on our notes payable to TD Bank, N.A.




Forecasted
principal and interest payments on bank debt for the next 12 months are $9.1
million, including the $3.0 million principal payment to TD Bank discussed in
the preceding paragraph, and will be funded from operating cash flows and from
the transaction discussed in the preceding paragraph. All other operating and
capital expenditures are expected to be funded completely from operating cash
flows.





Off-Balance
Sheet Arrangements





Other
than immaterial operating leases, we did not have any off-balance sheet
arrangements during 2010 or 2009.





Contractual
Obligations





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





Critical
Accounting Policies





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.





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.





Income
Taxes





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.




14





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 benefit 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.





We
classify interest on tax deficiencies as interest expense and income tax
penalties as other miscellaneous expenses.





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.





Intangible
Assets





Intangible
assets include developed technologies and patents, customer relationships and
non-compete agreements, which are amortized over their estimated useful lives,
and trademarks and trade names, which are considered to have indefinite useful
lives and therefore are not amortized. The carrying amounts of intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that those carrying amounts may not be recoverable. Costs incurred to renew or
extend the term of our intangible assets are expensed when
incurred.





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 recorded and reserves 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 write-offs to be materially different than reported inventory
reserve balances.





Foreign
Operations and Currency





Accounts
of our foreign subsidiary are recorded using their local currency (the euro) as
the functional currency. For consolidation purposes, income statement accounts
are converted to U.S. dollars using the average exchange rate for the monthly
period being reported. Assets and liabilities are converted to U.S. dollars
using the exchange rate in effect as of the balance sheet date. Equity
transactions are converted to U.S. dollars using the exchange rate in effect as
of the date of the transaction. Translation gains and losses are reported as a
component of accumulated other comprehensive income or loss. Gains and losses
resulting from transactions which are denominated in other than the functional
currencies are reported as other income or expenses in the statement of
operations in the period the gain or loss occurred.





ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM 4T. CONTROLS
AND PROCEDURES





Disclosure
controls and procedures





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act
of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed under the Exchange Act is accumulated and
communicated to management, including principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.





Our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2010. Based upon that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, concluded that the design and operation of our disclosure
controls and procedures were effective as of March 31, 2010.




15





Changes
in internal control over financial reporting





There was
no change in our internal control over financial reporting that occurred during
the three months ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





PART II – OTHER
INFORMATION




ITEM 1. LEGAL
PROCEEDINGS





Cyalume
is not currently a named party in any legal proceedings.





CTI is
currently named a defendant in Civil Action No. 06-706 in Superior Court of the
State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former
novelty business of CTI which was sold on January 23, 2006). CTI sold certain
assets and liabilities related to the novelty and retail business to certain
former shareholders and management (the “Omniglow Buyers”).  This was
done because CTI sought to retain only the Omniglow Corporation business
activities associated with 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. CTI has filed for damages of $368,000 against
the Omniglow Buyers.  CTI continues to rigorously defend our position
on these matters, as we believe the Omniglow Buyers’ claims to be without merit.
Court hearings were held and completed in October 2008.





ITEM 1A. RISK FACTORS





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





ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Recent
sales of unregistered securities and use of proceeds from registered
securities





None.





Purchases
of Equity Securities by the Company and Affiliated Purchasers





None.




ITEM 3. DEFAULTS
UPON SENIOR SECURITIES




None.





ITEM 4. [REMOVED
AND RESERVED]





ITEM 5. OTHER
INFORMATION





There
were no changes to the procedures by which security holders may recommend
nominees to our Board of Directors during the three months ended March 31,
2010.





There is
no information to report under this Item in lieu of reporting that information
on Form 8-K.




16


ITEM 6.    EXHIBITS





Exhibit
      Number
            
            Description10.1
            
            Supply
      Agreement between Cyalume Technologies, Inc. and the U.S. Department of
      Defense, dated January 22, 2010 (confidential treatment has been requested
      for certain portions of this agreement which have been redacted).
      (1)31.1
            *
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            *
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            *
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.







*
            Filed
      herewith.


(1)
            Incorporated by
      reference to (a) the Current Report on Form 8-K dated January 27, 2010 and
      filed with the Commission February 1, 2010 and (b) Exhibit 10.27 to the
      Registrant’s Annual Report on Form 10-K for the year ended December 31,
      2009 filed on March 22, 2010.




17


SIGNATURES





Pursuant
to the requirements 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:
      May 12, 2010
            
            By:
            /s/  DEREK
      DUNAWAY
              Derek
      Dunaway,
              Chief
      Executive Officer
              (Principal
      Executive Officer)






Date:
      May 12, 2010
            
            By:
            /s/  MICHAEL
      BIELONKO
              Michael
      Bielonko,
              Chief
      Financial Officer
              (Principal
      Financial Officer and
              Chief
      Accounting Officer)





18