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
June 30,
2009





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
Number000-52247





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
preceding12months (or for such shorter period
that theregistrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YesýNoo





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). YesoNoo





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 definitionsof "large accelerated
filer","accelerated filer" and "smaller
reporting company" in Rule 12b-2of the Exchange Act.


Largeacceleratedfilero
              
              Acceleratedfilero
              
              Non-acceleratedfilero
                (Donotcheckifasmaller
                reportingcompany)
              
              Smallerreportingcompanyý





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





Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: Asof
August 14, 2009, there were outstanding 15,345,925shares of the registrant’s Common Stock,
par value $.001 per share.








Cyalume Technologies
Holdings, Inc.





FORM 10-Q





INDEX




PART I—FINANCIAL
      INFORMATIONItem 1.
                                                      Financial
      StatementsCondensed Consolidated Statements
      of Operations (unaudited) for the three months ended June 30, 2009
      and 2008
                                                      4Condensed Consolidated Statements
      of Operations (unaudited) for the six months ended June 30, 2009 and
      2008
                                                      5Condensed Consolidated Balance
      Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
                                                      6Condensed Consolidated Statements
      of Changes in Stockholders' Equity and Comprehensive Loss for the six
      months ended June 30, 2009 (unaudited)
                                                      7Condensed Consolidated Statements
      of Cash Flows (unaudited) for the six months ended June 30, 2009 and
      2008
                                                      8Notes to Condensed Consolidated
      Financial Statements (unaudited)
                                                      9Item 2.
                                                      Management's Discussion and
      Analysis of Financial Condition and Results of
      Operations
                                                      17Item 3.
                                                      Quantitative and Qualitative
      Disclosures About Market Risk
                                                      20Item 4.
                                                      Controls and
      Procedures
                                                      20PART II—OTHER
      INFORMATIONItem 1.
                                                      Legal
      Proceedings
                                                      21Item 1A.
                                                      Risk
Factors
                                                      21Item 2.
                                                      Unregistered Sales of Equity
      Securities and Use of Proceeds
                                                      21Item 3.
                                                      Defaults Upon Senior
      Securities
                                                      21Item 4.
                                                      Submission of Matters to a Vote of
      Security Holders
                                                      22Item 5.
                                                      Other
      Information
                                                      22Item 6.
                                                      Exhibits
                                                      22Signatures
                                                      
                                                      23




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 thisquarterly 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 andper share
information)


(Unaudited)





PredecessorFortheThree
                                            
                                            
                                            FortheThree
                                            
                                            
                                            FortheThreeMonthsEnded
                                            
                                            
                                            MonthsEnded
                                            
                                            
                                            MonthsEndedJune30,
                                            
                                            
                                            June30,
                                            
                                            
                                            June30,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2008Revenues
                                            
                                            $
                                            7,959
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            10,737Cost of goods
      sold
                                            
                                            
                                            4,575
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            4,773Gross
profit
                                            
                                            
                                            3,384
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            5,964Other expenses
      (income):Sales and
      marketing
                                            
                                            
                                            746
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            862General and
      administrative
                                            
                                            
                                            1,377
                                            
                                            
                                            
                                            157
                                            
                                            
                                            
                                            1,062Research and
      development
                                            
                                            
                                            415
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            313Interest,
    net
                                            
                                            
                                            625
                                            
                                            
                                            
                                            (249
                                            )
                                            
                                            
                                            1,177Interest – related
      party
                                            
                                            
                                            15
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            —Amortization of intangible
      assets
                                            
                                            
                                            739
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            656Other, net
                                            
                                            
                                            19
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (102
                                            )Total other expenses
      (income)
                                            
                                            
                                            3,936
                                            
                                            
                                            
                                            (91
                                            )
                                            
                                            
                                            3,968Income (loss) before income
      taxes
                                            
                                            
                                            (552
                                            )
                                            
                                            
                                            91
                                            
                                            
                                            
                                            1,996Provision for (benefit from)
      income taxes
                                            
                                            
                                            (57
                                            )
                                            
                                            
                                            84
                                            
                                            
                                            
                                            640Net income
      (loss)
                                            
                                            $
                                            (495
                                            )
                                            
                                            $
                                            7
                                            
                                            
                                            $
                                            1,356Net income (loss) per common
      share:Basic
                                            
                                            $
                                            (.03
                                            )
                                            
                                            $
                                            —Diluted
                                            
                                            $
                                            (.03
                                            )
                                            
                                            $
                                            —Weighted average shares used to
      compute net income (loss) per common share:Basic
                                            
                                            
                                            15,333,160
                                            
                                            
                                            
                                            9,375,000Diluted
                                            
                                            
                                            15,333,160
                                            
                                            
                                            
                                            11,880,099





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


4


Cyalume Technologies
Holdings, Inc.


Condensed Consolidated Statements of
Operations


(in thousands, except shares andper share
information)


(Unaudited)





PredecessorFor the Six
                                            
                                            
                                            For the Six
                                            
                                            
                                            For the SixMonths Ended
                                            
                                            
                                            Months Ended
                                            
                                            
                                            Months EndedJune 30,
                                            
                                            
                                            June 30,
                                            
                                            
                                            June 30,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2008Revenues
                                            
                                            $
                                            14,583
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            20,853Cost of goods
      sold
                                            
                                            
                                            8,436
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            9,790Gross
profit
                                            
                                            
                                            6,147
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            11,063Other expenses
      (income):Sales and
      marketing
                                            
                                            
                                            1,531
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,794General and
      administrative
                                            
                                            
                                            2,602
                                            
                                            
                                            
                                            412
                                            
                                            
                                            
                                            2,308Research and
      development
                                            
                                            
                                            808
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            678Interest,
    net
                                            
                                            
                                            1,252
                                            
                                            
                                            
                                            (613
                                            )
                                            
                                            
                                            2,496Interest – related
      party
                                            
                                            
                                            29
                                            
                                            
                                            
                                            3
                                            
                                            
                                            
                                            —Amortization of intangible
      assets
                                            
                                            
                                            1,734
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,309Other, net
                                            
                                            
                                            63
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (1,097
                                            )Total other expenses
      (income)
                                            
                                            
                                            8,019
                                            
                                            
                                            
                                            (198
                                            )
                                            
                                            
                                            7,488Income (loss) before income
      taxes
                                            
                                            
                                            (1,872
                                            )
                                            
                                            
                                            198
                                            
                                            
                                            
                                            3,575Provision for (benefit from)
      income taxes
                                            
                                            
                                            (604
                                            )
                                            
                                            
                                            (20
                                            )
                                            
                                            
                                            1,237Net income
      (loss)
                                            
                                            $
                                            (1,268
                                            )
                                            
                                            $
                                            218
                                            
                                            
                                            $
                                            2,338Net income (loss) per common
      share:Basic
                                            
                                            $
                                            (0.08
                                            )
                                            
                                            $
                                            0.02Diluted
                                            
                                            $
                                            (0.08
                                            )
                                            
                                            $
                                            0.02Weighted average shares used to
      compute net income (loss) per common share:Basic
                                            
                                            
                                            14,956,448
                                            
                                            
                                            
                                            9,375,000Diluted
                                            
                                            
                                            14,956,448
                                            
                                            
                                            
                                            11,871,317




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


5


Cyalume Technologies
Holdings, Inc.


CondensedConsolidated Balance
Sheets


(in thousands, except shares and per share
information)




June 30,2009
                                                            (unaudited)
                                                          
                                                          
                                                          December 31,
                                                            2008AssetsCurrent assets:Cash
                                                          
                                                          $
                                                          1,002
                                                          
                                                          
                                                          $
                                                          3,952Accounts receivable, net of
      allowance for doubtful accounts of $221 and $452 at June 30, 2009 and
      December 31, 2008, respectively
                                                          
                                                          
                                                          4,588
                                                          
                                                          
                                                          
                                                          3,508Inventories,
      net
                                                          
                                                          
                                                          10,875
                                                          
                                                          
                                                          
                                                          11,447Income taxes
      refundable
                                                          
                                                          
                                                          141
                                                          
                                                          
                                                          
                                                          701Deferred income
      taxes
                                                          
                                                          
                                                          333
                                                          
                                                          
                                                          
                                                          317Prepaid expenses and other current
      assets
                                                          
                                                          
                                                          294
                                                          
                                                          
                                                          
                                                          195Totalcurrent
    assets
                                                          
                                                          
                                                          17,233
                                                          
                                                          
                                                          
                                                          20,120Property, plant and equipment,
      net
                                                          
                                                          
                                                          8,211
                                                          
                                                          
                                                          
                                                          7,882Goodwill
                                                          
                                                          
                                                          58,281
                                                          
                                                          
                                                          
                                                          60,896Other intangible assets,
      net
                                                          
                                                          
                                                          49,705
                                                          
                                                          
                                                          
                                                          49,426Derivatives
                                                          
                                                          
                                                          26
                                                          
                                                          
                                                          
                                                          —Other noncurrent
      assets
                                                          
                                                          
                                                          152
                                                          
                                                          
                                                          
                                                          188Total
assets
                                                          
                                                          $
                                                          133,608
                                                          
                                                          
                                                          $
                                                          138,512Liabilities and Stockholders’
      EquityCurrent
      liabilities:Lines of
    credit
                                                          
                                                          $
                                                          3,300
                                                          
                                                          
                                                          $
                                                          3,500Current portion of notes
      payable
                                                          
                                                          
                                                          4,056
                                                          
                                                          
                                                          
                                                          3,621Accounts
      payable
                                                          
                                                          
                                                          3,687
                                                          
                                                          
                                                          
                                                          3,230Accrued expenses and other current
      liabilities
                                                          
                                                          
                                                          2,519
                                                          
                                                          
                                                          
                                                          2,550Common stock subject to mandatory
      redemption
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,123Notes payable and advance due to
      related parties
                                                          
                                                          
                                                          64
                                                          
                                                          
                                                          
                                                          64Income taxes
      payable
                                                          
                                                          
                                                          7
                                                          
                                                          
                                                          
                                                          5Total current
      liabilities
                                                          
                                                          
                                                          13,633
                                                          
                                                          
                                                          
                                                          14,093Notes payable, net of current
      portion
                                                          
                                                          
                                                          23,662
                                                          
                                                          
                                                          
                                                          25,581Notes payable due to related
      parties, net of current portion
                                                          
                                                          
                                                          1,033
                                                          
                                                          
                                                          
                                                          1,000Deferred income
      taxes
                                                          
                                                          
                                                          7,906
                                                          
                                                          
                                                          
                                                          9,237Derivatives
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          163Asset retirement obligation, net
      of current portion
                                                          
                                                          
                                                          133
                                                          
                                                          
                                                          
                                                          128Total
      liabilities
                                                          
                                                          
                                                          46,367
                                                          
                                                          
                                                          
                                                          50,202Commitments 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 authorized; 15,328,775 and 13,719,035 issued and outstanding at
      June 30, 2009 and December 31, 2008,
    respectively
                                                          
                                                          
                                                          15
                                                          
                                                          
                                                          
                                                          14Additional paid-in
      capital
                                                          
                                                          
                                                          87,545
                                                          
                                                          
                                                          
                                                          87,348Retained earnings (accumulated
      deficit)
                                                          
                                                          
                                                          (39
                                                          )
                                                          
                                                          
                                                          1,229Accumulated other comprehensive
      loss
                                                          
                                                          
                                                          (280
                                                          )
                                                          
                                                          
                                                          (281
                                                          )Total stockholders’
      equity
                                                          
                                                          
                                                          87,241
                                                          
                                                          
                                                          
                                                          88,310Total liabilities and
      stockholders' equity
                                                          
                                                          $
                                                          133,608
                                                          
                                                          
                                                          $
                                                          138,512





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


6





Cyalume Technologies
Holdings, Inc.


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


(in thousands, except
shares)


(Unaudited)




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, 2008
                                            
                                            
                                            13,719,035
                                            
                                            
                                            $
                                            14
                                            
                                            
                                            $
                                            87,348
                                            
                                            
                                            $
                                            1,229
                                            
                                            
                                            $
                                            (281
                                            )
                                            
                                            $
                                            88,310
                                            
                                            
                                            $
                                            —Exercise
      of warrants
                                            
                                            
                                            5,500
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            27
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            27
                                            
                                            
                                            
                                            —Exercise
      of warrants - cashless
                                            
                                            
                                            1,630,143
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            (1
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Common
      stock repurchased
                                            
                                            
                                            (32,903
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (263
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (263
                                            )
                                            
                                            
                                            —Common
      stock awarded (not yet issued) for acquisition-related
      services
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            225
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            225
                                            
                                            
                                            
                                            —Share-based
      compensation expense - warrants awarded to
      director
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            110
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            110
                                            
                                            
                                            
                                            —Share-based
      compensation expense - options awarded under the 2009 Omnibus Securities
      and Incentive Plan
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            52
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            52
                                            
                                            
                                            
                                            —Share-based
      compensation expense - common stock awarded to non-employee
      consultant
                                            
                                            
                                            7,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            25
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            25
                                            
                                            
                                            
                                            —Share-based
      compensation expense - common stock awarded (not yet issued) under the
      2009 Omnibus Securities and Incentive Plan
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            22
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            22
                                            
                                            
                                            
                                            —Foreign
      currency translation adjustments
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (117
                                            )
                                            
                                            
                                            (117
                                            )
                                            
                                            
                                            (117
                                            )Unrealized
      gain on cash flow hedges, net of taxes of
$71
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            118
                                            
                                            
                                            
                                            118
                                            
                                            
                                            
                                            118Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (1,268
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (1,268
                                            )
                                            
                                            
                                            (1,268
                                            )Comprehensive
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            (1,267
                                            )Balance
      at June 30, 2009
                                            
                                            
                                            15,328,775
                                            
                                            
                                            $
                                            15
                                            
                                            
                                            $
                                            87,545
                                            
                                            
                                            $
                                            (39
                                            )
                                            
                                            $
                                            (280
                                            )
                                            
                                            $
                                            87,241





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


7




Cyalume Technologies
Holdings, Inc.


Condensed Consolidated Statements
of Cash Flows


(in thousands, except
shares)


(Unaudited)





PredecessorFor the Six
                                                                                                                      
                                                                                                                      For the Six
                                                                                                                      
                                                                                                                      
                                                                                                                      For the SixMonths Ended
                                                                                                                      
                                                                                                                      Months Ended
                                                                                                                      
                                                                                                                      
                                                                                                                      Months EndedJune 30,
                                                                                                                      
                                                                                                                      June 30,
                                                                                                                      
                                                                                                                      
                                                                                                                      June 30,2009
                                                                                                                      
                                                                                                                      2008
                                                                                                                      
                                                                                                                      
                                                                                                                      2008Cash flows from operating
      activities:Net income
      (loss)
                                                                                                                      $
                                                                                                                      (1,268
                                                                                                                      )
                                                                                                                      $
                                                                                                                      218
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      2,338Adjustments to reconcile net
      income (loss) to net cash
                                                                                                                        provided by operating
      activities:Depreciation of property, plant
      and equipment
                                                                                                                      
                                                                                                                      320
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      428Amortization
                                                                                                                      
                                                                                                                      2,420
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,473Provision for deferred income
      taxes
                                                                                                                      
                                                                                                                      (869
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      620Other non-cash
      expenses
                                                                                                                      
                                                                                                                      503
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      556Changes in operating assets and
      liabilities:Accounts
      receivable
                                                                                                                      
                                                                                                                      (1,127
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (35
                                                                                                                      )Inventories
                                                                                                                      
                                                                                                                      (166
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (2,000
                                                                                                                      )Prepaid expenses and other current
      assets
                                                                                                                      
                                                                                                                      (101
                                                                                                                      )
                                                                                                                      
                                                                                                                      55
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      208Deferred acquisition
      costs
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      (177
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      —Accounts payable and accrued
      liabilities
                                                                                                                      
                                                                                                                      229
                                                                                                                      
                                                                                                                      
                                                                                                                      (4
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,354
                                                                                                                      )Income taxes payable,
      net
                                                                                                                      
                                                                                                                      532
                                                                                                                      
                                                                                                                      
                                                                                                                      (20
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,834
                                                                                                                      )Accrued interest on notes payable
      to related parties
                                                                                                                      
                                                                                                                      (2)
                                                                                                                      
                                                                                                                      
                                                                                                                      13
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Net cash provided by operating
      activities
                                                                                                                      
                                                                                                                      471
                                                                                                                      
                                                                                                                      
                                                                                                                      85
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      400Cash flows from investing
      activities:Payments to trust
      account
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      (180
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      —Purchases of long-lived
      assets
                                                                                                                      
                                                                                                                      (283
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (779
                                                                                                                      )Net cash used in investing
      activities
                                                                                                                      
                                                                                                                      (283
                                                                                                                      )
                                                                                                                      
                                                                                                                      (180
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (779
                                                                                                                      )Cash flows from financing
      activities:Repayment of advances from and
      notes payable to related parties
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      (100
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      —Payments for common stock subject
      to redemption
                                                                                                                      
                                                                                                                      (1,123
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Net repayment of line of
      credit
                                                                                                                      
                                                                                                                      (200
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Payments of Predecessor notes
      payable
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,702
                                                                                                                      )Repayment of long-term notes
      payable
                                                                                                                      
                                                                                                                      (1,646
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Payments to reacquire and retire
      common stock
                                                                                                                      
                                                                                                                      (263
                                                                                                                      )
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Refund of debt issue
      costs
                                                                                                                      
                                                                                                                      10
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Proceeds from exercises of
      warrants
                                                                                                                      
                                                                                                                      27
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —Net cash used in financing
      activities
                                                                                                                      
                                                                                                                      (3,195
                                                                                                                      )
                                                                                                                      
                                                                                                                      (100
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,702
                                                                                                                      )Effect of exchange rate changes on
      cash
                                                                                                                      
                                                                                                                      57
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      108Net decrease in
      cash
                                                                                                                      
                                                                                                                      (2,950
                                                                                                                      )
                                                                                                                      
                                                                                                                      (195
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,973
                                                                                                                      )Cash, beginning of
      period
                                                                                                                      
                                                                                                                      3,952
                                                                                                                      
                                                                                                                      
                                                                                                                      570
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5,743Cash, end of
      period
                                                                                                                      $
                                                                                                                      1,002
                                                                                                                      
                                                                                                                      $
                                                                                                                      375
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      3,770




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


8





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 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 footnotes 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 statementsrecognize the effects of all subsequent events that provide additional
evidence about conditions that existed at June 30, 2009, including the estimates
inherent in the process of preparing financial statements.  We have
evaluated such subsequent events through August
14,2009, which is the date the accompanying unaudited
interim condensed consolidatedfinancial statements were issued (see also
Note 14). Additionally, all
significant intercompany accounts and transactions have been eliminated in
consolidation.




Certain
amounts in prior periods have been reclassified to conform to the 2009
presentation. These reclassifications had no effect on 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 interim condensed
consolidated financial statements. Operating results for the three and six-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, 2008 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/A for the year ended December 31, 2008.





2.
            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 business. 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 has a
wholly-owned subsidiary (Cyalume Technologies, S.A.S. or “CTSAS”). At the
Acquisition date, Vector changed its name to Cyalume Technologies Holdings, Inc.
(“Cyalume”). In these interim condensed consolidated financial statements and
footnotes, Cyalume’s operating results include the operations of the former
Vector for 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.
CTSAS is geographically located in France and represents us in certain
international markets, primarily Europe and Asia.





3.
            NEW
      ACCOUNTING PRONOUNCEMENTS





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“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 SFAS No. 160 is to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. The adoption of SFAS No. 160 on January
1, 2009 did not have an impact on our condensed consolidated financial
statements.


9





Cyalume
Technologies Holdings, Inc.


Notes
to Condensed 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.
The adoption of SFAS No. 161 on January 1, 2009 resulted in additional
disclosures in our condensed consolidated financial statements.





Effective
January 1, 2009, we adopted Statement of Financial Accounting Standard No. 157,
Fair Value
Measurements, (“SFAS No. 157”), for our nonfinancial assets and
liabilities that are measured at fair value on a non-recurring basis. 
Previous to January 1, 2009, SFAS No. 157 did not apply to such assets and
liabilities. The adoption of SFAS No. 157 on January 1, 2009 for such assets and
liabilities did not have an impact on our condensed consolidated financial
statements.





In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP No. 107-1”). FSP No. 107-1 requires
summarized disclosure in interim periods of the fair value of all financial
instruments for which it is practicable to estimate that value, whether
recognized or not recognized in the financial statements, as required by SFAS
No. 107, Disclosures about
Fair Value of Financial InstrumentsandAccounting Principles
Board Opinion No. 28, Interim
Financial Reporting.Previous to FSP No. 107-1, such disclosures were
required only for annual periods. The adoption of FSP No. 107-1 on April 1, 2009
resulted in additional disclosures in our unaudited interim condensed
consolidated financial statements.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No.
165”). SFAS No. 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.The adoption of SFAS No. 165 on June 30, 2009 required us
to disclose the date through which we have evaluated subsequent events and
whether that date is the date the financials were issued.





4.
            INVENTORIES





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


June 30,
                                        2009
                                      
                                      
                                      December 31,
                                        2008Raw
    materials
                                      
                                      $
                                      5,011
                                      
                                      
                                      $
                                      5,822Work-in-process
                                      
                                      
                                      3,543
                                      
                                      
                                      
                                      3,484Finished
    goods
                                      
                                      
                                      2,321
                                      
                                      
                                      
                                      2,141$
                                      10,875
                                      
                                      
                                      $
                                      11,447





5.
            GOODWILL





Goodwill
represents the excess of the cost of acquiring CTI over the net fair value
assigned to assets acquired and liabilities assumed. Changes in the carrying
amount of goodwill between December 31, 2008 and June 30, 2009 consist of the
following (all amounts in thousands):





Balance
      on December 31, 2008
                        
                        $
                        60,896Additional goodwill
      recognized:Finalization of thefair value of intangible
      assets
                        
                        
                        (2,024
                        )Finalization of thefair value of property, plant
      & equipment
                        
                        
                        (372
                        )Additional Acquisition costs
      recognized
                        
                        
                        435Adjustments resulting fromfinalizationof deferred
      taxes
                        
                        
                        (549
                        )Changes due to foreign currency
      translation adjustments
                        
                        
                        (105
                        )Balance
      on June 30, 2009
                        
                        $
                        58,281




10


Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





6.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





The
derivative liabilities as of June 30, 2009 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
      assets)
                
                $
                26





The
Predecessor did not hold any derivative instruments before the
Acquisition.





Interest
Rate Swaps





Simultaneous
with the Acquisition, 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 certain senior long-term notes payable that were also entered
into on the date of the Acquisition. 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 accumulated other comprehensive loss. These changes in fair value
must be reclassified in whole or in part from consolidated accumulated other
comprehensive loss into earnings if, and when, a comparison of the swaps 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 accumulated
other comprehensive 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 swaps’ contractual lives using an
estimated risk-free interest rate for each swap settlement date.





Currency
Forward Contracts





CTSAS’s
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’s
exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’s
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 loss (income) on our condensed
consolidated statement of operations. The fair value of these
contracts are 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 June 30, 2009, we hold no such
currency forward contracts.





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 June 30, 2009 was as follows (all amounts
in thousands):




Gain (Loss)
                      
                      
                      Gain (Loss)
                      
                      
                      Gain (Loss)In AOCI(1)
                      
                      
                      Reclassified(2)
                      
                      
                      in Earnings(3)Derivatives
      in cash flow hedging relationships:Interest rate
      swaps
                      
                      $
                      131
                      
                      
                      $
                      —
                      
                      
                      $
                      —Derivatives not designated as
      hedging instruments:Forward currency
      contracts
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      3





(1)
            Amount
      recognized in accumulated other comprehensive loss (AOCI) (effective
      portion and net of taxes) during the three months ended June 30,
      2009.


(2)
            Amount
      of gain (loss) originally recorded in AOCI but reclassified from AOCI into
      earnings during the three months ended June 30,
  2009.


11


Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





(3)
            Amount
      of gain (loss) recognized in earnings on the derivative (ineffective
      portion and amount excluded from effectiveness testing) reported in other
      loss (income) on the condensed consolidated statement of operations for
      the three months ended June 30,
2009.





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 six months ended June 30, 2009 was as follows (all amounts in
thousands):




Gain (Loss)
                    
                    
                    Gain (Loss)
                    
                    
                    Gain (Loss)In AOCI(1)
                    
                    
                    Reclassified(2)
                    
                    
                    in Earnings(3)Derivatives
      in cash flow hedging relationships:Interest rate
      swaps
                    
                    $
                    118
                    
                    
                    $
                    —
                    
                    
                    $
                    —Derivatives not designated as
      hedging instruments:Forward currency
      contracts
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —





(1)
            Amount
      recognized in accumulated other comprehensive loss (AOCI) (effective
      portion and net of taxes) during the six months ended June 30,
      2009.


(2)
            Amount
      of gain (loss) originally recorded in AOCI but reclassified from AOCI into
      earnings during the six months ended June 30,
  2009.


(3)
            Amount
      of gain (loss) recognized in earnings on the derivative (ineffective
      portion and amount excluded from effectiveness testing) reported in other
      loss (income) on the condensed consolidated statement of operations for
      the six months ended June 30, 2009.





7.
            SHARE-BASED
      AWARDS





On March 3, 2009, our Board of Directors
adopted theCyalume Technologies Holdings, Inc. 2009 Omnibus Securities
and Incentive Plan (the “Plan”). The Plan was approved during our Annual Meeting
of the Stockholders on June 18, 2009. 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. We
expect to file Form S-8 with the SEC to register the shares under the
Plan.





Also on
March 3, 2009, the Board of Directors authorized the following (i) 75,000
restricted shares of common stock to non-employee consultants; (ii) 133,333
restricted shares of common stock and 200,000 restricted options to our
executive officers and other management; and, (iii) a total of 82,500 options to
directors.  Details on these awards are as follows:





·
            The
      75,000 restricted shares to non-employee consultants (including 45,000
      earned by our current Chief Executive Officer as a consultant to the
      Company prior to becoming an employee) are to be issued as payment for
      services rendered in conjunction with the Acquisition. The fair value of
      this award was determined to be $225,000 using the quoted market price of
      the common stock on March 3, 2009 of $3. This is recorded as an increase
      to goodwill related to the Acquisition on the accompanying condensed
      consolidated balance sheet as of June 30, 2009. These restricted shares
      will vest over a 3-year period with no provision requiring continued
      employment or service to the
Company.





·
            The
      114,333 restricted shares to officers and other management are (i)
      compensation for their services in 2009, (ii) earned based on meeting
      board-determined performance goals and (iii) require continued employment
      over the 3-year vesting period.The fair value of the
      award was determined to be $172,000 using the quoted market price of the
      common stock on March 3, 2009 of $3 and applying appropriate estimated
      forfeiture rates.





·
            The
      9,000 common shares to our executive officers and other management are (i)
      compensation for their services during 2008, (ii) were earned based on
      meeting board-determined goals and (iii) require continued employment over
      the 3-year vesting period.The fair value of the award was determined to be $27,000, using the
      quoted market price of the common stock on March 3, 2009 of
      $3.


12


Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





·
            Remaining
      restricted shares totaling 10,000 have been reserved for future
      awards.





·
              The
      200,000 restricted options to our Chief Executive Officer are (i)
      compensation for his services in 2009, (ii) earned based on meeting
      board-determined performance goals and (iii) require continued employment
      over the 3-year vesting period. The 82,500 options to directors are
      compensation for their services as directors that will vest immediately.
      The award’s fair value of $386,000 was determined using the Black-Scholes
      pricing model. The following
      assumptions were usedto value the award:


Risk-free interest
      rate
                      
                      
                      2.93
                      %Expected
    term
                      
                      10 yearsExpected
      volatility   (1)
                      
                      
                      34.11
                      %Expected forfeitures for options
      to our chief executive officer
                      
                      
                      50
                      %Expected forfeitures for options
      to our directors
                      
                      
                      0
                      %Dividend
    yield
                      
                      
                      0
                      %





On April
24, 2009, the Board of Directors awarded to one director warrants to purchase
150,000 shares of our common stock at $3.50 per share. The warrants are for
compensation for services as director that vested immediately. The award’s fair
value of $110,000 was determined using the Black-Scholes pricing model. The following assumptions were usedto value the
award:




Risk-free interest
      rate
                      
                      
                      1.87
                      %Expected
    term
                      
                      5 yearsExpected
      volatility   (1)
                      
                      
                      25.98
                      %Expected forfeitures for options
      to our directors
                      
                      
                      0
                      %Dividend
    yield
                      
                      
                      0
                      %




(1)
            Because
      our common stock did not have a trading history that was representative of
      an operating company as of the date of the award, the expected 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.





On May
16, 2009, the Board of Directors awarded 7,000 common shares to a non-employee
consultant as payment for investor relations-related services performed. The
fair value of this award was determined to be $25,000 using the quoted market
price of the common stock on May 16, 2009 of $3.50 per share.





During
the three and six months ended June 30, 2009, total expense recorded for all
awards described above was $173,000 and $209,000, respectively.





8.
            RESTRUCTURING
      COSTS





During
six months ended June 30, 2008, the Predecessor underwent a corporate
restructuring pursuant to which the CEO and two Vice-Presidents left CTI,
resulting in a restructuring charge of $1.1 million.  The following
table summarizes restructuring cost activity from December 31, 2008 through June
30, 2009 (all amounts in thousands):





Balance
      on December 31, 2008
                      
                      $
                      229Cash
      payments
                      
                      
                      (229
                      )Balance
      on June 30, 2009
                      
                      $
                      —





The $1.1
million of restructuring charges is included in the Predecessor’s condensed
consolidated statement ofoperationsas an other loss for thesixmonths endedJune30, 2008.





9.
            INCOME
      TAXES





For the
six months ended June 30, 2009 and for the Predecessor’s six months ended June
30, 2008, effective tax rates of 32% and 35%, respectively, differed from the
statutory rate of 34% due to state and foreign taxes. For the six months ended
June 30, 2008, the effective tax rate of (10)% differed from the statutory rate
of 34% due to tax-exempt interest income, state taxes and an increase in the
valuation allowance on deferred income tax assets.


13


Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





For the
three months ended June 30, 2009 and for the Predecessor’s three months ended
June 30, 2008, effective tax rates of 10% and 32%, respectively, differed from
the statutory rate of 34% due to state and foreign taxes. For the three months
ended June 30, 2008, the effective tax rate of 92% differed from the statutory
rate of 34% due to tax-exempt interest income, state taxes and an increase in
the valuation allowance on deferred income tax assets.





10.
            NET INCOME (LOSS) PER COMMON
      SHARE





We account for and disclose net income(loss)per common share in accordance with SFAS
No. 128,Earnings per
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(loss)per common share is computed by dividing
net income(loss)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).




Three Months Ended June 30,
                          
                          Six Months Ended June 30,2009
                          
                          2008
                          
                          2009
                          
                          2008Basic:Net income (loss) (in
      thousands)
                          $
                          (495
                          )
                          $
                          7
                          
                          $
                          (1,268
                          )
                          $
                          218Weighted average
      shares
                          
                          15,333,160
                          
                          
                          9,375,000
                          
                          
                          14,956,448
                          
                          
                          9,375,000Basic income (loss) per common
      share
                          $
                          (0.03
                          )
                          $
                          —
                          
                          $
                          (0.08
                          )
                          $
                          0.02Diluted:Net income (loss) (in
      thousands)
                          $
                          (495
                          )
                          $
                          7
                          
                          $
                          (1,268
                          )
                          $
                          218Weighted average
      shares
                          
                          15,333,160
                          
                          
                          9,375,000
                          
                          
                          14,956,448
                          
                          
                          9,375,000Effect of dilutive
      securities
                          
                          —
                          (1)
                          
                          2,505,099
                          
                          
                          —
                          (1)
                          
                          2,496,317Weighted average shares, as
      adjusted
                          
                          15,333,160
                          
                          
                          11,880,099
                          
                          
                          14,956,448
                          
                          
                          11,871,317Diluted income (loss) per common
      share
                          $
                          (0.03
                          )
                          $
                          —
                          
                          $
                          (0.08
                          )
                          $
                          0.02





(1)
            Since we experienced a loss during
      this period, common shares issuable upon exercise of convertible
      securities were excluded from the loss per share calculation because the
      effect would be
antidilutive.





The followingcommonsharesissuable upon exercise of convertible
securitieswere excluded
from the calculation of diluted net income(loss)per common share because their effect
was antidilutive for each of the periods presented:





ForThePeriodsEndedJune30,2009
                
                2008Warrants
                
                
                4,370,256
                
                
                —Options
                
                
                1,745,000
                
                
                1,462,500





11.
            COMMITMENTS
      AND CONTINGENCIES





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 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.


14





Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





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 condensed consolidated financial statements of
the Predecessor for the six months ended June 30, 2008.





12.
            FAIR
  VALUE





Effective
January 1, 2008, we adopted SFAS No. 157, which establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements.  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 as follows:





Level
      1
            Quoted prices for identical assets
      or liabilities in active marketsto 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 June 30, 2009, the only assets and liabilities required to be
measured at fair value on a recurring basis were the interest rate swaps
described in Note 6, all of which are measured at fair value using Level 2
inputs.  Previous to June 30, 2009, we believed our derivative
instruments discussed in Note 6 (interest rate swaps and currency forward
contracts) were valued with Level 3, rather than Level 2, inputs. The following
table reflects their activity, including their transfer from Level 3 to Level 2,
for the three and six month periods ended June 30, 2009 (all amounts in
thousands):





Currency
                        Forward
                        Contracts
                      
                      
                      InterestRate
                        SwapsBalance as of December 31,
      2008
                      
                      $
                      —
                      
                      
                      $
                      (163
                      )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
                      
                      
                      (3
                      )
                      
                      
                      —Included in other comprehensive
      loss
                      
                      
                      —
                      
                      
                      
                      (21
                      )Purchases, issuances and
      settlements, net
                      
                      
                      —
                      
                      
                      
                      —Balance as of March 31,
      2009
                      
                      
                      (3
                      )
                      
                      
                      (184
                      )Transfers into Level 3 from Level
      1 or Level 2
                      
                      
                      —
                      
                      
                      
                      —Transfers out of Level 3 into
      Level 1 or Level 2
                      
                      
                      3
                      
                      
                      
                      184Total gains or (losses), realized
      or unrealized:Included in
      earnings
                      
                      
                      —
                      
                      
                      
                      —Included in other comprehensive
      loss
                      
                      
                      —
                      
                      
                      
                      —Purchases, issuances and
      settlements, net
                      
                      
                      —
                      
                      
                      
                      —Balance as of June 30,
      2009
                      
                      $
                      —
                      
                      
                      $
                      —





Fair
Value of Other Financial Instruments





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.


15


Cyalume
Technologies Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements





13.
            SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





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





SixMonthsEndedJune30,
                  
                  
                  Predecessor
                    FortheSix
                    MonthsEnded
                    June30,2009
                  
                  2008
                  
                  
                  2008Interest
                  
                  $
                  970
                  
                  
                  $
                  —
                  
                  
                  $
                  2,227Income
taxes
                  
                  
                  395
                  
                  
                  
                  —
                  
                  
                  
                  1,973





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





Six Months Ended June 30,
                    
                    Predecessor
                      For the Six
                      Months Ended
                      June 30,2009
                    
                    2008
                    
                    
                    2008Increase in the Acquisition date
      fair value of intangible assets (a reduction of
      goodwill)
                    $
                    2,024
                    
                    $
                    —
                    
                    $
                    —Increase in the Acquisition date
      fair value of property, plant & equipment (a reduction of
      goodwill)
                    
                    372
                    
                    
                    —
                    
                    
                    —Accrual of costs directly related
      to the Acquisition (an increase to goodwill)
                    
                    435
                    
                    
                    —
                    
                    
                    —Reduction of goodwill resulting
      from subsequent recognition of deferred taxes
                    
                    (549
                    )
                    
                    —
                    
                    
                    —





14.
            SUBSEQUENT
      EVENTS





In July 2009, $55,000 of the$64,000 notes payable due
to related parties that existed at June 30, 2009 was repaid in full, along with
all accrued interest, through the issuance of 17,150 restricted shares of our
common stock. This transaction will have a negligible effect on our consolidated
financial statements.




As of June 30, 2009, we did not meet two
financial covenants that utilize non-GAAP measurements contained in our
Revolving Credit and Term Loan Agreement. TheRevolving Credit and Term Loan Agreement
governs our notes payable, line of credit and derivative transactions with our
senior lender. On August 14, 2009, we have reached an agreement subject to
conditions precedent with the senior lender (which the parties believe will be
satisfied) to waive covenant violations and modify terms of the Revolving Credit
and Term Loan Agreement.. There have been no principal or interest payment
defaults on these notes and we do not expect any such payment defaults in the
future. In accordancewiththe waiveragreement, certain other terms of the Revolving
Credit and Term Loan Agreement were changed, including:(i)modification (some more and some less
restrictive) of and addition to the required financial covenants associated with
the Revolving Credit and Term Loan Agreement,(ii)shortening of the line of credit’s
maturityby one year to
December 31, 2010 (iii)a
change in the calculation of availability of the line of creditand (iv) a 1.5% increase in the current
borrowing rate.  We believe it is probable
we will satisfy these future covenant requirements.




16




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




This
discussion and analysis should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements that are
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008 (the Annual Report), as well as the consolidated financial statements
(unaudited) and notes to the condensed consolidated financial statements
(unaudited) and accompanying notes contained in this report.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.




Overview




On December 19, 2008, we purchased
Cyalume Technologies, Inc. (“CTI”). Prior to the acquisition of CTI, we did not
engage in any substantive commercial business. The Results of Cyalume Operations
section below compares the financial results from our financial statements for
the three-month and six-month periods ended June 30, 2009 to the comparable
periods in 2008, which did not include the operations of CTI, and also to the
operating results of CTI (the “Predecessor”) for the comparable periods in
2008.




Results
of Cyalume Operations




Revenues:  For the three months ended June
30, 2009, our revenues were $8.0 million, compared to same period 2008 revenues
for us of $0 and for the Predecessor of $10.7 million.  For the six
months ended June 30, 2009, our revenues were $14.6 million, compared to same
period 2008 revenues for us of $0 and for the Predecessor of $20.9 million. We
did not engage in any substantive business operations in the first two quarters
of 2008, and as such we recorded no sales during those quarters. For the
three-month and six-month periods ended June 30, 2009, our sales were
significantly lower than the Predecessor’s sales for the comparable periods in
2008 due toa
reduction inunits of
both chemical light and reflective products soldto the U.S. Militaryand foreign militaries. We believe this
reduced demand forour
products was temporary as we are not aware of any material changes in the
protocol for the use of our products.Beginning in May 2009, orders from
the U.S. Military for chemical light products increased to more normal levels,
which supports our belief that the sales reduction is temporary. As a result of
the increased orders for the chemical light products, revenues for the
three-month period ending June 30, 2009 were 20% higher than revenues for the
first quarter, although still below revenues for the same period a year ago. We
expect sales of reflective products to the U.S. Military and chemical light
products to foreign militaries to increase to more normal levels towards the end
of our third fiscal quarter. This is when we expect that stocking levels held by
the various militaries will need to be replenished.




Revenues
from our ammunition products of $2.9 million for the six-month period ended June
30, 2009 were approximately 97% higher than for the same period in 2008, meeting
our growth expectations and partially offsetting declines in the other areas of
our business.




Gross
profit:  For the three
months ended June 30, 2009, our gross profit was $3.4 million, compared to same
period 2008 gross profit for us of $0 and for the Predecessor of $6.0
million.  For the six months ended June 30, 2009, our gross profit was
$6.1 million, compared to same period 2008 gross profit for us of $0 and for the
Predecessor of $11.1 million. We did not engage in any substantive business
operations in the first two quarters of 2008, and as such we recorded no cost of
sales during those quarters. For the three-month and six-month periods ended
June 30, 2009, our cost of sales were significantly lower than the Predecessor’s
cost of sales for the comparable periods in 2008 due to the reduction in units
sold discussed above.  Our gross margin for the six-months ended June
30, 2009 was 42.2% compared to 53.1% for the Predecessor in 2008. The decline in
gross margin is attributable to the decline in sales of higher-margin chemical
light sticks to the U.S. Military, the cost of a workforce reduction and the
amortization of $572,000 of the inventory step-up to fair market value arising
from the acquisition of CTI included in cost of goods sold, combined with normal
inflationary increases in costs of labor and materials. We anticipate the
amortization of the remaining$148,000step-up in the third quarter of
2009.




Sales and
marketingexpenses:For the three months ended June
30, 2009, our sales and marketing expenses were $746,000, compared to same
period 2008 sales and marketing expenses for us of $0 and for the Predecessor of
$862,000. For the six months ended June 30, 2009, oursales and marketing expenses were $1.5
million, compared to same period 2008 sales and marketing expenses for us of $0
and for the Predecessor of $1.8 million. We did not engage in any substantive
business operations in the first two quarters of 2008, and as such we recorded
no sales and marketing expense during those quarters. The reduction compared to
the Predecessor is due to the change incommercial sales strategies to make
more extensive use of distributors who have established key relations with
end-users, rather than trying to sell direct to consumers, thus reducing direct selling
expenses.




General and
administrative expenses:For the three months ended June
30, 2009, our general and administrative expenses were $1.4 million, compared to
same period 2008 general and administrative expenses for us of $157,000 and for
the Predecessor of $1.1 million. For the six months ended June 30, 2009,
ourgeneral and administrative expenses were
$2.6 million, compared to same period 2008 general and administrative expenses
for us of $412,000 and for the Predecessor of $2.3 million.  We did
not engage in any substantive business operations in the first two quarters of
2008, and as such the only general and administrative expenses incurred were
those related to the efforts to consummate a business acquisition and fulfilling
our obligations as a publicly traded company. The business acquisition-related
expenses ended in 2008 with the acquisition of CTI. Our general and
administrative expenses for the three-months and six-months ended June 30, 2009
include the expenses related to being a publicly owned company. The
Predecessor’s results for the comparable periods in 2008 did not include similar
expenses. As a result, our general and administrative expenses for 2009 are
greater than the Predecessor’s for the comparable
periods.


17




Interest expense
(income), net:For the three months ended June
30, 2009, our interest expense was $625,000, compared to same period 2008
interest income was for us of $249,000 and interest expense for the Predecessor
of $1.2 million. For the six months ended June 30, 2009, ourinterest expense was $1.3 million,
compared to same period 2008 interest income for us of $613,000 and interest
expense for the Predecessor of $2.5 million. In 2008, we earned interest income
on cash held in trust pending the completion of an acquisition. In December
2008, this cash was used to purchase CTI, and therefore, our interest income in
2009 has been minimal. Additionally, we borrowed $33.0 million in notes payable
to complete the acquisition of CTI, which resulted in our recording interest
expense in 2009. Interest expense has decreased compared to the Predecessor due
to our having less debt and paying lower average interest rates than the
Predecessor.




Amortization of
intangible assets:For the three months ended June 30, 2009, our amortization of intangible
asset expense was $739,000, compared to same period 2008 amortization of
intangible asset expense for us of $0 and for the Predecessor of $656,000. For
the six months ended June 30, 2009, ouramortization of intangible asset expense
was $1.7 million, compared to same period 2008 amortization of intangible asset
expense for us of $0 and for the Predecessor of $1.3 million. As a result of the
acquisition of CTI, we recorded significant intangible assets in December 2008.
We are amortizing intangible assets into expense in 2009, after having no
amortization expense in the comparable periods in 2008. The Predecessor had
intangible assets as a result of a prior acquisition, and related amortization
of intangible assets expense in 2008.




Otherloss(income), net:For the three months ended June
30, 2009, our other loss expense was $19,000, compared to same period 2008 other
loss (income) for us of $0 and other income for the Predecessor of $102,000. For
the six months ended June 30, 2009, ourother loss expense was $63,000, compared
to same period 2008 other loss (income) for us of $0 and other income for the
Predecessor of $1.1 million.Inthe first quarter of2008,the Predecessorreachedasettlement with thepre-2006 owners of CTI in connection
with litigation.The Predecessorreceived $3.0 million in cash,
resulting in a net gain of $2.8 million on the settlement.Several one-time expenses partially
offset this net gain. The most significant was a restructuring charge of $1.1
million. The Predecessorimplementeda restructuringto facilitateitssale tous,pursuant to which thechief executive officerand twovice-presidents left.In addition, the Predecessor incurred
approximately $0.6 million of costs related to the acquisition, primarily legal
and accounting fees.




Provision for
(benefit from) income taxes:The benefit from income taxesincreased for the
three-monthand six-month periodsendedJune 30, 2009 as compared to thesame periods in2008 due to net operating losses
generated by CTI.




Balance
Sheet




Assets, other than
cash: Assets, other than
cash, were $132.6 million at June 30, 2009 compared to $134.6 million at
December 31, 2008. The decrease is partly due to the amortizationof the inventory step up to fair market
values recorded at the date
we acquired CTI and intangible assets amortization during the first six months
of 2009.In addition, $2.0 million was moved
from goodwill into other intangible assets in the second quarter.The remaining changes in asset values
are the result of normal business activities.




Liabilities:Liabilities were $46.4 million at June
30, 2009, compared to $50.2 million at December 31, 2008. The decrease
isdue to: a)common stock subject to mandatory
redemption declining $1.1 million after the redemption of 139,850 shares of
common stock held by stockholders who voted against theacquisitionof CTIand which wasfinalized in the first quarter of
2009, and b) payments made
on notes payable. The remaining changesare the result of normal business
activities.




Liquidity
and Capital Resources


Cash on hand was $1.0 million at June
30, 2009 and $4.0 million at December 31, 2008. The decrease since December 31,
2008 resulted primarily from paying$1.1 million to complete the redemptionof common stock as part of
the acquisitionof CTI,$1.8 millionin payments on the line of credit and
notes payable, and $263,000
to purchase shares of our common stock from certain members of CTI
management.





As a result of the lower than
anticipated sales experienced this year, we did not meet two financial covenants
contained in our Revolving Credit and Term Loan Agreement for the three months
ended June 30, 2009. The Revolving Credit and Term Loan Agreement governs our
notes payable, line of credit and derivative transactions with our senior
lender. On August 14, 2009, we have reached an agreement subject to conditions
precedent with the senior lender (which the parties believe will be satisfied)
to waive covenant violations and modify terms of the Revolving Credit and Term
Loan Agreement. There have been no principal or interest payment defaults on
these notes and we do not expect any such payment defaults in the
future.
 
 In accordance with the waiver agreement,
certain other terms of the Revolving Credit and Term Loan Agreement were
changed, including modification (some more and some less restrictive) of and
addition to the required financial covenants associated with the Revolving
Credit and Term Loan Agreement, shortening of the line of credit’s maturity and
a change in the calculation of availability of the line of credit.  We
believe it is probable we will satisfy these future covenant
requirements.


During
the six months ended June 30, 2009, 1,635,643 shares of common stock were issued
due to the exercise of common stock warrants. The impact on liquidity was
negligible as most warrants were exercised on a cashless basis.


18




Forecasted principal and interest
payments on bank debt for the next 12 months are $6.0 million and will be funded
from operating cash flows. In 2008, we made $500,000 in bank debt
payments,exclusive of the
debt payments made at the acquisition of CTI.CTI made principal and interest
payments of $7.8 million in
2008 prior to being acquired by us.




The 2009 capital expenditures budgetis expected tobe funded from operating cash
flows.In the second
quarter we began the implementation of a new company-wide computer system to
improve our operations and financial information. It is anticipated that this
implementation, when completed in 2010, will cost $600,000 to complete, with
$114,000 incurred in the second quarter.









Off-Balance
Sheet Arrangements





Other than immaterial operating leases,
we did not have any off-balance sheet arrangements during 2009 or 2008.





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





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 have been 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, management believes 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.


19





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





Goodwill





We apply the provisions of SFAS No. 142,Goodwill and Other
Intangible Assets,to 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. No such charges have been recorded in the
three or six month periods ended June 30, 2009 and 2008.





Intangible Assets





Intangible assets include developed
technologies and patents, trademarks and trade names, customer relationships and
non-compete agreements, which are amortized over their estimated useful lives
(with the exception of 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 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 reported inventory reserve
balances.





Foreign Operations and
Currency





Accounts of our foreign subsidiary are
translated using their local currency as the functional currency. Income
statement accounts are converted to U.S. dollars using the average exchange rate
for the period covered by the income statement. 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 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 loss 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 4.
            CONTROLS AND
      PROCEDURES





Evaluation of 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 June 30, 2009. 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 June 30, 2009.





Changes in internal control over
financial reporting





There was no change in our internal
control over financial reporting that occurred during the three months endedJune 30, 2009that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


20





PART II– OTHER INFORMATION





ITEM1.
            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. A decision is expected
in late 2009.





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





Purchases
of Equity Securities by the Company and Affiliated Purchasers


Period
                
                TotalNumber
                  ofShares
                  Purchased
                
                
                Average
                  Price
                  Paidper
                  Share
                
                
                TotalNumberof
                  SharesPurchasedas
                  PartofPublicly
                  AnnouncedPlansor
                  Programs
                
                
                Maximum
                  Number(or
                  Approximate
                  DollarValue)of
                  SharesthatMay
                  yetbePurchased
                  underthePlans
                  orProgramsJanuary 1 to
      January  31
                
                
                32,903
                (1)
                
                $
                7.97
                
                
                
                —
                
                
                $
                —February 1 to February
      28
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —March 1 to March
      31
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —April 1 to April
      30
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —May 1 to May
    31
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —June 1 to June
      30
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —





(1)
            The
      shares were repurchased from members of management. These shares were a
      portion of the shares that certain members of CTI’s management received
      relating to the December 19, 2008 acquisition of CTI. Our Board of
      Directors voted at its January 13, 2009 meeting to honor a pre-Acquisition
      verbal commitment to repurchase 20% (or 32,903) of such shares to provide
      the holders of those shares with cash to pay personal income taxes arising
      from exchanging their shares of GMS Acquisition Partners for Cyalume
      common stock during the acquisition of
CTI.





ITEM3.
            DEFAULTS UPON SENIOR
      SECURITIES





As of June 30, 2009, we did not meet two
financial covenants that utilize non-GAAP measurements contained in our
Revolving Credit and Term Loan Agreement. The Revolving Credit and Term Loan
Agreement governs our notes payable, line of credit and derivative transactions
with our senior lender. On August 14, 2009, we have reached an agreement subject
to conditions precedent with the senior lender (which the parties believe will
be satisfied) to waive covenant violations and modify terms of the Revolving
Credit and Term Loan Agreement. There have been no principal or interest payment
defaults on these notes and we do not expect any such payment defaults in the
future.
 
 In accordance with the waiver agreement,
certain other terms of the Revolving Credit and Term Loan Agreement were
changed, including modification (some more and some less restrictive) of and
addition to the required financial covenants associated with the Revolving
Credit and Term Loan Agreement, shortening of the line of credit’s maturity and
a change in the calculation of availability of the line of credit.  We
believe it is probable we will satisfy these future covenant
requirements.


21





ITEM 4.
            SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS





We held
our annual meeting of stockholders on June 18, 2009 at 345 Park Avenue, New York
City, NY 10154. Our stockholders voted on the following three
proposals.





Proposal
1: Election of Directors





The
eleven directors standing for election (Winston Churchill, Yaron Eitan, Archie
Clemins, Doren Cohen, Jason Epstein, Daniel Gaspar, Joseph Gorman, General
(Ret.) Jack Keane, Frank Kline, Thomas Rebar, and Yair Shamir) were each
re-elected to serve until the 2010 annual meeting of stockholders. Each nominee
received 11,798,361 shares voting in favor and 17,600 shares voting
against.





Proposal 2: Approval and Ratification
of the Cyalume Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive
Plan (the “Plan”)





The Plan
was approved and ratified with 9,134,661 shares voting in favor, 600 shares
voting against and 1,400 shares abstaining.





Proposal
3: Ratification of Independent Auditors





Stockholders
ratified the appointment of CCR LLP as our independent auditor. There were
11,780,978 shares voting in favor, 16,200 shares voting against and 18,788
shares abstained.





ITEM 5.
            OTHER
      INFORMATION





The Board of Directors approved a
written charter for its nominating committee on March 3, 2009. There were no
changes to the procedures by which security holders may recommend nominees to
our Board of Directors.





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





ITEM
    6.
            EXHIBITS





Exhibit
      Number
            
            Description10.1
            
            Employment agreementofDerek Dunaway, Chief Executive
      Officer, Cyalume
      Technologies, Inc. (1)10.2
            
            Employment agreement
      ofMichael Bielonko,
      Chief Financial Officer, Cyalume Technologies, Inc.
      (1)10.3
            
            Employment agreement
      ofThomasMcCarthy,Government Sales Vice
      President, Cyalume
      Technologies, Inc. (1)10.4
            
            Employment agreement
      ofTomas Ogas,Operations Vice President, Cyalume Technologies, Inc.
      (1)31.1
            *
            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





*
            Filed
    herewith.


(1)
            Incorporated by reference to the
      Current Report on Form 8-K dated May 14, 2009 and filed with theCommission June 4,
      2009.




22


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:August
      14, 2009
                
                By:
                /s/  DEREK
      DUNAWAYDerek Dunaway, Chief Executive
      Officer(Principal Executive
      Officer)





Date:August
      14, 2009
                
                By:
                /s/  MICHAEL
      BIELONKOMichael Bielonko, Chief Financial
      Officer(Principal Financial
      Officer)




23