UNITED
STATES


SECURITIES
A ND
EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q/A


(Amendment
No. 1)


(Mark
      One)





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





For
      the quarterly period ended September 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 Number 000-52247





Cyalume Technologies
Holdings, Inc.


(Exact
name of registrant as specified in its charter)





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





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





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





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ý
    No o





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





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


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





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o    No ý





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of November 30, 2009, there were
outstanding 15,420,925shares of the registrant’s
Common Stock, par value $.001 per share.




Cyalume Technologies
Holdings, Inc.





EXPLANATORY
NOTE





This
Amendment No. 1 (the “Amendment”) on Form 10-Q/A to the Quarterly Report on Form
10-Q (the “Initial Filing”) of Cyalume Technologies Holdings, Inc. (“Cyalume”)
for the period ended September 30, 2009, which was filed with the Securities and
Exchange Commission on  November 23, 2009, is being filed solely for
the purpose of correcting a typographical error on the condensed consolidated
balance sheet on page 6 of the Initial Filing by changing the amount presented
for other intangible assets, net from $49,908,000 to $48,908,000 as of September
30, 2009. No other amounts presented on the condensed consolidated financial
statements required correction.





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





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









Cyalume Technologies
Holdings, Inc.





FORM
10-Q





INDEX





PART
      I—FINANCIAL INFORMATIONItem 1.
            
            Financial
      Statements





Condensed
      Consolidated Statements of Operations (unaudited) for the three months
      ended September 30, 2009 and 2008
            
            4Condensed
      Consolidated Statements of Operations (unaudited) for the nine months
      ended September 30, 2009 and 2008
            
            5Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
            
            6Condensed
      Consolidated Statements of Changes in Stockholders' Equity and
      Comprehensive Loss for the nine months ended September 30, 2009
      (unaudited)
            
            7





Condensed
      Consolidated Statements of Cash Flows (unaudited) for the nine months
      ended September 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
            
            19Item 3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            23Item 4T.
            
            Controls
      and Procedures
            
            23PART
      II—OTHER INFORMATIONItem 1.
            
            Legal
      Proceedings
            
            23Item 1A.
            
            Risk
      Factors
            
            23Item 2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            24Item 3.
            
            Defaults
      Upon Senior Securities
            
            24Item 4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            25Item 5.
            
            Other
      Information
            
            25Item 6.
            
            Exhibits
            
            25Signatures
            
            26




2





PART I—FINANCIAL INFORMATION





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




3





ITEM 1.
            Financial
      Statements





Cyalume
Technologies Holdings, Inc.


Condensed
Consolidated Statements of Operations


(in
thousands, except shares and per share information)


(Unaudited)





PredecessorFor the
      Three
            
            
            For
      the Three
            
            
            For
      the ThreeMonths
      Ended
            
            
            Months
      Ended
            
            
            Months
      EndedSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2008Revenues
            
            $
            9,860
            
            
            $
            —
            
            
            $
            10,833Cost
      of goods sold
            
            
            5,938
            
            
            
            —
            
            
            
            5,411Gross
      profit
            
            
            3,922
            
            
            
            —
            
            
            
            5,422Other
      expenses (income):Sales
      and marketing
            
            
            791
            
            
            
            —
            
            
            
            738General
      and administrative
            
            
            887
            
            
            
            225
            
            
            
            1,210Research
      and development
            
            
            487
            
            
            
            —
            
            
            
            306Interest,
      net
            
            
            673
            
            
            
            (287
            )
            
            
            1,221Interest
      – related party
            
            
            16
            
            
            
            2
            
            
            
            —Amortization
      of intangible assets
            
            
            878
            
            
            
            —
            
            
            
            659Other,
      net
            
            
            16
            
            
            
            —
            
            
            
            59Total
      other expenses (income)
            
            
            3,748
            
            
            
            (60
            )
            
            
            4,193Income
      before income taxes
            
            
            174
            
            
            
            60
            
            
            
            1,229Provision
      for (benefit from) income taxes
            
            
            (151
            )
            
            
            2
            
            
            
            517Net
      income
            
            $
            325
            
            
            $
            58
            
            
            $
            712Net
      income per common share:Basic
            
            $
            0.02
            
            
            $
            0.01Diluted
            
            $
            0.02
            
            
            $
            —Weighted
      average shares used to compute net income per common
share:Basic
            
            
            15,352,478
            
            
            
            9,375,000Diluted
            
            
            15,418,949
            
            
            
            11,944,844




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 and per share information)


(Unaudited)





PredecessorFor the
      Nine
            
            
            For
      the Nine
            
            
            For
      the NineMonths
      Ended
            
            
            Months
      Ended
            
            
            Months
      EndedSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2008Revenues
            
            $
            24,443
            
            
            $
            —
            
            
            $
            31,686Cost
      of goods sold
            
            
            14,374
            
            
            
            —
            
            
            
            15,201Gross
      profit
            
            
            10,069
            
            
            
            —
            
            
            
            16,485Other
      expenses (income):Sales
      and marketing
            
            
            2,322
            
            
            
            —
            
            
            
            2,532General
      and administrative
            
            
            3,489
            
            
            
            637
            
            
            
            3,520Research
      and development
            
            
            1,295
            
            
            
            —
            
            
            
            984Interest,
      net
            
            
            1,925
            
            
            
            (899
            )
            
            
            3,715Interest
      – related party
            
            
            45
            
            
            
            4
            
            
            
            —Amortization
      of intangible assets
            
            
            2,612
            
            
            
            —
            
            
            
            1,968Other,
      net
            
            
            79
            
            
            
            —
            
            
            
            (1,038
            )Total
      other expenses (income)
            
            
            11,767
            
            
            
            (258
            )
            
            
            11,681Income
      (loss) before income taxes
            
            
            (1,698
            )
            
            
            258
            
            
            
            4,804Provision
      for (benefit from) income taxes
            
            
            (755
            )
            
            
            (18
            )
            
            
            1,754Net
      income (loss)
            
            $
            (943
            )
            
            $
            276
            
            
            $
            3,050Net
      income (loss) per common share:Basic
            
            $
            (0.06
            )
            
            $
            0.03Diluted
            
            $
            (0.06
            )
            
            $
            0.02Weighted
      average shares used to compute net income (loss) per common
      share:Basic
            
            
            15,089,909
            
            
            
            9,375,000Diluted
            
            
            15,089,909
            
            
            
            11,896,460




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)




September
      30,2009
              (unaudited)
              (restated)
            
            
            December 31,
              2008Current
      assets:Cash
            
            $
            1,831
            
            
            $
            3,952Accounts
      receivable, net of allowance for doubtful accounts of $217 and $452 at
      September 30, 2009 and December 31, 2008, respectively
            
            
            4,542
            
            
            
            3,508Inventories,
      net
            
            
            9,734
            
            
            
            11,447Income
      taxes refundable
            
            
            377
            
            
            
            701Deferred
      income taxes
            
            
            425
            
            
            
            317Prepaid
      expenses and other current assets
            
            
            204
            
            
            
            195Total
      current assets
            
            
            17,113
            
            
            
            20,120Property,
      plant and equipment, net
            
            
            8,250
            
            
            
            7,882Goodwill
            
            
            58,452
            
            
            
            60,896Other
      intangible assets, net
            
            
            48,908
            
            
            
            49,426Other
      noncurrent assets
            
            
            138
            
            
            
            188Total
      assets
            
            $
            132,861
            
            
            $
            138,512Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Lines
      of credit
            
            $
            3,300
            
            
            $
            3,500Current
      portion of notes payable
            
            
            4,120
            
            
            
            3,621Accounts
      payable
            
            
            3,450
            
            
            
            3,230Accrued
      expenses and other current liabilities
            
            
            2,451
            
            
            
            2,550Common
      stock subject to mandatory redemption
            
            
            —
            
            
            
            1,123Notes
      payable and advance due to related parties
            
            
            9
            
            
            
            64Income
      taxes payable
            
            
            7
            
            
            
            5Total
      current liabilities
            
            
            13,337
            
            
            
            14,093Notes
      payable, net of current portion
            
            
            22,626
            
            
            
            25,581Notes
      payable due to related parties, net of current portion
            
            
            1,048
            
            
            
            1,000Deferred
      income taxes
            
            
            7,801
            
            
            
            9,237Derivatives
            
            
            127
            
            
            
            163Asset
      retirement obligation, net of current portion
            
            
            156
            
            
            
            128Total
      liabilities
            
            
            45,095
            
            
            
            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 shares authorized; 15,360,925 and
      13,719,035 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
            
            
            15
            
            
            
            14Additional
      paid-in capital
            
            
            87,410
            
            
            
            87,348Retained
      earnings
            
            
            286
            
            
            
            1,229Accumulated
      other comprehensive income (loss)
            
            
            55
            
            
            
            (281
            )Total
      stockholders’ equity
            
            
            87,766
            
            
            
            88,310Total
      liabilities and stockholders' equity
            
            $
            132,861
            
            
            $
            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
            
            
            
            
            
            
            
            
            AccumulatedNumber
      of Shares
            
            
            Amount
            
            
            Additional
              Paid-In
              Capital
            
            
            Retained
      Earnings
            
            
            Other
      Comprehensive Income (Loss)
            
            
            Total
      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
            
            
            —
            
            
            
            —
            
            
            
            180
            
            
            
            —
            
            
            
            —
            
            
            
            180
            
            
            
            —Common
      stock issued for acquisition-related services
            
            
            15,000
            
            
            
            —
            
            
            
            45
            
            
            
            —
            
            
            
            —
            
            
            
            45
            
            
            
            —Common
      stock issued to extinguish notes payable
            
            
            17,150
            
            
            
            —
            
            
            
            82
            
            
            
            —
            
            
            
            —
            
            
            
            82
            
            
            
            —Share-based
      compensation expense - warrants awarded to director
            
            
            —
            
            
            
            —
            
            
            
            110
            
            
            
            —
            
            
            
            —
            
            
            
            110
            
            
            
            —Share-based
      compensation expense - options awarded under the 2009 Omnibus Securities
      and Incentive Plan
            
            
            —
            
            
            
            —
            
            
            
            98
            
            
            
            —
            
            
            
            —
            
            
            
            98
            
            
            
            —Share-based
      compensation expense - common stock issued 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
            
            
            —
            
            
            
            —
            
            
            
            38
            
            
            
            —
            
            
            
            —
            
            
            
            38
            
            
            
            —Stock
      registration costs
            
            
            —
            
            
            
            —
            
            
            
            (279
            )
            
            
            —
            
            
            
            —
            
            
            
            (279
            )
            
            
            —Foreign
      currency translation adjustments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            314
            
            
            
            314
            
            
            
            314Unrealized
      gain on cash flow hedges, net of taxes of $14
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            22
            
            
            
            22
            
            
            
            22Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (943
            )
            
            
            —
            
            
            
            (943
            )
            
            
            (943
            )Comprehensive
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            (607
            )Balance
      at September 30, 2009
            
            
            15,360,925
            
            
            $
            15
            
            
            $
            87,410
            
            
            $
            286
            
            
            $
            55
            
            
            $
            87,766




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 Nine
            
            
            For
      the Nine
            
            
            For
      the NineMonths
      Ended
            
            
            Months
      Ended
            
            
            Months
      EndedSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2008Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (943
            )
            
            $
            276
            
            
            $
            3,050Adjustments
      to reconcile net income (loss) to net cash
              provided
      by operating activities:Depreciation
      of property, plant and equipment
            
            
            479
            
            
            
            —
            
            
            
            651Amortization
            
            
            3,446
            
            
            
            —
            
            
            
            2,216Provision
      for deferred income taxes
            
            
            (1,009
            )
            
            
            —
            
            
            
            1,056Expense
      associated with share-based awards
            
            
            271
            
            
            
            —
            
            
            
            —Other
      non-cash expenses
            
            
            357
            
            
            
            —
            
            
            
            254Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,024
            )
            
            
            —
            
            
            
            (1,091
            )Inventories
            
            
            953
            
            
            
            —
            
            
            
            (2,183
            )Prepaid
      expenses and other current assets
            
            
            (9
            )
            
            
            85
            
            
            
            304Deferred
      acquisition costs
            
            
            —
            
            
            
            (275
            )
            
            
            —Accounts
      payable and accrued liabilities
            
            
            (22
            )
            
            
            51
            
            
            
            (620
            )Income
      taxes payable, net
            
            
            329
            
            
            
            (85
            )
            
            
            (2,270
            )Accrued
      interest on notes payable to related parties
            
            
            —
            
            
            
            14
            
            
            
            —Net
      cash provided by operating activities
            
            
            2,828
            
            
            
            66
            
            
            
            1,367Cash
      flows from investing activities:Payments
      to trust account
            
            
            —
            
            
            
            (399
            )
            
            
            —Purchases
      of long-lived assets
            
            
            (449
            )
            
            
            —
            
            
            
            (1,212
            )Net
      cash used in investing activities
            
            
            (449
            )
            
            
            (399
            )
            
            
            (1,212
            )Cash
      flows from financing activities:Repayment
      of advances from and notes payable to related parties
            
            
            —
            
            
            
            (150
            )
            
            
            —Payments
      for common stock subject to redemption
            
            
            (1,123
            )
            
            
            —
            
            
            
            —Net
      repayment of line of credit
            
            
            (200
            )
            
            
            —
            
            
            
            —Payments
      of Predecessor notes payable
            
            
            —
            
            
            
            —
            
            
            
            (2,428
            )Repayment
      of long-term notes payable
            
            
            (2,633
            )
            
            
            —
            
            
            
            —Payments
      to reacquire and retire common stock
            
            
            (263
            )
            
            
            —
            
            
            
            —Payment
      of stock registration costs
            
            
            (279
            )
            
            
            —
            
            
            
            —Payment
      of deferred financing costs
            
            
            (75
            )
            
            
            —
            
            
            
            —Refund
      of debt issue costs
            
            
            10
            
            
            
            —
            
            
            
            —Proceeds
      from exercises of warrants
            
            
            27
            
            
            
            —
            
            
            
            —Net
      cash used in financing activities
            
            
            (4,536
            )
            
            
            (150
            )
            
            
            (2,428
            )Effect
      of exchange rate changes on cash
            
            
            36
            
            
            
            —
            
            
            
            30Net
      decrease in cash
            
            
            (2,121
            )
            
            
            (483
            )
            
            
            (2,243
            )Cash,
      beginning of period
            
            
            3,952
            
            
            
            570
            
            
            
            5,743Cash,
      end of period
            
            $
            1,831
            
            
            $
            87
            
            
            $
            3,500




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




8




Cyalume Technologies Holding, 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 disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements.




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





These accompanying
unaudited interim condensed consolidated financial statementsrecognize
the effects of all subsequent events that provide additional evidence about
conditions that existed at September 30, 2009, including the estimates inherent
in the process of preparing financial statements.  We have evaluated
such subsequent events through December 1, 2009, which is the date the
accompanying unaudited interim
condensed consolidatedfinancial statements were issued (see also Note
16). 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 unaudited interim
condensed consolidated financial statements. Operating results for the three and
nine-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 June
2009, the Financial Accounting Standards Board (“FASB”) launched the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
U.S. GAAP recognized by the FASB. The ASC reorganizes various U.S. GAAP
pronouncements into accounting topics and displays them using a consistent
structure. All existing accounting standards documents are superseded as
described in Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. All of the contents of the ASC carry the same level of
authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which identified and ranked the sources of
accounting principles and the framework for selecting the principles used in
preparing financial statements in conformity with U.S. GAAP. Also included in
the ASC are rules and interpretive releases of the SEC, under authority of
federal securities laws that are also sources of authoritative U.S. GAAP for SEC
registrants. The ASC is effective for interim and annual periods ending after
September 15, 2009. The adoption of the ASC as of July 1, 2009 had no impact on
our financial statements other than changing the way specific accounting
standards are referenced in our financial statements.




9




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


In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“SFAS No. 160”), which is now codified within ASC 810 Consolidation. 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.





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”), which is now codified within ASC 815 Derivatives and Hedging. 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”), which is now codified within ASC 820
Fair Value Measurements and
Disclosures, 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”), which is now codified within
ASC 825 Financial
Instruments. 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.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”), which is now codified within ASC 855 Subsequent Events. 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):


September
      30,
              2009
            
            
            December
      31,
              2008Raw
      materials
            
            $
            4,945
            
            
            $
            5,822Work-in-process
            
            
            2,874
            
            
            
            3,484Finished
      goods
            
            
            1,915
            
            
            
            2,141$
            9,734
            
            
            $
            11,447





10




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


5.
            GOODWILL





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





Balance
      on December 31, 2008
            
            $
            60,896Finalization
      of the fair value of intangible assets
            
            
            (2,024
            )Finalization
      of the fair value of property, plant & equipment
            
            
            (372
            )Additional
      Acquisition costs recognized
            
            
            435Adjustments
      to deferred taxes associated with tangible and intangible asset
      valuations
            
            
            (549
            )Changes
      due to foreign currency translation adjustments
            
            
            66Balance
      on September 30, 2009
            
            $
            58,452





6.
            NOTES
      PAYABLE





Effective
September 1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment
to Credit Agreement and Limited Waiver (the “Loan Amendment”). The Loan
Amendment was signed on September 11, 2009 and amends the Revolving Credit and
Term Loan Agreement (the “Original Credit Agreement”) dated as of December 19,
2008 among CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to
CTI not meeting two financial covenants that utilize non-GAAP measurements
contained in our Original Credit Agreement. The Loan Amendment, among other
things:





·
            Waived
      the requirement that CTI be in compliance as of June 30, 2009 with certain
      financial covenants contained in the Original Credit
      Agreement;


·
            Changed
      the maturity date of the line of credit from December 19, 2011 to December
      31, 2010;


·
            Increased
      the Base Rate charged on the line of credit by an Applicable Margin, which
      is defined in the Loan Amendment;


·
            Reduced
      the maximum management fee that CTI may pay to Cyalume from $125,000 per
      quarter to $21,000 per month;


·
            Increased
      the maximum allowable Leverage Ratios for the months of September 2009
      through December 2009 and


·
            Added
      a minimum quarterly EBITDA
covenant.





As of
September 30, 2009, CTI achieved the required minimum quarterly EBITDA covenant,
but did not achieve the service coverage and leverage ratio covenants in the
Original Credit Agreement, as amended. Effective November 23, 2009 CTI, Cyalume
and TD Bank, N.A. reached an agreement that will result in the following changes
to the Original Credit Agreement, as amended:





·
            Waived
      the requirement that CTI be in compliance as of September 30, 2009 with
      the service coverage and leverage ratio covenants contained in the
      Original Credit Agreement, as amended by the Loan
    Amendment;


·
            Requires
      that all net proceeds from any new subordinated debt or equity offerings
      be used to pay-down senior debt;


·
            Requires
      the Company to receive at least $3.0 million in new subordinated debt or
      equity offering before April 30,
2010;


·
            Set
      new schedules of required ratios for maximum senior leverage, minimum
      fixed charge coverage and minimum total debt service coverage ratios and
      set new quarterly EBITDA targets to take effective December 31, 2009
      and


·
            Requires
      the Company to maintain $1.0 million cash on the consolidated balance
      sheet.





We fully
expect to achieve the revised covenants. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.





7.
            NOTES
      PAYABLE AND ADVANCE DUE TO RELATED
PARTIES





In July
2009, $55,000 of the $64,000 notes payable due to related parties that existed
at December 31, 2008 was repaid in full, along with all accrued interest,
through the issuance of 17,150 restricted and unregistered shares of our common
stock.




11




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


8.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





The
derivative liabilities as of September 30, 2009 in our condensed consolidated
balance sheet consist of the following (all amounts in thousands):




Derivative
      Instrument
            
            Balance
      Sheet Location
            
            Fair
      ValueCurrency
      forward contract
            
            Accrued
      expenses and other current liabilities (current
    liabilities)
            
            $
            (3
            )Interest
      rate swaps
            
            Derivatives
      (noncurrent liabilities)
            
            
            (127
            )





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 income (loss). These changes in
fair value must be reclassified in whole or in part from consolidated
accumulated other comprehensive income (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 income (loss) to earnings in
the future.





The fair
values of the swaps are determined by discounting the estimated cash flows to be
received and paid due to the swaps over the swaps’ contractual lives using an
estimated risk-free interest rate for each swap settlement date.





Currency
Forward Contracts





CTSAS’
functional currency is the Euro. Periodically, CTSAS purchases inventory from
CTI, which requires payment in U.S. dollars. Beginning in 2009 and only under
certain circumstances, we use currency forward contracts to mitigate CTSAS’
exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSAS’ payment
to CTI for these inventory purchases.  Such currency forward contracts
typically have durations of less than six months. We report these currency
forward contracts at their fair value. This relationship has not been designated
as a hedge and therefore all changes in these currency forward contracts’ fair
value are recorded in other expenses (income) on our condensed consolidated
statement of operations. The fair value of these
contracts 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 September 30, 2009, we held one
such currency forward contract.





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




Gain
      (Loss)
            
            
            Gain
      (Loss)
            
            
            Gain
      (Loss)In
      AOCI (1)
            
            
            Reclassified
      (2)
            
            
            in
      Earnings (3)Derivatives
      designated as cash flow hedges:Interest
      rate swaps
            
            $
            (96
            )
            
            $
            —
            
            
            $
            —Derivatives
      not designated as hedging instruments:Currency
      forward contracts
            
            $
            —
            
            
            $
            —
            
            
            $
            (3
            )





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


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


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




12




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


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 nine months ended September 30, 2009 was as follows (all
amounts in thousands):




Gain
      (Loss)
            
            
            Gain
      (Loss)
            
            
            Gain
      (Loss)In
      AOCI (1)
            
            
            Reclassified
      (2)
            
            
            in
      Earnings (3)Derivatives
      designated as cash flow hedges: relationships:Interest
      rate swaps
            
            $
            22
            
            
            $
            —
            
            
            $
            —Derivatives
      not designated as hedging instruments:Currency
      forward contracts
            
            $
            —
            
            
            $
            —
            
            
            $
            (3
            )





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


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


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





9.
            SHARE-BASED
      AWARDS





On March
3, 2009, our Board of Directors adopted the Cyalume 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.





Also on
March 3, 2009, the Board of Directors authorized under the Plan the following
awards: (i) 75,000 restricted shares of common stock to non-employee
consultants; (ii) 119,333 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 common shares to non-employee consultants (including
      45,000 earned by our current Chief Executive Officer as a consultant to
      Vector prior to becoming our Chief Executive Officer) 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 September 30, 2009. These
      restricted shares will vest over a 3-year period with no provision
      requiring continued employment or
service.





·
            The
      100,333 restricted common 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 $151,000 using the quoted market price of the common stock on March
      3, 2009 of $3 and applying appropriate estimated forfeiture
      rates.





·
            The
      9,000 restricted 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.




13




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


·
            Remaining
      restricted common 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 used to 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 under the Plan. 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 used to 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
            %





On July
17, 2009, the Board of Directors granted 40,000 restricted shares of common
stock and 110,000 restricted options to one of our executive officers under the
Plan.  These restricted shares and options are (i) compensation for
his services in 2009, (ii) earned based on meeting board-determined performance
goals and (iii) require continued employment over the 4-year vesting period. The
fair value of the stock award was determined to be $157,000 using the quoted
market price of the common stock on July 17, 2009 of $3.93 and applying
appropriate estimated forfeiture rates. The fair value of the option award was
determined to be $223,000 using was determined using the Black-Scholes pricing
model. The following assumptions were used to value the award:





Risk-free
      interest rate
            
            
            3.67
            %Expected
      term
            
            10
      yearsExpected
      volatility  (1)
            
            
            33.99
            %Expected
      forfeitures
            
            
            50
            %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.  These
7,000 shares are not registered and were not issued under the Cyalume
Technologies Holdings, Inc. 2009 Omnibus Securities and Incentive
Plan.





During
the three and nine months ended September 30, 2009, total expense recorded for
all awards described above was $62,000 and $271,000, respectively.




14




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


10.
            RESTRUCTURING
      COSTS





During
nine months ended September 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 the restructuring cost liability’s activity from December 31,
2008 through September 30, 2009 (all amounts in thousands):





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





The $1.1
million of restructuring charges is included in the Predecessor’s condensed
consolidated statement of operations as an other expense for the nine months
ended September 30, 2008.





11.
            INCOME
      TAXES





For the
nine months ended September 30, 2009 and for the Predecessor’s nine months ended
September 30, 2008, effective tax rates of 44% and 37%, respectively, differed
from the statutory rate of 34% due to state and foreign taxes. For the nine
months ended September 30, 2008, the effective tax rate of (7)% 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.





For the
three months ended September 30, 2009 and for the Predecessor’s three months
ended September 30, 2008, effective tax rates of (87)% and 42%, respectively,
differed from the statutory rate of 34% due to state and foreign taxes. For the
three months ended September 30, 2008, the effective tax rate of 3% 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.





12.
            NET
      INCOME (LOSS) PER COMMON SHARE





Basic net
income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (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 and options (using the treasury stock method).




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Basic:Net
      income (loss) (in thousands)
            
            $
            325
            
            
            $
            58
            
            
            $
            (943
            )
            
            $
            276Weighted
      average shares
            
            
            15,352,478
            
            
            
            9,375,000
            
            
            
            15,089,909
            
            
            
            9,375,000Basic
      income (loss) per common share
            
            $
            0.02
            
            
            $
            0.01
            
            
            $
            (0.06
            )
            
            $
            0.03Diluted:Net
      income (loss) (in thousands)
            
            $
            325
            
            
            $
            58
            
            
            $
            (943
            )
            
            $
            276Weighted
      average shares
            
            
            15,352,478
            
            
            
            9,375,000
            
            
            
            15,089,909
            
            
            
            9,375,000Effect
      of dilutive securities
            
            
            66,471
            
            
            
            2,569,844
            
            
            
            —
            (1)
            
            
            2,521,460Weighted
      average shares, as adjusted
            
            
            15,418,949
            
            
            
            11,944,844
            
            
            
            15,089,909
            
            
            
            11,896,460Diluted
      income (loss) per common share
            
            $
            0.02
            
            
            $
            —
            
            
            $
            (0.06
            )
            
            $
            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.




15




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


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





For
      The Periods Ended September 30,2009
            
            
            2008Warrants
            
            
            4,370,256
            
            
            
            —Options
            
            
            1,855,000
            
            
            
            1,462,500





13.
            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.





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. Consequently, CTI presented 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 nine months ended September 30,
2008.





14.
            FAIR
      VALUE





Fair
value is an exit price that represents the amount that would be received upon
sale of an asset or paid to transfer a liability in an orderly transaction
between market participants. We group all assets and liabilities reported at
fair value based on significant levels of inputs as follows:





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





The
determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. As of September 30, 2009, the only assets and liabilities required
to be measured at fair value on a recurring basis were the interest rate swaps
and the currency forward contract described in Note 8, all of which are measured
at fair value using Level 2 inputs.





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




16




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


15.
            SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





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


Nine
      Months Ended September 30,
            
            
            Predecessor
              For
      the Nine Months Ended September 30,2009
            
            2008
            
            
            2008Interest
            
            $
            1,495
            
            
            $
            —
            
            
            $
            3,207Income
      taxes
            
            
            608
            
            
            
            —
            
            
            
            2,046





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


Nine
      Months Ended September 30,
            
            
            Predecessor
              For
      the Nine Months Ended September 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
            
            
            
            —
            
            
            
            —Remeasurement
      of asset retirement obligation
            
            
            26
            
            
            
            —
            
            
            
            —Extinguishment
      of notes payable due to related parties by issuing common
      stock
            
            
            82
            
            
            
            —
            
            
            
            —





16.
            SUBSEQUENT
      EVENTS





See Note
6 for a discussion of an agreement our senior lender that was reached on
November 23, 2009.





On
November 18, 2009, we entered to a Management Agreement with Selway Capital, LLC
(“Selway”) that provides for (but is not limited to) the following services to
be performed by Selway on our behalf:




1)
            Strategic
      development and implementation as well as consultation to our chief
      executive officer on a regular basis as per his reasonable
      requests;




2)
            Identifying
      strategic partners with companies with which Selway has relationships and
      access. In this connection, Selway will focus on building partnerships
      with companies in Israel, Singapore, India and Europe. The focus will be
      on the expansion of our munitions
business;




3)
            Advise
      and support us on our investor relations
  strategy;




4)
            Advise
      and support our future fund raising, including identifying sources of
      capital in the United States; and




5)
            Support
      our mergers and acquisitions strategy and play an active role in our due
      diligence and analysis.




17




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


The
Management Agreement stipulates that these services will be performed by Yaron
Eitan, a member of our board of directors and an employee of Selway, with the
assistance as needed from other employees of Selway.  The Management
Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can
terminated by either us or Selway upon 30-days’ written notice or upon our
default in payment or Selway’s failure to perform services under the Management
Agreement. Selway’s compensation for these services will be $41,666.67 per month
for the duration of the Management Agreement. However, we are only required to
pay $11,000 per month through January 31, 2010 with the balance of $31,666.67
per month remaining unpaid until our senior lender consents to such payment.
Additionally, Selway can earn a $210,000 bonus, payable in cash or our common
stock at the discretion of our board of directors. We will also reimburse Selway
for costs incurred specifically on our behalf for these services. Under the
Management Agreement, we indemnify Selway and Selway indemnifies us against
certain losses incurred while carrying out its obligations under the Management
Agreement.




17.
            RESTATEMENT





The
accompanying condensed consolidated balance sheet as of September 30, 2009 has
been restated to correct a typographical error by changing the amount presented
for other intangible assets, net to $48,908,000.  The previously
issued version of the condensed consolidated balance sheet as of September 30,
2009 incorrectly stated other intangible assets, net to be $49,908,000. No other
amounts presented on the accompanying condensed consolidated financial
statements required correction.




18





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 nine-month periods ended
September 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 September 30, 2009, our revenues were $9.9 million, compared to
same period 2008 revenues for us of $0 and for the Predecessor of $10.8
million.  For the nine months ended September 30, 2009, our revenues
were $24.4 million, compared to same period 2008 revenues for us of $0 and for
the Predecessor of $31.7 million. We did not engage in any substantive business
operations in the first three quarters of 2008, and as such we recorded no sales
during those quarters. For the three-month and nine-month periods ended
September 30, 2009, our sales were significantly lower than the Predecessor’s
sales for the comparable periods in 2008 due to a reduction in units of
both chemical light and reflective products sold to the U.S. Military and
foreign militaries. We believe this reduced demand for our products is
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. Primarily as a result of the
increased military orders for the chemical light products and ammunition
products, revenues for the three-month period ending September 30, 2009 were 24%
higher than revenues for the second quarter of 2009 and 49% higher than revenues
for the first quarter of 2009, although still below revenues for the same period
a year ago. Military-related revenues from our chemical light products during
the three-month period ending September 30, 2009 were 39% higher than revenues
for the second quarter of 2009 and 59% higher than revenues for the first
quarter of 2009. Revenues from our ammunition products of $4.7 million for the
nine-month period ended September 30, 2009 were approximately 162% higher than
for the same period in 2008, meeting our growth expectations and partially
offsetting declines in the other areas of our business. Sales of reflective
products have remained stable throughout 2009.




Gross profit:  For the
three months ended September 30, 2009, our gross profit was $3.9 million,
compared to same period 2008 gross profit for us of $0 and for the Predecessor
of $5.4 million.  For the nine months ended September 30, 2009, our
gross profit was $10.1 million, compared to same period 2008 gross profit for us
of $0 and for the Predecessor of $16.5 million. We did not engage in any
substantive business operations in the first three quarters of 2008, and as such
we recorded no cost of sales during those quarters. For the nine-month period
ended September 30, 2009, our cost of sales was significantly lower than the
Predecessor’s cost of sales for the comparable period in 2008 due to the
reduction in units sold during the first two quarters of 2009 discussed
above.  For the three-month period ended September 30, 2009, our cost
of sales were $527,000 higher than the Predecessor’s cost of sales for the
comparable period in 2008 due to the increase in ammunition products sales
discussed above.  Our gross margin for the nine-months ended September
30, 2009 was 41.2% compared to 52.0% 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 and the amortization of $655,000 of the
inventory step-up to fair market value arising from the acquisition of CTI
included in cost of goods sold. We anticipate the amortization of the remaining
$67,000 step-up in the fourth quarter of 2009.




Sales and marketing expenses:
 For the three months ended September 30, 2009, our sales and marketing
expenses were $791,000, compared to same period 2008 sales and marketing
expenses for us of $0 and for the Predecessor of $738,000. For the nine months
ended September 30, 2009, our sales and marketing expenses were $2.3 million,
compared to same period 2008 sales and marketing expenses for us of $0 and for
the Predecessor of $2.5 million. We did not engage in any substantive business
operations in the first three 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 in commercial 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 September 30, 2009, our
general and administrative expenses were $887,000, compared to same period 2008
general and administrative expenses for us of $225,000 and for the Predecessor
of $1.2 million. For the nine months ended September 30, 2009, our general and
administrative expenses were $3.5 million, compared to same period 2008 general
and administrative expenses for us of $637,000 and for the Predecessor of $3.5
million.  We did not engage in any substantive business operations in
the first three 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
ended September 30, 2009 are less than the Predecessor’s for the comparable
period in 2008 due to a decrease in legal expenses.




19




Interest expense (income),
net:  For the three months ended September 30, 2009, our interest
expense was $673,000, compared to same period 2008 interest income for us of
$287,000 and interest expense for the Predecessor of $1.2 million. For the nine
months ended September 30, 2009, our interest expense was $1.9 million, compared
to same period 2008 interest income for us of $899,000 and interest expense for
the Predecessor of $3.7 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 September 30, 2009, our
amortization of intangible asset expense was $878,000, compared to same period
2008 amortization of intangible asset expense for us of $0 and for the
Predecessor of $659,000. For the nine months ended September 30, 2009, our
amortization of intangible asset expense was $2.6 million, compared to same
period 2008 amortization of intangible asset expense for us of $0 and for the
Predecessor of $2.0 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.




Other loss (income), net:
 For the three months ended September 30, 2009, our other loss expense was
$16,000, compared to same period 2008 other loss (income) for us of $0 and other
loss for the Predecessor of $59,000. For the nine months ended September 30,
2009, our other loss expense was $79,000, compared to same period 2008 other
loss (income) for us of $0 and other income for the Predecessor of $1.0 million.
In the first quarter of 2008, the Predecessor reached a settlement with the
pre-2006 owners of CTI in connection with litigation. The Predecessor received
$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 Predecessor implemented a
restructuring to facilitate its sale to us, pursuant to which the chief
executive officer and two vice-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 taxes increased for the three-month and
nine-month periods ended September 30, 2009 as compared to the same periods
in 2008 due to net operating losses generated by CTI.




Balance
Sheet




Assets, other than cash:
Assets, other than cash, were $131.0 million at September 30, 2009 compared to
$134.6 million at December 31, 2008. The decrease is partly due to the
amortization of the inventory step up to fair market values recorded at the date
we acquired CTI and intangible assets amortization during the first nine months
of 2009. In addition, $2.0 million was moved from goodwill into other intangible
assets in the second quarter of 2009 and is now being amortized. The remaining
changes in asset values are the result of normal business
activities.




Liabilities: Liabilities were
$45.1 million at September 30, 2009, compared to $50.2 million at December 31,
2008. The decrease is due 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 the acquisition of CTI and which was
finalized in the first quarter of 2009, and b) payments made on notes payable.
The remaining changes are the result of normal business activities.




Liquidity
and Capital Resources


Cash on
hand was $1.8 million at September 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 redemption of common stock as part of the acquisition of
CTI, $2.8 million in payments on the line of credit and notes payable, purchases
of long-lived assets of $449,000 and $263,000 to purchase shares of our common
stock from certain members of CTI management, partially offset by positive cash
flows from our operations.





As a
result of lower than anticipated sales, we did not meet two financial covenants
contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009.
The Revolving Credit and Term Loan Agreement governs our notes payable, line of
credit and derivative transactions with our senior lender. Effective September
1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit
Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was
signed on September 11, 2009 and amends the Revolving Credit and Term Loan
Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among
CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not
meeting two financial covenants that utilize non-GAAP measurements contained in
our Original Credit Agreement. The Loan Amendment, among other
things:





·
            Waived
      the requirement that CTI be in compliance as of June 30, 2009 with certain
      financial covenants contained in the Original Credit
      Agreement;




20




·
            Changed
      the maturity date of the line of credit from December 19, 2011 to December
      31, 2010;


·
            Increased
      the Base Rate charged on the line of credit by an Applicable Margin, which
      is defined in the Loan Amendment;


·
            Reduced
      the maximum management fee that CTI may pay to Cyalume from $125,000 per
      quarter to $21,000 per month;


·
            Increased
      the maximum allowable Leverage Ratios for the months of September 2009
      through December 2009 and


·
            Added
      a minimum quarterly EBITDA
covenant.





As of
September 30, 2009, CTI achieved the required minimum quarterly EBITDA covenant,
but did not achieve the service coverage and leverage ratio covenants in the
Original Credit Agreement, as amended. Effective November 23, 2009 CTI, Cyalume
and TD Bank, N.A. reached an agreement that will result in the following changes
to the Original Credit Agreement, as amended:





·
            Waived
      the requirement that CTI be in compliance as of September 30, 2009 with
      the service coverage and leverage ratio covenants contained in the
      Original Credit Agreement, as amended by the Loan
    Amendment;


·
            Requires
      that all net proceeds from any new subordinated debt or equity offerings
      be used to pay-down senior debt;


·
            Requires
      the Company to receive at least $3.0 million in new subordinated debt or
      equity offering before April 30,
2010;


·
            Set
      new schedules of required ratios for maximum senior leverage, minimum
      fixed charge coverage and minimum total debt service coverage ratios and
      set new quarterly EBITDA targets to take effective December 31, 2009
      and


·
            Requires
      the Company to maintain $1.0 million cash on the consolidated balance
      sheet.





We fully
expect to achieve the revised covenants. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.





During
the nine months ended September 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.





Forecasted
principal and interest payments on bank debt for the next 12 months are $6.3
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 budget is expected to be funded from operating cash flows.
In the second quarter of 2009 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 $134,000 incurred in the third quarter of 2009.





We
believe that we will generate sufficient cash from operations to continue
operations for the next twelve months. We are considering financing alternatives
to comply with the above described agreement with TD Bank.





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.




21





Revenue
Recognition





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





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





Income
Taxes





Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.  Deferred tax assets are recognized when, based upon
available evidence, realization of the assets is more likely than
not.





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.





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





Goodwill





Goodwill
is deemed to have an indefinite life and accordingly, is not subject to annual
amortization.  Goodwill is subject to annual impairment reviews, and,
if conditions warrant, interim reviews based upon its estimated fair
value.  Impairment charges, if any, are recorded in the period in
which the impairment is determined. No such charges have been recorded in the
three or nine month periods ended September 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 amortized intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that those
carrying amounts may not be recoverable. The carrying amounts of non-amortizing
intangible assets are reviewed for impairment annually. 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 maintained in their local and functional currency,
the Euro. Monthly income statement account balances are converted to U.S.
dollars using that month’s average exchange rate. 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 (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.




22





ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





ITEM 4T.
            CONTROLS
      AND PROCEDURES





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 September 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 September 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 ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





PART II
– OTHER INFORMATION




ITEM 1.
            LEGAL
      PROCEEDINGS





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





CTI is
currently named a defendant in Civil Action No. 06-706 in Superior Court of the
State of Massachusetts. Filing suit against CTI is Omniglow, LLC (the former
novelty business of CTI which was sold on January 23, 2006). CTI sold certain
assets and liabilities related to the novelty and retail business to certain
former shareholders and management (the “Omniglow Buyers”).  This was
done because CTI sought to retain only the Omniglow Corporation business
activities associated with government, military and safety business. During
2006, CTI and the Omniglow Buyers commenced litigation and arbitration
proceedings against one another. Claims include breaches of a lease and breaches
of various other agreements between CTI and the Omniglow Buyers.  The
Omniglow Buyers seek compensatory damages of $1.4 million, to be trebled, and
recovery of costs and legal fees. CTI has filed for damages of $368,000 against
the Omniglow Buyers.  CTI continues to rigorously defend our position
on these matters, as we believe the Omniglow Buyers’ claims to be without merit.
Court hearings were held and completed in October 2008. 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.




23




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





Purchases
of Equity Securities by the Company and Affiliated Purchasers


Period
            
            Total
      Number of Shares Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            
            
            Maximum
      Number (or Approximate Dollar Value) of Shares that May yet be
      Purchased under the Plans or ProgramsJanuary
      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
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —July
      1 to July 31
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —August
      1 to August 31
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —September
      1 to September 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.





ITEM 3.
            DEFAULTS
      UPON SENIOR SECURITIES





As a
result of lower than anticipated sales, we did not meet two financial covenants
contained in our Revolving Credit and Term Loan Agreement as of June 30, 2009.
The Revolving Credit and Term Loan Agreement governs our notes payable, line of
credit and derivative transactions with our senior lender. Effective September
1, 2009, CTI, Cyalume and TD Bank, N.A. entered into a First Amendment to Credit
Agreement and Limited Waiver (the “Loan Amendment”). The Loan Amendment was
signed on September 11, 2009 and amends the Revolving Credit and Term Loan
Agreement (the “Original Credit Agreement”) dated as of December 19, 2008 among
CTI, Cyalume and TD Bank, N.A. The Loan Amendment was attributable to CTI not
meeting two financial covenants that utilize non-GAAP measurements contained in
our Original Credit Agreement. The Loan Amendment, among other
things:





·
            Waived
      the requirement that CTI be in compliance as of June 30, 2009 with certain
      financial covenants contained in the Original Credit
      Agreement;


·
            Changed
      the maturity date of the line of credit from December 19, 2011 to December
      31, 2010;


·
            Increased
      the Base Rate charged on the line of credit by an Applicable Margin, which
      is defined in the Loan Amendment;


·
            Reduced
      the maximum management fee that CTI may pay to Cyalume from $125,000 per
      quarter to $21,000 per month;


·
            Increased
      the maximum allowable Leverage Ratios for the months of September 2009
      through December 2009 and


·
            Added
      a minimum quarterly EBITDA
covenant.





As of
September 30, 2009, CTI achieved the required minimum quarterly EBITDA covenant,
but did not achieve the service coverage and leverage ratio covenants in the
Original Credit Agreement, as amended. Effective November 23, 2009 CTI, Cyalume
and TD Bank, N.A. reached an agreement that will result in the following changes
to the Original Credit Agreement, as amended:





·
            Waived
      the requirement that CTI be in compliance as of September 30, 2009 with
      the service coverage and leverage ratio covenants contained in the
      Original Credit Agreement, as amended by the Loan
    Amendment;


·
            Requires
      that all net proceeds from any new subordinated debt or equity offerings
      be used to pay-down senior debt;


·
            Requires
      the Company to receive at least $3.0 million in new subordinated debt or
      equity offering before April 30,
2010;


·
            Set
      new schedules of required ratios for maximum senior leverage, minimum
      fixed charge coverage and minimum total debt service coverage ratios and
      set new quarterly EBITDA targets to take effective December 31, 2009
      and


·
            Requires
      the Company to maintain $1.0 million cash on the consolidated balance
      sheet.




24




We fully
expect to achieve the revised covenants. There have been no principal or
interest payment defaults on these notes and we do not expect any such payment
defaults in the future.





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





None.





ITEM 5.
            OTHER
      INFORMATION





There
were no changes to the procedures by which security holders may recommend
nominees to our Board of Directors during the three months ended September 30,
2009.





There is
no information to report under this item in lieu of reporting that information
on Form 8-K except for the necessity for filing this Form 10-Q/A and the
following discussion.





On
November 18, 2009, we entered to a Management Agreement with Selway Capital, LLC
(“Selway”) that provides for (but is not limited to) the following services to
be performed by Selway on our behalf:




1)
            Strategic
      development and implementation as well as consultation to our chief
      executive officer on a regular basis as per his reasonable
      requests;




2)
            Identifying
      strategic partners with companies with which Selway has relationships and
      access. In this connection, Selway will focus on building partnerships
      with companies in Israel, Singapore, India and Europe. The focus will be
      on the expansion of our munitions
business;




3)
            Advise
      and support us on our investor relations
  strategy;




4)
            Advise
      and support our future fund raising, including identifying sources of
      capital in the United States; and




5)
            Support
      our mergers and acquisitions strategy and play an active role in our due
      diligence and analysis.





The
Management Agreement stipulates that these services will be performed by Yaron
Eitan, a member of our board of directors and an employee of Selway, with the
assistance as needed from other employees of Selway.  The Management
Agreement is retroactive to October 1, 2009, expires on October 1, 2012 and can
terminated by either us or Selway upon 30-days’ written notice or upon our
default in payment or Selway’s failure to perform services under the Management
Agreement. Selway’s compensation for these services will be $41,666.67 per month
for the duration of the Management Agreement. However, we are only required to
pay $11,000 per month through January 31, 2010 with the balance of $31,666.67
per month remaining unpaid until our senior lender consents to such payment.
Additionally, Selway can earn a $210,000 bonus, payable in cash or our common
stock at the discretion of our board of directors. We will also reimburse Selway
for costs incurred specifically on our behalf for these services. Under the
Management Agreement, we indemnify Selway and Selway indemnifies us against
certain losses incurred while carrying out its obligations under the Management
Agreement.





The
foregoing description of the terms of the Management Agreement is not complete
and is qualified in its entirety by reference to the Management Agreement, a
copy of which is attached as Exhibit 10.3 to this Form 10-Q.





ITEM 6.
            EXHIBITS





Exhibit
              Number
            
            Description10.1
            
            Employment
      agreement of Edgar Cranor, Technology Vice President, Cyalume
      Technologies, Inc. (1)10.2
            
            First
      Amendment to Credit Agreement and Limited Waiver, effective September 1,
      2009, among CTI, Cyalume and TD Bank, N.A. under the Revolving Credit and
      Term Loan Agreement dated as of December 19, 2008. (2)10.3
            *
            Management
      Agreement between Cyalume Technologies Holdings, Inc. and Selway Capital,
      LLC.31.1
            *
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            *
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            *
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.





*
            Filed
      herewith.


(1)
            Incorporated
      by reference to the Current Report on Form 8-K dated July 17, 2009 and
      filed with the Commission July 22,
2009.


(2)
            Incorporated
      by reference to the Current Report on Form 8-K dated September 11, 2009
      and filed with the Commission September 23,
  2009.




25


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:
      December 1, 2009
              By:
              /s/  DEREK
      DUNAWAYDerek
      Dunaway, Chief Executive Officer
                (Principal
      Executive Officer)




Date:
      December 1, 2009
            By:
            /s/  MICHAEL
      BIELONKOMichael
      Bielonko, Chief Financial Officer
                (Principal
      Financial Officer)




26