UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549





FORM
10-Q


(Mark
One)


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





For
the quarterly period ended March 31, 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 twelve (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 ninety
(90) days. Yes ý
    No  ̈





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈    No  ̈





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
definition of "accelerated filer", "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (check
one):


Large
      accelerated filer  ̈
              
              Accelerated
      filer  ̈
              
              Non-accelerated
      filer  ̈
                (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 May 12, 2009, there were
outstanding 15,321,775shares of the registrant’s
Common Stock, par value $.001 per share.











Cyalume Technologies
Holdings, Inc.





FORM
10-Q





INDEX





PART
      I—FINANCIAL INFORMATIONItem 1.
                  
                  Financial
      StatementsCondensed
      Consolidated Statements of Operations (unaudited) for the three months
      ended March 31, 2009 and 2008
                  
                  4Condensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and
      December 31, 2008
                  
                  5Condensed
      Consolidated Statements of Changes in Stockholders' Equity and
      Comprehensive Loss for the three months ended March 31, 2009
      (unaudited)
                  
                  6Condensed
      Consolidated Statements of Cash Flows (unaudited) for the three months
      ended March 31, 2009 and 2008
                  
                  7Notes
      to Condensed Consolidated Financial Statements (unaudited)
                  
                  8Item 2.
                  
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  14Item 3.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  17Item 4.
                  
                  Controls
      and Procedures
                  
                  17PART
      II—OTHER INFORMATIONItem 1.
                  
                  Legal
      Proceedings
                  
                  18Item 1A.
                  
                  Risk
      Factors
                  
                  18Item 2.
                  
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  18Item 3.
                  
                  Defaults
      Upon Senior Securities
                  
                  18Item 4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  18Item 5.
                  
                  Other
      Information
                  
                  18Item 6.
                  
                  Exhibits
                  
                  19Signatures
                  
                  20





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 EndedMarch 31,
                                                
                                                
                                                
                                                March 31,
                                                
                                                
                                                
                                                March 31,2009
                                                
                                                
                                                
                                                2008
                                                
                                                
                                                
                                                2008Revenues
                                                
                                                $
                                                6,624
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                10,116Cost
      of goods sold
                                                
                                                
                                                3,861
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                5,017Gross
      profit
                                                
                                                
                                                2,763
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                5,099Other
      expenses (income):Sales
      and marketing
                                                
                                                
                                                785
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                932General
      and administrative
                                                
                                                
                                                1,225
                                                
                                                
                                                
                                                256
                                                
                                                
                                                
                                                1,246Research
      and development
                                                
                                                
                                                393
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                365Interest
      expense (income), net
                                                
                                                
                                                627
                                                
                                                
                                                
                                                (364
                                                )
                                                
                                                
                                                1,319Interest
      expense – related party
                                                
                                                
                                                14
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                —Amortization
      of intangible assets
                                                
                                                
                                                995
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                653Other
      loss (income), net
                                                
                                                
                                                44
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (995
                                                )Total
      other expenses (income)
                                                
                                                
                                                4,083
                                                
                                                
                                                
                                                (106
                                                )
                                                
                                                
                                                3,520Income
      (loss) before income taxes
                                                
                                                
                                                (1,320
                                                )
                                                
                                                
                                                106
                                                
                                                
                                                
                                                1,579Provision
      for (benefit from) income taxes
                                                
                                                
                                                (547
                                                )
                                                
                                                
                                                (105
                                                )
                                                
                                                
                                                597Net
      income (loss)
                                                
                                                $
                                                (773
                                                )
                                                
                                                $
                                                211
                                                
                                                
                                                $
                                                982Net
      income (loss) per common share:Basic
                                                
                                                $
                                                (0.05
                                                )
                                                
                                                $
                                                0.02Diluted
                                                
                                                $
                                                (0.05
                                                )
                                                
                                                $
                                                0.02Weighted
      average shares used to compute net income (loss) per common
      share:Basic
                                                
                                                
                                                14,564,234
                                                
                                                
                                                
                                                9,375,000Diluted
                                                
                                                
                                                14,564,234
                                                
                                                
                                                
                                                11,861,296





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





4





Cyalume Technologies
Holdings, Inc.


CondensedConsolidated Balance
Sheets


(in
thousands, except shares and per share information)





March 31,2009
                          (unaudited)
                        
                        
                        December 31,
                          2008AssetsCurrent
      assets:Cash
                        
                        $
                        1,203
                        
                        
                        $
                        3,952Accounts
      receivable, net of allowance for doubtful accounts of $217 and $452 at
      March 31, 2009 and December 31, 2008, respectively
                        
                        
                        3,346
                        
                        
                        
                        3,508Inventories,
      net
                        
                        
                        11,350
                        
                        
                        
                        11,447Income
      taxes refundable
                        
                        
                        747
                        
                        
                        
                        701Deferred
      income taxes
                        
                        
                        280
                        
                        
                        
                        317Prepaid
      expenses and other current assets
                        
                        
                        357
                        
                        
                        
                        195Total
      current assets
                        
                        
                        17,283
                        
                        
                        
                        20,120Property,
      plant and equipment, net
                        
                        
                        7,737
                        
                        
                        
                        7,882Goodwill
                        
                        
                        60,764
                        
                        
                        
                        60,896Other
      intangible assets, net
                        
                        
                        48,293
                        
                        
                        
                        49,426Other
      noncurrent assets
                        
                        
                        165
                        
                        
                        
                        188Total
      assets
                        
                        $
                        134,242
                        
                        
                        $
                        138,512Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Lines
      of credit
                        
                        $
                        3,300
                        
                        
                        $
                        3,500Current
      portion of notes payable
                        
                        
                        3,993
                        
                        
                        
                        3,621Accounts
      payable
                        
                        
                        2,884
                        
                        
                        
                        3,230Accrued
      expenses and other current liabilities
                        
                        
                        2,974
                        
                        
                        
                        2,550Common
      stock subject to mandatory redemption
                        
                        
                        —
                        
                        
                        
                        1,123Notes
      payable and advance due to related parties
                        
                        
                        64
                        
                        
                        
                        64Income
      tax payable
                        
                        
                        7
                        
                        
                        
                        5Total
      current liabilities
                        
                        
                        13,222
                        
                        
                        
                        14,093Notes
      payable, net of current portion
                        
                        
                        24,631
                        
                        
                        
                        25,581Notes
      payable due to related parties, net of current portion
                        
                        
                        1,017
                        
                        
                        
                        1,000Deferred
      income taxes
                        
                        
                        8,550
                        
                        
                        
                        9,237Derivatives
                        
                        
                        184
                        
                        
                        
                        163Asset
      retirement obligation, net of current portion
                        
                        
                        130
                        
                        
                        
                        128Total
      liabilities
                        
                        
                        47,734
                        
                        
                        
                        50,202Commitments
      and contingencies
                        
                        
                        —
                        
                        
                        
                        —Stockholders'
      equity:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized, no shares issued or
      outstanding
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, $0.001 par value; 50,000,000 authorized; 15,321,775 and 13,719,035
      issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                        
                        
                        15
                        
                        
                        
                        14Additional
      paid-in capital
                        
                        
                        87,111
                        
                        
                        
                        87,348Retained
      earnings
                        
                        
                        456
                        
                        
                        
                        1,229Accumulated
      other comprehensive loss
                        
                        
                        (1,074
                        )
                        
                        
                        (281
                        )Total
      stockholders’ equity
                        
                        
                        86,508
                        
                        
                        
                        88,310Total
      liabilities and stockholders' equity
                        
                        $
                        134,242
                        
                        
                        $
                        138,512





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





5





Cyalume
Technologies Holdings, Inc.


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


(in
thousands, except shares)


(Unaudited)





Common Stock
                              
                              
                              
                              
                              
                              Retained
                              
                              
                              AccumulatedNumber
                                of Shares
                              
                              
                              Amount
                              
                              
                              Additional
                                Paid-In
                                Capital
                              
                              
                              Earnings
                                (Accumulated
                                Deficit)
                              
                              
                              Other
                                Comprehensive
                                Loss
                              
                              
                              Total
                                Stockholders’
                                Equity
                              
                              
                              Comprehensive
                                LossBalance
      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
                              )
                              
                              
                              —Foreign
      currency translation adjustments
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (780
                              )
                              
                              
                              (780
                              )
                              
                              
                              (780
                              )Unrealized
      loss on cash flow hedges, net of taxes of $8
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (13
                              )
                              
                              
                              (13
                              )
                              
                              
                              (13
                              )Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (773
                              )
                              
                              
                              —
                              
                              
                              
                              (773
                              )
                              
                              
                              (773
                              )Comprehensive
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              (1,566
                              )Balance
      at March 31, 2009
                              
                              
                              15,321,775
                              
                              
                              $
                              15
                              
                              
                              $
                              87,111
                              
                              
                              $
                              456
                              
                              
                              $
                              (1,074
                              )
                              
                              $
                              86,508





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





6





Cyalume
Technologies Holdings, Inc.


Condensed
Consolidated Statements of Cash Flows


(in
thousands, except shares)


(Unaudited)





PredecessorFor
      the Three
                                                  
                                                  For
      the Three
                                                  
                                                  
                                                  For
      the ThreeMonths
      Ended
                                                  
                                                  Months
      Ended
                                                  
                                                  
                                                  Months
      EndedMarch
      31,
                                                  
                                                  March
      31,
                                                  
                                                  
                                                  March
      31,2009
                                                  
                                                  2008
                                                  
                                                  
                                                  2008Cash
      flows from operating activities:Net
      income (loss)
                                                  $
                                                  (773
                                                  )
                                                  $
                                                  211
                                                  
                                                  
                                                  $
                                                  982Adjustments
      to reconcile net income (loss) to net cash
                                                    provided
      by (used in) operating activities:Depreciation
      of property, plant and equipment
                                                  
                                                  158
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  199Amortization
                                                  
                                                  1,312
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  734Provision
      for deferred income taxes
                                                  
                                                  (642
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  269Other
      non-cash expenses
                                                  
                                                  127
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  302Changes
      in operating assets and liabilities:Accounts
      receivable
                                                  
                                                  83
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  315Inventories
                                                  
                                                  (331
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (1,475
                                                  )Prepaid
      expenses and other current assets
                                                  
                                                  (166
                                                  )
                                                  
                                                  27
                                                  
                                                  
                                                  
                                                  (164
                                                  )Accounts
      payable and accrued liabilities
                                                  
                                                  (137
                                                  )
                                                  
                                                  (77
                                                  )
                                                  
                                                  
                                                  861Income
      taxes payable, net
                                                  
                                                  (88
                                                  )
                                                  
                                                  (85
                                                  )
                                                  
                                                  
                                                  103Accrued
      interest on notes payable to stockholders
                                                  
                                                  (1
                                                  )
                                                  
                                                  12
                                                  
                                                  
                                                  
                                                  —Net
      cash provided by (used in) operating activities
                                                  
                                                  (458
                                                  )
                                                  
                                                  88
                                                  
                                                  
                                                  
                                                  2,126Cash
      flows from investing activities:Payments
      to trust account
                                                  
                                                  —
                                                  
                                                  
                                                  (90
                                                  )
                                                  
                                                  
                                                  —Purchases
      of long-lived assets
                                                  
                                                  (111
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (576
                                                  )Net
      cash used in investing activities
                                                  
                                                  (111
                                                  )
                                                  
                                                  (90
                                                  )
                                                  
                                                  
                                                  (576
                                                  )Cash
      flows from financing activities:Repayment
      of advances from and notes payable to related parties
                                                  
                                                  —
                                                  
                                                  
                                                  (100
                                                  )
                                                  
                                                  
                                                  —Payments
      for common stock subject to redemption
                                                  
                                                  (1,123
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      repayment of line of credit
                                                  
                                                  (200
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Payments
      of Predecessor notes payable
                                                  
                                                  —
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (25
                                                  )Repayment
      of long-term notes payable
                                                  
                                                  (658
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Payments
      to reacquire and retire common stock
                                                  
                                                  (263
                                                  )
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Refund
      of debt issue costs
                                                  
                                                  10
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Proceeds
      from exercises of warrants
                                                  
                                                  27
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      cash used in financing activities
                                                  
                                                  (2,207
                                                  )
                                                  
                                                  (100
                                                  )
                                                  
                                                  
                                                  (25
                                                  )Effect
      of exchange rate changes on cash
                                                  
                                                  27
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  285Net
      increase (decrease) in cash and cash equivalents
                                                  
                                                  (2,749
                                                  )
                                                  
                                                  (102
                                                  )
                                                  
                                                  
                                                  1,810Cash,
      beginning of period
                                                  
                                                  3,952
                                                  
                                                  
                                                  570
                                                  
                                                  
                                                  
                                                  5,743Cash,
      end of period
                                                  $
                                                  1,203
                                                  
                                                  $
                                                  468
                                                  
                                                  
                                                  $
                                                  7,553





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





7


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





1.
            BASIS
      OF PRESENTATION




We have
prepared the accompanying unaudited interim condensed consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these interim
condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements.  All significant intercompany accounts and transactions
have been eliminated in consolidation.





We
believe all adjustments (consisting of normal, recurring adjustments) considered
necessary for a fair presentation have been included in these interim condensed
consolidated financial statements. Operating results for the three-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.




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.




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.





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. or “CTSA”). 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.
CTSA is geographically located in France and represents us in certain
international markets, primarily Europe and Asia.





3.
            NEW
      ACCOUNTING PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The objective of 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”). 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.





8




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


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





4.
            INVENTORIES





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


March
      31,
                    2009
                  
                  
                  December
      31,
                    2008Raw
      materials
                  
                  $
                  5,548
                  
                  
                  $
                  5,822Work-in-process
                  
                  
                  3,695
                  
                  
                  
                  3,484Finished
      goods
                  
                  
                  2,107
                  
                  
                  
                  2,141$
                  11,350
                  
                  
                  $
                  11,447





5.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





The
derivative liabilities as of March 31, 2009 in our condensed consolidated
balance sheet consist of the following (all amounts in thousands):





Derivative
      Instrument
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValueInterest
      rate swaps
                          
                          Derivatives
      (noncurrent liabilities)
                          
                          $
                          (184
                          )Currency
      forward contract
                          
                          Accrued
      expenses and other current liabilities (current
    liabilities)
                          
                          
                          (3
                          )$
                          (187
                          )





Neither
we nor the Predecessor held any derivative instruments before the Acquisition
and, other than the derivatives listed above, have not held any other types of
derivative instruments.





Interest
Rate Swaps





Simultaneous
with the Acquisition, we entered into two pay-fixed, receive-variable interest
rate swaps to reduce exposure to changes in cash payments caused by changes in
interest rates on certain senior long-term notes payable that were also entered
into on the date of the Acquisition. Both relationships are designated as cash
flow hedges and meet the criteria for the shortcut method for assessing hedge
effectiveness; therefore, the hedge is assumed to be 100% effective and all
changes in the fair value of the interest rate swaps are recorded in
consolidated accumulated other comprehensive loss. These changes in fair value
must be reclassified in whole or in part from consolidated accumulated other
comprehensive loss into earnings if, and when, a comparison of the swaps and the
related hedged cash flows demonstrates that the shortcut method is no longer
applicable. We expect these hedges to meet the criteria of the shortcut method
for the duration of the hedging relationship and therefore we do not expect to
reclassify any portion of these unrealized losses from consolidated accumulated
other comprehensive loss to earnings in the future.





The fair
values of the swaps were 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





CTSA’s
functional currency is the Euro. Periodically, CTSA purchases inventory from
CTI, which requires repayment in U.S. dollars. Beginning in 2009 and only under
certain circumstances, we use currency forward contracts to mitigate CTSA’s
exposure to changes in the Euro-to-U.S.-dollar exchange rate upon CTSA’s payment
to CTI for these inventory purchases.  Such currency forward contracts
typically have durations of less than six months. We report these currency
forward contracts at their fair value. This relationship has not been designated
as a hedge and therefore all changes in these currency forward contracts’ fair
value are recorded in other loss (income) on our condensed consolidated
statement of operations. At March 31, 2009, we hold only one such currency
forward contract. The fair value of this
contract was 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.





9




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


Effect
of Derivatives on Statement of Operations





The
effect of derivative instruments (a) designated as cash flow hedges and (b) not
designated as hedging instruments on our condensed consolidated statement of
operations for the three months ended March 31, 2009 was as follows (all amounts
in thousands):


Gain (Loss)
                  
                  
                  Gain (Loss)
                  
                  
                  Gain (Loss)In AOCI (1)
                  
                  
                  Reclassified (2)
                  
                  
                  in Earnings (3)Derivatives
      in cash flow hedging relationships:Interest
      rate swaps
                  
                  $
                  (13
                  )
                  
                  $
                  —
                  
                  
                  $
                  —Derivatives
      not designated as hedging instruments:Forward
      currency contracts
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  (3
                  )





(1)
            Amount
      recognized in accumulated other comprehensive loss (AOCI) (effective
      portion and net of taxes) during the three months ended March 31,
      2009.


(2)
            Amount
      of gain (loss) originally recorded in AOCI but reclassified from AOCI into
      earnings during the three months ended March 31,
  2009.


(3)
            Amount
      of gain (loss) recognized in earnings on the derivative (ineffective
      portion and amount excluded from effectiveness testing) reported in other
      loss (income) on the condensed consolidated statement of operations for
      the three months ended March 31,
2009.





6.
            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 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 the following (i) 75,000
restricted shares of common stock to non-employee consultants; (ii) 133,333
restricted shares of common stock and 200,000 restricted options to our
executive officers and other management; and, (iii) a total of 82,500 options to
directors.  Although the Plan has not been approved by shareholders as
of March 31, 2009, we believe it is probable that the Plan will be approved by
shareholders at the 2009 Annual Meeting of Shareholders and therefore we have
estimated liabilities for these future award issuances where appropriate.
Subsequent to approval by shareholders at the 2009 Annual Meeting of
Shareholders, we expect to file Form S-8 with the SEC to register the shares
under the Plan. Details on these awards are as follows:





·
            The
      75,000 restricted shares to non-employee consultants (including 45,000
      earned by our current Chief Executive Officer as a consultant to the
      Company prior to becoming an employee) are to be issued as payment for
      services rendered in conjunction with the Acquisition. The fair value of
      this liability 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 March 31, 2009. These
      restricted shares will vest over a 3-year period with no provision
      requiring continued employment or service to the
  Company.





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





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





10




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


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





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




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




Because
our common stock did not have a trading history that was representative of an
operating company as of March 3, 2009, 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.




·
            Total
      expense related to these awards of $36,000 was recorded in the three
      months ended March 31, 2009.




7.
            RESTRUCTURING
      COSTS





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





Balance
      on December 31, 2008
                    
                    $
                    229Cash
      payments
                    
                    
                    (166
                    )Balance
      on March 31, 2009
                    
                    $
                    63





The
$63,000 of accrued and unpaid restructuring costs as of March 31, 2009 is
included in accrued expenses and other current liabilities on the accompanying
condensed consolidated balance sheet. The $1.1 million of restructuring charges
is included in the Predecessor’s condensed consolidated statement of
operations as an other loss for the three months ended March 31,
2008.





8.
            INCOME
      TAXES





For the
three months ended March 31, 2009 and for the Predecessor’s three months ended
March 31, 2008, effective tax rates of 41% and 38%, respectively, differed from
the statutory rate of 34% due to state and foreign taxes. For the three months
ended March 31, 2008, the effective tax rate of (99)% 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.





9.
            NET
      INCOME (LOSS) PER COMMON SHARE





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





11


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


Three Months Ended March 31,2009
                  
                  2008Basic:Net
      income (loss) (in thousands)
                  
                  $
                  (773
                  )
                  $
                  211Weighted
      average shares
                  
                  
                  14,564,234
                  
                  
                  9,375,000Basic
      income (loss) per common share
                  
                  $
                  (0.05
                  )
                  $
                  0.02Diluted:Net
      income (loss) (in thousands)
                  
                  $
                  (773
                  )
                  $
                  211Weighted
      average shares
                  
                  
                  14,564,234
                  
                  
                  9,375,000Effect
      of dilutive warrants
                  
                  
                  —
                  (1)
                  
                  2,486,296Weighted
      average shares, as adjusted
                  
                  
                  14,564,234
                  
                  
                  11,861,296Diluted
      income (loss) per common share
                  
                  $
                  (0.05
                  )
                  $
                  0.02





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





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:




Three Months Ended March 31,2009
                    
                    2008Public
      Offering Warrants
                    
                    
                    4,001,506
                    
                    —Warrants
      Issued for Acquisition-Related Costs
                    
                    
                    100,000
                    
                    —Other
      Warrants Sold
                    
                    
                    118,750
                    
                    —Options
                    
                    
                    1,462,500
                    
                    1,462,500





10.
            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 Cyalume Technologies, Inc. (CTI). Prior to, or substantially
simultaneously with, the Transaction, CTI sold certain assets and liabilities
related to Omniglow Corporation’s novelty and retail business to certain former
Omniglow Corporation stockholders and management (the “Omniglow
Buyers”).  This was done because CTI sought to retain only the
Omniglow Corporation assets and current liabilities associated with its
government, military and safety business. During 2006, CTI and the Omniglow
Buyers commenced litigation and arbitration proceedings against one another.
Claims include breaches of a lease and breaches of various other agreements
between CTI and the Omniglow Buyers.  The Omniglow Buyers seek
compensatory damages of $1.4 million, to be trebled, and recovery of costs and
legal fees. We have filed for damages of $368,000 against the Omniglow
Buyers.  We continue to rigorously defend our position on these
matters, as we believe the Omniglow Buyers’ claims to be without
merit.





During
2006, CTI and the former stockholders of Omniglow (“Sellers”) commenced
arbitration proceedings against one another that are separate and distinct from
those discussed in the previous paragraph. These arbitration proceedings
included claims with respect to certain representations, warranties, contracts,
covenants and other agreements in connection with the Transaction and a number
of other unrelated items.  In January 2008, CTI reached settlement with the
Sellers on all matters, which resulted in CTI receiving $3.0 million in cash.
The terms of the settlement, which was reached to minimize the parties' risk,
time and cost of further litigation, gave no explicit consideration as to
whether the disputes being resolved arose in the purchase process or pursuant to
subsequent events. As a result, CTI followed the guidance in SFAS No. 141, Business Combinations and
SFAS No. 16, Prior Period
Adjustments and reflected the settlement as a gain in 2008, rather than
an adjustment to the purchase price. The net gain of $2.8 million is included in
other income on the accompanying condensed consolidated financial statements of
the Predecessor for the 3 months ended March 31, 2008.





12


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


11.
            FAIR
      VALUE





Effective
January 1, 2008, we adopted SFAS No. 157, which establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements.  SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
SFAS No. 157 also requires disclosure about how fair value is determined for
assets and liabilities and establishes a hierarchy for which these assets and
liabilities must be grouped, based on significant levels of inputs as
follows:





Level 1
            Quoted
      prices in active markets for identical assets or
    liabilities.





Level 2
            Quoted
      prices in active markets for similar assets or liabilities and inputs that
      are observable for the asset or
liability.





Level 3
            Unobservable
      inputs for the asset or liability, such as discounted cash flow models or
      valuations.





The
determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. As of March 31, 2009, the only liabilities required to be measured
at fair value on a recurring basis were the interest rate swaps and currency
forward contracts described in Note 5, all of which are measured at fair value
using Level 3 inputs. The following table reflects their activity for the three
months ended March 31, 2009 (all amounts in thousands):


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





12.
            SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





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




Three Months Ended March 31,
                  
                  
                  Predecessor
                    For the Three
                    Months Ended
                    March 31,2009
                  
                  2008
                  
                  
                  
                  2008Interest
                  $
                  434
                  
                  $
                  —
                  
                  
                  $
                  1,169Income
      taxes
                  $
                  833
                  
                  $
                  —
                  
                  
                  $
                  225





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




Three Months Ended March 31,
                    
                    
                    Predecessor
                      For the Three
                      Months EndedMarch 31,2009
                    
                    2008
                    
                    
                    
                    2008Accrual
      of costs directly related to the Acquisition
                    $
                    234
                    
                    $
                    —
                    
                    
                    $
                    —





13


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




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




Overview




On
December 19, 2008, we purchased Cyalume Technologies, Inc. (“CTI”) (the
“Acquisition”). Prior to the Acquisition 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 period
ended March 31, 2009 to the comparable period in 2008, which did not include the
operations of CTI, and also to the operating results of the Predecessor for the
comparable period in 2008.




Results
of Cyalume Operations




Revenues:  Cyalume did
not engage in any substantive business operations in the first quarter of 2008,
and as such we recorded no sales during that quarter. For the three-month period
ended March 31, 2009, our sales were $3.5 million lower than the Predecessor’s
sales for the comparable period in 2008. The reduction in sales compared to
Predecessor was primarily due to a reduction in units sold to the U.S.
Military. 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 by the U.S. Military. Furthermore, we have recently seen
an increase in orders during the month of May 2009 from the U.S. Military, the
nature of which further supports our belief that the sales reduction is
temporary. From these orders, we anticipate that revenues for the period ending
June 30, 2009 will show a noticeable increase over revenues for the first
quarter, but still be below revenues for the same period a year
ago.




Cost of goods sold: Cyalume
did not engage in any substantive business operations in the first quarter of
2008, and as such we recorded no cost of sales during that quarter. For the
three-month period ended March 31, 2009, our cost of sales was $1.2 million
lower than the Predecessor’s cost of sales for the comparable period in 2008 due
to the reduction in units sold discussed above.  Our gross margin for
2009 was 41.7% compared to 50.4% for the Predecessor in 2008. The decline in
gross margin is attributable to the decline in sales of high margin chemical
light sticks to the U.S. Military, the cost of a workforce reduction and the
amortization of $262,000 of the inventory step-up to fair market value arising
from the Acquisition. We anticipate the amortization of the remaining $453,000
step-up to continue into the third quarter of 2009 and negatively impact second
and third quarter gross margins also.




In order
to more closely align our short-term costs with our revenues, we have taken
steps to reduce our costs, including a 23% reduction in our workforce
in March 2009. Estimated annualized savings from these cost reducing measures
are $1.0 million.




Sales and marketing expenses
increased for the three months ended March 31, 2009 as compared to the
three months ended March 31, 2008 due to the operations of CTI. These expenses
were $147,000 lower than the Predecessor’s for the comparable period in 2008 as
the Predecessor withdrew from the direct-to-consumer market in 2008 and revamped
its 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 declined $21,000 compared to the Predecessor, with lower legal
costs being the most significant factor.




Interest expense (income), net
increased $1.0 million from the same period in 2008. In the first quarter of
2008, we earned $364,000 on cash held in trust. In December 2008, this cash was
used to purchase CTI, and therefore, our interest income in the first quarter of
2009 was minimal. Additionally, we borrowed $33.0 million in notes payable to
complete the Acquisition, which resulted in our recording $627,000 in interest
expense in the first quarter of 2009. Interest expense decreased $692,000
compared to the Predecessor due to our having less debt and paying lower average
interest rates than the Predecessor.




Amortization of intangible
assets: As a result of the Acquisition, we recorded significant
intangible assets in December 2008. We amortized $995,000 of intangible assets
into expense in the first quarter of 2009, after having no amortization in the
first quarter of 2008. The Predecessor had intangible assets as a result of a
prior acquisition, and had a $653,000 amortization of intangible assets expense
in the first quarter of 2008.




Other income (loss), net:
During the first quarter of 2008, the Predecessor implemented a restructuring to
facilitate the sale of CTI to Cyalume pursuant to which the CEO and two
Vice-Presidents left CTI, resulting in a restructuring charge of $1.1 million.
Cash payments of restructuring charges were primarily incurred in 2008 with
$166,000 made in the first quarter of 2009. In the first quarter of 2008, the
Predecessor reached a settlement with the previous 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. The restructuring charge and the
gain on the settlement are the primary components of other income (loss), net
shown for the Predecessor.




14




Income tax benefit increased
$442,000 for the three months ended March 31, 2009 as compared to the
three months ended March 31, 2008 due to net operating losses generated during
the quarter by CTI. Income tax benefit increased $1.1 million for the three
months ended March 31, 2009 as compared to the Predecessor’s three
months ended March 31, 2008 as the Predecessor had pre-tax net income of $1.6
million while we had a pre-tax net loss of $1.3 million.




Balance
Sheet




Assets, other than cash,
decreased $1.5 million in the first quarter primarily due to the amortization of
$262,000 of the inventory step up to fair market values recorded at the date of
Acquisition, $995,000 of intangible assets amortization and the effects of
changes in the foreign exchange rate, offset by the addition of $225,000 of
additional goodwill recorded as a result of 70,000 shares of common stock being
awarded March 3, 2009 in connection with the Acquisition, property plant and
equipment purchases of $111,000. The remaining changes in asset values are the
result of normal business activities.




Current liabilities decreased
$988,000 primarily due to 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 were finalized in the first
quarter of 2009. The remaining changes in current liability values are the
result of normal business activities.




Non-current deferred income tax
liabilities decreased $687,000 primarily due to the quarterly
amortization of intangible assets and inventory step-up that is not deductible
for income tax purposes and the net operating loss generated during the quarter,
which has been classified as long-term due to the limitations of its
deductibility by the Internal Revenue Code.




Liquidity
and Capital Resources




As of
March 31, 2009 and December 31, 2008, we had $1.2 million and $4.0 million,
respectively, in cash on hand. The major uses of cash during the period were
$1.1 million to complete the redemption of common stock as part of the
Acquisition, $858,000 in payments on the line of credit and notes payable, and
$263,000 to purchase shares of our common stock from certain members of CTI
management.





During
the three months ended March 31, 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. At March 31,
2009 there were 4,951,506 warrants and warrant equivalents (warrants contained
within common stock units) that could be exercised in the future, and most of
which will likely be exercised on a cashless basis.




Notes
payable (current and long-term) declined $561,000 during the first quarter as
the result of making $658,000 in principal payments offset by amortization of
debt discounts and the capitalization of paid-in-kind interest.




Forecasted
principal and interest payments on bank debt for the next 12 months are $5.9
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,
and CTI made principal and interest payments of $7.8 million prior to the
Acquisition.




On March
3, 2009, our Board of Directors adopted the Cyalume Technologies Holdings, Inc.
2009 Omnibus Securities and Incentive Plan (the “Plan”). Under the Plan, two
million shares have been reserved for potential issuance as incentives to
certain employees and non-employees.  On March 3, 2009, each of our 11
Board of Directors members was awarded options to purchase 7,500 shares of our
common stock pursuant to this Plan. Also on March 3, 2009, our CEO was awarded
50,000 restricted shares of our common stock and options to purchase 200,000
shares of our common stock pursuant to this Plan if certain performance goals
are met. Subsequent to approval by shareholders at the 2009 Annual Meeting of
Shareholders, we expect to file Form S-8 with the SEC to register the shares
under the Plan. Issuance of shares under the Plan will not provide capital and
will cause dilution of earnings per share.




The 2009
capital expenditures budget is expected to be funded completely from operating
cash flows.





Off-Balance
Sheet Arrangements





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





Contractual
Obligations





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




15





Critical
Accounting Policies





Use
of Estimates





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




Revenue
Recognition





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





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





Income
Taxes





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





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





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





Goodwill





We apply
the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, to goodwill. Goodwill is deemed to have an indefinite life and
accordingly, is not subject to annual amortization.  Goodwill is
subject to annual impairment reviews, and, if conditions warrant, interim
reviews based upon its estimated fair value.  Impairment charges, if
any, are recorded in the period in which the impairment is determined. No such
charges have been recorded in the three month periods ended March 31, 2009 and
2008.





Intangible
Assets





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




16





Inventories





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





Foreign
Operations and Currency





Accounts
of our foreign subsidiary are translated using their local currency as the
functional currency. Income statement accounts are converted to U.S. dollars
using the average exchange rate for the period covered by the income statement.
Assets and liabilities are converted to U.S. dollars using the exchange rate in
effect as of the balance sheet date. Equity transactions are converted to U.S.
dollars using the exchange rate in effect as of the date of the transaction.
Translation gains and losses are reported as component of accumulated other
comprehensive income or loss. Gains and losses resulting from transactions which
are denominated in other than the functional currencies are reported as other
income or loss in the statement of operations in the period the gain or loss
occurred.





ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





ITEM 4.
            CONTROLS
      AND PROCEDURES





Evaluation
of disclosure controls and procedures





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





Our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 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 March 31, 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 March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


17





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.





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
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





(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. 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.





ITEM 3.
            DEFAULTS
      UPON SENIOR SECURITIES





None.





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





None.





ITEM 5.
            OTHER
      INFORMATION





None.




18


ITEM 6.
            EXHIBITS





Exhibit
      Number
            
            Description31.1
            *
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            *
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            *
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





*
            Filed
      herewith.


19


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Cyalume
      Technologies Holdings, Inc.Date:
      May 13, 2009
                              
                              By:
                              /s/  DEREK
  DUNAWAYDerek
      Dunaway, Chief Executive Officer
                                (Principal
      Executive Officer)Date:
      May 13, 2009
                              
                              By:
                              /s/  MICHAEL
    BIELONKOMichael
      Bielonko, Chief Financial Officer
                                (Principal
      Financial
Officer)


20