UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549










FORM
10-Q/A







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





For
the quarterly period ended March 29, 2009




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





For the transition period from
______to______.





OPTEX SYSTEMS HOLDINGS,
INC.


(Exact
Name of Registrant as Specified in Charter)




Delaware
            
            333-143215
            
            33-143215(State
      or other jurisdiction of
              incorporation)
            
            (Commission
      File Number)
            
            (IRS
      Employer Identification No.)




1420
      Presidential Drive, Richardson, TX
            
            75081-2439(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code: 972-644-0722





Sustut
Exploration, Inc. 1420 5th Avenue #220


Seattle,
Washington 98101





(Former
name or former address, if changed since last report)





(206)
274-5321


(Issuer
Telephone number)








(Former
Name or Former Address if Changed Since Last Report)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes oNo oNot
applicable.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
 See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer o Accelerated Filer o      
Non-Accelerated Filer oSmaller Reporting Company x





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





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 11, 2009: 138,914,940 shares of common stock.





OPTEX
SYSTEMS HOLDINGS, INC.


(formerly
known as Sustut Exploration, Inc.)


FORM
10-Q


March
29, 2009


INDEX





PART
      I— FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              F-26Item
      3
              Quantitative
      and Qualitative Disclosures About Market Risk
              21Item
      4T.
              Control
      and Procedures
              21PART
      II— OTHER INFORMATIONItem
      1
              Legal
      Proceedings
              22Item
      1A
              Risk
      Factors
              22Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              30Item
      3.
              Defaults
      Upon Senior Securities
              30Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              31Item
      5.
              Other
      Information
              31Item
      6.
              Exhibits
              32SIGNATURE
              33


Item
1. Financial Information





OPTEX
SYSTEMS HOLDINGS, INC.


(formerly
known as Sustut Exploration, Inc.)





CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS





AS OF
MARCH 29, 2009


2


OPTEX
SYSTEMS HOLDINGS, INC.


(formerly
known as Sustut Exploration, Inc.)




BALANCE
      SHEETS
              F-1STATEMENTS
      OF OPERATIONS
              F-4STATEMENTS
      OF CASH FLOWS
              F-5STATEMENTS
      OF STOCKHOLDERS’ EQUITY
              F-7FINANCIAL
      STATEMENT FOOTNOTES
              F-8


3


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Balance Sheets





RestatedSuccessor
                                
                                
                                RestatedMarch
      29, 2009
                                
                                
                                Predecessor(Unaudited)
                                September
      28, 2008ASSETSCurrent
      AssetsCash
                                
                                $
                                1,233,956
                                
                                
                                $
                                170,183Accounts
      Receivable
                                
                                
                                2,061,699
                                
                                
                                
                                2,454,235Net
      Inventory
                                
                                
                                6,466,123
                                
                                
                                
                                4,547,726Prepaid
      Expenses
                                
                                
                                235,896
                                
                                
                                
                                307,507Total
      Current Assets
                                
                                
                                9,997,674
                                
                                
                                
                                7,479,651Property
      and EquipmentProperty
      Plant and Equipment
                                
                                
                                1,345,172
                                
                                
                                
                                1,314,109Accumulated
      Depreciation
                                
                                
                                (1,055,039
                                )
                                
                                
                                (994,542
                                )Total
      Property and Equipment
                                
                                
                                290,133
                                
                                
                                
                                319,567Other
      AssetsSecurity
      Deposits
                                
                                
                                20,684
                                
                                
                                
                                20,684Intangibles
                                
                                
                                3,001,193
                                
                                
                                
                                1,100,140Goodwill
                                
                                
                                7,110,415
                                
                                
                                
                                10,047,065Total
      Other Assets
                                
                                
                                10,132,292
                                
                                
                                
                                11,167,889Total
      Assets
                                
                                $
                                20,420,099
                                
                                
                                $
                                18,967,107





The
accompanying notes are an integral part of these financial
statements


F-1


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Balance
Sheets – Continued





Restated
                                
                                
                                RestatedSuccessor
                                
                                
                                PredecessorMarch 29, 2009(Unaudited)
                                September 28, 2008LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      LiabilitiesAccounts
      Payable
                                
                                $
                                2,066,815
                                
                                
                                $
                                1,821,534Accrued
      Expenses
                                
                                
                                963,990
                                
                                
                                
                                798,974Accrued
      Warranties
                                
                                
                                284,305
                                
                                
                                
                                227,000Accrued
      Contract Losses
                                
                                
                                806,643
                                
                                
                                
                                821,885Loans
      Payable
                                
                                
                                -
                                
                                
                                
                                373,974Income
      Tax Payable
                                
                                
                                350,318
                                
                                
                                
                                4,425Total
      Current Liabilities
                                
                                
                                4,472,071
                                
                                
                                
                                4,047,792Other
      LiabilitiesNote
      Payable
                                
                                
                                -
                                
                                
                                
                                2,000,000Accrued
      Interest on Note
                                
                                
                                -
                                
                                
                                
                                336,148Due
      to Parent
                                
                                
                                -
                                
                                
                                
                                4,300,151Total
      Other Liabilities
                                
                                
                                -
                                
                                
                                
                                6,636,299Total
      Liabilities
                                
                                
                                4,472,071
                                
                                
                                
                                10,684,091Stockholders'
      EquityOptex
      Systems Holdings, Inc. Common Stock– (par $0.001, 200,000,000 authorized,
      138,914,940 shares issued and outstanding as of March 29,
      2009)
                                
                                
                                138,915Optex
      Systems Holdings, Inc.  Preferred Stock (.001 par 5,000
      authorized,  1027 series A preferred issued i and
      outstanding)
                                
                                
                                1Optex
      Systems, Inc. (Texas) Common Stock (no par 100,000 authorized, 18,870
      shares issued and 10,000 shares outstanding)
                                
                                
                                
                                
                                
                                
                                164,834Optex
      Systems, Inc. (Texas) Treasury Stock (8,870 shares at
cost)
                                
                                
                                -
                                
                                
                                
                                (1,217,400
                                )Additional
      Paid-in-capital
                                
                                
                                16,229,144
                                
                                
                                
                                15,246,282Retained
      Earnings (Deficit)
                                
                                
                                (420,032
                                )
                                
                                
                                (5,910,700
                                )Total
      Stockholders' Equity
                                
                                
                                15,948,028
                                
                                
                                
                                8,283,016Total
      Liabilities and Stockholders' Equity
                                
                                $
                                20,420,099
                                
                                
                                $
                                18,967,107




F-2




The
accompanying notes are an integral part of these financial
statements


F-3


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Operations - Restated and Unaudited





Successor
                                  
                                  
                                  Predecessor
                                  
                                  
                                  Successor
                                  
                                  
                                  Predecessor
                                  
                                  
                                  PredecessorThree Months ended
                                    March 29, 2009
                                  
                                  
                                  Three Months ended
                                    March 30, 2008
                                  
                                  
                                  For the period October
                                    15, 2008 throughMarch
                                    29, 2009
                                  
                                  
                                  For the period September
                                    29, 2008 through October
                                    14, 2008
                                  
                                  
                                  Six Months endedMarch
                                    30, 2008Revenues
                                  
                                  $
                                  6,708,286
                                  
                                  
                                  $
                                  5,628,115
                                  
                                  
                                  $
                                  13,100,430
                                  
                                  
                                  $
                                  871,938
                                  
                                  
                                  $
                                  10,044,019Total
      Cost of Sales
                                  
                                  
                                  6,151,915
                                  
                                  
                                  
                                  5,026,005
                                  
                                  
                                  
                                  11,717,097
                                  
                                  
                                  
                                  739,868
                                  
                                  
                                  
                                  8,865,499Gross
      Margin
                                  
                                  
                                  556,371
                                  
                                  
                                  
                                  602,110
                                  
                                  
                                  
                                  1,383,333
                                  
                                  
                                  
                                  132,070
                                  
                                  
                                  
                                  1,178,520General
      and AdministrativeSalaries
      and Wages
                                  
                                  
                                  189,167
                                  
                                  
                                  
                                  316,838
                                  
                                  
                                  
                                  326,014
                                  
                                  
                                  
                                  22,028
                                  
                                  
                                  
                                  490,526Employee
      Benefits & Taxes
                                  
                                  
                                  56,570
                                  
                                  
                                  
                                  20,070
                                  
                                  
                                  
                                  154,735
                                  
                                  
                                  
                                  495
                                  
                                  
                                  
                                  99,142Employee
      Stock Bonus Plan
                                  
                                  
                                  -
                                  
                                  
                                  
                                  77,094
                                  
                                  
                                  
                                  4,812
                                  
                                  
                                  
                                  (4,812
                                  )
                                  
                                  
                                  178,861Amortization
      of Intangible
                                  
                                  
                                  101,158
                                  
                                  
                                  
                                  54,123
                                  
                                  
                                  
                                  202,317
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  115,245Rent,
      Utilities and Building Maintenance
                                  
                                  
                                  57,102
                                  
                                  
                                  
                                  32,891
                                  
                                  
                                  
                                  99,942
                                  
                                  
                                  
                                  12,493
                                  
                                  
                                  
                                  91,041Legal
      and Accounting Fees
                                  
                                  
                                  92,493
                                  
                                  
                                  
                                  30,233
                                  
                                  
                                  
                                  168,353
                                  
                                  
                                  
                                  360
                                  
                                  
                                  
                                  97,528Consulting
      and Contract Service Fees
                                  
                                  
                                  55,255
                                  
                                  
                                  
                                  80,106
                                  
                                  
                                  
                                  124,050
                                  
                                  
                                  
                                  10,527
                                  
                                  
                                  
                                  200,545Travel
      Expenses
                                  
                                  
                                  11,704
                                  
                                  
                                  
                                  34,291
                                  
                                  
                                  
                                  25,023
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  87,962Corporate
      Allocations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  508,696
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  942,630Board
      of Director Fees
                                  
                                  
                                  37,500
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  50,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other
      Expenses
                                  
                                  
                                  104,046
                                  
                                  
                                  
                                  76,294
                                  
                                  
                                  
                                  124,174
                                  
                                  
                                  
                                  16,155
                                  
                                  
                                  
                                  148,092Total
      General and Administrative
                                  
                                  
                                  704,995
                                  
                                  
                                  
                                  1,230,636
                                  
                                  
                                  
                                  1,279,420
                                  
                                  
                                  
                                  57,246
                                  
                                  
                                  
                                  2,451,572Operating
      Income (Loss)
                                  
                                  
                                  (148,624
                                  )
                                  
                                  
                                  (628,526
                                  )
                                  
                                  
                                  103,913
                                  
                                  
                                  
                                  74,824
                                  
                                  
                                  
                                  (1,273,052
                                  )Other
      ExpensesOther
      Income and Expense
                                  
                                  
                                  (647
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,083
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (502
                                  )Interest
      (Income) Expense - Net
                                  
                                  
                                  91,904
                                  
                                  
                                  
                                  49,863
                                  
                                  
                                  
                                  174,710
                                  
                                  
                                  
                                  9,492
                                  
                                  
                                  
                                  99,503Total
      Other
                                  
                                  
                                  91,257
                                  
                                  
                                  
                                  49,863
                                  
                                  
                                  
                                  173,627
                                  
                                  
                                  
                                  9,492
                                  
                                  
                                  
                                  99,001Income
      (Loss) Before Taxes
                                  
                                  
                                  (239,881
                                  )
                                  
                                  
                                  (678,389
                                  )
                                  
                                  
                                  (69,714
                                  )
                                  
                                  
                                  65,332
                                  
                                  
                                  
                                  (1,372,053
                                  )Income
      Taxes (Benefit)
                                  
                                  
                                  86,664
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  350,318
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      Income (Loss) After Taxes
                                  
                                  $
                                  (326,545
                                  )
                                  
                                  $
                                  (678,389
                                  )
                                  
                                  $
                                  (420,032
                                  )
                                  
                                  $
                                  65,332
                                  
                                  
                                  $
                                  (1,372,053
                                  )Basic
      and diluted loss per share (1)
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (67.84
                                  )
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  6.53
                                  
                                  
                                  $
                                  (137.21
                                  )Weighted
      Average Common Shares Outstanding
                                  
                                  
                                  113,614,399
                                  
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  113,473,841
                                  
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  10,000





The
accompanying notes are an integral part of these financial
statements


F-4


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Statements
of Cash Flows - Restated and Unaudited





Successor
                                                    
                                                    
                                                    Predecessor
                                                    
                                                    
                                                    PredecessorFor the period October 15, 2008
                                                      through March 29, 2009
                                                    
                                                    
                                                    For the period September 29, 2008
                                                      through October 14, 2008
                                                    
                                                    
                                                    Six months ended March
                                                      30,2008Cash
      flows from operating activities:Net
      Income (Loss)
                                                    
                                                    $
                                                    (420,032
                                                    )
                                                    
                                                    $
                                                    65,332
                                                    
                                                    
                                                    $
                                                    (1,372,053
                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                    
                                                    
                                                    1,086,403
                                                    
                                                    
                                                    
                                                    9,691
                                                    
                                                    
                                                    
                                                    429,791Provision
      for (use of) allowance for inventory valuation
                                                    
                                                    
                                                    95,773
                                                    
                                                    
                                                    
                                                    27,363
                                                    
                                                    
                                                    
                                                    -Noncash
      interest expense
                                                    
                                                    
                                                    159,780
                                                    
                                                    
                                                    
                                                    9,500
                                                    
                                                    
                                                    
                                                    99,503(Increase)
      decrease  in accounts receivable
                                                    
                                                    
                                                    (657,266
                                                    )
                                                    
                                                    
                                                    1,049,802
                                                    
                                                    
                                                    
                                                    (514,772
                                                    )(Increase)
      decrease in inventory (net of progress billed)
                                                    
                                                    
                                                    (1,177,967
                                                    )
                                                    
                                                    
                                                    (863,566
                                                    )
                                                    
                                                    
                                                    1,444,598(Increase)
      decrease in other current assets
                                                    
                                                    
                                                    240,570
                                                    
                                                    
                                                    
                                                    18,541
                                                    
                                                    
                                                    
                                                    (33,221
                                                    )Increase
      (decrease) in accounts payable and accrued expenses
                                                    
                                                    
                                                    595,890
                                                    
                                                    
                                                    
                                                    (186,051
                                                    )
                                                    
                                                    
                                                    (163,053
                                                    )Increase
      (decrease) in accrued warranty costs
                                                    
                                                    
                                                    57,305
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Increase
      (decrease) in due to parent
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,428
                                                    
                                                    
                                                    
                                                    812,435Increase
      (decrease) in accrued estimated loss on contracts
                                                    
                                                    
                                                    62
                                                    
                                                    
                                                    
                                                    (15,304
                                                    )
                                                    
                                                    
                                                    (374,770
                                                    )Increase
      (decrease) in income taxes payable
                                                    
                                                    
                                                    350,318
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Total
      adjustments
                                                    
                                                    
                                                    750,868
                                                    
                                                    
                                                    
                                                    51,404
                                                    
                                                    
                                                    
                                                    1,700,511Net
      cash (used)/provided by operating activities
                                                    
                                                    
                                                    330,836
                                                    
                                                    
                                                    
                                                    116,736
                                                    
                                                    
                                                    
                                                    328,458Cash
      flows from investing activities:Cash
      Received through Optex Systems, Inc. (Texas) acquisition
                                                    
                                                    
                                                    253,581
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Purchased
      of property and equipment
                                                    
                                                    
                                                    (17,725
                                                    )
                                                    
                                                    
                                                    (13,338
                                                    )
                                                    
                                                    
                                                    (97,136
                                                    )Net
      cash used in investing activities
                                                    
                                                    
                                                    235,856
                                                    
                                                    
                                                    
                                                    (13,338
                                                    )
                                                    
                                                    
                                                    (97,136
                                                    )Cash
      flows from financing activities:Private
      Placement net of stock issuance cost
                                                    
                                                    
                                                    874,529
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Proceeds
      (to) from Loans Payable
                                                    
                                                    
                                                    (207,265
                                                    )
                                                    
                                                    
                                                    (20,000
                                                    )
                                                    
                                                    
                                                    -Net
      cash used in financing activities
                                                    
                                                    
                                                    667,264
                                                    
                                                    
                                                    
                                                    (20,000
                                                    )
                                                    
                                                    
                                                    -Net
      increase (decrease) in cash and cash equivalents
                                                    
                                                    
                                                    1,233,956
                                                    
                                                    
                                                    
                                                    83,398
                                                    
                                                    
                                                    
                                                    231,322Cash
      and cash equivalents at beginning of period
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    170,183
                                                    
                                                    
                                                    
                                                    504,753Cash
      and cash equivalents at end of period
                                                    
                                                    $
                                                    1,233,956
                                                    
                                                    
                                                    $
                                                    253,581
                                                    
                                                    
                                                    $
                                                    736,075


F-5


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Statements
of Cash Flows - Restated and Unaudited





Successor
                                        
                                        
                                        Predecessor
                                        
                                        
                                        PredecessorFor
      the period October 15, 2008
                                          through
      March 29, 2009
                                        
                                        
                                        For
      the period September 29, 2008
                                          through
      October 14, 2008
                                        
                                        
                                        Six
      months ended
                                          March
      30, 2008Noncash
      investing and financing activities:Optex
      Systems, Inc. (Delaware) (Successor) purchase of Optex Systems, Inc.
      (Texas) (Predecessor)Cash
      received
                                        
                                        $
                                        253,581
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Accounts
      Receivable
                                        
                                        
                                        1,404,434
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Inventory
                                        
                                        
                                        5,383,929
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Intangibles
                                        
                                        
                                        4,036,790
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Other
      Assets
                                        
                                        
                                        632,864
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Accounts
      Payable
                                        
                                        
                                        (1,953,833
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Other
      Liabilities
                                        
                                        
                                        (1,868,180
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Debt
                                        
                                        
                                        (6,000,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Goodwill
                                        
                                        
                                        7,110,415
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Issuance
      of Stock
                                        
                                        $
                                        9,000,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Conversion
      of Debt to Series A Preferred StockAdditonal
      Paid in Capital (6,000,000 Debt Retirement plus accrued interest of
      $159,780)
                                        
                                        $
                                        6,159,780
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Issuance
      of Common shares in exchange for Investor Relations
    ServicesAdditonal
      Paid in Capital (1,250,000 shares issued at $0.001 par)
                                        
                                        $
                                        187,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Supplemental
      cash flow information:Cash
      paid for interest
                                        
                                        $
                                        3,817
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Cash
      paid for taxes
                                        
                                        
                                        -





The
accompanying notes are an integral part of these financial
statements


F-6


Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Statement
of Stockholders' Equity and Comprehensive Income/(Loss) (Restated)





Common
                                  
                                  
                                  Series
      A
                                  
                                  
                                  
                                  
                                  
                                  Preferred
                                  
                                  
                                  Treasury
      Stock
                                  
                                  
                                  Additional
                                  
                                  
                                  
                                  
                                  
                                  TotalShares
                                    Outstanding
                                  
                                  
                                  Preferred
                                    Shares
                                  
                                  
                                  Common
                                    Stock
                                  
                                  
                                  Series
      A
                                    Stock
                                  
                                  
                                  Optex
      Systems,
                                    Inc.
      (Texas)
                                  
                                  
                                  Paid
      in
                                    Capital
                                  
                                  
                                  Retained
                                    Earnings
                                  
                                  
                                  Stockholders
                                    EquityPredecessor
      EntityBalance
      at September 28, 2008
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  
                                  
                                  $
                                  164,834
                                  
                                  
                                  $
                                  
                                  
                                  
                                  $
                                  (1,217,400
                                  )
                                  
                                  $
                                  15,246,282
                                  
                                  
                                  $
                                  (5,910,700
                                  )
                                  
                                  $
                                  8,283,016Net
      Income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  65,332
                                  
                                  
                                  
                                  65,332Balance
      at October 14, 2008
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  164,834
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (1,217,400
                                  )
                                  
                                  $
                                  15,246,282
                                  
                                  
                                  $
                                  (5,845,368
                                  )
                                  
                                  $
                                  8,348,348Successor
      EntityBalance
      at October 15, 2008
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Issuance
      of Common Stock (1)
                                  
                                  
                                  113,333,282
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  113,333
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,886,667
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  9,000,000Conversion
      of 6,000,000 Debt and Interest to Series A Preferred
shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,027
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,159,780
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,159,781Sustut
      Exploration Reorganization (2)
                                  
                                  
                                  17,449,991
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  17,450
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  170,050
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  187,500Private
      Placement Sale of Stock (2)
                                  
                                  
                                  8,131,667
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,132
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,012,647
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,020,779Net
      Earnings (Loss) from continuing operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (420,032
                                  )
                                  
                                  
                                  (420,032
                                  )Balance
      at March 29, 2009
                                  
                                  
                                  138,914,940
                                  
                                  
                                  
                                  1,027
                                  
                                  
                                  $
                                  138,915
                                  
                                  
                                  $
                                  1
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  16,229,144
                                  
                                  
                                  $
                                  (420,032
                                  )
                                  
                                  $
                                  15,948,028





The
accompanying notes are an integral part of these financial
statements





(1)After
giving affect to the equivalent number of shares issued to existing Optex
shareholders due to the reorganization.





(2)Reorganization
and private placement transactions which occurred on March 30,
2009.


F-7





OPTEX
SYSTEMS HOLDINGS, INC.


(formerly
known as Sustut Exploration, Inc.)


Notes
to Condensed Consolidated Financial Statements





Note 1 - Organization and
Operations





On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.), a Delaware corporation, along with Optex Systems, Inc. , a privately held
Delaware corporation which is Optex Systems  Holdings’ wholly-owned
subsidiary (also known as Successor), entered into a reorganization agreement
and Plan of reorganization, pursuant to which Optex Systems, Inc. (Delaware) was
acquired by Optex Systems Holdings in a share exchange
transaction.  Optex Systems Holdings became the surviving corporation.
At the closing, Optex Systems Holdings changed its name from Sustut Exploration
Inc. to Optex Systems Holdings, Inc. and its year end from December 31 to a
fiscal year ending on the Sunday nearest September 30.





On
October 14, 2008, certain senior secured creditors of Irvine Sensors
Corporation, Longview Fund, L.P. and Alpha Capital Anstalt formed Optex Systems,
Inc. (Delaware), which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation and wholly owned
subsidiary of Irvine Sensors Corporation, (also known as Predecessor) in a
transaction that was consummated via purchase at a public
auction.  Following this asset purchase, Optex Systems, Inc. (Texas)
remained a wholly-owned subsidiary of Irvine Sensors Corporation.





In
accordance with SFAS 141 “Business Combination” and EITF 98-3 “Determining
Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a
Business” Optex Systems, Inc. (Delaware)’s purchase of substantially all of the
assets and assumption of certain liabilities represented the acquisition of a
business.  EITF 98-3 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.





Optex
Systems, Inc. (Texas) was a privately held Subchapter “S” Corporation from
inception in 1987 until December 30, 2005 when 70% of the issued and outstanding
stock was acquired by Irvine Sensors Corporation, and Optex Systems, Inc.
(Texas) was automatically converted to a Subchapter “C”
Corporation.  On December 29, 2006, the remaining 30% equity interest
in Optex Systems, Inc. (Texas) was purchased by Irvine Sensors
Corporation.





On
February 20, 2009, Sileas Corp., a newly-formed Delaware corporation, owned by
present members of the company’s management, purchased 100% of Longview's equity
and debt interest in Optex Systems, Inc. (Delaware), representing 90% of
the issued and outstanding common equity interests in Optex Systems, Inc.
(Delaware), in a private transaction (the “Acquisition”).  See Note
4.


F-8


Optex
Systems, Inc. (Delaware) operated as a privately-held Delaware corporation until
March 30, 2009, when as a result of the reorganization agreement (described
above and also in Note 5), it became a wholly-owned subsidiary of Optex Systems
Holdings.  Sileas is the majority owner (parent) of Optex Systems
Holdings owning approximately 73.5% of Optex Systems Holdings. Optex Systems
Holdings plans to carry on the business of Optex Systems, Inc. (Delaware) as its
sole line of business and all of Optex Systems  Holdings’ operations
are conducted by and through it’s wholly-owned subsidiary, Optex Systems, Inc.
(Delaware).  Accordingly, in subsequent periods the financial
statements presented will be those of the accounting acquirer.  The
financial statements of Optex Systems Holdings represent subsidiary statements
and do not include the accounts of its majority owner.





The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet.  As of March 29, 2009, Optex Systems
Holdings operated with 117 full-time equivalent employees.





Optex
Systems Holdings manufactures optical sighting systems and assemblies, primarily
for Department of Defense applications.  Its products are installed on
a variety of U.S. military land vehicles such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Systems Holdings’
products consist primarily of build to customer print products that are
delivered both directly to the military and to other defense prime
contractors.





In
February 2009, Optex Systems Holdings’ ISO certification status was upgraded
from  9001:2000 to 9001:2008 bringing Optex Systems Holdings into
compliance with the new ISO standards rewritten to align with ISO
14001.





Note
2 - Accounting Policies





Basis
of Presentation





Principles of
Consolidation:The consolidated financial statements include
the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex
Systems, Inc. (Delaware).  All significant inter-company balances and
transactions have been eliminated in consolidation.





The
accompanying financial statements include the results of operations and cash
flows of Optex Systems, Inc. (Delaware), the accounting acquirer in the Sustut
reorganization and the Successor in the October 14, 2008 Optex Systems, Inc.
(Texas) asset purchase transaction, for the period from October 15, 2008 through
March 29, 2009.  The accompanying financial statements include the
balance sheet at September 28, 2008 and the results of operations, changes in
stockholders’ equity and cash flows for the period from September 29, 2008
through October 14, 2008 of Optex Systems, Inc. (Texas),
Predecessor.


F-9


Although
Optex Systems, Inc. (Texas) (predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements.  The Optex
Systems, Inc. (Texas) accounts have been presented on the basis of push
down accounting in accordance with Staff Accounting Bulletin No.
54  Application of
“Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired
by Purchase. SAB 54 states that the push down basis of accounting should
be used in a purchase transaction in which the entity becomes wholly-owned.
Under the push down basis of accounting certain transactions incurred by the
parent company, which would otherwise be accounted for in the accounts of the
parent, are “pushed down” and recorded on the financial statements of the
subsidiary. Accordingly, items resulting from the Optex Systems, Inc. (Texas)
purchase transaction such as goodwill, debt incurred by the parent to acquire
the subsidiary and other costs related to the purchase have been  recorded
on the financial statements of Optex Systems Holdings.





Upon
completing the business combination with Sustut on March 30, 2009, Optex Systems
Holdings elected to change its fiscal year to match that of Optex Systems, Inc.
(Delaware). Accordingly, all activity of the combined companies was presented as
of the quarter’s end of the accounting acquirer, which was March 29,
2009.





Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior (on March 29, 2009) so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the reorganization.





The
condensed consolidated financial statements of Optex Systems Holdings included
herein have been prepared by Optex Systems Holdings, without audit, pursuant to
the rules and regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements prepared in conjunction
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Optex Systems Holdings believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the annual audited financial statements and the notes thereto included in
Optex Systems Holdings’ Forms 8-K and other reports filed with the
SEC.





The
accompanying unaudited interim financial statements reflect all adjustments of a
normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
of Optex Systems Holdings for the interim periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other interim period or for the fiscal year taken as a whole.
Certain information that is not required for interim financial reporting
purposes has been omitted.





Use of
Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires


F-10


management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the
estimates.





Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts. Payments received for
such undelivered inventory are classified as unliquidated progress payments and
deducted from the gross inventory balance. At March 29, 2009, and September 28,
2008 inventory included:





Successor
                  As of March
                  29, 2009
                
                
                Predecessor
                  As of
                  September
                  28, 2008Raw
      Materials
                
                $
                5,842,090
                
                
                $
                5,575,520Work
      in Process
                
                
                4,191,291
                
                
                
                4,199,657Finished
      Goods
                
                
                596,301
                
                
                
                28,014Gross
      Inventory
                
                $
                10,629,682
                
                
                $
                9,803,191Less:Unliquidated
      Progress Payments
                
                
                (3,366,694
                )
                
                
                (4,581,736
                )Inventory
      Reserves
                
                
                (796,865
                )
                
                
                (673,729
                )Net
      Inventory
                
                $
                6,466,123
                
                
                $
                4,547,726





Stock-Based
Compensation:In December 2004, FASB issued SFAS No.
123R,“Share-Based
Payment”.  SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services.  It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.  SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions.  SFAS No. 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements.  That cost will be measured based on the
fair value of the equity or liability instruments issued.





Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of EITF
96-18, “Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees.”  The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at
which a commitment for


F-11


performance
by the consultant or vendor is reached or (ii) the date at which the
consultant or vendor’s performance is complete. In the case of equity
instruments issued to consultants, the fair value of the equity instrument is
recognized over the term of the consulting agreement.  Stock-based
compensation related to non-employees is accounted for based on the fair value
of the related stock or options or the fair value of the services, which ever is
more readily determinable in accordance with SFAS 123R.





Earnings per
Share: Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
year presented. Diluted earnings per common share give the effect to the assumed
exercise of stock options when dilutive. In a loss year, the calculation for
basic and diluted earnings per share is considered to be to be the same, as the
impact of potential common shares is anti-dilutive. For the period October 15,
2008 through March 29, 2009, there were zero stock options issued and
outstanding that could dilute future earnings. For the period September 29, 2008
through October 14, 2008 and for the six months ended March 29, 2008, there were
no stock options that could dilute future earnings.





Note
3 - Recent Accounting Pronouncements





In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. As
participating securities, we will be required to include these instruments in
the calculation of our basic earnings per share, and we will need to calculate
basic earnings per share using the "two-class method." Restricted stock is
currently included in our dilutive earnings per share calculation using the
treasury stock method. The two-class method of computing earnings per share is
an earnings allocation formula that determines earnings per share for each class
of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. As such,
Optex Systems Holdings is required to adopt these provisions at the beginning of
the fiscal year ending October 3, 2010. Optex Systems Holdings does not expect
adoption of FSP EITF 03-6-1 to have a material effect on Optex
Systems  Holdings’ financial statements.





In May
2009, FASB issued SFAS No. 165, "Subsequent Events". SFAS 165
establishes principles and requirements for the reporting of events or
transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. SFAS 165 is effective for
financial statements issued for fiscal years and interim periods ending after
June 15, 2009. As such, Optex Systems Holdings adopted these provisions at the
beginning of the interim period ended June 28, 2009. Adoption of SFAS 165 did
not have a material effect on Optex Systems Holdings’ financial
statements.





In June
2009, FASB issued Statement of Financial Accounting Standard No. 168, " The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted


F-12


Accounting Principles - a
replacement of FASB Statement No. 162". SFAS 168 replaces Statement 162
and establishes the FASB Accounting Standards CodificationTM (Codification) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. SFAS 168 is effective for financial statements issued
for fiscal years and interim periods ending after September 15, 2009. As such,
Optex Systems Holdings is required to adopt these provisions at the beginning of
the interim period ending September 27, 2009. Optex Systems Holdings does not
expect adoption of SFAS 168 to have a material effect its financial
statements.





In June
2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income
Taxes  ”..  FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 did not have a
material impact on Optex Systems Holdings’ financial position, results of
operations, or cash flows.





In
September 2006, the FASB issued FASB Statement 157, “Fair Value Measurements”.
FASB No. 157 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB No.
157 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB No. 157 does not require any new fair
value measurements. However, for some entities, the application of FASB No. 157
will change current practice. The changes to current practice resulting from the
application of FASB No. 157 relate to the definition of fair value, the methods
used to measure fair value and the expanded disclosures about fair value
measurements. The provisions of FASB No. 157 are effective as of January 1,
2008, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. However, delayed application of
this statement is permitted for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years. The adoption of FASB No. 157 did not have a material impact on Optex
Systems Holdings’ financial position, results of operations, or cash
flows.





In
February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the beginning of our fiscal year 2008, with early adoption
permitted. The adoption of FASB No. 159


F-13






did not have a material impact on Optex
Systems Holdings’ financial position, results of operations, or cash
flows.


In March 2007, EITF Issue No. 06-10,
"Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements”. EITF 06-10 provides guidance for
determining a liability for the postretirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the terms of
the collateral assignment agreement. EITF 06-10 is effective for fiscal years
beginning after December 15, 2007. The adoption of EITF 06-10 did not have a
material impact on Optex Systems Holdings’ financial position, results of
operations, or cash flows.





In December 2007,FASB issued SFAS No.
141(R),“Business Combinationsand
SFAS No. 160,Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51”.
These new standards will significantly change the accounting for and reporting
of business combinations and non-controlling (minority) interests in
consolidated financial statements. Statement Nos. 141(R) and 160 are required to
be adopted simultaneously and are effective for the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is prohibited.
Optex Systems Holdings is currently evaluating the impact of adopting SFAS Nos.
141(R) and SFAS 160 on its financial statements.




In December 2007, the SEC issued
Staff Accounting Bulletin No. 110. SAB 110 permits companies to continue to use
the simplified method, under certain circumstances, in estimating the expected
term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates
guidance provided in SAB 107 that previously stated that the Staff would not
expect a company to use the simplified method for share option grants after
December 31, 2007. Optex Systems Holdings does not have any outstanding stock
options issued before December 31, 2007.





In March 2008, FASB issued SFAS No. 161,
"Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133”.
SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging
activities. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008 with early
application encouraged. As such, Optex Systems Holdings is required to adopt
these provisions at the beginning of the fiscal year ended September 30, 2009.
Optex Systems Holdings is currently evaluating the impact of SFAS 161 on its
financial statements but does not expect it to have a material
effect.





In May 2008, FASB issued SFAS No. 162,
"The
Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the united States. SFAS 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption of FASB No. 162 did
not have a material impact on Optex Systems  Holdings’ financial
position, results of operations, or cash flows.




F-14




In May 2008, FASB issued SFAS No. 163,
"Accounting for
Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60". SFAS 163 interprets
Statement 60 and amends existing accounting pronouncements to clarify their
application to the financial guarantee insurance contracts included within the
scope of that Statement. SFAS 163 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and all interim periods
within those fiscal years. As such, Optex Systems Holdings is required to adopt
these provisions at the beginning of the fiscal year ended September 30, 2011.
Optex Systems Holdings is currently evaluating the impact of SFAS 163 on its
financial statements but does not expect it to have a material
effect.




Note 4 — Acquisition of Substantially
All of the Assets of Optex Systems, Inc. (Texas)





Acquisition of Assets of Optex Systems,
Inc. (Texas) by Optex Systems, Inc. (Delaware) on October 14,
2008





On October 14, 2008, in a purchase
transaction that was consummated via public auction, Optex Systems, Inc.
(Delaware) (Successor) purchased all of the assets of Optex Systems, Inc.
(Texas) (Predecessor) in exchange for $15 million of Irvine Sensors Corporation
debt owned by it and the assumption of approximately $3.8 million of certain
Optex Systems, Inc. (Texas) liabilities. The $15 million of Irvine Sensors
Corporation debt was contributed by Longview and Alpha to Optex Systems, Inc.
(Delaware) in exchange for a $6 million note payable from Optex Systems, Inc.
(Delaware) and a $9 million equity interest in Optex Systems, Inc. (Delaware)
(which consisted of the issuance by Optex Systems, Inc. (Delaware) of 45,081,350
and 4,918,650 shares of its common stock to each of Longview Fund and Alpha,
respectively). On October 30, 2008, Alpha sold its Optex Systems, Inc.
(Delaware) common stock to Arland Holdings, Ltd. There was no contingent
consideration associated with the purchase. Longview and Arland Holdings, Ltd.,
owned Optex Systems, Inc. (Delaware) until February 20, 2009, when Longview sold
100% of its equity interests in Optex Systems, Inc. (Delaware) to Sileas, as
discussed below.





Optex Systems, Inc. (Delaware) purchased
all of the assets of Optex Systems, Inc. (Texas), including: intellectual
property, production processes and know-how, and outstanding contracts and
customer relationships. Optex Systems, Inc. (Delaware) also assumed certain
liabilities of Optex Systems, Inc. (Texas) consisting of accounts payable and
accrued liabilities. Optex Systems Holdings’ management intends to improve the
business’s ability to serve its existing customers and to attract new customers
by providing quality products and superior service which will be achieved by
improving Optex Systems Holdings’ working capital availability as opposed
to the limited working capital that was available during the time period in
which the assets were owned by Irvine Sensors Corporation.





Optex Systems, Inc. (Delaware) has
allocated the consideration for its acquisition of the Purchased Assets among
tangible and intangible assets acquired and liabilities assumed based upon their
fair values. Assets that met the criteria for recognition as intangible assets
apart from goodwill were also valued at their fair values.





F-15




The purchase price was assigned to the
acquired interest in the assets and liabilities of Optex Systems Holdings as of
October 14, 2008 as follows:





Assets:Current assets, consisting
      primarily of inventory of $5,383,929 and accounts receivable of
      $1,404,434
                            
                            $
                            7,330,910Identifiable intangible
      assets
                            
                            
                            4,036,789Purchased
      Goodwill
                            
                            
                            7,110,416Other non-current assets,
      principally property and equipment
                            
                            
                            343,898Total
assets
                            
                            $
                            18,822,013Liabilities:Current liabilities, consisting of
      accounts payable of $1,953,833 and accrued liabilities of
      $1,868,180
                            
                            
                            3,822,013Acquired net
      assets
                            
                            $
                            15,000,000





The following table summarizes the
estimate of the fair values of the intangible assets as of the asset transfer
date:


TotalContracted Backlog - Existing
      Orders
                
                $
                2,763,567Program Backlog - Forecasted
      Indefinite Delivery/Indefinite Quantity awards
                
                
                1,273,222Total Intangible Asset to be
      amortized
                
                $
                4,036,789




Identifiable intangible assets primarily
consist of customer and program backlog and will be amortized between general
and administrative expenses and costs of sales according to their respective
estimated useful lives as follows:





2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013Contracted backlog amortized by
      delivery schedule
                      
                      COS
                      
                      $
                      1,666,559
                      
                      
                      $
                      718,289
                      
                      
                      $
                      126,158
                      
                      
                      $
                      19,614
                      
                      
                      $
                      4,762Contracted backlog amortized by
      delivery schedule
                      
                      G&A
                      
                      
                      149,990
                      
                      
                      
                      64,646
                      
                      
                      
                      11,354
                      
                      
                      
                      1,765
                      
                      
                      
                      429Program backlog amortized straight
      line across 5 years
                      
                      G&A
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645Total Amortization by
      Year
                      
                      
                      
                      $
                      2,071,194
                      
                      
                      $
                      1,037,580
                      
                      
                      $
                      392,157
                      
                      
                      $
                      276,024
                      
                      
                      $
                      259,836





The accompanying unaudited pro forma
financial information for the consolidated predecessor and successor three and
six months ended March 29, 2009 and successor three and six months ended March
30, 2008 present the historical financial information of the accounting
acquirer. The pro forma financial information is presented for informational
purposes only. Such information is based upon the standalone historical results
of each entity and does not reflect the actual results that would have been
reported had the acquisition been completed when assumed, nor is it indicative
of the future results of operations for the combined
enterprise.





Pro forma revenue and earnings per share
information is presented cumulatively in Note 5.




Secured Promissory Note Issued in
Connection with Purchase by Optex Systems, Inc. (Delaware)
(Successor)




F-16




In connection with the public sale of
the Optex Systems, Inc. (Texas) (Predecessor) assets to Optex Systems, Inc.
(Delaware) (Successor), Optex Systems, Inc. (Delaware) delivered to Longview and
Alpha Secured Promissory Notes, due September 19, 2011, in the principal amounts
of $5,409,762 and $540,976, respectively. On February 20, 2009, Longview sold
its Optex Systems, Inc. (Delaware) promissory note to Sileas, as described
below. On March 27, 2009, Sileas and Alpha exchanged their Notes plus accrued
and unpaid interest thereon for 1,027 shares of Optex Systems, Inc. (Delaware)
Series A preferred stock.





Acquisition by Sileas on February 20,
2009





On February 20, 2009, Sileas purchased
100% of the equity and debt interest held by Longview, representing 90% of Optex
Systems, Inc. (Delaware), in the “Acquisition”. As of the date of this
transaction, Sileas is the majority owner of Optex Systems
Holdings.





Secured Promissory Note Due February 20,
2012/Longview Fund, LP





As a result of the transaction described
above between Sileas and Longview Fund, LP on February 20, 2009, Sileas,
currently majority owner of Optex Systems Holdings, executed and delivered to
Longview, a Secured Promissory Note due February 20, 2012 in the principal
amount of $13,524,405. The Note bears simple interest at the rate of 4% per
annum, and the interest rate upon an event of default increases to 10% per
annum. In the event Optex Systems Holdings sells or conveys all or substantially
all its assets to a third party entity for more than nominal consideration,
other than a reorganization into Sileas or reincorporation in another
jurisdiction, then this Note shall be immediately due and owing without demand.
In the event that a Major Transaction occurs prior to the maturity date
resulting in the Borrower receiving Net Consideration with a fair market value
in excess of the principal and interest due under the terms of this Secured
Note, (the “Optex Consideration”), then in addition to paying the principal and
interest due, Sileas shall also pay an amount equal to 90% of the Optex
Consideration. The obligations of Sileas under the Note are secured by a
security interest in Optex Systems  Holdings’ common and preferred
stock owned by Sileas that was granted to Longview pursuant to a Stock Pledge
Agreement delivered by Sileas to Longview and also by a lien on all of the
assets of Sileas.





Optex Systems Holdings has not
guaranteed the note and Longview is not entitled to pursue Optex Systems
Holdings in the event of a default by Sileas. Therefore, there are no actual or
potential cash flow commitments from Optex Systems Holdings. In the event of
default by Sileas on its obligations under the note, Longview would only be
entitled to receive Optex Systems Holdings common and preferred stock held by
Sileas.




Note 5 –Reorganization Plan and Private
Placement





Reorganization/Share
Exchange





On March 30, 2009, the reorganization
occurred whereby the then existing shareholders of Optex Systems, Inc.
(Delaware) exchanged their shares of common stock with the shares of common
stock of Optex Systems Holdings as follows: (i) the outstanding 85,000,000
shares of Optex Systems, Inc. (Delaware) common stock were exchanged by Optex
Systems Holdings for 113,333,282 shares of Company common stock, (ii) the
outstanding 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock were exchanged by




F-17




Optex Systems Holdings for 1,027 shares
of Company Series A preferred stock and (iii) the 8,131,667 shares of Optex
Systems, Inc. (Delaware) common stock purchased in the private placement were
exchanged by Optex Systems Holdings for 8,131,667 shares of Company common
stock. Following the reorganization, Optex Systems, Inc. (Delaware) remained a
wholly-owned subsidiary of Optex Systems Holdings.





Shares outstanding of Optex Systems
Holdings just prior to the close consisted of 17,449,991 shares of which
1,250,000 shares were issued on March 27, 2009 as payment for Investor Relations
Services, of which 700,000 were surrendered to Optex Systems Holdings upon
termination of one of the Investor Relations contracts in June 2009. See Note 11
– “Subsequent Events” for a further discussion of the termination of the
relationship with one of Optex Systems Holdings’ investor relations firms
and appointment of a replacement service provider.





Private Placement





Prior to the closing of the
reorganization agreement, as of March 30, 2009, Optex Systems Holdings accepted
subscriptions from accredited investors for a total of 27.1 units, for $45,000
per unit, with each unit consisting of 300,000 shares of common stock, of Optex
Systems Holdings and warrants to purchase 300,000 shares of common stock for
$0.45 per share for a period of five years from the initial closing, which were
issued by Optex Systems Holdings after the closing referenced above. Gross
proceeds to Optex Systems Holdings were $1,219,750, and after deducting (i) a
cash finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed
to an investor of $146,250, and (iii) stock issuance costs of $59,416, net
proceeds were $874,529. The finder also received five year warrants to purchase
2.39 units, at an exercise price of $49,500 per unit.





The following table represents the
reorganization and Private Placement transactions which occurred on March 30,
2009 reflected in March 29, 2009 statements due to the election to report as of
the accounting acquirers’ period end:




Optex Systems Holdings,
Inc.


Balance Sheet Adjusted for
Reorganization and Private Placement




Unaudited
                    Quarter
                    Ended March 29,
                    2009
                  
                  
                  Reorganization
                    Adjustments
                    (1)
                  
                  
                  Private
                    Placement
                    Adjustments
                  
                  
                  Unaudited Quarter
                    Ended March 29,
                    2009AssetsCurrent
    Assets
                  
                  $
                  8,880,436
                  
                  
                  $
                  187,500
                  
                  
                  $
                  929,738
                  
                  
                  $
                  9,997,674Non-current
    Assets
                  
                  
                  10,422,425
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,422,425Total
Assets
                  
                  $
                  19,302,861
                  
                  
                  $
                  187,500
                  
                  
                  $
                  929,738
                  
                  
                  $
                  20,420,099




F-18


LiabilitiesLoans
    Payable
                    
                    
                    146,709
                    
                    
                    
                    
                    
                    
                    
                    (146,250
                    )
                    
                    
                    459Other Current
      Liabilities
                    
                    
                    4,416,403
                    
                    
                    
                    -
                    
                    
                    
                    55,209
                    
                    
                    
                    4,471,612Total
      Liabilities
                    
                    $
                    4,563,112
                    
                    
                    $
                    -
                    
                    
                    $
                    (91,041
                    )
                    
                    $
                    4,472,071EquityOptex Systems Holdings, Inc. –
      (par $0.001per share, 200,000,000 shares authorized, 138,914,940 shares
      issued and outstanding as of March 29, 2009)
                    
                    
                    113,333
                    
                    
                    
                    17,450
                    
                    
                    
                    8,132
                    
                    
                    
                    138,915Optex Systems Holdings,
      Inc.  preferred stock (par value $0.001per share, 5,000 shares
      authorized,  1027 shares of Series A Preferred issued and
      outstanding)
                    
                    
                    1
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1Additional Paid in
      Capital
                    
                    
                    15,046,446
                    
                    
                    
                    170,050
                    
                    
                    
                    1,012,647
                    
                    
                    
                    16,229,144Retained
      Earnings
                    
                    
                    (420,031
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (420,031
                    )Total Stockholders
      Equity
                    
                    $
                    14,739,749
                    
                    
                    $
                    187,500
                    
                    
                    $
                    1,020,779
                    
                    
                    $
                    15,948,028Total Liabilities and Stockholders
      Equity
                    
                    $
                    19,302,861
                    
                    
                    $
                    187,500
                    
                    
                    $
                    929,738
                    
                    
                    $
                    20,420,099




(1) Sustut Exploration, Inc.
Balance Sheet as of the March 30, 2009 reorganization. Other assets include
$187,500 in prepaid expenses for investor relation services to be realized over
the next 12 months. The services were prepaid by the issue of 1,250,000 Sustut
shares issued by Sustut prior to March 30, 2009. The prepaid expense covers
April 2009 through April 2010 and will be reflected on the consolidated
Statement of Operations for Optex Systems Holdings as expensed.See Note 11 - Subsequent Events. 700,000
of these shares were returned to Optex Systems Holdings subsequent to the
quarter end.




The expenses reflected by Optex Systems
Holdings on its Statement of Operations for the period from April 1, 2009
through March 31, 2010 will be increased by $46,875 per calendar quarter (as a
non-cash expense) as a result of the issuance of the 1,250,000 shares for
Investor Relations Services by Sustut and are carried on the Sustut Balance
Sheet as a prepaid expense. The same Investor Relations agreements also call for
an aggregate cash payment of $8,000 per month which will increase the expense by
an additional $24,000 per quarter. Therefore, the total impact of the agreements
for Investor Relations Services is $70,875 per quarter (pretax) including both
the current cash expense and theamortization of the prepaid expense
which is carried on the Condensed Consolidated Balance Sheet of Optex Systems
Holdings. See Note 11 - Subsequent Events. 700,000 of these shares were returned
toOptex Systems Holdings
subsequent to the quarter end.




The accompanying unaudited pro forma
financial information for the consolidated successor and predecessor three and
six months ended March 29, 2009 and successor three and six months ended March
30, 2008 present the historical financial information of the accounting
acquirer. The pro forma financial information is presented for
information




F-19




purposes only. Such information is based
upon the standalone historical results of each company and does not reflect the
actual results that would have been reported had the acquisition been completed
when assumed, nor is it indicative of the future results of operations for the
combined enterprise.





The following represents condensed pro
forma revenue and earnings information for the three and six months ended March
29, 2009 and March 30, 2008 as if the acquisition of Optex Systems, Inc. (Texas)
and reorganization Plan had occurred on the first day of each of the
years.





Unaudited
                              
                              
                              UnauditedThree Months Ended
                              
                              
                              Nine Months EndedMarch 29,
                                2009
                              
                              
                              March 30,
                                2008
                              
                              
                              March 29,
                                2009
                              
                              
                              March30,
                                2008Revenues
                              
                              
                              6,708,286
                              
                              
                              
                              5,628,115
                              
                              
                              
                              13,972,368
                              
                              
                              
                              10,044,019Net Income
      (Loss)
                              
                              
                              (326,545)
                              
                              
                              
                              (420,161)
                              
                              
                              
                              (345,200)
                              
                              
                              
                              (1,036,286)Diluted earnings per
      share
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.01
                              )Weighted Average Shares
      Outstanding
                              
                              
                              138,914,940
                              
                              
                              
                              138,914,940
                              
                              
                              
                              138,914,940
                              
                              
                              
                              138,914,940





The pro forma information depicted above
reflect the impacts of reduced interest expense, increased intangible
amortization expenses, the elimination of corporate allocation costs from Irvine
Sensors Corporation and the elimination of employee stock bonus compensation
previously allocated from Irvine Sensors Corporation to reflect the costs of the
ongoing entity.  There is no expected tax effect of the proforma
adjustments for the periods affected in 2008 due to net loss and
accumulated retained deficit of Irvine Sensors Corporation.





Note 6  Commitments and
Contingencies




Leases





Optex Systems Holdings leases its office
and manufacturing facilities under two non-cancellable operating leases expiring
November 2009 and February 2010 in addition to maintaining several
non-cancellable operating leases for office and manufacturing
equipment.  Optex Systems Holdings is in negotiation to enter into new
leases for the facilities; however, in the event the negotiations are not
successful, Optex Systems Holdings believes it can secure replacement facilities
upon similar terms in the surrounding vicinity.Total expenses
under these facility lease agreements for the three and six months ended March
29, 2009 was $56,978 and 170,935 respectively.  Total expenses for
manufacturing and office equipment for the three and six months ended March 29,
2009 was $5,598 and $11,195.  At March 29, 2009, the remaining minimum
lease payments under non-cancelable operating leases for equipment, office and
facility space are as follows:




Operating
                      LeasesFiscal Years:2009
                    
                    $
                    182,130


F-20
  2010
                      
                      
                      79,8672011
                      
                      
                      16,7532012
                      
                      
                      -2013
                      
                      
                      -Thereafter
                      
                      
                      -Total minimum lease
      payments
                      
                      $
                      278,750




Note 7 - Debt
Financing





Non-Related parties





Short
Term Note Payable/Longview Fund -On September 23, 2008,
Optex Systems, Inc. (Delaware) borrowed $146,709 from Longview and issued a
promissory note dated September 23, 2008, to Longview in connection
therewith.   Pursuant to an Allonge No. 1 to Promissory Note, dated
January 20, 2009, the Maturity Date was extended until March 31,
2009.  On March 30, 2009 in conjunction with the reorganization and
Private Placement, Longview Fund purchased 3.25 units of the Private Placement
using $146,250 of the outstanding Note Payable as consideration for the
purchase. (See Note 5).





Short
term note payable (Qioptic) -On November 20, 2008, Optex Systems,
Inc. (Delaware) issued a promissory note to Qioptiq Limited in the amount of
$117,780. The Note originated as a trade payable as of September 28, 2008 in the
amount of $227,265, and was paid in full as of March 29,
2009.




Note
8  –  Stockholders Equity




Common
Stock:





Stock Split





On March 26, 2009, Optex Systems, Inc.
(Delaware)’s Board of Directors reconfirmed a 1.7:1 forward split of its common
stock to holders of record as of February 23, 2009.  Accordingly, as a
result of the forward split, the 45,081,350 shares of common stock held by
Sileas was split into 76,638,295  shares, and the 4,918,650 shares of
common stock held by Arland Holdings, Ltd. was split into
8,361,705  shares.





As of March 30, 2009, Optex Systems,
Inc. (Delaware)’s was authorized to issue 200,000,000 shares of $0.001 par value
common stock, of which 85,000,000 shares were issued and outstanding as
follows:





Sileas
      Corporation
                    
                    
                    76,638,295Arland Holdings,
      Ltd.
                    
                    
                    8,361,705Total
      Outstanding
                    
                    
                    85,000,000





Reorganization & Private
Placement:





On March 29, 2009, as a result of the
reorganization agreement and private placement, the 85,000,000 outstanding
shares of Optex Systems, Inc. (Delaware) as of March 30,




F-21




2009 were exchanged for 113,333,282
shares of Optex Systems Holdings (formerly Sustut Exploration, Inc.). An
additional 8,131,667 shares were issued as a result of the private placement
closed prior to the reorganization.





Each share of stock entitles the holder
to one vote on matters brought to a vote of the
shareholders.





The company granted an officer at the
consummation of the reorganization, options: to purchase 1,414,649 shares with
exercise price of $0.15 per share. The options vest 34% one year following the
date of grant, and 33% on each of the second and third anniversaries following
the date of grant. See Note 10 - Stock Based Compensation.





Series A preferred
stock





On March 24, 2009, Optex Systems
Holdings filed a Certificate of Designation with the Secretary of State of the
State of Delaware authorizing a series of preferred stock, under its articles of
incorporation, known as “Series A preferred stock”. This Certificate of
Designation was approved by Optex Systems Holdings’ Board of Directors and
Shareholders at a Board Meeting and Shareholders Meeting held on February 25,
2009. The Certificate of Designation sets forth the following terms for the
Series A preferred stock: (i) number of authorized shares: 1,027; (ii) per share
stated value: $6,000; (iii) liquidation preference per share: stated value; (iv)
conversion price: $0.15 per share as adjusted from time to time; and (v) voting
rights: votes along with the common stock on an as converted basis with one vote
per share.





The Series A preferred stock entitles
the holders to receive cumulative dividends at the rate of 6% per annum payable
in cash at the discretion of Board of Directors. Each share of preferred stock
is immediately convertible into common shares at the option of the holder which
entitles the holder to receive the equivalent number of common shares equal to
the stated value of the preferred shares divided by the conversion price, which
was initially set at $0.15 per share.





Holders of preferred shares receive
preferential rights in the event of liquidation. Additionally the preferred
stock shareholders are entitled to vote together with the common stock on an
”as-converted” basis.





On March 27, 2009, Sileas and Alpha
exchanged their promissory notes in the total amount of $6,000,000 plus accrued
and unpaid interest thereon into 1,027 shares of Series A preferred stock. On
March 30, 2009 shares of Optex Systems, Inc. Series A preferred stock was
exchanged on a 1:1 basis for Series A preferred stock of Optex Systems
Holdings.





Note 9—Earnings/Loss
Per Share




Basic earnings per share is computed by
dividing income available to common shareholders (the numerator) by the
weighted-average number of common shares outstanding (the denominator) for the
period. Diluted earnings per share is computed by assuming that any dilutive
convertible securities outstanding were converted, with
related




F-22




preferred stock dividend requirements
and outstanding common shares adjusted accordingly.  In a loss year,
the calculation for basic and diluted earnings per share is considered to be the
same, as the impact of potential common shares is anti-dilutive.  As
of all periods presented, there were no stock options that could dilute future
earnings.





The following table sets forth the
computation of basic and diluted net loss attributable to common stockholders
per share for the three and six months ended March 29, 2009, and March 30,
2008.





Successor
                      
                      
                      Predecessor
                      
                      
                      Successor
                      
                      
                      Predecessor
                      
                      
                      PredecessorThree Months
                        ended March 29,
                        2009
                      
                      
                      Three Months
                        ended March 30,
                        2008
                      
                      
                      For the period
                        October 15, 2008
                        through March 29,
                        2009
                      
                      
                      For the period
                        September 29,
                        2008 through
                        October 14,
                        2008
                      
                      
                      Six Months
                        ended March 30
                        2008Numerator:Net loss
                      
                      $
                      (326,545
                      )
                      
                      $
                      (678,389
                      )
                      
                      $
                      (420,032
                      )
                      
                      $
                      65,332
                      
                      
                      $
                      (1,372,053
                      )Denominator:Weighted average
      shares
                      
                      
                      113,614,399
                      
                      
                      
                      10,000
                      
                      
                      
                      113,473,841
                      
                      
                      
                      10,000
                      
                      
                      
                      10,000Basic and diluted net loss per
      share
                      
                      $
                      (0.00
                      )
                      
                      $
                      (67.84
                      )
                      
                      $
                      (0.00
                      )
                      
                      $
                      6.53
                      
                      
                      $
                      (137.21
                      )





Note 10-Stock Based
Compensation





On March 26, 2009, the Board of
Directors and Shareholders of Sustut adopted the 2009 Stock Option Plan
providing for the issuance of up to 6,000,000 shares to Optex Systems
Holdings officers, directors, employees and to independent contractors who
provide services to Optex Systems Holdings.





Options granted under the 2009 Stock
Option Plan vest as determined by the Board of Directors of Optex Systems
Holdings or committee set up to act as a compensation committee of the Board of
Directors and terminate after the earliest of the following events: expiration
of the option as provided in the option agreement, 90 days subsequent to the
date of termination of the employee, or ten years from the date of grant (five
years from the date of grant for incentive options granted to an employee who
owns more than 10% of the total combined voting power of all classes of Optex
Systems Holdings stock at the date of grant).  In some instances,
granted stock options are immediately exercisable into restricted shares of
common stock, which vest in accordance with the original terms of the related
options. Optex Systems Holdings recognizes compensation expense ratably over the
requisite service period.





The option price of
each share of common stock shall be determined by the Board of Directors or
compensation committee (when one is established), provided that with respect to
incentive stock options, the option price per share shall in all cases be equal
to or greater than 100% of the fair value of a share of common stock on the date
of the grant, except an incentive option granted under the 2009 Stock Option
Plan to a shareholder that owns more than 10% of the total combined voting power
of all classes of




F-23




Optex Systems Holdings
stock, shall have an exercise price of not less than 110% of the fair value of a
share of common stock on the date of grant. No participant may be granted
incentive stock options, which would result in shares with an aggregate fair
value of more than $100,000 first becoming exercisable in one calendar
year.





On March 30, 2009, 1,414,649 stock
options with an exercise price of $0.15 were granted to an officer of Optex
Systems Holdings which vest as follows: 34% after the first year, and 33%
each after the second and third years.  These options carry a grant
expiration date of seven years after issuance.  As of March 29, 2009
none of the stock options had vested.




Note 11-Subsequent
Events





Stock Options Granted:





On May 14, 2009, 1,267,000 stock options
were issued to other Optex Systems Holdings employees, including 250,000 shares
to one Optex Systems Holdings officer.  These stock options vest
25%   per year after each year of employment and carry a grant
expiration date of seven years after issuance.  For shares granted as
of May 14, 2009, Optex Systems Holdings anticipates an annualized employee
turnover rate of 3% per year, and as such anticipate that only 1,174,786 of the
1,267,000 shares will vest as of the end of the contract
term.





Investor Relations:





On June 26, 2009, Optex Systems Holdings
terminated its Investor Relations Agreement with American Capital Ventures,
Inc., and pursuant to this termination, American Capital Ventures returned
700,000 of the 1,000,000 restricted shares of Optex Systems Holdings common
stock it received pursuant to the agreement.





Effective as of June 29, 2009, Optex
Systems Holdings entered into a Consulting Agreement with ZA Consulting, Inc.
for the provision of consulting services to Optex Systems  Holdings’
management including investor support; broker relations; conducting due
diligence meetings with brokers, analysts, institutional money managers and
financial media companies; attendance at investor conferences and trade shows;
and assistance in the preparation and dissemination of press releases and
stockholder communications.  ZA Consulting will also assist Optex
Systems Holdings with corporate communications involving brand, product, and
corporate awareness.  The term of the Agreement is for one year
terminating June 30, 2010.  For services rendered, ZA Consulting was
paid $150,000 upon execution of the Agreement and will receive $5,000 per month
for the duration of the agreement, and it received 480,000 shares of common
stock which vest at the rate of 40,000 shares per month.




The expenses reflected by Optex Systems
Holdings on its Statement of Operations for the period from June 29, 2009
through June 27, 2010 will be increased by $36,000 over the next twelve months
due to amortization of the prepaid expense of $150,000 and non cash related
stock issues as a result of the change in firms.




F-24




Private Placement:





On June 29, 2009,750,000 common shares were sold in a
private transactionforgross proceeds of
$150,000.





Lease Agreement:





On October 27, 2009, Optex Systems
Holdings borrowed $250,000 from Longview pursuant to a promissory note, which
originally expired on December 1, 2009, but was extended until July 15,
2010.  The note bears interest at the rate of 10% per annum, and all
accrued and unpaid interest will be due upon maturity.  Optex is
required to pay down 50% of the then outstanding principal amount plus accrued
and unpaid interest thereon upon the closing of a credit facility or other
equity or debt financing from which the net proceeds are at least $900,000, with
any remaining unpaid balance due on July 15, 2010.  In exchange for
the extension, Optex Systems Holdings granted Longview a warrant to purchase
100,000 shares of restricted common stock with an exercise price of $0.15 per
share and a term of three years.





Effective as of January 4, 2010, Optex
Systems Holdings, Inc. renewed its Richardson, TX lease.  Under the
terms of the amendment:





·
            The lease term is extended until
      July 31, 2015.


·
            The base rent is as follows: (i)
      until 7/31/2010, $0.00 per square foot, (ii) from 8/1/2010 – 7/31/2013,
      $4.70 per square foot and (iii) from 8/1/2013 – 7/31/2015, $4.95 per
      square foot.


·
            A $195,352.00 tenant leasehold
      improvement allowance is
included.


·
            For the first two years of the
      extended term, the landlord has granted the option to take over additional
      space at similar terms as in the
  amendment.





The company has evaluated subsequent
events for the period March 30, 2009 through January 11, 2010, the date its
financial statements were issued, and concluded there were no other events or
transactions occurring during this period that required recognition of
disclosure in its financial statements.





Note 12-Restatement of September 28,
2008 financial statements




The
financial statements have been reissued for the correction of an error to
properly reflect the following:




·
            Optex
      Systems Holdings reclassified the asset impairment of goodwill from other
      expenses to an operating expense. This reclassification increased the loss
      from operations by $1,586,416 to $4,653,743 with no change to the net
      loss.




·
            Note
      2 has been restated to accurately reflect Optex Systems Holdings’ revenue
      recognition policy.




F-25




·
            Note
      5 has been restated to properly state the pro forma earnings as if the
      acquisition of Optex Systems, Inc. (Texas) had occurred on the first day
      of each of the years.




·
            Note
      7 has been restated to reflect the estimated general and administrative
      expenses assuming Optex Systems, Inc. (Texas) was operated on a
      stand-alone basis.




·
            Note
      14 has been revised to reflect only those transactions related to the
      predecessor entity.





The above
restatements had no effect on the balance sheet, statements of stockholders’
equity, net loss or cash flows for the year ended September 28,
2008





Note 13-Restatement of March 29, 2009
financial statements





The presentation of the October 14, 2008
Optex Systems, Inc. (Delaware) acquisition of all the assets and certain
liabilities of Optex Systems, Inc. (Texas) has been restated to properly reflect
Optex Systems, Inc. (Delaware) as the successor entity and Optex Systems, Inc.
(Texas) as the predecessor entity. The acquisition of the assets and certain
liabilities of Optex Systems, Inc. (Texas) was deemed a business acquisition
(See Note 1) therefore the activity of Optex Systems, Inc. (Texas) is presented
as the predecessor.  Additionally, Optex Systems Holdings, Inc’s
outstanding common stock and additional paid in capital have been restated to
properly reflect the number and dollar value of Sustut Exploration common shares
as of the date of reorganization.





The effect of the restatement is a
reclassification of stockholders’ equity as follows:





OriginallyReported
                  
                  
                  RestatementAdditional
      Paid-in-Capital
                  
                  
                  22,071,962
                  
                  
                  
                  16,229,144Optex Systems Holdings, Inc.
      Common Stock
                  
                  
                  141,465
                  
                  
                  
                  138,915Retained
      Earnings
                  
                  
                  (6,265,400
                  )
                  
                  
                  (420,032
                  )





Assets and liabilities remained
unchanged.  There is no effect on overall net income and cash flows
however the Statements of Operations and Cash Flows have been restated to
present the breakdown for the period between successor and
predecessor.




Note 5 has been restated to reflect the
estimated general and administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis.





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




Management’s
Discussion and Analysis or Plan of Operations




F-26




All
references to the “Company,” “we,” “our” and “us” for periods prior to the
closing of the Reorganization refer to Optex, and references to the “Company,”
“we,” “our” and “us” for periods subsequent to the closing of the Reorganization
refer to the Registrant and its subsidiaries.





The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described.  This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.





Background





Management’s
Discussion and Analysis or Plan of Operations





This
management's discussion and analysis reflects information known to management as
at March 29, 2009. This MD&A is intended to supplement and complement our
audited financial statements and notes thereto for the year ended September 28,
2008 (Predecessor), prepared in accordance with U.S. generally accepted
accounting principles (GAAP). You are encouraged to review our financial
statements in conjunction with your review of this MD&A. The financial
information in this MD&A has been prepared in accordance with GAAP, unless
otherwise indicated. In addition, we use non-GAAP financial measures as
supplemental indicators of our operating performance and financial position. We
use these non-GAAP financial measures internally for comparing actual results
from one period to another, as well as for planning purposes. We will also
report non-GAAP financial results as supplemental information, as we believe
their use provides more insight into our performance. When non-GAAP measures are
used in this MD&A, they are clearly identified as a non-GAAP measure and
reconciled to the most closely corresponding GAAP measure.





The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described.  This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.





Background





On March
30, 2009, the reorganization was consummated pursuant to which the then existing
shareholders of Optex Systems, Inc. (Delaware) exchanged their shares of common
stock with the shares of common stock of Optex Systems Holdings as
follows:   (i) the outstanding 85,000,000 shares of Optex Systems,
Inc. (Delaware) common stock were exchanged by Optex Systems Holdings
for 113,333,282 shares of Optex Systems Holdings common stock, (ii) the
outstanding 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock were exchanged by Optex Systems Holdings for 1,027 shares of Optex
Systems Holdings Series A preferred stock, and (iii) the 8,131,667 shares
of Optex Systems, Inc. (Delaware) common stock purchased in the private
placement were exchanged by Optex Systems Holdings for 8,131,667 shares of Optex
Systems Holdings common stock.  Optex Systems, Inc. (Delaware) has
remained a wholly-owned subsidiary of Optex Systems Holdings.





As a
result of the reorganization, Optex Systems Holdings changed its name from
Sustut Exploration Inc. to Optex Systems Holdings, Inc. and its year end from
December 31 to a fiscal year ending on the Sunday nearest September
30.





Immediately
prior to the closing under the reorganization agreement (and the shares included
above), as of March 30, 2009, Optex Systems, Inc. (Delaware) accepted
subscriptions from accredited investors for a total 27.1 units, for $45,000 per
unit, with each unit consisting of 300,000 shares of common




4




stock, no
par value, of Optex Systems, Inc. (Delaware) and warrants to purchase 300,000
shares of common stock for $0.45 per share for a period of five (5) years from
the initial closing, which were issued by Optex Systems, Inc. (Delaware) after
the closing referenced above.  Gross proceeds to Optex Systems, Inc.
(Delaware) were $1,219,750, and after deducting (i) a cash finder’s fee of
$139,555, (ii) non-cash consideration of indebtedness owed to an investor of
$146,250, and (iii) stock issuance costs of $59,416, the net proceeds were
$874,529.  The finder also received five year warrants to purchase
2.39 units, at an exercise price of $49,500 per unit.  As described
above, these 8,131,667 shares were exchanged for 8,131,667 shares of Optex
Systems Holdings common stock in the reorganization.





Optex
Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies
primarily for Department of Defense applications. Its products are installed on
a majority of types of U.S. military land vehicles, such as the Abrams and
Bradley fighting vehicles, light armored and armored security vehicles and have
been selected for installation on the Stryker family of vehicles. Optex Systems,
Inc. (Delaware) also manufactures and delivers numerous periscope
configurations, rifle and surveillance sights and night vision optical
assemblies.  Optex Systems, Inc. (Delaware) products consist
primarily of build-to-customer print products that are delivered both directly
to the armed services and to other defense prime
contractors.  Less than 1% of today’s revenue is resale of products
“substantially manufactured by others”.  In this case, the product
would likely be a simple replacement part of a larger system previously produced
by Optex Systems, Inc. (Delaware).




Optex
Systems, Inc. (Delaware) delivers high volume products, under multi-year
contracts, to large defense contractors.  It has the reputation and
credibility with those customers as a strategic supplier. Irvine Sensors
Corporation (“Irvine Sensors Corporation”) is predominately a research and
design company with capabilities enabling only prototype or low quantity
volumes.  Optex Systems, Inc. (Delaware) is predominately a high volume
manufacturing company.  Therefore the systems and processes needed to meet
customer’s needs are quite different.  While both companies serve the
military market, the customers within these markets are different.  For
example, two of the largest customers for Optex are GDLS and TACOM.  Irvine
Sensors Corporation did not have any contracts or business relations with either
of these two customers.  Therefore the separation has allowed Optex
Systems, Inc. (Delaware) to fully focus on high volume manufacturing and
the use of the six sigma manufacturing methodology.   This shift in
priorities has allowed Optex Systems, Inc. (Delaware) to improve delivery
performance and reduce operational costs.
 
 Many of
our contracts allow for government contract financing in the form of contract
progress payments pursuant to Federal Acquisition Regulation
52.232-16. “Progress Payments”.  As a small business, and subject
to certain limitations, this clause provides for government payment of up to 90%
of incurred program costs prior to product delivery.  To the extent
our contracts allow for progress payments, we intend to utilize this benefit,
thereby minimizing the working capital impact on Optex Systems Holdings for
materials and labor required to complete the contracts.
 
 Optex
Systems Holdings also anticipates the opportunity to integrate some of its night
vision and optical sights products into commercial
applications.  Optex Systems Holdings plans to carry on the business
of Optex Systems, Inc. (Delaware) as its sole line of business, and all of Optex
Systems  Holdings’ operations are expected to be conducted by and
through Optex Systems, Inc. (Delaware).
 
 The
successful completion of the separation from Irvine Sensors
Corporation, which was accomplished by Optex Systems, Inc. (Delaware)’s
acquisition of all of the assets and assumption of certain liabilities of Optex
Systems, Inc. (Texas), reduced the general and administrative costs allocated by
Irvine Sensors Corporation. These costs represented services paid by Irvine
Sensors Corporation  for expenses incurred on Optex Systems, Inc.
(Texas)’ behalf such as legal, accounting and audit, consulting fees and
insurance costs
  5
  in
addition to significant amounts of Irvine Sensors Corporation’s general overhead
allocated to Optex Systems, Inc. (Texas).




The
estimated total General and Administrative expenses assuming Optex Systems, Inc
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
 
 Accounting
      and Auditing Fees
                        
                        $
                        250,000Legal
      Fees
                        
                        
                        60,000Consulting
      Fees
                        
                        
                        60,000Workers
      Comp and General Insurance
                        
                        
                        70,000Total
                        
                        $
                        440,000
 
 As a result of the  purchaseof Optex Systems, Inc.
(Texas)on October 14,
2008, these general and administrative costswereincurred and paid directly by Optex
Systems, Inc.(Delaware), and have been reflected in the
financial statementsto the
extent incurred through March 29, 2009.
 
 The
liabilities not assumed relate to costs that would not have been incurred by
Optex Systems, Inc. (Texas) if they were operated on a stand-alone basis,
including a note due to Timothy Looney.  The 2007 promissory note had
a principal amount of $2,000,000 together with accrued and unpaid interest
aggregating to approximately $2,300,000.  The note was an amendment to
Looney’s earn-out agreement which was the consideration for Irvine Sensor’s
purchase of Optex Systems, Inc. (Texas).
 
 The 2007
promissory note was not assumed by Optex Systems, Inc. (Delaware) in the October
2008 transaction.  The note and accrued interest was reported on Optex
Systems, Inc. (Texas) financial statements as of September 28, 2008 as a result
of push down accounting for the acquisition of Optex Systems, Inc. (Texas) by
Irvine Sensors.  The note would not have been incurred by Optex
Systems, Inc. (Texas) if operated as a stand alone entity because it relates to
Irvine Sensor’s consideration for its purchase of Optex Systems, Inc. (Texas).
Therefore, we expect no similar impact to the future operating results or
liquidity of  Optex Systems Holdings.
 
 Additionally,
as of September 28, 2008, Optex Systems, Inc. (Texas) reported $4.3 million of
liabilities attributable to corporate expenses allocated to Optex Systems, Inc.
(Texas) through an intercompany payable.  The outstanding intercompany
payable was not acquired by the company in the acquisition from Irvine
Sensors.
 
 Plan
of Operation
 
 Through a
private placement offering completed prior to consummation of the reorganization
agreement, Optex Systems, Inc. (Delaware) raised $1,219,750 ($874,529, net of
finders fees, issuance costs and non cash consideration resulting from
satisfaction of indebtedness owed to an investor) to fund
operations.  The proceeds have been used as follows:
 
 Description
                      
                      OfferingAdditional
      Personnel
                      
                      $
                      150,000Legal
      and Accounting Fees
                      
                      $
                      100,000Investor
      Relations Fees
                      
                      
                      96,000Working
      Capital
                      
                      $
                      528,529Totals
                      
                      $
                      874,529
 
 Results
of Operations
 
 Based on
the current level of deliverable backlog, we expect the next three months’
revenues to be consistent with the total for the periods September 29, 2008
through October 14, 2008 (Predecessor) and October 15, 2008 through March 29,
2009 (Successor).  In addition, future business includes expected
awards yet to be determined.  Although the current range of products
being manufactured is dependent on
  6


the
receipt of continued and timely funding to existing programs, the most recent
proposed federal budget is not expected to impact any of our existing programs
in the near term.
 
 The
Revenue, Expenses and Income for the fourteen day period of Optex Systems, Inc.
(Texas) prior to the acquisition by Optex Systems, Inc. (Delaware) are
summarized below (in millions).
 
 Optex
      Systems Inc. (Texas)
                        (Predecessor)Revenue
                      
                      $
                      0.9Cost
      of Sales
                      
                      
                      0.7Gross
      Margin
                      
                      
                      0.2General
      & Administrative
                      
                      
                      0.1Operating
      Income
                      
                      $
                      0.1Net
      Income
                      
                      $
                      0.1
 
 The table
below summarizes our quarterly and year to date operating results in terms of
both a GAAP net income measure and a non GAAP EBITDA measure. We use EBITDA as
an additional measure for evaluating the performance of our business as “net
income” includes the significant impact of noncash Intangible Amortization on
our income performance. Consequently, in order to have a meaningful measure of
our operating performance on a continuing basis, we need to evaluate an income
measure which does not take into account this Intangible Amortization. We have
summarized the quarterly revenue and margin below along with a reconciliation of
the GAAP net loss to the non GAAP EBITDA calculation for comparative purposes
below. We believe that including both measures allows the reader to have a
“complete picture” of our overall performance.
 
 September29,2008throughMarch29,2009
                            
                            
                            Predecessor-FiscalYear2008Predecessor - Qtr 1
                              (Sept 29, 2008
                              through Oct 14,
                              2008)
                            
                            
                            Successor- Qtr 1
                              (Oct 15, 2008
                              through Dec 27,
                              2008)
                            
                            
                            Qtr 2
                            
                            
                            6 months ended
                              March
                              29, 2009
                            
                            
                            Qtr 1
                            
                            
                            Qtr 2
                            
                            
                            6 months ended
                              March 30,
                              2008Net
      Loss After Taxes - GAAP
                            
                            $
                            (0.1
                            )
                            
                            $
                            0.1
                            
                            
                            $
                            (0.3
                            )
                            
                            $
                            (0.3
                            )
                            
                            $
                            (0.7
                            )
                            
                            $
                            (0.7
                            )
                            
                            $
                            (1.4
                            )Add:Interest
      Expense
                            
                            
                            
                            
                            
                            $
                            0.1
                            
                            
                            $
                            0.1
                            
                            
                            $
                            0.2
                            
                            
                            $
                            0.1
                            
                            
                            $
                            0.1
                            
                            
                            $
                            0.2Federal
      Income Taxes
                            
                            
                            
                            
                            
                            
                            0.2
                            
                            
                            
                            0.1
                            
                            
                            
                            0.3
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Depreciation
      & Amortization
                            
                            
                            
                            
                            
                            
                            0.6
                            
                            
                            
                            0.5
                            
                            
                            
                            1.1
                            
                            
                            
                            0.3
                            
                            
                            
                            0.2
                            
                            
                            
                            0.5EBITDA
      - Non GAAP
                            
                            $
                            (0.1
                            )
                            
                            $
                            1.0
                            
                            
                            $
                            0.4
                            
                            
                            $
                            1.3
                            
                            
                            $
                            (0.3
                            )
                            
                            $
                            (0.4
                            )
                            
                            $
                            (0.7
                            )
 
 We have
experienced substantial improvement in our EBITDA as compared to our prior year
performance. We have increased our EBITDA by $1.1million in the six months
ending March 29, 2009 as compared to the six months ending March 30, 2008
(Predecessor), primarily as a result of increased revenue and lower general and
administrative costs. We expect this trend to continue over the next 12 months
as our product mix shifts towards more profitable programs and we continue to
pursue cost reductions in our production and general and administrative
areas.
 
 Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates. Shifts in gross margin from quarter to
quarter are primarily attributable to the differing product mix recognized as
revenues during each respective period. During the three and six months ended
March 29, 2009, our revenues on legacy periscope programs increased
significantly over the prior year while margins significantly decreased. The
legacy periscope contracts were awarded January 2003, and due to significant
material price increases subsequent to the contract award date, we are
experiencing a loss on these contracts. We have fully reserved for future
contract losses on this program, thus deliveries against these programs yield a
product margin of zero. During the first six months of 2009,
  7
  we
recognized revenue of $3.2 million from these legacy periscope programs, with a
remaining backlog of $3.4 million, $2.2 million of which should be recognized in
2009 and the remaining $1.2 million in the first three quarters of 2010. We
expect our product margins on periscopes to increase over the next 12 months as
the legacy programs are completed and are replaced with new awards.
 
 We are
aggressively pursuing additional, potentially higher margin periscope business,
and in May 2009, Optex Systems Holdings was awarded a multi-year Indefinite
Delivery/Indefinite Quantity type contract accompanied by the first delivery
order from TACOM. If all government forecasted delivery orders against this
Indefinite Delivery/Indefinite Quantity contract are awarded and if we were to
share equally with the other supplier in the awarded releases, the total value
of the contract to us could be valued at approximately $7.5 million over the
next three years. In June 2009, we received an additional $3.4 million dollar
award from GDLS and in September 2009, an additional $1.9 million award to
provide product beginning with delivery starting in 2011 at the completion of
our current production contract.
 
 As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), our amortizable intangible assets increased significantly
over the prior year. The non cash amortization of intangible assets has had a
negative impact on our Gross Margin for 2009 as compared to 2008. In 2009, our
anticipated intangible amortization expense is $2 million and is expected to
decline to $1 million in 2010.
 
 Backlog
as of March 29, 2009 was $33.3 million as compared to a backlog of $36.8 million
as of March 30, 2008. The following table depicts the current expected delivery
by quarter of all contracts awarded as of March 30, 2009.
 
 2009
                                                                  
                                                                  2010
                                                                  
                                                                  2011
                                                                  
                                                                  2012
                                                                  
                                                                  2013Program
      Backlog
      (000's)
                                                                  
                                                                  Qtr 3
                                                                  
                                                                  Qtr 4
                                                                  
                                                                  Qtr 1
                                                                  
                                                                  Qtr 2
                                                                  
                                                                  Qtr 3
                                                                  
                                                                  Qtr 4
                                                                  
                                                                  Qtr 1
                                                                  
                                                                  Qtr 2
                                                                  
                                                                  Qtr 3
                                                                  
                                                                  Qtr 4
                                                                  
                                                                  Qtr 1
                                                                  
                                                                  Qtr 2
                                                                  
                                                                  Qtr 3
                                                                  
                                                                  Qtr 4
                                                                  
                                                                  Qtr 1Howitzer
      Programs
                                                                  
                                                                  $
                                                                  1.0
                                                                  
                                                                  $
                                                                  0.8
                                                                  
                                                                  $
                                                                  0.6
                                                                  
                                                                  $
                                                                  1.7
                                                                  
                                                                  $
                                                                  1.9
                                                                  
                                                                  $
                                                                  2.6
                                                                  
                                                                  $
                                                                  1.7
                                                                  
                                                                  $
                                                                  0.1
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -Periscope
      Programs
                                                                  
                                                                  
                                                                  2.6
                                                                  
                                                                  
                                                                  2.1
                                                                  
                                                                  
                                                                  1.9
                                                                  
                                                                  
                                                                  2.0
                                                                  
                                                                  
                                                                  2.5
                                                                  
                                                                  
                                                                  1.5
                                                                  
                                                                  
                                                                  0.5
                                                                  
                                                                  
                                                                  0.3
                                                                  
                                                                  
                                                                  0.2
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  -
                                                                  
                                                                  -Sighting
      Systems
                                                                  
                                                                  
                                                                  1.3
                                                                  
                                                                  
                                                                  1.0
                                                                  
                                                                  
                                                                  0.6
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  -
                                                                  
                                                                  -All
      Other
                                                                  
                                                                  
                                                                  2.3
                                                                  
                                                                  
                                                                  1.4
                                                                  
                                                                  
                                                                  0.6
                                                                  
                                                                  
                                                                  0.5
                                                                  
                                                                  
                                                                  0.4
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1
                                                                  
                                                                  
                                                                  0.1Total
                                                                  
                                                                  $
                                                                  7.2
                                                                  
                                                                  $
                                                                  5.3
                                                                  
                                                                  $
                                                                  3.7
                                                                  
                                                                  $
                                                                  4.2
                                                                  
                                                                  $
                                                                  4.8
                                                                  
                                                                  $
                                                                  4.2
                                                                  
                                                                  $
                                                                  2.3
                                                                  
                                                                  $
                                                                  0.5
                                                                  
                                                                  $
                                                                  0.3
                                                                  
                                                                  $
                                                                  .01
                                                                  
                                                                  $
                                                                  0.1
                                                                  
                                                                  $
                                                                  0.2
                                                                  
                                                                  $
                                                                  0.2
                                                                  
                                                                  $
                                                                  0.1
                                                                  
                                                                  $
                                                                  0.1
 
 Virtually
all of our contracts are prime or subcontracted directly with the Federal
government and, as such, are subject to Federal Acquisition Regulation Subpart
49.5, “Contract Termination Clauses” and more specifically Federal Acquisition
Regulation clauses 52.249-2 “Termination for Convenience of the Government
Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”.
These clauses are standard clauses on our prime military contracts and generally
apply to us as subcontractors. It has been our experience that the termination
for convenience is rarely invoked, except where it is mutually beneficial for
both parties. We are currently not aware of any pending terminations for
convenience or for default on our existing contracts.
 
 By way of
background, Federal Acquisition Regulation is the principal set of regulations
that govern the acquisition process of government agencies and contracts with
the U.S. government. In general, parts of the Federal Acquisition Regulation are
incorporated into government solicitations and contracts by reference as terms
and conditions effecting contract awards and pricing solicitations.
 
 In the
event a termination for convenience were to occur, these Federal Acquisition
Regulation clause 52.249-2 provides for full recovery of all contractual costs
and profits reasonably occurred up to and as a result of the terminated
contract. In the event a termination for default were to occur, we could be
liable for any excess cost incurred by the government to acquire supplies from
another supplier similar to those
  8
  terminated
from us. We would not be liable for any excess costs if the failure to perform
the contract arises from causes beyond the control and without the fault or
negligence of the company as defined by Federal Acquisition Regulation clause
52.249-8. In addition, the Government may require us to transfer title and
deliver to the Government any completed supplies, partially completed supplies
and materials, parts, tools, dies, jigs, fixtures, plans, drawings, information,
and contract rights that we have specifically produced or acquired for the
terminated portion of this contract. The Government shall pay contract price for
completed supplies delivered and accepted, and we and the Government would
negotiate an agreed upon amount of payment for manufacturing materials delivered
and accepted and for the protection and preservation of the property. Failure to
agree on an amount for manufacturing materials is subject to the Federal
Acquisition Regulation Disputes clause 52.233-1.
 
 In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold. These contracts are considered firm contracts at an undefinitized,
but not to exceed specified limits threshold. Cost Accounting Standards Board
covered contracts are subject to the Truth in Negotiations Act disclosure
requirements and downward only price negotiation. As of March 29, 2009, 5.1% of
our outstanding backlog, or $1.7 million of booked orders, fell under this
criterion. Our experience has been that the historically negotiated price
differentials have been minimal (5% or less) and accordingly, we do not
anticipate any significant downward adjustments on these booked
orders.
 
 Three
Months Ended March 29, 2009 (Successor) Compared to the Three Months Ended March
30, 2008 (Predecessor)
 
 Revenues. In the three months
ended March 29, 2009, revenues increased by 19.64% over the respective prior
period:
 
 Product Line
                    
                    3 mos ended
                      3/29/2009
                      (Successor)
                    
                    
                    3 mos ended
                      3/30/2008
                      (Predecessor)
                    
                    
                    ChangeHowitzer
      Programs
                    
                    
                    0.2
                    
                    
                    
                    1.0
                    
                    
                    
                    (0.8
                    )Periscope
      Programs
                    
                    
                    4.3
                    
                    
                    
                    2.7
                    
                    
                    
                    1.6Sighting
      Systems
                    
                    
                    1.2
                    
                    
                    
                    1.0
                    
                    
                    
                    0.2All
      Other
                    
                    
                    1.0
                    
                    
                    
                    0.9
                    
                    
                    
                    0.1Total
                    
                    
                    6.7
                    
                    
                    
                    5.6
                    
                    
                    
                    1.1Percent
      increase
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    19.64
                    %
 
 Revenues
increased $1.6 million in the periscope product line during the three months
ended March 29, 2009 as compared to the same period in 2008. The significant
increases in periscopes is attributable to increased demand by GDLS and U.S.
government accelerated schedules, whereby, in consideration for increased
pricing of approximately $1 million, Optex Systems, Inc. (Delaware) agreed to
accelerate the contract delivery schedule and deliver at higher volumes to
support increased military service needs. Of the total periscope revenue
increase, approximately 82% is attributable to increased product levels, as
compared to 18% due to accelerated pricing. The ramp up included the addition
direct labor headcount of approximately 8 employees, combined with dual sourcing
of material on several key components needed to meet the increased production
requirements. Based on our current backlog demand, we expect the periscope
revenues to decline in the last half of 2009 as the accelerated orders near
completion; however we expect the revenue on periscopes to remain strong in 2010
as we continue to quote and receive awards for additional periscopes from
multiple customers.
  9
 
 Revenues
in the Howitzer programs decreased by ($0.8) million over the same quarter in
the prior year due to technical issues experienced on the Howitzer product lines
related to problems with the government technical data and drawing package
affecting the manufacturability of the products and the functionality of the
product during field use and testing. These issues were resolved subsequent to
the second fiscal quarter of 2009 through Optex initiated engineering change
proposals and customer changes to the statement of work and contract schedules
modified accordingly to implement the required changes. With most of the
technical and start up issues behind us on these programs, we expect to increase
program deliveries on these programs during the third and fourth fiscal quarters
of fiscal year 2009 continuing through 2010.
 
 Sighting
Systems revenues increased $0.2 million over the prior year due to the delivery
of higher quantities of U.S. government and GDLS sighting systems in the current
quarter over prior quarter deliveries, offset with the reduction in shipments to
Textron related to a program that ended in 2008.
 
 Increases
in the other product line of $0.1 million for the three months ending March 29,
2009 are a result of increased business in muzzle reference systems from
GDLS.
 
 Cost of Goods Sold. During
the quarter ended March 29, 2009, we recorded cost of goods sold of $6.2 million
as opposed to $5.0 million during the quarter ended March 30, 2008, an increase
of $1.2 million or 24.0%. This increase in cost of goods sold was primarily
associated with increased revenue on our periscope lines in support of higher
backlog and accelerated delivery schedules, in addition to increased intangible
amortization resulting from the acquisition of Optex Systems, Inc. (Texas)
(Predecessor) assets from Irvine Sensors Corporation on October 14, 2008. The
gross margin during the quarter ended March 29, 2009 (Successor) was 8.3% of
revenues as compared to a gross margin of 10.7% for the quarter ended March 30,
2008 (Predecessor). Product margins increased substantially to 15.9% for the
quarter ended March 29, 2009 (Successor) versus 10.9% for the quarter ended
March 30, 2008 (Predecessor) due to a shift in second quarter revenue mix toward
more profitable glass periscope and sighting system contracts and lower revenues
in Howitzer programs. Margins were further impacted by higher intangible
amortization allocable to cost of goods sold of $0.4 million, and increased
reserves for valuations and warranties of $0.1 million, resulting in an overall
increase in cost of goods sold of 7.6% of revenues in the quarter ended March
29, 2009.
 
 G&A Expenses. During the
three months ended March 29, 2009, we recorded operating expenses of $0.7
million as opposed to $1.2 million during the three months ended March 30, 2008,
a decrease of $0.5 million or 41.7%. The components of the significant net
decrease in general and administrative expenses as compared to quarter ended
March 30, 2008 are outlined below.
 
 ·
              Elimination of corporate cost
      allocations from Irvine Sensors Corporation of $0.5 million and the Irvine
      Sensors Corporation Employee Stock Bonus Plan (ESBP) of $0.1 million as a
      result of the ownership
change.
 ·
              Increased costs of $0.1 million
      in legal, accounting fees, board of directors fees, and investor
      relations.
 ·
              Lower Salaries and Wages and
      employee related costs of $0.1 million primarily due to the
      reclassification of 10 purchasing and planning employees from general and
      administrative to manufacturing overhead in cost of sales. The annualized
      impact of the personnel move is expected to be a reduction in general and
      administrative expenses of approximately $0.3 million with an offsetting
      increase to cost of goods
sold.
 ·
              Increased Amortization of
      Intangible Assets of $0.1 million as a result of the ownership change on
      October 14, 2008.
  10
 
 Loss from Operations. During
the three months ended March 29, 2009, we recorded a loss from operations of
$(0.1) million, as compared to $(0.6) million for three months ended March 30,
2008, a decrease in operating loss of $0.5 million or 83.3%. The loss from
operations includes a $0.4 million increase in non-cash amortization of
intangible assets as a result of the October 14, 2008 acquisition of the assets
of Optex Systems, Inc. (Texas) (Predecessor).
 
 Net Loss. During the three
months ended March 29, 2009, we recorded a net loss of $(0.33) million, as
compared to $(0.68) million for three months ended March 30, 2008, a decrease in
loss of $0.35 million or 51.5%. Federal Income Taxes expense increased by $0.1
million over the prior year as a result of increased profit before intangible
amortization expense. The intangible amortization expense is amortized over 5
years for book purposes and is deductable over 15 years for income tax purposes.
In 2008, there was no Federal Income Tax expense due to the loss from
operations. Excluding the impact of the increased intangible expenses of $0.4
million, we would have recorded net income of $.07 million for the three months
ended March 29, 2009.
 
 Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through March 29, 2009 compared to the Predecessor six month
period ended March 30, 2008.
 
 Revenues the For the six
months ended March 29, 2009 (Combined) revenues increased by 40.0% over the
respective prior period (Predecessor) per the table below:
 
 Predecessor
                  
                  
                  Successor
                  
                  
                  Combined
                  
                  
                  PredecessorSeptember 29,
                    2008 through
                    October 14,
                    2008
                  
                  
                  October 15,
                    2008
                    through
                    March 29,
                    2009
                  
                  
                  6 mos.
                    ended
                    March 29,
                    2009
                  
                  
                  6 mos. ended
                    March 30, 2008
                  
                  
                  ChangeRevenue
                  
                  $
                  0.9
                  
                  
                  $
                  13.1
                  
                  
                  
                  14.0
                  
                  
                  
                  10.0
                  
                  
                  
                  4.0Percent
      increase
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  40.0
                  %
 
 The table
below details the revenue changes by product line in the six months ended March
29, 2009.
 
 Product Line
                      
                      6 mos ended
                        3/29/2009
                        (Combined)
                      
                      
                      6 mos ended
                        3/30/2008
                        (Predecessor)
                      
                      
                      ChangeHowitzer
      Programs
                      
                      
                      0.7
                      
                      
                      
                      1.2
                      
                      
                      
                      (0.5)Periscope
      Programs
                      
                      
                      9.1
                      
                      
                      
                      4.5
                      
                      
                      
                      4.6Sighting
      Systems
                      
                      
                      2.2
                      
                      
                      
                      2.6
                      
                      
                      
                      (0.4)All
      Other
                      
                      
                      2.0
                      
                      
                      
                      1.7
                      
                      
                      
                      0.3Total
                      
                      
                      14.0
                      
                      
                      
                      10.0
                      
                      
                      
                      4.0Percent
      increase
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      40.0
                      %
 
 Revenues
increased $4.6 million in periscopes during the six months ended March 29, 2009
as compared to the same period in 2008. The significant increase in periscope
sales is attributable to increased demand by GDLS and U.S. government
accelerated schedules, whereby, in consideration for increased pricing of
approximately $1.0 million, Optex Systems, Inc. (Delaware) agreed to accelerate
the contract delivery schedule and deliver at higher volumes to support
increased military service needs. Of the total periscope revenue increase,
approximately 82% is attributable to increased product levels, as compared to
18% due to accelerated pricing. The ramp up included the addition direct labor
headcount of approximately 8 employees, combined with dual sourcing of material
on several key components needed to meet the increased production requirements.
During the first 6 months of 2009, Optex had delivered approximately 49% of the
accelerated units, with the remaining units to be delivered through the first
quarter of 2010. Based on our current backlog demand, we expect the periscope
revenues to decline in the last half of 2009 as the accelerated orders near
completion; however we expect the revenue on periscopes to remain strong in 2010
as we continue to quote and receive awards for additional periscopes from
multiple customers.
  11
 
 Revenues
in the Howitzer programs declined slightly by ($0.5) million over the same
period in the prior year due to technical issues experienced on the Howitzer
product lines related to problems with the government technical data and drawing
package affecting the manufacturability of the products and the functionality of
the product during field use and testing. These issues were resolved subsequent
to the second fiscal quarter of 2009 through Optex initiated engineering change
proposals and customer changes to the statement of work and contract schedules
modified accordingly to implement the required changes. With most of the
technical and start up issues behind us on these programs, we expect to increase
program deliveries on these programs during the third and fourth fiscal quarters
of fiscal year 2009 continuing through 2010.
 
 Sighting
Systems revenues decreased ($0.4) million over the prior year due to completion
of a substantial Textron related M36 program in 2008. There has been no follow
on award to the program subsequent to the program completion in April
2008.
 
 Increases
in the other products $0.3 million for the six months ending March 29, 2009 are
a result of increased business in muzzle reference sensor assemblies from
GDLS.
 
 Currently,
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability. These issues have resulted in increased labor and
material costs due to higher scrap and extensive engineering costs incurred
during the start up phase of the programs. In addition some of our older
“legacy” periscope programs are experiencing losses due to significant material
price increases since the initial 5 year contract award in 2004. As of March 29,
2009, Optex Systems Holdings has reserved $0.6 million in contract loss reserves
on Howitzer programs and $0.2 million on periscope programs for a total of $0.8
million in contract loss reserves. The total remaining backlog on these loss
programs as of March 29, 2009 is $10.3 million. We are expecting to ship $4.0 of
the loss contract backlog in the second half of 2009 and $4.5 million of the
existing loss contract backlog in 2010, with the remaining $1.8 million expected
to ship in the first quarter of 2011. As these losses have been previously
recognized to the extent identified, future margins on these revenues are
expected to be zero.
 
 Currently,
we are not experiencing any negative impact due to changes in incremental
funding commitments by federal agencies. There has been one delay in the award
of the second delivery order for the U.S. government periscope contract
subsequent to March 29, 2009, however as the contract is a dual award between
Optex Systems Holdings and a competitor with no volume guaranteed to any
single-source, we have not expended any resources in support of the yet to be
awarded portion of the contract. We are anticipating a government award on the
contract in the second quarter of 2010. However, delay of the government
procurement is not expected to negatively impacted Optex Systems Holdings’
revenue in 2009, and due to other increased periscope orders from non U.S.
government contracts further delays in the award on the prime government
contract should not materially affect Optex Systems Holdings in the next 12
months.
 
 Cost of Goods Sold. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.7 million and during the Successor period from
October 15 through March 29, 2009 we recorded cost of goods sold of $11.7
million for a total cost of good sold during the six month period of $12.5
million as compared, to $8.9 million during the six months ended March 30, 2008,
an increase of $3.6 million or 40.4%. This increase in cost of goods sold was
primarily associated with increased revenue on our periscope product lines in
support of higher backlog and accelerated delivery schedules and increased
intangible amortization resulting from the acquisition of the assets of Optex
Systems, Inc. (Texas) (Predecessor) on October 14, 2008. The gross margin during
the Predecessor period beginning September 29, 2008 through October 14, 2008 was
$0.1 million and the gross margin for the Successor period beginning October 15,
2008 through March 29, 2009 was $1.4 million for a total of $1.5 million or
10.8% of revenues as compared to a gross margin of 11.7% for the six months
ended March 30, 2008. Product gross margins were up 3.4% to 18.1% for the period
ended March 29, 2009 versus 14.7% for the six months ended March 30, 2008 due to
a shift in revenue mix toward more profitable contracts for periscopes and
sighting systems. Margins were further impacted by higher intangible
amortization
  12
  allocable
to cost of goods sold of $0.6 million, and increased reserves for valuations and
warranties of $0.1 million, resulting in an overall increase in cost of goods
sold of 7.3% of revenues in the period ended March 29, 2009 as compared to the
six months ended March 30, 2008.
 
 G&A Expenses. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through March 29, 2009, we recorded operating expenses of $1.2 million for a
total of $1.3 million for the six months ended March 29, 2009 as opposed to $2.5
million during the six months ended March 30, 2008, a decrease of $1.2 million
or 48.0%. The components of the significant net decrease in general and
administrative expenses as compared to the six months ended March 30, 2008 are
outlined below.
 
 •
              Elimination
      of corporate cost allocations from Irvine Sensors Corporation of $0.9
      million and the Irvine Sensors Corporation Employee Stock Bonus Plan of
      $0.2 million as a result of the ownership
  change.
 •
              Increased
      costs of $0.1million in legal, accounting fees, board of director fees,
      and investor relations
 •
              Lower
      Salaries and Wages and employee related costs of $0.1 million primarily
      due to the reclassification of 10 purchasing and planning employees from
      general and administrative to manufacturing overhead in cost of sales. The
      annualized impact of the personnel move is expected to be a reduction in
      general and administrative expenses of approximately $0.3
      million.
 
 •
              Increased
      Amortization of Intangible Assets of $0.1million as a result of the
      ownership change as of October 14,
2008.
 •
              Decreased
      consulting and travel expenses of $0.1 million, primarily a result of the
      change in ownership.
 
 Income (Loss) from
Operations. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through March 29, 2009, we recorded a
income from operations of $0.1 million for a total operating income of $0.17
million during the six month period as opposed to a loss from operations of
$(1.3) million during the six months ended March 30, 2008. This improvement was
primarily due to increased sales revenue in the period ended March 29, 2009,
combined with reduced general and administrative expenses driven by the
elimination of Irvine Sensors Corporation corporate costs pushed down to us in
the six months ended March 30, 2008. The current year loss from operations also
includes $1.0 million of non cash amortization of intangible assets as a result
of the October 14, 2008 acquisition transaction.
 
 Net Income (Loss). During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
net income of $0.07 million, and for the period beginning October 15, 2008
through March 29, 2009, we recorded a net loss of $(0.4) million for a total net
loss of $(.33) million during the six months ended March 29, 2009, as compared
to $(1.4) million for six months ended March 30, 2008, a decrease in net loss of
$1.07 million or 76.4%. This decrease in net loss was principally the result of
reduced operating expenses related to the elimination of corporate cost
allocations from Irvine Sensors Corporation since the successor operating as a
stand-alone entity did not incur these costs in the six months ended March 30,
2008 combined with increased revenue in the period ending March 29, 2009.
Federal Income Tax expense increased by $0.4 million over the prior year period
as a result of the increased profit before intangible amortization expense. The
intangible amortization expense is amortized over five years for book purposes
and is deductible over 15 years for income tax purposes. In 2008, there was no
Federal Income Tax expense due to the loss from operations. Excluding the impact
of the increased intangible expenses of $1.0
  13
  million,
we would have recorded net income of $0.7 million for the six month period
ending March 29, 2009.
 
 Liquidity
and Capital Resources
 
 In the
2008 fiscal year, Optex Systems, Inc. (Texas) working capital was significantly
constrained due a high level of loss programs and production increases across
multiple programs which necessitated the need for investment in inventories and
manpower resources required to meet the additional product demand. As Optex
Systems, Inc. (Texas) was a wholly-owned subsidiary of Irvine Sensors
Corporation, access to additional outside funding apart from government progress
bills was severely limited. Further, Optex Systems, Inc. (Texas) had incurred
significant costs on one of the Howitzer programs and was unable to recover
these costs until fiscal 2009 due to progress billing limitations prior to first
article inspection testing and approval which did not occur until August of
2009. During 2008, Optex Systems, Inc. (Texas) transferred $0.7 million in cash
to Irvine Sensors in support of intercompany services provided by Irvine Sensors
on behalf of Optex Systems, Inc. (Texas) that were outside our control,
including: legal, accounting, and consulting fees; Irvine Sensors Corporation
travel expenses; and insurance costs.
 
 The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
 
 Year- EndedSeptember 28,
                        2008Accounting &
      Auditing Fees
                      
                      $
                      250,000Legal
      Fees
                      
                      
                      60,000Consulting
      Fees
                      
                      
                      60,000Workers
      Comp & General Insurance
                      
                      
                      70,000Total
                      
                      $
                      440,000
 
 As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008, these
general and administrative costs are incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year and have been reflected in the
financial statements to the extent incurred through March 29, 2009.
 
 Subsequent
to the asset acquisition from Irvine Sensors on October 14, 2008 and the reverse
merger and reorganization on March 30, 2009, Optex Systems Holdings raised
additional cash through a private equity sale that generated gross proceeds of
$1.0 million. As a result of the new capital, Optex Systems Holdings will be
able acquire the necessary inventory and personnel resources required to operate
at the higher revenue levels, and improve the company’s working capital
position.
 
 We have
historically met our liquidity requirements from a variety of sources, including
government and customer funding through contract progress bills, short term
loans, notes from related parties, and the sale of equity securities. Based upon
our current working capital position and potential for expanded business
revenues, we believe that our working capital is sufficient to fund our current
operations for the next 12 months. However, based upon our strategy and the
anticipated growth in our business, we believe that our liquidity needs may
increase in the future. The amount of such increase will depend on many factors,
including the costs associated with the fulfillment of our projects, whether we
upgrade our technology, and the amount of inventory required for our expanding
business. If our liquidity needs do increase, we believe additional capital
resources will be derived from a variety of sources including, but not limited
to, cash flow from operations and further private placements of our common stock
and/or debt, including receivables funding through a commercial lender.
 
 Predecessor
period of September 29, 2008 through October 14, 2008
  14
 
 Cash and Cash Equivalents. As
of October 14, 2008, Optex Systems, Inc. (Texas) (Predecessor) had cash and cash
equivalents of $0.3 million, an increase of $0.1 million from September 29,
2008. The slight increase in cash was primarily due to the timing of cash
receipts on accounts receivable collections and supplier payments. The cash
balance as of October 14, 2008 is included as “Cash Received through Optex
Systems, Inc. (Texas) acquisition” as of October 15, 2008.
 
 Net Cash Provided by Operating
Activities. Net cash provided by operating activities totaled $0.1
million for the Predecessor period of September 29, 2008 through October 14,
2008. Cash provided by operating activities was primarily due to the timing of
purchases and accounts receivable collections during the 15 day period prior to
the acquisition of Optex Systems Inc, (Texas), by Optex Systems Inc.,
(Delaware). During this period, our net inventory increased by $0.9 million to
support substantially increased production rates across all of our product lines
and our accounts receivable decreased $(1.0) million due to timing of
collections from one of our major customers in the second week of October 2008.
Accounts payable and accrued expenses decreased by $(0.2) million due to the
timing of cash disbursements prior to the acquisition.
 
 Net Cash Used in Investing
Activities. There was no net cash used in investing activities during the
Predecessor period beginning September 29, 2008 and ending October 14, 2008.
Optex Systems Holdings’ business is labor intensive and we purchase equipment as
it becomes necessary.
 
 Net Cash Provided by Financing
Activities. There was no net cash provided by financing activities during
the Predecessor period beginning September 29, 2008 and ending October 14,
2008.
 
 Successor
period of October 15, 2008 through March 29, 2009
 
 Cash and Cash Equivalents. As
of March 29, 2009, we had cash and cash equivalents of $1.2 million. During the
Successor period of October 15, 2008 through March 29, 2009 we increased cash
and cash equivalents by $0.9 million primarily due to the net proceeds received
by us in the private placement with the balance of increased cash due to
aggressive collections on accounts receivable and increased accounts payable due
to timing of disbursements.
 
 Net Cash Used in Operating
Activities. Net cash provided by operating activities during the
Successor period beginning October 15, 2008 and ending March 29, 2009 totaled
$0.3 million. The primary sources of cash during this period relate to the
timing of purchases, accelerated collections on government contracts, and the
timing of payments to vendors. Accelerated collections of government contracts
was accomplished by offering nominal discounts for prompt payment. Federal
Acquisition Regulation Clause 52.232-8 “Discounts for Prompt Payment” permits
the offer of nominal discounts on payment terms for government contracts in
order to expedite invoice payment. Because many of our programs incur
significant, long lead times from material acquisition through production and
shipment, it is the standard policy of Optex Systems, Inc. (Delaware) to offer a
0.5% discount for all government invoices paid in net 10 days or less. The
normal payment terms on these contracts are net 30. The foregone revenues as a
result of the discounted payments equate to less than 0.1% of total revenue
reported during the same period. In the period beginning October 15, 2008 and
ending March 29, 2009, our net inventory increased by $1.1 million to support
substantially increased production rates across all of our product lines. A
large portion of these inventories are progress billable costs and as such were
billed to our customer as costs were incurred. As of March 29, 2009, our
accounts receivable included approximately $0.6 million in unpaid outstanding
progress bills related to these programs, which were paid in April 2009. We
expect similar cash flows from operations until at least mid 2010 when our low
margin legacy periscope programs are anticipated to end and are replaced with
other significant programs as they reach level production rates.
 
 Net Cash Provided by Investing
Activities. In the Successor period beginning October 15, 2008 and ending
March 29, 2009, net cash provided by investing activities totaled $0.23 million
and consisted of cash
  15
  acquired
during the Optex Systems, Inc. (Delaware) Predecessor acquisition as of October
14, 2009 of $0.25 million and cash used to purchase equipment of $(0.02) million
during the period.
 
 Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $0.7
million during the period beginning October 15, 2008 through March 29, 2009, The
change of $0.7 million is due to receipt of the private placement funds of $0.9
million offset by funds used to repay outstanding loans of $(0.2) million. We
raised funds through a private placement for working capital needs, primarily
inventory purchases and additional personnel so support increased revenue and
production rates during the period.
  16
  Critical
Policies and Accounting Pronouncements
 
 Stock-Based
Compensation:In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, Share-Based
Payment. SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires that the compensation cost relating to
share-based payment transactions be recognized in the financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued.
 
 Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of EITF
96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other Than Employees.” The measurement date for the fair
value of the equity instruments issued is determined at the earlier of (i) the
date at which a commitment for performance by the consultant or vendor is
reached or (ii) the date at which the consultant or vendor’s performance is
complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting
agreement. Stock-based compensation related to non-employees is accounted for
based on the fair value of the related stock or options or the fair value of the
services, which ever is more readily determinable in accordance with SFAS
123R.
 
 Revenue Recognition. Optex
Systems Holdings recognizes revenue based on the modified percentage of
completion method utilizing the units-of-delivery method, in accordance with SOP
81-1:
 
 ·
              The
      units-of-delivery methodrecognizes as revenue the
      contract price of units of a basic production product delivered during a
      period and as the cost of earned revenue the costs allocable to the
      delivered units; costs allocable to undelivered units are reported in the
      balance sheet as inventory or work in progress. The method is used in
      circumstances in which an entity produces units of a basic product under
      production-type contracts in a continuous or sequential production process
      to buyers' specifications.
 
 Our
contracts are fixed price production type contracts whereas a defined order
quantity is delivered to the customer in a continuous or sequential production
process in accordance with buyer specifications (build to print). Our deliveries
against these contracts generally occur in monthly increments across fixed
delivery periods spanning from 3 to 36 months.
 
 Warranty Costs:Some of
our customers require that we warranty the quality of our products to meet
customer requirements and be free of defects for up to fifteen months subsequent
to delivery. In the six months ended March 29, 2009 Optex Systems Holdings
recognized warranty expenses of $57,306. Future warranty costs are based on the
estimated cost of replacement for expected returns based upon our most recent
experience rate of defects as a percentage of warranty covered sales. Prior to
fiscal year 2008, all warranty expenses were incurred as product was replaced
with no reserve for warranties against deliveries in the covered
period.
 
 On
certain periscope product lines, the warranty period has been extended from 15
to 24 months due to technical considerations incurred during the manufacture of
such products. During June of 2008, Optex Systems, Inc. (Texas) experienced an
internal control test failure related to the laser filters used on one of the
periscope products. As a result of the internal test failure, Optex implemented
a manufacturing process change to eliminate the potential for future failures.
We believe the internal control test environment to be significantly more
stringent than that which would occur under field conditions, however as a
result of the internal test failure and manufacturing process change, we
extended our warranty for all product shipped
  17
  prior to
the implemented change. As of the date of this report, Optex Systems Holdings
has not received any warranty claims as a result of the condition.
 
 Estimated Costs to Complete and
Accrued Loss on Contracts. Optex Systems Holdings reviews and reports on
the performance of its contracts and production orders against the respective
resource plans for such contracts/orders. These reviews are summarized in the
form of estimates to complete and estimates at completion. Estimates at
completion include Optex Systems Holdings’ incurred costs to date against the
contract/order plus management's current estimates of remaining amounts for
direct labor, material, other direct costs and subcontract support and indirect
overhead costs based on the completion status and future contractual
requirements for each order. If an estimate at completion indicates a potential
overrun (loss) against a fixed price contract/order, management generally seeks
to reduce costs and /or revise the program plan in a manner consistent with
customer objectives in order to eliminate or minimize any overrun and to secure
necessary customer agreement to proposed revisions.
 
 If an
estimate at completion indicates a potential overrun against budgeted resources
for a fixed price contract/order, management first attempts to implement lower
cost solutions to still profitably meet the requirements of the fixed price
contract. If such solutions do not appear practicable, management makes a
determination whether to seek renegotiation of contract or order requirements
from the customer. If neither cost reduction nor renegotiation appears probable,
an accrual for the contract loss/overrun is recorded against earnings and the
loss is recognized in the first period the loss is identified based on the most
recent estimate at completion of the particular contract or product
order.
 
 Government Contracts:
Virtually all of our contracts are prime or subcontracted directly with the
Federal government and as such, are subject to Federal Acquisition Regulation
Subpart 49.5, “Contract Termination Clauses” and more specifically Federal
Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the
Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for
default”.
 
 Recent
Accounting Pronouncements.
 
 In June 2006, The FASB
issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income
Taxes”. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have a material impact on
Optex Systems Holdings’ consolidated financial position, results of operations,
or cash flows.
 
 In
September 2006, the FASB issued FASB No. 157, “Fair Value Measurements”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. While FASB No. 157 does not apply to transactions
involving share-based payment covered by FASB No. 123, it establishes a
theoretical framework for analyzing fair value measurements that is absent from
FASB No. 123. We have relied on the theoretical framework established by FASB
No. 157 in connection with certain valuation measurements that were made in the
preparation of these financial statements. FASB No. 157 is effective for years
beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
FASB issued an exposure draft that provides a one year deferral for
implementation of the Standard for non-financial assets and liabilities. Optex
Systems Holdings is currently evaluating the impact FASB No. 157 will have on
its financial statements.
 
 In
February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the
  18
  beginning
of our fiscal year 2008, with early adoption permitted. Optex Systems Holdings
is currently evaluating what effect the adoption of FASB 159 will have on its
financial statements.
 
 In March
2007, the Financial Accounting Standards Board ratified “EITF” Issue No. 06-10,
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”.
EITF 06-10 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. EITF
06-10 is effective for fiscal years beginning after December 15, 2007. Optex
Systems Holdings is currently evaluating the impact of EITF 06-10 on its
financial statements, but does not expect it to have a material
effect.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations and
SFAS No. 160, Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51. These new standards will significantly change
the accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. Statement Nos. 141(R)
and 160 are required to be adopted simultaneously and are effective for the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited. Optex Systems Holdings is currently evaluating the
impact of adopting SFAS Nos. 141(R) and SFAS 160 on its financial statements.
See Note 14 to the financial statements for the year ended September 28, 2008
for adoption of SFAS 141R subsequent to September 30, 2008.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007. Optex Systems Holdings does not have any
outstanding stock options.
 
 In March
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161,
"Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”. SFAS 161 requires enhanced disclosures about an entity’s derivative
and hedging activities. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008 with
early application encouraged. As such, Optex Systems Holdings is required to
adopt these provisions at the beginning of the fiscal year ended September 30,
2009. Optex Systems Holdings is currently evaluating the impact of SFAS 161 on
its financial statements but does not expect it to have a material
effect.
 
 In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. Optex Systems Holdings is currently evaluating the impact of SFAS
162 on its consolidated financial statements but does not expect it to have a
material effect.
 
 In May
2008, FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60". SFAS 163
interprets Statement 60 and amends existing accounting pronouncements to clarify
their application to the financial guarantee insurance contracts included within
the scope of that Statement. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. As such, Optex Systems Holdings is required
to adopt these provisions at the beginning of the fiscal year ended September
30, 2011. Optex Systems Holdings is currently evaluating the impact of SFAS 163
on its financial statements but does not expect it to have a material
effect.
  19
 
 In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. We
have granted and expect to continue to grant restricted stock that contain
non-forfeitable rights to dividends and will be considered participating
securities upon adoption of FSP EITF 03-6-1. As participating securities, we
will be required to include these instruments in the calculation of our basic
earnings per share ("EPS"), and we will need to calculate basic EPS using the
"two-class method." Restricted stock is currently included in our dilutive EPS
calculation using the treasury stock method. The two-class method of computing
EPS is an earnings allocation formula that determines EPS for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. As such,
Optex Systems Holdings is required to adopt these provisions at the beginning of
the fiscal year ending October 3, 2010. Optex Systems Holdings does not expect
adoption of FSP EITF 03-6-1 to have a material effect on the Optex Systems
Holdings’ financial statements.
 
 In May
2009, “FASB issued SFAS No. 165, "Subsequent Events". SFAS 165
establishes principles and requirements for the reporting of events or
transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. SFAS 165 is effective for
financial statements issued for fiscal years and interim periods ending after
June 15, 2009. As such, Optex Systems Holdings adopted these provisions at the
beginning of the interim period ended June 28, 2009. Adoption of SFAS 165 did
not have a material effect on Optex Systems Holdings’ financial
statements.
 
 In June
2009, FASB issued SFAS No. 168, " The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No.
162". SFAS 168 replaces Statement 162 and to establish the FASB
Accounting Standards CodificationTM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. SFAS 168 is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009. As such, Optex Systems Holdings is required to adopt these
provisions at the beginning of the period ending September 27, 2009. Optex
Systems Holdings does not expect adoption of SFAS 168 to have a material effect
its financial statements.
 
 Cautionary
Factors That May Affect Future Results
 
 This
Quarterly Report on Form 10-Q and other written reports and oral statements made
from time to time by Optex Systems Holdings may contain so-called
“forward-looking statements,” all of which are subject to risks and
uncertainties. You can identify these forward-looking statements by their use of
words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects”
and other words of similar meaning. You can identify them by the fact that they
do not relate strictly to historical or current facts. These statements are
likely to address Optex Systems Holdings’ growth strategy, financial results and
product and development programs. You must carefully consider any such statement
and should understand that many factors could cause actual results to differ
from Optex Systems Holdings’ forward-looking statements. These factors include
inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward-looking
statement can be guaranteed and actual future results may vary
materially.
 
 Optex
Systems Holdings does not assume the obligation to update any forward-looking
statement. You should carefully evaluate such statements in light of factors
described in this Form 10-Q. In various filings the Optex Systems Holdings has
identified important factors that could cause actual results to differ from
expected or historic results. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete list of all potential risks or
uncertainties.
  20
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
required for smaller reporting companies.
 
 Item
4T. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of the
end of the period covered by our Annual Report on Form 10-K for the year ended
December 31, 2008, management performed, with the participation of our Principal
Executive Officer and Principal Financial Officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our Principal Executive Officer and our Principal Financial Officer,
to allow timely decisions regarding required disclosures. Based on the
evaluation and the identification of the material weaknesses in our internal
control over financial reporting described below, our Principal Executive
Officer and our Principal Financial Officer concluded that, as of March 27,
2009, our disclosure controls and procedures were effective.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projection of any evaluation of effectiveness to
future periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Management’s
assessment of internal control over financial reporting is governed by the
criteria in Internal Control
over Financial Reporting - Guidance for Smaller Public Companiesissued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting as
required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified no
material weaknesses in our internal control over financial reporting as of March
29, 2009:
 
 Management
has concluded that we did maintain effective internal control over financial
reporting as of March 29, 2009, based on Internal Control over Financial
Reporting - Guidance for Smaller Public Companiesissued by
COSO.
 
 There
have not been any other changes that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
  21


PART
II - OTHER INFORMATION





Item
1. Legal Proceedings.





Currently
we are not aware of any litigation pending or threatened by or against Optex
Systems Holdings.





Item 1A.  RISK
FACTORS





Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this Form 10-Q, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us , material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter
market.


Risks Related to our
Business





We
expect that we will need to raise additional capital in the future; additional
funds may not be available on terms that are acceptable to us, or at
all.





We
anticipate we will have to raise additional capital in the future to service our
debt and to finance our future working capital needs. We cannot assure you that
any additional capital will be available on a timely basis, on acceptable terms,
or at all. Future equity or debt financings may be difficult to obtain. If we
are not able to obtain additional capital as may be required, our business,
financial condition and results of operations could be materially and adversely
affected.





We
anticipate that our capital requirements will depend on many factors,
including:





·
                  our
      ability to fulfill backlog;




·
                  our
      ability to procure additional production
  contracts;




·
                  our
      ability to control costs;




·
                  the
      timing of payments and reimbursements from government and other contracts,
      including but not limited
      to         changes in
      federal government military spending and the federal government
      procurement process;




·
                  increased
      sales and marketing expenses;




·
                  technological
      advancements and competitors’ response to our
  products;




·
                  capital
      improvements to new and existing
facilities;




·
                  our
      relationships with customers and suppliers;
and




·
                  general
      economic conditions including the effects of future economic slowdowns,
      acts of war


22




or
terrorism and the current international conflicts.


Even if
available, financings can involve significant costs and expenses, such as legal
and accounting fees, diversion of management’s time and efforts, and substantial
transaction costs. If adequate funds are not available on acceptable terms, or
at all, we may be unable to finance our operations, develop or enhance our
products, expand our sales and marketing programs, take advantage of future
opportunities or respond to competitive pressures.





Current
economic conditions may adversely affect our ability to continue
operations.





Current
economic conditions may cause a decline in business and consumer spending and
capital market performance, which could adversely affect our business and
financial performance.  Our ability to raise funds, upon which we are
fully dependent to continue to expand our operations, may be adversely affected
by current and future economic conditions, such as a reduction in the
availability of credit, financial market volatility and economic
recession.





Our
ability to fulfill our backlog may have an effect on our long term ability to
procure contracts and fulfill current contracts.





Our
ability to fulfill our backlog may be limited by our ability to devote
sufficient financial and human capital resources and limited by available
material supplies.  If we do not fulfill our backlog in a timely
manner, we may experience delays in product delivery which would postpone
receipt of revenue from those delayed deliveries.  Additionally, if we
are consistently unable to fulfill our backlog, this may be a disincentive to
customers to award large contracts to us in the future until they are
comfortable that we can effectively manage our backlog.





Our
historical operations depend on government contracts and
subcontracts.  We face risks related to contracting with the federal
government, including federal budget issues and fixed price
contracts.





Future
general political and economic conditions, which cannot be accurately predicted,
may directly and indirectly affect the quantity and allocation of expenditures
by federal agencies. Even the timing of incremental funding commitments to
existing, but partially funded, contracts can be affected by these factors.
Therefore, cutbacks or re-allocations in the federal budget could have a
material adverse impact on our results of operations. Obtaining government
contracts may also involve long purchase and payment cycles, competitive
bidding, qualification requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification development, price
negotiations and milestone requirements. In addition, our government contracts
are primarily fixed price contracts, which may prevent us from recovering costs
incurred in excess of budgeted costs. Fixed price contracts require us to
estimate the total project cost based on preliminary projections of the
project’s requirements. The financial viability of any given project depends in
large part on our ability to estimate such costs accurately and complete the
project on a timely basis. Some of those contracts are for products that
are new to our business and are thus subject to unanticipated impacts to
manufacturing costs.  Given the current economic conditions, it is
also possible that even if our estimates are reasonable at the time made, that
prices of materials are subject to unanticipated adverse
fluctuation.  In the event our actual costs exceed fixed contractual
costs of our product contracts, we will not be able to recover the excess costs
which could have a material adverse effect on our business and results of
operations.  We examine these contracts on a regular basis and accrue
for anticipated losses on these contracts, if necessary.  As of
September 27, 2009, we had approximately $1.3 million of loss provision accrued
for these fixed price contracts.





Approximately
95% of our contracts contain contract termination clauses for
convenience.  In the event these clauses should be invoked by our
customer, future revenues against these contracts could be affected, however
these clauses allow for a full recovery of any incurred contract cost plus a
reasonable fee up through and as a result of the contract
termination.  We are currently unaware of any pending terminations on
our existing contracts.  In some cases, contract awards may be issued
that are subject to renegotiation at a date (up to 180 days) subsequent to the
initial award date.  Generally, these subsequent




23




negotiations
have had an immaterial impact (zero to 5%) on the contract price of the affected
contracts.  Currently, none of our awarded contracts are subject to
renegotiation.


If
we fail to scale our operations appropriately in response to growth and changes
in demand, we may be unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and adversely
affected.





Our past
growth has placed, and any future growth in our historical business is expected
to continue to place, a significant strain on our management personnel,
infrastructure and resources. To implement our current business and product
plans, we will need to continue to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors will require
substantial management effort and additional capital. If we are unable to
effectively manage our expanding operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and
adversely affected.





We
do not have long-term employment agreements with our key personnel, other than
our Principal Operating Officer. If we are not able to retain our key personnel
or attract additional key personnel as required, we may not be able to implement
our business plan and our results of operations could be materially and
adversely affected.





We depend
to a large extent on the abilities and continued participation of our executive
officers and other key employees. The loss of any key employee could have a
material adverse effect on our business. We currently have only one employment
agreement, with our Principal Operating Officer, and do not presently maintain
“key man” insurance on any key employees. We believe that as our activities
increase and change in character, additional, experienced personnel will be
required to implement our business plan. Competition for such personnel is
intense and we cannot assure you that they will be available when required, or
that we will have the ability to attract and retain them. In addition, we do not
presently have depth of staffing in our executive, operational and financial
management. Until additional key personnel can be successfully integrated into
our operations, the timing or success of which we cannot currently predict, our
results of operations and ultimate success will be vulnerable to challenges
associated with recruiting additional key personnel and difficulties associated
with the loss of any key personnel in the future.





Our
intangible assets or goodwill may suffer impairment in the future.





Goodwill
represents the cost of acquired businesses in excess of fair value of the
related net assets at acquisition.  Valuation of intangible assets,
such as goodwill, requires us to make significant estimates and assumptions
including, but not limited to, estimating future cash flows from product sales,
developing appropriate discount rates, maintaining customer relationships and
renewing customer contracts, and approximating the useful lives of the
intangible assets acquired. To the extent actual results differ from these
estimates, our intangible assets or goodwill may suffer impairment in the future
that will impact our results of operations.  We reviewed the fair
market value of our goodwill and intangible assets as of September 28, 2008,
based on the fair market values established in connection with the acquisition
by Optex Systems, Inc. (Delaware) of the assets of Optex Systems, Inc. (Texas)
as of October 14, 2008, and as a result, determined that the current carrying
value of goodwill had been impaired by $1.6 million.  Goodwill was
reviewed for impairment as of September 27, 2009 and based on the review, there
have been no material changes to our assumptions or estimates that would suggest
any further impairment is currently warranted.  We intend to continue
to monitor the value of our intangible assets and goodwill in order to identify
any impairment that may occur in the future.





Certain
of our products are dependent on specialized sources of supply that are
potentially subject to disruption which could have a material, adverse impact on
our business.





Optex
Systems Holdings has selectively single-sourced some of our material components
in order to mitigate excess procurement costs associated with significant
tooling and startup costs.  Furthermore,




24




because
of the nature of government contracts, we are often required to purchase
selected items from Government approved suppliers, which may further limit our
ability to utilize multiple supply sources for these key
components.


To the
extent any of these single sourced or government approved suppliers should have
disruptions in deliveries due to production, quality, or other issues, Optex
Systems Holdings may also experience related production delays or unfavorable
cost increases associated with retooling and qualifying alternate
suppliers.  The impact of delays resulting from disruptions in supply
for these items could negatively impact our revenue, our customer reputation,
and our results of operations.  In addition, significant price
increases from single-source suppliers could have a negative impact on our
profitability to the extent that we are unable to recover these cost increases
on our fixed price contracts.





Each
contract has a specific quantity of material which needs to be purchased,
assembled, and finally shipped.  Prior to bidding a contract, Optex Systems
Holdings contacts potential sources of material and receives qualified
quotations for this material.  In some cases, the entire volume is given to
a single supplier and in other cases, the volume might be split between several
suppliers.  If a contract has a single source supplier and that supplier
fails to meet their obligations (e.g., quality, delivery), then Optex Systems
Holdings would find an alternate supplier and bring this information back to the
final customer.  Contractual deliverables would then be re-negotiated
(e.g., specifications, delivery, price).  Currently, approximately 28% of
our total material requirements are single-sourced across 21 suppliers
representing approximately 20% of our active supplier base.  Single-sourced
component requirements span across all of our major product lines.  The
vast majority of these single-sourced components could be provided by another
supplier with minimal interruption in schedule (supply delay of 3 months or
less) or increased costs.  We do not believe these single sourced
materials to pose any significant risk to Optex Systems Holdings as other
suppliers are capable of satisfying the purchase requirements in a reasonable
time period with minimal increases in cost.  Of these single sourced
components, we have contracts (purchase orders) with firm pricing and delivery
schedules in place with each of the suppliers to supply parts in satisfaction of
our current contractual needs.





We
consider only those specialized single source suppliers where a disruption in
the supply chain would result in a period of three months or longer for Optex
Systems Holdings to identify and qualify a suitable replacement to present a
material financial or schedule risk.  In the table below we identify
only those specialized single source suppliers and the product lines supported
by those materials.





Product Line
                                                            
                                                            Supplier
                                                            
                                                            Supply Item
                                                            
                                                            Risk
                                                            
                                                            Purchase OrdersPeriscopes
                                                            
                                                            TSP
      Inc
                                                            
                                                            Window
      used on all glass & plastic periscopes
                                                            
                                                            Proprietary
      coatings would take in excess of 6 months to identify and qualify an
      alternative source
                                                            
                                                            Current
      Firm Fixed Price & Quantity Purchase orders are in place with the
      supplier to meet all contractual requirements.  Supplier is on
      schedule.Periscopes
                                                            
                                                            Spartec
      Polycast
                                                            
                                                            Acrylic
      raw material used on plastic periscope assemblies
                                                            
                                                            This
      material has quality characteristics which would take in excess of 6
      months to identify and qualify an alternative source.
                                                            
                                                            Current
      Firm Fixed Price & Quantity Purchase orders are in place with the
      supplier to meet all contractual requirements.  Supplier is on
      schedule.Howitzers
                                                            
                                                            Danaher
      Controls
                                                            
                                                            Counter
      Assembly for M137 & M187 Howitzer programs
                                                            
                                                            Critical
      assembly would take in excess of 6 months to identify and qualify an
      alternative source.  Currently, the only US
                                                            
                                                            Current
      Firm Fixed Price & Quantity Purchase orders are in place with the
      supplier to meet all
contractual
  25
  Government
      approved supplier.
                                    
                                    requirements.  Supplier
      is on schedule.Other
                                    
                                    SWS
      Trimac
                                    
                                    Subcontracted
      Electron Beam Welding
                                    
                                    Subcontracted
      welder that is the only qualified supplier for General Dynamics Land
      Systems muzzle reference system collimator assemblies.  This
      operation would take in excess of 6 months to identify and qualify an
      alternative supplier.
                                    
                                    Current
      Firm Fixed Price & Quantity Purchase orders are in place with the
      supplier to meet all contractual requirements.  Supplier is on
      schedule.


The
defense technology supply industry is subject to technological change and if we
are not able to keep up with our competitors and/or they develop advanced
technology as response to our products, we may be at a competitive
disadvantage.





The
market for our products is generally characterized by technological
developments, evolving industry standards, changes in customer requirements,
frequent new product introductions and enhancements, short product life cycles
and severe price competition. Our competitors could also develop new, more
advanced technologies in reaction to our products.  Currently accepted
industry standards may change. Our success depends substantially on our ability,
on a cost-effective and timely basis, to continue to enhance our existing
products and to develop and introduce new products that take advantage of
technological advances and adhere to evolving industry standards. An unexpected
change in one or more of the technologies related to our products, in market
demand for products based on a particular technology or of accepted industry
standards could materially and adversely affect our business. We may or may not
be able to develop new products in a timely and satisfactory manner to address
new industry standards and technological changes, or to respond to new product
announcements by others. In addition, new products may or may not achieve market
acceptance.





Unexpected
warranty and product liability claims could adversely affect our business and
results of operations.





The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products.  Some of our
customers require that we warrant the quality of our products to meet customer
requirements and be free of defects for up to fifteen months subsequent to
delivery.  Approximately 50% of our current contract deliveries are covered
by these warranty clauses. We establish reserves for warranty claims based on
our historical rate of less than one percent of returned shipments against these
contracts.  There can be no assurance that this reserve will be
sufficient if we were to experience an unexpectedly high incidence of problems
with our products.  Significant increases in the incidence of such
claims may adversely affect our sales and our reputation with
consumers.  Costs associated with warranty and product liability
claims could materially affect our financial condition and results of
operations.





We
derive almost all of our revenue from two customers and the loss of either
customer or both customers could have a material adverse effect on our
revenues.





At
present, we derive approximately 93% of the gross revenue from our business from
two customers, with 46% from General Dynamics Land System Division and 47% from
Tank-automotive and Armaments Command. Procuring new customers and
contracts may partially mitigate this risk. A decision by either General
Dynamics Land System Division or Tank-automotive and Armaments Command to cease
issuing contracts could have a significant material impact on our business and
results of operations.  There can be no assurance that we could
replace these customers on a timely basis or at all.


26


We have
approximately 50 discrete contracts with General Dynamics Land System Division
and Tank-automotive and Armaments Command.  If they choose to
terminate these contracts, Optex Systems Holdings is entitled to fully recover
all contractual costs and reasonable profits incurred up to or as a result of
the terminated contract.





We
do not possess any patents and rely solely on trade secrets to protect our
intellectual property.





We
utilize several highly specialized and unique processes in the manufacture of
our products, for which we rely solely on trade secrets to protect our
innovations.  We cannot assure you that we will be able to maintain
the confidentiality of our trade secrets or that our non-disclosure agreements
will provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or other disclosure.  The confidentiality agreements that are designed
to protect our trade secrets could be breached, and we might not have adequate
remedies for the breach.





It is
also possible that our trade secrets will otherwise become known or
independently developed by our competitors, many of which have substantially
greater resources, and may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with our
ability to make and sell some of our products. Although based upon our general
knowledge (and we have not conducted exhaustive patent searches), we believe
that our products do not infringe on the patents or other proprietary rights of
third parties; however, we cannot assure you that third parties will not assert
infringement claims against us or that such claims will not be
successful.





In
the future, we may look to acquire other businesses in our industry and the
acquisitions will require us to use substantial resources, among other
things.





At some
time in the future, we may decide to pursue a consolidation strategy with other
businesses in our industry.  In order to successfully acquire other
businesses, we would be forced to spend significant resources in both
acquisition and transactional costs, which could divert substantial resources in
terms of both financial and personnel capital from our current
operations.  Additionally, we might assume liabilities of the acquired
business, and the repayment of those liabilities could have a material adverse
impact on our cash flow.  Furthermore, when a new business is
integrated into our ongoing business, it is possible that there would be a
period of integration and adjustment required which could divert resources from
ongoing business operations.





Conversion
of our Series A preferred stock could cause substantial dilution to our existing
common stock holders, and certain other rights of the preferred stock holders
present other risks to our existing common stock holders.





As of
September 27, 2009, we had 139,444,940 shares of our common stock issued and
outstanding, as well as 1,027 shares of our Series A preferred stock issued and
outstanding.  The Series A preferred stock is convertible into
41,080,000 shares of our common stock, and upon conversion, the Series A
preferred stock would represent 21.7% of our outstanding common
stock.  This would greatly dilute the holdings of our existing common
stockholders.  In addition, the preferred shareholders vote on a
one-to-one basis with our common shareholders on an as converted
basis.





Furthermore,
in the event of a liquidation, the holders of our Series A preferred stock would
receive priority liquidation payments before payments to common shareholders
equal to the amount of the stated value of the preferred stock before any
distributions would be made to our common shareholders.  The total
stated value of our preferred stock is $6,162,000, so the preferred shareholders
would need to receive that amount before any distributions could be made to
common shareholders.  Our assets with liquidation value are exceeded
by our liabilities on our balance sheet; therefore, upon a liquidation,
there would be no assets remaining for distribution to common
shareholders.





Lastly,
the preferred shareholders have the right, by majority vote of the shares of
preferred stock, to generally approve any issuances by us of equity and/or
indebtedness, which is not ordinary course trade
indebtedness.  Therefore, the preferred shareholders can effectively
bar us from entering into a transaction




27




which
they feel is not in their best interests even if the transaction would otherwise
be in the best interests of Optex Systems Holdings and its common
shareholders.


Risks
Relating to the Reorganization





A director who is also
an executive officer beneficially owns a substantial percentage of Optex
Systems  Holdings’ outstanding common stock, which gives him control
over certain major decisions on which Optex Systems Holdings’ stockholders may
vote, which may discourage an acquisition of Optex Systems Holdings
..





As a
result of the reorganization, Sileas, which is owned by Optex Systems Holdings’
three officers (one of whom is also one of Optex Systems Holdings’ three
directors), beneficially owns, in the aggregate, 73.52% of Optex
Systems  Holdings’ outstanding common stock.  One director
who is also an executive officer, Stanley Hirschman, owns the majority
equity interest in Sileas.  The interests of Optex Systems Holdings’
management may differ from the interests of other stockholders. As Optex Systems
Holdings’ executive management has the right and ability to control virtually
all corporate actions requiring stockholder approval, irrespective of how Optex
Systems Holdings’ other stockholders may vote, including the following
actions:






            Confirming
      or defeating the election of
directors;





            amending
      or preventing amendment of Optex Systems  Holdings’ certificate
      of incorporation or bylaws;





            effecting
      or preventing a reorganization, sale of assets or other corporate
      transaction; and controlling the outcome of any other matter submitted to
      the stockholders for vote.





Optex
Systems Holdings’ management’s beneficial stock ownership may discourage a
potential acquirer from seeking to acquire shares of Optex Systems Holdings’
common stock or otherwise attempting to obtain control of Optex Systems
Holdings, which in turn could reduce the stock price or prevent Optex Systems
Holdings’ stockholders from realizing a premium over Optex Systems Holdings’
stock price.





If
Sileas is unable to meet its obligations under the purchase money note to the
party from which it purchased its stock holdings in Optex Systems Holdings,
there could be a change in control in Optex Systems Holdings.





On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware), in a private
transaction. The purchase price for the acquisition of Longview’s position was
$13,524,405, and the consideration was paid in the form of a promissory
note.   The obligations of Sileas under the promissory note are
secured by a security interest in Optex Systems  Holdings’ common and
preferred stock owned by Sileas.  As Sileas has no operations or
business activities other than holding the purchased assets, Sileas is depending
upon the value of its common stock and preferred stock holdings in Optex Systems
Holdings to increase over time in order to pay its obligations under the
promissory note.  If the value of the holdings does not sufficiently
increase, and Sileas is unable to meet its payment obligations, Longview could
exercise its remedies with respect to its security interest and take control of
the pledged stock, and thus there would be a change in control of Optex Systems
Holdings, as Sileas is currently the majority owner of Optex Systems
Holdings.  There can be no guarantee that the investment objectives of
Longview will be the same as those of Sileas or our other shareholders. In the
event that control shifts to Longview from Sileas, Longview may vote its shares
differently than Sileas would have voted under similar
circumstances.


Public company compliance may make it
more difficult to attract and retain officers and directors
..





The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, Optex Systems




28




Holdings
expects these new rules and regulations to increase compliance costs in 2010 and
beyond and to make certain activities more time consuming and costly. As a
public entity, Optex Systems Holdings also expects that these new rules and
regulations may make it more difficult and expensive for Optex Systems Holdings
to obtain director and officer liability insurance in the future and it may be
required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for Optex Systems Holdings to attract and retain qualified persons to
serve as directors or as executive officers.





We
did not give separate notice by mailing to then current shareholders of Sustut
of the written consent by Andrey Oks as the majority shareholder of the
reorganization.





Section
228(e) of the Delaware General Corporation Law requires "[p]rompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders . . . who have not consented in
writing.”  Prior management of Sustut did not give notice to the other
then existing shareholders of Sustut of the written consent of Andrey Oks in
lieu of a meeting of stockholders approving the reorganization on March 26, 2009
in compliance with Section 228(e).  On April 3, 2009, current
management filed a Form 8-K which detailed the transaction although it did not
specifically mention approval of the transaction by Andrey Oks as the majority
shareholder of Sustut.  Potential ramifications of this lack of
compliance with Section 228(e) could include possible inquiry or litigation from
then existing shareholders of Sustut for failure of being made aware of the
consent.  To the knowledge of current management of Optex Systems
Holdings, there have been no claims or inquiries made and/or any litigation
filed by then current shareholders of Sustut for failure to receive notice under
Section 228(e) of the Delaware General Corporation Law.





Risks
Relating to the common stock





Optex Systems Holdings’ stock price
may be volatile.





The
market price of Optex Systems Holdings’ common stock is likely to be highly
volatile and could fluctuate widely in price in response to various factors,
many of which are beyond Optex Systems  Holdings’ control, including
the following:






            additions
      or departures of key personnel;





            limited
      “public float” following the reorganization, in the hands of a small
      number of persons whose sales or lack of sales could result in positive or
      negative pricing pressure on the market price for the common
      stock;





            operating
      results that fall below
expectations;





            economic
      and other external factors, including but not limited to changes in
      federal government military spending and the federal government
      procurement process; and





            period-to-period
      fluctuations in Optex Systems  Holdings’ financial
      results.





In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of Optex Systems Holdings’ common
stock.


There is currently no liquid trading
market for Optex Systems Holdings’ common stock and Optex Systems Holdings
cannot ensure that one will ever develop or be sustained .





Our
common stock is currently approved for quotation on the OTC Bulletin Board
trading under the symbol OPXS.OB.  However, there is limited trading
activity and not currently a liquid trading market.  There is no assurance
as to when or whether a liquid trading market will develop, and if such a
market




29




does
develop, there is no assurance that it will be maintained.  Furthermore,
for companies whose securities are quoted on the Over-The-Counter Bulletin Board
maintained by the National Association of Securities Dealers, Inc., it is more
difficult (1) to obtain accurate quotations, (2) to obtain coverage for
significant news events because major wire services generally do not publish
press releases about such companies, and (3) to raise needed capital.
 As a result, purchasers of Optex Systems Holdings’ common stock may have
difficulty selling their shares in the public market, and the market price may
be subject to significant volatility.





Offers or
availability for sale of a substantial number of shares of Optex Systems
Holdings’ common stock may cause the price of Optex Systems Holdings’ common
stock to decline or could affect Optex Systems Holdings’ ability to raise
additional working capital.





Under
Rule 144(i)(2), Optex Systems Holdings’ stockholders can avail themselves of
Rule 144 and commence selling significant amounts of shares into the market one
year after the filing of “Form 10” information with the SEC as long as the other
requirements of Rule 144(i)(2) are met.  While affiliates would be
subject to volume limitations under Rule 144(e), which is one percent of the
shares outstanding as shown by our then most recent report or statement
published, nonaffiliates would then be able to sell their stock without volume
limitations.  If Optex Systems Holdings’ current stockholders seek to
sell substantial amounts of common stock in the public market either upon
expiration of any required holding period under Rule 144 or pursuant to an
effective registration statement, it could create a circumstance commonly
referred to as “overhang,” in anticipation of which the market price of Optex
Systems Holdings’ common stock could decrease substantially.  The existence
of an overhang, whether or not sales have occurred or are occurring, could also
make it more difficult for Optex Systems Holdings to raise additional financing
in the future through sale of securities at a time and price that Optex Systems
Holdings deems acceptable.





The date
on which current shareholders can sell a substantial amount of shares into the
public market would be the earlier of the date on which the registration
statement is effective and one year anniversary of the date on which all Form 10
information is deemed by the SEC to be filed (September 28, 2009), which would
then allow sales under Rule 144.  The amount of shares then available
would be 11,784,177 shares (all of those being registered for resale under the
prospectus) and 8,131,667 shares (under Rule 144, which are the remaining shares
of common stock underlying warrants purchased in the private placement which
took place just prior to the reorganization) respectively.





The elimination of monetary liability
against Optex Systems Holdings’ directors, officers and employees under Delaware
law and the existence of indemnification rights to Optex Systems Holdings’
directors, officers and employees may result in substantial expenditures by
Optex Systems Holdings and may discourage lawsuits against Optex Systems
Holdings’ directors, officers and employees.





Optex
Systems Holdings’ certificate of incorporation does not contain any specific
provisions that eliminate the liability of directors for monetary damages to
Optex Systems Holdings and Optex Systems Holdings’ stockholders; however, Optex
Systems Holdings provides such indemnification to its directors and officers to
the extent provided by Delaware law. Optex Systems Holdings may also have
contractual indemnification obligations under its employment agreements with its
executive officers. The foregoing indemnification obligations could result in
Optex Systems Holdings incurring substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which Optex Systems
Holdings may be unable to recoup. These provisions and resultant costs may also
discourage Optex Systems Holdings from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties and may similarly discourage the
filing of derivative litigation by Optex Systems Holdings’ stockholders against
Optex Systems Holdings’ directors and officers even though such actions, if
successful, might otherwise benefit Optex Systems Holdings and its
stockholders.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





See Item
5. below.





Item
3. Defaults Upon Senior Securities.





30




None.


Item
4. Submission of Matters to a Vote of Security Holders.





On
March 26, 2009, our shareholders and directors authorized us to file an
Amendment to our Certificate of Incorporation with the State of Delaware (the
“Amendment”) in order to: (i) change our name to Optex Systems Holdings, Inc.;
(ii) designate 5,000 shares of preferred stock; (iii) provide further
explanation of the powers of the directors and stockholders of the corporation;
and (iv) certain other provisions.





Additionally,
on March 26, 2009, we authorized the designation of 1,027 shares of our
preferred stock to be designated as Series A Convertible Preferred Stock
pursuant to the rights and designations described in the Certificate of
Designation for Series A Convertible Preferred Stock (the “Certificate of
Designation”).


Item
5. Other Information.





On March
30, 2009, the reorganization was consummated pursuant to which the then existing
shareholders of Optex Systems, Inc. (Delaware) exchanged their shares of common
stock with the shares of common stock of Optex Systems Holdings as
follows:   (i) the outstanding 85,000,000 shares of Optex Systems,
Inc. (Delaware) common stock were exchanged by Optex Systems Holdings
for 113,333,282 shares of Optex Systems Holdings common stock, (ii) the
outstanding 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock were exchanged by Optex Systems Holdings for 1,027 shares of Optex
Systems Holdings Series A preferred stock, and (iii) the 8,131,667 shares
of Optex Systems, Inc. (Delaware) common stock purchased in the private
placement were exchanged by Optex Systems Holdings for 8,131,667 shares of Optex
Systems Holdings common stock.  Optex Systems, Inc. (Delaware) has
remained a wholly-owned subsidiary of Optex Systems Holdings.





As a
result of the reorganization, Optex Systems Holdings changed its name from
Sustut Exploration Inc. to Optex Systems Holdings, Inc. and its year end from
December 31 to a fiscal year ending on the Sunday nearest September
30.





Immediately
prior to the closing under the reorganization agreement, Optex Systems, Inc.
(Delaware) accepted subscriptions from accredited investors for a total 27.1
units, for $45,000 per unit, with each unit consisting of 300,000 shares of
common stock, no par value, of Optex Systems, Inc. (Delaware) and warrants to
purchase 300,000 shares of common stock for $0.45 per share for a period of five
(5) years from the initial closing, which were issued by Optex Systems, Inc.
(Delaware) after the closing referenced above.  Gross proceeds to
Optex Systems, Inc. (Delaware) were $1,219,750, and after deducting (i) a cash
finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed to an
investor of $146,250, and (iii) stock issuance costs of $59,416, the net
proceeds were $874,529.  The finder also received five year warrants
to purchase 2.39 units, at an exercise price of $49,500 per unit.  As
described above, these 8,131,667 shares were exchanged for 8,131,667 shares of
Optex Systems Holdings common stock in the reorganization.





Neither
the Company nor Optex had any options or warrants to purchase shares of capital
stock outstanding immediately prior to or following the Reorganization, except
for 8,941,667 warrants issued in the Private Placement. Immediately prior to the
closing, Registrant adopted the 2009 Stock Option Plan providing for the
issuance of up to 6,000,000 shares for the purpose of having shares available
for the granting of options to Company officers, directors, employees and to
independent contractors who provide services to the Company.




The
shares of the Company’s common stock issued in connection with the
Reorganization and the private placement offering were not registered under the
Securities Act.  All shares issued in connection with the Reorganization
were issued in reliance upon the exemption from registration provided by
Regulation D under the Securities Act, which exempts transactions to certain
accredited. The shares issued in connection with the private placement offering
were issued in part in reliance upon the exemption from registration provided by
Regulation D under the Securities Act and in part in reliance upon the exemption
from registration provided by Section 4(2) under the Securities Act for
transactions not involving any public offering.  All such securities
constitute “restricted securities” as defined in Rule 144 under the Securities
Act of 1933, and may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements.
Certificates representing these shares contain a restrictive legend stating the
same.





31




Item
6. Exhibits





Exhibits




Exhibit
                No.
              
              Description2.1
              
              Agreement
      and Plan of reorganization, dated as of the March 30, 2009, by and between
      registrant, a Delaware corporation and Optex Systems, Inc., a Delaware
      corporation (1).3.1
              
              Certificate
      of Incorporation, as amended, of Optex Systems Holdings,
    Inc.3.2
              
              Bylaws
      of Optex Systems Holdings (1).5.1
              
              Opinion
      as to Legality of the Shares (3)10.1
              
              Lease
      for 1420 Presidential Blvd., Richardson, TX
(1).
  10.2
              
              Employment
      Agreement with Danny Schoening (1).10.3
              
              2009
      Stock Option Plan (1).10.4
              
              Form
      of Warrant (3)10.5
              
              Specimen
      Stock Certificate (3)10.6
              
              Contract
      W52H0905D0248 with Tank-automotive and Armaments Command, dated July 27,
      2005 (2)*10.7
              
              Contract
      W52H0909D0128 with Tank-automotive and Armaments Command, dated March 24,
      2009 (2)*10.8
              
              Contract
      W52H0905D0260 with Tank-automotive and Armaments Command, dated August 3,
      2005 (2)*10.9
              
              PO#
      40050551 with General Dynamics, dated June 8, 2009 (2)*10.10
              
              Contract
      9726800650 with General Dynamics, dated April 9, 2007
  (2)*10.11
              
              Form
      of Subscription Agreement (5)10.12
              
              Single
      Source Supplier Purchase Orders with TSP Inc. (4)*10.13
              
              Single
      Source Supplier Purchase Orders with SWS Trimac (4)*10.14
              
              Since
      Source Supplier Purchase Orders with Danaher Controls
  (4)*10.15
              
              Single
      Source Supplier Purchase Orders with Spartech Polycast
  (4)*14.1
              
              Code
      of Ethics (1)16
              
              Letter
      re: Change in Certifying Accountant21.1
              
              List
      of Subsidiaries – Optex Systems, Inc.
(1)
  31.1 and
31.2 Certifications pursuant to Section 302 of Sarbanes Oxley Act of
2002
 
 32.1 and
32.2 Certifications pursuant to Section 906 of Sarbanes Oxley Act of
2002
  *
              Portions
      of this exhibit have been omitted pursuant to a confidential treatment
      request, and information regarding this confidential treatment request is
      being separately submitted to the Commission.(1)
              Incorporated
      by reference from our Current Report on Form 8-K dated April 3,
      2009.(2)
              Incorporated
      by reference from our Amendment No. 1 to Registration Statement on Form
      S-1 filed on September 28, 2009(3)
              Incorporated
      by reference from our Registration Statement on Form S-1 filed on May 19,
      2009(4)
              Incorporated
      by reference from our Amendment No. 2 to Registration Statement on Form
      S-1 filed on November 12, 2009(5)
              Incorporated
      by reference from our Form 10-K filed on January 11,
  2009.


32


SIGNATURES





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




OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      January 11, 2010
                  By:
                  /s/
      Stanley A. HirschmanStanley
      A. Hirschman
                    Principal
      Executive Officer





OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      January 11, 2010
                By:
                /s/
      Karen HawkinsKaren
      Hawkins
                  Principal
      Financial Officer


33