UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q







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





For
the quarterly period ended December 27, 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





(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  o  No  x




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 o   
 Smaller Reporting Company x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes 
 o 
 No  o
Not applicable.




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 February 8, 2010: 139,444,940 shares of common stock.







OPTEX
SYSTEMS HOLDINGS, INC.


FORM
10-Q


December
27, 2009





INDEX




PART
      I— FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements
                    
                    
                    3Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition
                    
                    
                    5Item
      3
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    
                    16Item
      4T.
                    Control
      and Procedures
                    
                    
                    17PART
      II— OTHER INFORMATIONItem
      1
                    Legal
      Proceedings
                    
                    
                    17Item
      1A
                    Risk
      Factors
                    
                    
                    17Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    
                    19Item
      3.
                    Defaults
      Upon Senior Securities
                    
                    
                    19Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    
                    
                    19Item
      5.
                    Other
      Information
                    
                    
                    19Item
      6.
                    Exhibits
                    
                    
                    19SIGNATURE
                    
                    
                    20


2


Item
1. Financial Information





OPTEX
SYSTEMS HOLDINGS, INC.





UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





AS OF
DECEMBER 27, 2009


3


OPTEX
SYSTEMS HOLDINGS, INC.





BALANCE
      SHEETS AS OF DECEMBER 27, 2009 (SUCCESSOR) (UNAUDITED) AND SEPTEMBER 27,
      2009 (SUCCESSOR)
                
                
                F-1STATEMENTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 27, 2009 (SUCCESSOR) AND
      FOR THE PERIOD OCTOBER 15, 2008 THROUGH DECEMBER 28, 2008 (SUCCESSOR) AND
      FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR)
      (UNAUDITED)
                
                
                F-3STATEMENTS
      OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 27, 2009
      (SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH DECEMBER 28, 2008
      (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
      (PREDECESSOR) (UNAUDITED)
                
                
                F-4STATEMENTS
      OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED DECEMBER 27, 2009
      (SUCCESSOR) AND THE PERIOD OCTOBER 15, 2008 THROUGH DECEMBER 28, 2008
      (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
      (PREDECESSOR) (UNAUDITED)
                
                
                F-6FINANCIAL
      STATEMENT FOOTNOTES (UNAUDITED)
                
                
                F-7




4





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Balance Sheets





Successor
                        
                        
                        SuccessorDecember 27, 2009
                        
                        
                        September 27, 2009(Unaudited)ASSETSCurrent
      AssetsCash
                        
                        $
                        450,872
                        
                        
                        $
                        915,298Accounts
      Receivable
                        
                        
                        2,114,015
                        
                        
                        
                        1,802,429Net
      Inventory
                        
                        
                        8,683,366
                        
                        
                        
                        8,013,881Deferred
      Tax Asset
                        
                        
                        728,879
                        
                        
                        
                        711,177Prepaid
      Expenses
                        
                        
                        279,569
                        
                        
                        
                        318,833Total
      Current Assets
                        
                        $
                        12,256,701
                        
                        
                        $
                        11,761,618Property
      and EquipmentProperty
      Plant and Equipment
                        
                        $
                        1,344,487
                        
                        
                        $
                        1,341,271Accumulated
      Depreciation
                        
                        
                        (1,115,634
                        )
                        
                        
                        (1,094,526
                        )Total
      Property and Equipment
                        
                        $
                        228,853
                        
                        
                        $
                        246,745Other
      AssetsSecurity
      Deposits
                        
                        $
                        20,684
                        
                        
                        $
                        20,684Intangibles
                        
                        
                        1,706,201
                        
                        
                        
                        1,965,596Goodwill
                        
                        
                        7,110,415
                        
                        
                        
                        7,110,415Total
      Other Assets
                        
                        $
                        8,837,300
                        
                        
                        $
                        9,096,695Total
      Assets
                        
                        $
                        21,322,854
                        
                        
                        $
                        21,105,058





The
accompanying notes are an integral part of these financial
statements


F-1




Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Balance Sheets - Continued





Successor
                                                          
                                                          
                                                          SuccessorDecember 27, 2009
                                                          
                                                          
                                                          September 27, 2009(Unaudited)LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      Payable
                                                          
                                                          $
                                                          2,445,400
                                                          
                                                          
                                                          $
                                                          2,497,322Accrued
      Expenses
                                                          
                                                          
                                                          706,950
                                                          
                                                          
                                                          
                                                          671,045Accrued
      Warranties
                                                          
                                                          
                                                          81,530
                                                          
                                                          
                                                          
                                                          81,530Accrued
      Contract Losses
                                                          
                                                          
                                                          1,228,792
                                                          
                                                          
                                                          
                                                          1,348,060Loans
      Payable
                                                          
                                                          
                                                          250,000
                                                          
                                                          
                                                          
                                                          -Total
      Current Liabilities
                                                          
                                                          $
                                                          4,712,672
                                                          
                                                          
                                                          $
                                                          4,597,957Stockholders'
      EquityOptex
      Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
      shares issued and outstanding)
                                                          
                                                          $
                                                          139,445
                                                          
                                                          
                                                          $
                                                          139,445Optex
      Systems Holdings, Inc.  Preferred Stock ($0.001 par, 5,000
      authorized,  1,027 series A preferred issued and
      outstanding)
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          1Additional
      Paid-in-capital
                                                          
                                                          
                                                          16,761,112
                                                          
                                                          
                                                          
                                                          16,643,388Retained
      Earnings (Deficit)
                                                          
                                                          
                                                          (290,376
                                                          )
                                                          
                                                          
                                                          (275,733
                                                          )Total
      Stockholders' Equity
                                                          
                                                          
                                                          16,610,182
                                                          
                                                          
                                                          
                                                          16,507,101Total
      Liabilities and Stockholders' Equity
                                                          
                                                          $
                                                          21,322,854
                                                          
                                                          
                                                          $
                                                          21,105,058





The
accompanying notes are an integral part of these financial
statements


F-2





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Operations (unaudited)





Successor
                                  
                                  
                                  Successor
                                  
                                  
                                  PredecessorThree months
                                    Ended
                                    December27,
      2009
                                  
                                  
                                  For the period
                                    October 15, 2008
                                    through
                                    December28,2008
                                  
                                  
                                  For the period
                                    September 29, 2008
                                    through
                                    October14,2008Revenues
                                  
                                  $
                                  5,915,302
                                  
                                  
                                  $
                                  6,392,144
                                  
                                  
                                  $
                                  871,938Total
      Cost of Sales
                                  
                                  
                                  5,160,402
                                  
                                  
                                  
                                  5,565,182
                                  
                                  
                                  
                                  739,868Gross
      Margin
                                  
                                  $
                                  754,900
                                  
                                  
                                  $
                                  826,962
                                  
                                  
                                  $
                                  132,070General
      and AdministrativeSalaries
      and Wages
                                  
                                  $
                                  165,151
                                  
                                  
                                  $
                                  136,847
                                  
                                  
                                  $
                                  22,028Employee
      Benefits & Taxes
                                  
                                  
                                  48,525
                                  
                                  
                                  
                                  98,165
                                  
                                  
                                  
                                  495Employee
      Stock/Option Bonus Plan
                                  
                                  
                                  22,500
                                  
                                  
                                  
                                  4,812
                                  
                                  
                                  
                                  (4,812
                                  )Amortization
      of Intangible
                                  
                                  
                                  79,823
                                  
                                  
                                  
                                  101,159
                                  
                                  
                                  
                                  -Rent,
      Utilities and Building Maintenance
                                  
                                  
                                  53,475
                                  
                                  
                                  
                                  42,840
                                  
                                  
                                  
                                  12,493Investor
      Relations
                                  
                                  
                                  87,405
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Legal
      and Accounting Fees
                                  
                                  
                                  50,740
                                  
                                  
                                  
                                  75,860
                                  
                                  
                                  
                                  360Consulting
      and Contract Service Fees
                                  
                                  
                                  55,416
                                  
                                  
                                  
                                  68,795
                                  
                                  
                                  
                                  10,527Travel
      Expenses
                                  
                                  
                                  10,466
                                  
                                  
                                  
                                  13,319
                                  
                                  
                                  
                                  -Board
      of Director Fees
                                  
                                  
                                  37,500
                                  
                                  
                                  
                                  12,500
                                  
                                  
                                  
                                  -Other
      Expenses
                                  
                                  
                                  77,565
                                  
                                  
                                  
                                  20,128
                                  
                                  
                                  
                                  16,155Total
      General and Administrative
                                  
                                  $
                                  688,566
                                  
                                  
                                  $
                                  574,425
                                  
                                  
                                  $
                                  57,246Operating
      Income (Loss)
                                  
                                  $
                                  66,334
                                  
                                  
                                  $
                                  252,537
                                  
                                  
                                  $
                                  74,824Other
      ExpensesOther
      Income and Expense
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (436
                                  )
                                  
                                  $
                                  -Interest
      (Income) Expense - Net
                                  
                                  
                                  3,455
                                  
                                  
                                  
                                  82,806
                                  
                                  
                                  
                                  9,492Total
      Other
                                  
                                  $
                                  3,455
                                  
                                  
                                  $
                                  82,370
                                  
                                  
                                  $
                                  9,492Income
      (Loss) Before Taxes
                                  
                                  $
                                  62,879
                                  
                                  
                                  $
                                  170,167
                                  
                                  
                                  $
                                  65,332Income
      Taxes (Benefit)
                                  
                                  
                                  (17,702
                                  )
                                  
                                  
                                  263,654
                                  
                                  
                                  
                                  -Net
      Income (Loss)
                                  
                                  $
                                  80,581
                                  
                                  
                                  $
                                  (93,487
                                  )
                                  
                                  $
                                  65,332Less
      preferred stock dividend
                                  
                                  $
                                  (95,224
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Net
      income (loss) applicable to common shareholders
                                  
                                  $
                                  (14,643
                                  )
                                  
                                  $
                                  (93,487
                                  )
                                  
                                  $
                                  65,332Basic
      and diluted loss per share
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  6.53Weighted
      Average Common Shares Outstanding
                                  
                                  
                                  139,444,940
                                  
                                  
                                  
                                  50,000,000
                                  
                                  
                                  
                                  10,000





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 Cash Flows (unaudited)





Successor
                      
                      
                      Successor
                      
                      
                      PredecessorThree months
                        ended
                        December 27, 2009
                      
                      
                      For the period
                        October 15,2008
                        through
                        December 28,2008
                      
                      
                      For the period
                        September 29, 2008
                        through
                        October 14,2008Cash
      flows from operating activities:Net
      Income (Loss)
                      
                      $
                      80,581
                      
                      
                      $
                      (93,487
                      )
                      
                      $
                      65,332Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      280,504
                      
                      
                      
                      544,549
                      
                      
                      
                      9,691Provision
      for (use of) allowance for inventory valuation
                      
                      
                      (44,433
                      )
                      
                      
                      33,273
                      
                      
                      
                      27,363Noncash
      interest expense
                      
                      
                      3,455
                      
                      
                      
                      82,798
                      
                      
                      
                      9,500Stock
      Option Compensation Expense
                      
                      
                      22,500
                      
                      
                      
                      -
                      
                      
                      
                      -(Increase)
      decrease  in accounts receivable
                      
                      
                      (311,586
                      )
                      
                      
                      (720,394
                      )
                      
                      
                      1,049,802(Increase)
      decrease in inventory (net of progress billed)
                      
                      
                      (625,052
                      )
                      
                      
                      (497,852
                      )
                      
                      
                      (863,566
                      )(Increase)
      decrease in other current assets
                      
                      
                      39,264
                      
                      
                      
                      242,154
                      
                      
                      
                      18,541(Increase)
      decrease in deferred tax asset
                      
                      
                      (17,702
                      )
                      
                      
                      -
                      
                      
                      
                      -Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      (19,473
                      )
                      
                      
                      574,415
                      
                      
                      
                      (186,051
                      )Increase
      (decrease) in accrued warranty costs
                      
                      
                      -
                      
                      
                      
                      29,397
                      
                      
                      
                      -Increase
      (decrease) in due to parent
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,428Increase
      (decrease) in accrued estimated loss on contracts
                      
                      
                      (119,268
                      )
                      
                      
                      (63,263
                      )
                      
                      
                      (15,304
                      )Increase
      (decrease) in income taxes payable
                      
                      
                      -
                      
                      
                      
                      263,654
                      
                      
                      
                      -Total
      adjustments
                      
                      $
                      (791,791
                      )
                      
                      $
                      488,731
                      
                      
                      $
                      51,404Net
      cash (used)/provided by operating activities
                      
                      $
                      (711,210
                      )
                      
                      $
                      395,244
                      
                      
                      $
                      116,736Cash
      flows from investing activities:Cash
      Received through Optex Texas acquisition
                      
                      
                      
                      
                      
                      $
                      253,581
                      
                      
                      $
                      -Purchased
      of property and equipment
                      
                      
                      (3,216
                      )
                      
                      
                      (12,189
                      )
                      
                      
                      (13,338
                      )Net
      cash used in investing activities
                      
                      $
                      (3,216
                      )
                      
                      $
                      241,392
                      
                      
                      $
                      (13,338
                      )Cash
      flows from financing activities:Proceeds
      (to) from Loans Payable
                      
                      
                      250,000
                      
                      
                      
                      (139,484
                      )
                      
                      
                      (20,000
                      )Net
      cash (used in) provided by financing activities
                      
                      $
                      250,000
                      
                      
                      $
                      (139,484
                      )
                      
                      $
                      (20,000
                      )Net
      increase (decrease) in cash and cash equivalents
                      
                      $
                      (464,426
                      )
                      
                      $
                      497,152
                      
                      
                      $
                      83,398Cash
      and cash equivalents at beginning of period
                      
                      
                      915,298
                      
                      
                      
                      -
                      
                      
                      
                      170,183Cash
      and cash equivalents at end of period
                      
                      $
                      450,872
                      
                      
                      $
                      497,152
                      
                      
                      $
                      253,581





The
accompanying notes are an integral part of these financial
statements


F-4




Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Cash Flows (unaudited) - continued





Successor
                      
                      
                      Successor
                      
                      
                      PredecessorThree months
                        ended
                        December 27, 2009
                      
                      
                      For the period
                        October 15,2008
                        through
                        December 28,2008
                      
                      
                      For the period
                        September 29, 2008
                        through
                        October 14,2008Noncash
      investing and financing activities:Optex
      Delaware (Successor) purchase of Optex 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
                      
                      
                      $
                      -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-5


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 a wholly-owned subsidiary of Optex
Systems Holdings, 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 FASB ASC 805 (Prior authoritative literature:  SFAS No.
141(R),“Business
Combinations”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.  FASB ASC 805 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 Corporation., 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.





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 its 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 December 27, 2009, Optex Systems
Holdings operated with 107 full-time equivalent employees.




F-6


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 three months ending December 27,
2009 and the period from October 15, 2008 through December 28, 2008 and the
results of operations and cash flows for the period from September 29, 2008
through October 14, 2008 of Optex Systems, Inc. (Texas), Predecessor.  The
accompanying financial statements include the balance sheets at December 27,
2009 and September 27, 2009 for Optex Systems, Inc. (Delaware), the accounting
acquirer.





These
financial statements have been presented as subsidiary-only financial
statements, reflecting the statements of operations and cash flows of the
subsidiary as a stand-alone entity.





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 FASB ASC 805-50-S99 (Prior authoritative literature: 
Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase).
FASB ASC 805-50-S99 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 beenrecorded on the
financial statements of Optex Systems Holdings.





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’ Form 10-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.


F-7





Use
ofEstimates: 
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect 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
necessary, 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. As of December 27, 2009, and
September 27, 2009 inventory included:





As of
                            December 27, 2009
                          
                          
                          As of
                            September 27, 2009(unaudited)Raw
      Materials
                          
                          $
                          6,466,594
                          
                          
                          $
                          7,161,241Work
      in Process
                          
                          
                          5,204,940
                          
                          
                          
                          4,043,308Finished
      Goods
                          
                          
                          260,230
                          
                          
                          
                          245,056Gross
      Inventory
                          
                          $
                          11,931,764
                          
                          
                          $
                          11,449,605Less:Unliquidated
      Progress Payments
                          
                          
                          (2,738,005
                          )
                          
                          
                          (2,880,898
                          )Inventory
      Reserves
                          
                          
                          (510,393
                          )
                          
                          
                          (554,826
                          )Net
      Inventory
                          
                          $
                          8,683,366
                          
                          
                          $
                          8,013,881





Stock-Based
Compensation:In
December 2004, FASB issued FASB ASC 718 (Prior authoritative literature: 
SFAS No. 123R,“Share-Based
Payment”).  FASB ASC 718 establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, but primarily focuses on transactions whereby an entity obtains
employee services for share-based payments.     FASB ASC 718
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. 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.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50 (Prior authoritative literature:  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,
whichever is more readily determinable in accordance with FASB ASC
718.




F-8


Income
Tax/Deferred Tax:FASB ASC 740 (Prior Authoritative Literature:
SFAS No. 109, “Accounting for
Income Taxes”), requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on differing treatment of items
for financial reporting and income tax reporting purposes.  The deferred
tax balances are adjusted to reflect tax rates by tax jurisdiction, based on
currently enacted tax laws, which will be in effect in the years in which the
temporary differences are expected to reverse.  Under FASB ASC 740, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future
operations.  Optex Systems Holdings has recognized deferred income tax
benefits on net operating loss carry-forwards to the extent Optex Systems
Holdings believes it will be able to utilize them in future tax filings. 
The difference between the income tax expense and pretax accounting income is
primarily attributable to $114,945 of deductable expenses representing permanent
timing differences between book income and taxable income for the amortization
of goodwill.  This expense is deductable over 15 years for income tax
purposes but is not amortized for accounting purposes.  The tax effect of
this permanent timing difference is a reduction of income tax expense of $39,081
for the period ended December 27, 2009.




Earnings per
Share: Basic earnings per share is computed by dividing income
available for common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator) for the period.  Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.




The
potentially dilutive securities the Company has outstanding are convertible
preferred stock, stock options and warrants. In computing the dilutive effect of
convertible preferred stock, the numerator is adjusted to add back any
convertible preferred dividends and the denominator is increased to include the
number of additional common shares if converted. The Company uses Treasury Stock
Method to compute the diluted effect of stock options and warrants. Convertible
preferred stocks, stock options and warrants that are antidilutive are excluded
from the calculation of diluted earnings per common share.




For the
three months ended December 27, 2009, 1,027 convertible preferred stocks and
2,665,649 stock options were excluded as antidilutive. There were no dilutive
convertible securities issued and outstanding for the periods ended December 28,
2008 (successor) or October 14, 2008 (predecessor).




Note
3 - Recent Accounting Pronouncements





In June
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative literature:  FASB
Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”).  FASB ASC 260-10-55 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. FASB ASC
260-10-55 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 adopted these provisions at the beginning
of the interim period ended December 27, 2009.  Adoption of FASB ASC
260-10-55 did not have a material effect on Optex Systems Holdings’ financial
statements.


F-9


In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative literature:  SFAS
No. 165, "Subsequent
Events"). FASB ASC 855-10 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. FASB ASC
855-10 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 FASB ASC 855-10 did not have a material effect on Optex
Systems Holdings’ financial statements.





In June
2009, FASB issued ASC 105-10 (Prior authoritative literature:  SFAS No.
168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162").  FASB ASC
105-10 establishes the FASB Accounting Standards Codification TM (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.  FASB ASC 105-10 is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009.  Optex Systems Holdings adopted these provisions at the
beginning of the interim period ended December 27, 2009.  Adoption of
FASB ASC 105-10 did not have a material effect on Optex Systems Holding’s
financial statements.





In
December 2007, FASB issued FASB ASC 805 (Prior authoritative literature: 
SFAS No. 141(R),“Business
Combinations”) and FASB ASC 810-10-65 (Prior authoritative
literature:  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. FASB ASC 805 and FASB
ASC 810-10-65 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.  The adoption of FASB ASC 805 and FASB ASC
810-10-65 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.




In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative literature:  SFAS
No. 161, "Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 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 27, 2009.  The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems Holdings’ financial position, results of
operations, or cash flows.





In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature:  SFAS No.
163, "Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement
No. 60"). FASB ASC 944 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. FASB
ASC 944 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal
years.  Optex Systems Holdings adopted these provisions at the beginning of
the interim period ended December 27, 2009.  The adoption of issued FASB
ASC 944 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.




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) together until February 20,
2009, when Longview sold 100% of its equity and debt interests in Optex Systems,
Inc. (Delaware) to Sileas, as discussed below.


F-10


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.





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)





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 of
$159,780 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 such a major transaction occurs
prior to the maturity date resulting in Sileas receiving net consideration with
a fair market value in excess of the principal and interest due under the terms
of the 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 the Optex Systems Holdings common and
preferred stock held by Sileas.




F-11


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 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. 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 closing of the
reorganization consisted of 17,449,991 shares which included 1,250,000 shares
issued on March 27, 2009 as payment for Investor Relations Services.  On
June 29, 2009, 700,000 of the issued investor relations shares were surrendered
to Optex Systems Holdings and cancelled upon termination of one of the Investor
Relations contracts.





Private
Placement





Prior to
the closing of the reorganization agreement, as of March 30, 2009 , Optex
Systems, Inc. (Delaware) 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, Inc. (Delaware) 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, 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, 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:


F-12





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
                
                
                $
                20,420,099LiabilitiesLoans
      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 $0.001 per 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
                
                
                
                16,229,143Retained
      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 issuance of
1,250,000 Sustut shares by Sustut prior to March 30, 2009. The original prepaid
expense covered April 2009 through April 2010.  On June 29, 2009 700,000 of
these shares were returned to Optex Systems Holdings due to the cancellation of
one of the investor relations agreements.  The amortized expense related to
the remaining 550,000 shares has been reflected on the Consolidated Statement of
Operations for Optex Systems Holdings as expensed.




The
accompanying unaudited pro forma financial information for the consolidated
successor three months ended December 27, 2009 and combined successor and
predecessor three months ended December 28, 2008 present the historical
financial information of the accounting acquirer. The pro forma financial
information is presented for information 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 months ended December 27, 2009 and December 28, 2008 as if the
acquisition of Optex Systems, Inc. (Texas) and reorganization plan had occurred
on the first day of each of the years.


F-13





UnauditedThree Months EndedDecember 27,
                          2009
                        
                        
                        December
      28,
                          2008Revenues
                        
                        
                        5,915,302
                        
                        
                        
                        7,264,082Net
      Income (Loss) attributable to common shareholders
                        
                        
                        (14,643
                        )
                        
                        
                        (65,010
                        )Diluted
      earnings per share
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.00
                        )Weighted
      Average Shares Outstanding
                        
                        
                        139,444,940
                        
                        
                        
                        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.





Note
6 - Commitments and Contingencies




Leases





As of
December 27, 2009, Optex Systems Holdings leased 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
concluded negotiations on an extension of its lease on the existing facilities
effective as of January 4, 2010 (see Subsequent Events).  Total expenses
under the existing facility lease agreements as of the three months ended
December 27, 2009 was $77,350 and total expenses for manufacturing and office
equipment was $8,134.  Total expenses under these facility lease agreements
for the three months ended December 28, 2008 was $77,350.  Total expenses
for manufacturing and office equipment for the three months ended December 28,
2008 was $13,715.





As of
December 27, 2009, the remaining minimum lease payments under the non-cancelable
operating leases for equipment, office and facility space (taking into effect
January 4, 2010 extension of the lease for the existing facilities) are as
follows:


F-14





OperatingLeasesFiscal
      Year2010
                            
                            $
                            59,1942011
                            
                            
                            246,2922012
                            
                            
                            229,5392013
                            
                            
                            231,5742014
                            
                            
                            241,7482015
                            
                            
                            201,457Total
      minimum lease payments
                            
                            $
                            1,209,804





Pursuant
to the terms of the amendment to the facilities lease, there is no base rent
payment due from March 1, 2010 through July 31, 2010, and the total value of
this rent abatement is $133,898.  The value of the deferred rent expense
will be amortized monthly at a rate of $1,998 per month over the remaining life
of the lease.  The total expected facilities rent expense for the remaining
nine months of 2010 is $154,168 or $51,389 per quarter.





Note
7 - Debt Financing





Related
Parties





Short Term Note
Payable/Longview Fund -    On October 27, 2009, Optex Systems
Holdings borrowed $250,000 from the Longview Fund pursuant to a promissory note,
with an original maturity date of December 1, 2009, but as of an allonge dated
January 5, 2010 the term of the note 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.  However, Optex Systems Holdings is
required to make a prepayment equal to 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 to Optex
Systems Holdings 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 its restricted common
stock with an exercise price of $0.15 per share for a term of three
years.





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 including accrued interest as of March 29,
2009.





Note
8 – Intangible Assets and Goodwill





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 (see Note 4).
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.





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:


F-15





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





Goodwill
was tested for impairment as of September 27, 2009 using a fair value approach
and based on the review, no impairment was required.





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




The
amortization of identifiable intangible assets associated with the Optex Systems
Inc. (Texas) acquisition on October 14, 2008 expensed for the three months ended
December 27, 2009 was $259,395.  The allocation between manufacturing cost
of sales and general and administrative cost was $179,572 and $79,823,
respectively. The amortization of identifiable intangible assets expensed for
the three months ended December 28, 2008 was $517,798.  The allocation
between manufacturing cost of sales and general and administrative cost was
$416,640 and $101,158, respectively. The identifiable intangible assets and
recorded goodwill are amortized over five years for book purposes and over 15
years for income tax purposes.  As of the December 27, 2009, the total
unamortized balance of intangible assets was $1,706,201.  The amortizable
intangible assets were tested for impairment as of September 27, 2009 utilizing
undiscounted, projected cash flows and based upon this analysis, no impairment
was noted. Subsequent to the review, there have been no material changes to our
assumptions or estimates that would result in impairment.  However, 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.





Identifiable
intangible assets primarily consist of customer and program backlog.  The
remaining unamortized balance of intangible assets will be amortized between
general and administrative expenses and costs of sales over their remaining
respective estimated useful lives as follows:





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013Contracted
      backlog amortized by delivery schedule
                  COS
                  
                  $
                  538,718
                  
                  
                  $
                  126,158
                  
                  
                  $
                  19,614
                  
                  
                  $
                  4,762Contracted
      backlog amortized by delivery schedule
                  G&A
                  
                  
                  48,485
                  
                  
                  
                  11,354
                  
                  
                  
                  1,765
                  
                  
                  
                  427Program
      backlog amortized straight line across 5 years
                  G&A
                  
                  
                  190,983
                  
                  
                  
                  254,645
                  
                  
                  
                  254,645
                  
                  
                  
                  254,645Total
      Amortization by Year
                  
                  
                  $
                  778,186
                  
                  
                  $
                  392,157
                  
                  
                  $
                  276,024
                  
                  
                  $
                  259,834





Note
9-Stock Based Compensation





On March
26, 2009, the Board of Directors of Optex Systems Holdings 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.




F-16


Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or any committee set up to act as a
compensation committee of the Board of Directors and terminate after the
earliest of the following events: (i) expiration of the option as provided in
the option agreement, (ii) 90 days following the date of termination of the
employee, or (iii) 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 is 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 will 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 stock 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 Optex Systems Holdings’ stock, will 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 per
share were granted to an officer of Optex Systems Holdings.  These options
vest as follows: 34% after the first year, and 33% each after the second and
third years.  These options have a seven year term from the date of
issuance.  On May 14, 2009, 1,267,000 stock options were issued to other
Optex Systems Holdings employees, including options to purchase 250,000 shares
to one executive officer.  These stock options vest 25% per year after
each year of employment and have a seven year term from the date of
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
anticipates that only 1,174,786 of the 1,267,000 shares will vest as of the end
of the contract term.  As of December 27, 2009, none of the stock options
had vested and 16,000 shares had been forfeited due to employee
turnover.





Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $22,500 for the three months ended December 27,
2009.  There were no stock options or shares granted or outstanding as of
December 28, 2008; therefore, no compensation expense was recorded during that
period.  The impact of this expense was immaterial to the basic and diluted
net loss per share for the three months ended December 27, 2009.  A
deduction is not allowed for income tax purposes until nonqualified options are
exercised. The amount of this deduction will be the difference between the fair
value of Optex Systems Holdings’ common stock and the exercise price at the
date of exercise. For the three months ended December 27, 2009 estimated
deferred tax assets related to option compensation costs were $7,650 and have
been recorded to reflect the tax effect of the financial statement
expense.  There was no similar tax effect related to option compensation
costs for the three months ended December 27, 2009 related to these stock
options.  No tax deduction is allowed for incentive stock options.
Accordingly, no deferred tax asset is recorded for GAAP expense related to these
options.





Management
has valued the options at their date of grant utilizing the Black-Scholes-Merton
option pricing model.  The fair value of the underlying shares was
determined based on the closing price of Optex Systems Holdings’
publicly-traded shares on the grant date.   Further, the expected
volatility was calculated using the historical volatility of a diversified
index of companies in the defense, homeland security, and space
industry in accordance with FASB ASC 718-10-S99-1 (Prior authoritative
literature:  Question 6 of SAB Topic 14.D.1).  In making this
determination and trying to find another comparable company, Optex Systems
Holdings considered the industry, stage of life cycle, size and financial
leverage of such other entities.  Based on the development stage of Optex
Systems Holdings, similar companies with sufficient historical data were not
available.   Optex Systems Holdings utilized the three year volatility
of the SPADE Defense Index, which is a diversified index of 58 companies in the
same industry as Optex Systems Holdings.  The risk-free interest rate is
based on the implied yield available on U.S. Treasury issues with an equivalent
term approximating the expected life of the options depending on the date of the
grant and expected life of the options.  The expected life of options used
was based on the contractual life of the option grant.  Optex Systems
Holdings determined the expected dividend rate based on the assumption and
expectation that earnings generated from operations are not expected to be
adequate to allow for the payment of dividends in the near future and the
assumption that the company does not presently have any intention of paying cash
dividends on its common stock. The following weighted-average assumptions were
utilized in the fair value calculations for options granted:


F-17





Three
      months endedDecember 27, 2009Expected
      dividend yield
                
                0
      %Expected
      stock price volatility
                
                23.6
      %Risk-free
      interest rate  (1)
                
                2.8%-4.07
      %Expected
      life of options
                
                4.5
      to 7 Years





(1) 
   2.8% for grant expected life less than 7 years


(2) 
   4.07% for grant expected life of 7 years.





Optex
Systems Holdings has granted stock options to officers and employees as
follows:





Date of
                      
                      Shares
                      
                      
                      Exercise
                      
                      
                      Shares Outstanding
                      
                      Expiration
                      
                      VestingGrant
                      
                      Granted
                      
                      
                      Price
                      
                      
                      As of 12/27/09
                      
                      Date
                      
                      Date03/30/09
                      
                      
                      480,981
                      
                      
                      $
                      0.15
                      
                      
                      
                      480,981
                      
                      03/29/2016
                      
                      03/30/201003/30/09
                      
                      
                      466,834
                      
                      
                      
                      0.15
                      
                      
                      
                      466,834
                      
                      03/29/2016
                      
                      03/30/201103/30/09
                      
                      
                      466,834
                      
                      
                      
                      0.15
                      
                      
                      
                      466,834
                      
                      03/29/2016
                      
                      03/30/201205/14/09
                      
                      
                      316,750
                      
                      
                      
                      0.15
                      
                      
                      
                      312,750
                      
                      05/13/2016
                      
                      05/14/201005/14/09
                      
                      
                      316,750
                      
                      
                      
                      0.15
                      
                      
                      
                      312,750
                      
                      05/13/2016
                      
                      05/14/201105/14/09
                      
                      
                      316,750
                      
                      
                      
                      0.15
                      
                      
                      
                      312,750
                      
                      05/13/2016
                      
                      05/14/201205/14/09
                      
                      
                      316,750
                      
                      
                      
                      0.15
                      
                      
                      
                      312,750
                      
                      05/13/2016
                      
                      05/14/2013Total
                      
                      
                      2,681,649
                      
                      
                      
                      
                      
                      
                      
                      2,665,649





The
following table summarizes the status of Optex Systems Holdings’ aggregate
stock options granted under the incentive stock option plan:




Number
                        
                        Weightedof Shares
                        
                        Average
                        
                        
                        WeightedRemaining
                        
                        Intrinsic
                        
                        
                        Average
                        
                        AggregateSubject to Exercise
                        
                        Options
                        
                        Price
                        
                        
                        Life (Years)
                        
                        ValueOutstanding
      as of September 27, 2009
                        
                        
                        2,667,649
                        
                        
                        $
                        0.21
                        
                        
                        
                        5.14
                        
                        
                        
                        560,206Granted
      – 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
      – 2010
                        
                        
                        (2,000
                        )
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
      – 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      as of December 27, 2009
                        
                        
                        2,665,649
                        
                        
                        $
                        -
                        
                        
                        
                        4.89
                        
                        
                        $
                        -Exercisable
      as of December 27, 2009
                        
                        
                        0
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -




F-18


The
weighted-average grant date fair value of options granted during the three
months ended December 27, 2009 was $0.14 and the total intrinsic value of
options exercised during the three months ended December 27, 2009 was
$0.
 
 The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan:
 
 Number of
                      Non-
                      vested
                      Shares
                      Subject to
                      Options
                    
                    
                    Weighted-
                      Average
                      Grant-
                      Date
                      Fair ValueNon-vested
      as of September 27, 2009
                    
                    
                    2,667,649
                    
                    
                    $
                    0.14Non-vested
      granted — three months ended December 27, 2009
                    
                    
                    -
                    
                    
                    $
                    0.00Vested — 
      three months ended December 27, 2009
                    
                    
                    -
                    
                    
                    $
                    0.00Forfeited — three
      months ended December 27, 2009
                    
                    
                    (2,000)
                    
                    
                    $
                    0.14Non-vested
      as of December 27, 2009
                    
                    
                    2,665,649
                    
                    
                    $
                    0.14
 
 As of
December 27, 2009, the unrecognized compensation cost related to non-vested
share based compensation arrangements granted under the plan that was
approximately $297,999.  These costs are expected to be recognized on a
straight line basis from March 30, 2009 through May 13, 2013. The total
fair value of options and shares vested during the three months ended December
27, 2009 was $0.
 
 During
the fiscal year ended September 27, 2009, Optex Systems issued 480,000 shares of
common stock at a market value of $0.30 per share for a total $144,000 and paid
$150,000 cash to a vendor in support of an investor relations agreement executed
on June 29, 2009. Pursuant to the agreement, the shares are earned over the life
of the contract at the rate of 40,000 shares per month through June 2010. 
During the three months ended December 27, 2009, Optex Systems expensed $36,000
for shares earned and the unamortized balance of shares issued against the
contract is $72,000 to be expensed through the third fiscal quarter of
2010.
 
 There
were no stock options issued to Optex Systems, Inc. (Texas) employees or equity
instruments issued to consultants and vendors in three months ended December 28,
2008.
 
 Note
10  –  Stockholders Equity
  Common
stock:
 
 Optex
Systems, Inc. (Texas) was authorized to issue 100,000 shares of no par common
stock.  At September 28, 2008 there were 18,870 shares issued and 10,000
shares outstanding.
  The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Systems, Inc. (Texas) as
it existed prior to the acquisition by Irvine Sensors Corporation, since Optex
Systems, Inc. (Texas) is presenting its financial statements as a separate,
stand-alone entity.
  F-19
  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. both owned Optex Systems, Inc. (Delaware) until February 20,
2009, when Longview sold 100% of its equity and debt interests in Optex Systems,
Inc. (Delaware) to Sileas Corp., as discussed below.
 
 On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware). As of the date of
this transaction, Sileas is the majority owner of Optex Systems
Holdings.
 
 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 were split into 76,638,295 shares, and the
4,918,650 shares of common stock held by Arland Holdings, Ltd. were split into
8,361,705  shares.
 
 As of
March 30, 2009, Optex Systems, Inc. (Delaware) 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,
2009 were exchanged for 113,333,282 shares of Optex Systems Holdings (formerly
Sustut Exploration, Inc.). An additional 8,131,667 shares were issued in
connection with the private placement closed prior to the
reorganization.
 
 On June
29, 2009, 750,000 common shares were sold to in a private transaction for gross
proceeds of $150,000.
 
 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 an 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 9 - 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.
  F-20
  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.
(Delaware) Series A preferred stock was exchanged on a 1:1 basis for Series A
preferred stock of Optex Systems Holdings.  As of the three months ended
December 27, 2009 Optex Systems Holdings recorded $95,224 of dividends payable
on Series A preferred shares.
 
 Cancellation
of Common Stock
 
 On June
29, 2009, Optex Systems Holdings cancelled an investor relations agreement
resulting in the return of 700,000 shares of common stock previously issued by
Sustut prior to the reverse merger on March 30, 2009.  The shares were
valued at $105,000, returned to Optex System Holdings, and then cancelled. (see
also Note 9 regarding new investor relations shares issued).
 
 Note
11 — Subsequent Events
 
 Effective
as of January 4, 2010, Optex Systems Holdings, Inc. renewed its Richardson, TX
lease.  Under the terms of the renewal:
 
 ·
              The
      lease term is extended until July 31,
2015.
 ·
              The
      base rent during the extended term is as follows: until 7/31/2010, $0.00
      per square foot, from 8/1/2010 – 7/31/2013, $4.70 per square foot and from
      8/1/2013 – 7/31/2015, $4.95 per square
foot.
 ·
              A
      $195,352.00 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.
 
 Optex
Systems Holdings has evaluated subsequent events for the period December 27,
2009 through February 9, 2010, the date its financial statements were issued,
and concluded there were no other events or transactions occurring during this
period that required disclosure in its financial
statements.
  F-21
  ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  Management’s
Discussion and Analysis or Plan of Operations
 
 This
management's discussion and analysis reflects information known to management as
at December 27, 2009. This MD&A is intended to supplement and complement our
audited financial statements and notes thereto for the year ended September 27,
2009, 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.
  5
  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 Company 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 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.  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 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.
 
 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).
 
 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).
  6
  The
successful completion of the separation from Irvine Sensors
Corporation, which was accomplished by Optex 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 Texas’ behalf such as legal,
accounting and audit, consulting fees and insurance costs in addition to
significant amounts of Irvine Sensors Corporation’s general overhead allocated
to Optex -Texas.
 
 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 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.
 
 
 The
estimated total General and Administrative expenses assuming Optex Systems, Inc
(Texas) was operated under 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  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) and have been reflected in the 2009 and 2010 financial
results to the extent incurred for the periods presented herein.
 
 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. 
Among those liabilities not assumed by Optex Systems, Inc. (Delaware) was a note
due to Tim Looney.  The 2007 promissory note had a principal amount of
$2,000,000 together with accrued interest unpaid aggregating to approximately
$2,300,000.  The note was an amendment to Looney’s earn-out agreement which
was the consideration for Irvine Sensors Corporation’s purchase of Optex
Systems, Inc. (Texas).
 
 The
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 Corporation.  These costs would not be incurred by Optex
Systems, Inc. (Texas) if operated as a stand alone entity because it relates to
Irvine Sensors Corporation’s consideration for their purchase of Optex Systems,
Inc. (Texas). Since this was not an operating cost associated with Optex
Systems, Inc. (Texas) and they would not incur these costs if operating as a
stand alone entity, we expect no impact to the future operating results or
liquidity of the Company.
 
 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 account “Due to Parent”.  The
outstanding “Due to Parent” balance was not acquired by the company in the
acquisition from Irvine Sensors Corporation.
  7
  To the
extent that Optex Systems, Inc. (Delaware) has incurred these similar costs on
an ongoing basis, these amounts have been funded from the Optex Delaware’s own
operating cash flow.
 
 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 December 27,
2009 (Successor).  In addition, future business includes expected awards
yet to be determined.  Although the current range of products being
manufactured is dependent on 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.
  8
 
 Successor - Three months
                      ended December 27, 2009
                    
                    
                    Combined - Three
                      months ended December
                      28, 2008
                    
                    
                    Predecessor - (September
                      29, 2008 through October
                      14, 2008)
                    
                    
                    Successor - (October 15,
                      2008 through December 27,
                      2008)Net
      Loss Applicable to Common Shareholders – GAAP
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (0.1
                    )
                    
                    $
                    0.1Add:Interest
      Expense
                    
                    
                    -
                    
                    
                    
                    0.1
                    
                    
                    
                    
                    
                    
                    
                    0.1Preferred
      Stock Dividend
                    
                    
                    0.1Federal
      Income Taxes (Benefit)
                    
                    
                    -
                    
                    
                    
                    0.2
                    
                    
                    
                    
                    
                    
                    
                    0.2Depreciation
      & Amortization
                    
                    
                    0.3
                    
                    
                    
                    0.6
                    
                    
                    
                    
                    
                    
                    
                    0.6EBITDA
      - Non GAAP
                    
                    $
                    0.4
                    
                    
                    $
                    0.9
                    
                    
                    $
                    (0.1
                    )
                    
                    $
                    1.0
 
 Our
EBITDA declined by $0.5 million in the three months ended December 27, 2009 as
compared to the prior year performance for the same period.  The EBITDA
reduction for the quarter was primarily attributable to the lower sales revenue
of $1.3 million, lower product margins related to the mix of product lines
shipped during the quarter, and higher general and administrative spending of
$0.1 million.  Based on recent increases in periscope orders from multiple
customers, we expect our revenues to increase over the next three quarters and
our product mix to shift toward more profitable programs beginning in the third
quarter of 2010.  We continue to pursue cost efficiencies 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.  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 three months ended December 27, 2009, we recognized
revenue of $0.7 million from these legacy periscope programs, with a remaining
backlog of $0.5 million, which should be recognized by the end of the third
quarter of 2010.  We expect our product margins on periscopes to increase
each quarter 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. The total
orders recorded for all product lines in the three months ended December 27,2009
was $7.7 million of which $7.4 million related to periscope business from
several customers.  The total backlog increased $1.7 million during the
same period, net of current quarter shipments.
 
 As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), the company’s amortizable intangible assets increased
significantly in 2009 over prior years. We expect the intangible amortization
expense to decline $1.0 million in the year ended September 27, 2010 from $2.0
million  in the year ended September 27, 2009.
 
 Backlog
as of December 27, 2009 was $28.2 million as compared to a backlog of $30.9
million as of December 28, 2008.  The following table depicts the current
expected delivery by quarter of all contracts awarded as of December 27,
2009.
  9
 
 FY2010
                      
                      
                      FY2011
                      
                      
                      FY2012
                      
                      
                      FY2013Program Backlog (millions)
                      
                      Qtr 2
                      
                      
                      Qtr 3
                      
                      
                      Qtr 4
                      
                      
                      Qtr 1
                      
                      
                      Qtr 2
                      
                      
                      Qtr 3
                      
                      
                      Qtr 4
                      
                      
                      Qtr 1
                      
                      
                      Qtr 2
                      
                      
                      Qtr 3
                      
                      
                      Qtr 4
                      
                      
                      Qtr 1
                      
                      
                      Qtr 2Howitzer
      Programs
                      
                      $
                      1.2
                      
                      
                      $
                      1.8
                      
                      
                      $
                      2.6
                      
                      
                      $
                      1.7
                      
                      
                      $
                      0.1
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Periscope
      Programs
                      
                      
                      3.0
                      
                      
                      
                      2.9
                      
                      
                      
                      2.3
                      
                      
                      
                      1.5
                      
                      
                      
                      1.8
                      
                      
                      
                      1.0
                      
                      
                      
                      0.7
                      
                      
                      
                      0.7
                      
                      
                      
                      1.2
                      
                      
                      
                      0.9
                      
                      
                      
                      0.6
                      
                      
                      
                      0.3
                      
                      
                      
                      0.2Sighting
      Systems
                      
                      
                      0.2
                      
                      
                      
                      0.1
                      
                      
                      
                      0.1
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -All
      Other
                      
                      
                      1.4
                      
                      
                      
                      0.8
                      
                      
                      
                      0.3
                      
                      
                      
                      0.2
                      
                      
                      
                      0.1
                      
                      
                      
                      0.1
                      
                      
                      
                      0.1
                      
                      
                      
                      0.1
                      
                      
                      
                      0.1
                      
                      
                      
                      -
                      
                      
                      
                      0.1
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      5.8
                      
                      
                      $
                      5.6
                      
                      
                      $
                      5.3
                      
                      
                      $
                      3.4
                      
                      
                      $
                      2.0
                      
                      
                      $
                      1.1
                      
                      
                      $
                      0.8
                      
                      
                      $
                      0.8
                      
                      
                      $
                      1.3
                      
                      
                      $
                      0.9
                      
                      
                      $
                      0.7
                      
                      
                      $
                      0.3
                      
                      
                      $
                      0.2
 
 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 incurred 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 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 December 27, 2009, none of our outstanding backlog fell
under this criterion.
 
 Three
Months Ended December 27, 2009 (Successor) Compared to the Three Months Ended
December 28, 2008 (combined Predecessor and Successor)
 
 Revenues.  In the three
months ended December 27, 2009, revenues decreased by 19.2% from the respective
prior period in 2008:
 
 Product Line
                      
                      Three months ended
                        12/27/09
                      
                      
                      Three months ended
                        12/28/08
                      
                      
                      Change(Successor)
                      
                      
                      (Combined)Howitzer
      Programs
                      
                      $
                      1.0
                      
                      
                      $
                      0.5
                      
                      
                      $
                      0.5Periscope
      Programs
                      
                      
                      3.1
                      
                      
                      
                      4.8
                      
                      
                      
                      (1.7
                      )Sighting
      Systems
                      
                      
                      0.5
                      
                      
                      
                      1.0
                      
                      
                      
                      (0.5
                      )All
      Other
                      
                      
                      1.3
                      
                      
                      
                      1.0
                      
                      
                      
                      0.3Total
                      
                      $
                      5.9
                      
                      
                      $
                      7.3
                      
                      
                      $
                      (1.4
                      )Percent
      increase (decrease)
                      
                      
                      
                      
                      
                      
                      
                      (19.2
                      %)
  10
  Revenues
decreased 35% on our periscope line during the three months ended December 27,
2009 as compared to the three months ended December 28, 2008.  During the
first quarter of fiscal year 2009, periscope production from one of our major
periscope contracts had been accelerated to compensate for production delays
that occurred during the last quarter of fiscal year 2008.  The delay was a
result of a manufacturingcontrol test failure
related to the environmental testing of one of the products.  Subsequent to
the environmental control test failure, Optex Systems Holdings implemented a
manufacturing process change to eliminate the potential for future failures and
increased the production rate in the first three months of fiscal 2009 to
compensate for the previous delay.  Based on our current backlog demand, we
expect the revenue from our periscope product lines to remain consistent during
the balance of the 2010 fiscal year as we continue to quote and receive awards
for additional periscopes from multiple customers.
 
 Revenues
from the Howitzer programs increased $0.5 million or 100% over the same quarter
in the prior year.  During the third quarter of 2009, we worked
aggressively with the US Government to resolve technical field issues related to
two of our Howitzer programs and completed the First Article Testing and
Acceptance requirements on a third program, for which government acceptance
approval was obtained on August 25, 2009.   These issues were resolved
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 the successful implementation of these changes in place,
we expect to increase program deliveries on these programs throughout
2010.
 
 Sighting
Systems revenues decreased $0.5 million or 50% over the three months ended
December 28, 2008 as our U.S. Government delivery order on back up sighting
units was completed in the last fiscal quarter of 2009.  We currently do
not have a follow on delivery order for additional sighting units; however, the
primary contract ordering period does not expire until December 31, 2012. 
Thus, we expect additional volume awards for the contract in the next
year.  We continue to ship sighting systems pursuant to other contracts to
both U.S. government and non U.S. government customers and are currently bidding
on several substantial programs for commander weapon sighting systems and M36
thermal sighting units, which if successfully consummated, would yield
deliveries beginning in fiscal year 2010.
 
 Increases
in the other product line of 30% or $0.3 million for the three months ending
December 27, 2009 are a result of increased sales of PVS-4 and TVS-5 night
vision eyepiece and objective lens assemblies to the U.S. government.  We
expect to have increases in other product line revenues through the second
quarter of 2010 as we continue to ship against the existing backlog on these
units.
 
 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 December 27, 2009, Optex Systems Holdings has reserved $1.2 million in
contract loss reserves on these programs with a remaining backlog of $7.9
million.  We are expecting to ship $6.1 million of the existing loss
contract backlog in 2010, with the remaining $1.8 million expected to ship in
early fiscal year 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 December 28, 2008, 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 impact Optex Systems
Holdings’ revenue in 2010, 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’ revenues in the
next 12 months.
  11
  Cost of Goods Sold. During
the quarter ended December 27, 2009, we recorded cost of goods sold of $5.2
million as opposed to $6.3 million during the combined predecessor and successor
quarter ended December 28, 2008, a decrease of $1.1 million or 17.5%. This
decrease in cost of goods sold was primarily associated with decreased revenue
on our glass periscope line from the prior year quarter, in addition to
decreased intangible amortization in the first quarter of fiscal 2010 as
compared to the first quarter of fiscal 2009 associated with the Optex Systems,
Inc. (Texas) acquisition on October 14, 2008. The gross margin during the
quarter ended December 27, 2009 (Successor) was 11.9% of revenues as compared to
a gross margin of 13.7% for the quarter ended December 28, 2008 (combined
predecessor and successor).  Product margins decreased to 17.0% for the
quarter ended December 27, 2009 (Successor) versus 20.5% for the quarter ended
December 28, 2008 (combined Predecessor and Successor) due to a shift in first
quarter revenue mix toward less profitable contracts, gross margins were further
impacted by a decrease in intangible amortization allocable to cost of goods
sold of $0.24 million, and lower reserves for valuations and warranties of $0.02
million.  Amortization of intangibles and inventory reserve adjustments
accounted for 5.1% of cost of goods sold in the quarter ended December 27, 2009
as compared to 6.8% in quarter ended December 28, 2008.
 
 G&A Expenses. During the
three months ended December 27, 2009, we recorded operating expenses of $0.7
million as opposed to $0.6 million during the three months ended December 28,
2008, an increase of $0.1 million or 16.7%.  The primary driver of the
increased general and administrative costs relate to increased investor
relations fees.
 
 Operating Income (Loss).
During the three months ended December 27, 2009, we recorded operating income of
$0.1 million, as compared to operating income of $0.3 million during the three
months ended December 28, 2008.  Operating income is lower in the current
quarter as compared to the prior year quarter due to lower revenues of $1.3
million, combined with changes in product mix effecting current quarter gross
margin and higher general and administrative spending of $0.1 million for
investor relations costs.
 
 Net Income (Loss) applicable to
common shareholders. During the three months ended December 27, 2009, we
recorded a net loss of ($0.01) million, as compared to ($0.03) million for three
months ended December 28, 2008, a reduction in loss of $0.02 million or
67%.  The decrease in net loss is primarily attributable to reduced income
taxes for the effect of temporary and permanent timing differences related to
intangible amortization and changes in reserve balances. The intangible
amortization expense is amortized over 5 years for book purposes and over 15
years for income tax purposes.
 
 Liquidity
and Capital Resources
 
 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 has
acquired the necessary inventory and personnel resources required to operate at
the higher revenue levels, and improve the company’s working capital
position.  On October 27, 2009, Optex secured a short term note payable
from the Longview Fund in the amount of $250,000 bearing interest at 10% per
annum.  The note matures July 15, 2010 and the principal amount and all
accrued and unpaid interest thereon will be repaid on or before the maturity
date.
 
 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 on 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.
  12
  Period
of September 28, 2009 through December 27, 2009
  Cash and Cash Equivalents. As
of December 27, 2009, we had cash and cash equivalents of $0.5 million. During
the period of September 28, 2009 through December 27, 2009 we decreased cash and
cash equivalents by $0.4 million primarily due to the timing of accounts
receivable collections and supplier payments in support of increased
inventory.
  Net Cash Used in Operating
Activities. Net cash used in operating activities during the period
starting September 28, 2009 and ending December 27, 2009 totaled $0.7 million.
The primary uses of cash during this period relate to increases in inventory in
support of new periscope orders from non U.S. Government customers and higher
production volume on our U.S government Howitzer programs, which generally
contain higher material content than other product lines.  In addition, we
have experienced an overall shift in revenues and accounts receivable in the
current quarter from government to non government customers.  Our non U.S.
government customers increased to 61% of revenue for the three months ended
December 27, 2009 as compared to 49% of total revenues for the fiscal year ended
September 27, 2009.  These customers generally pay slower than the U.S.
government, often beyond the 30 day terms and up to 45-50 days as compared to
direct U.S. government shipments which typically pay in 30 days or less. 
In the period of September 28, 2009 through December 27, 2009, our net inventory
increased by $0.6 million.  A portion of these inventories are progress
billable costs and as such were billed to our customer as costs were incurred.
As of December 27, 2009, our accounts receivable included approximately $0.1
million in unpaid outstanding progress bills related to these programs, which
were paid in January 2010.  We expect the cash used in operating activities
to decline significantly in the next quarter as revenues increase and our low
margin legacy periscope programs are anticipated to end.  The second half
of fiscal 2010 is expected to provide significant cash from operating activities
as new orders reach level production rates and material purchases on our
Howitzer programs near completion.
 
 Net Cash (Used) Provided by
Investing Activities. In the three months ended December 27, 2009, net
cash used by investing activities totaled ($0.003) million and consisted of
interest expense on short term notes payable during the period.
 
 Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $0.3
million during the three months ended December 27, 2009 as a result of a short
term note payable from Longview in November 2009.  The proceeds of the note
were used to secure inventory from several key suppliers in support of new
periscope orders and higher purchasing and production volume on our Howitzer
programs during the period.
  Critical
Policies and Accounting Pronouncements
 
 Stock-Based
Compensation:In
December 2004, FASB issued FASB ASC 718 (Prior authoritative literature: 
SFAS No. 123R,Share-Based
Payment).  FASB ASC 718 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.  FASB ASC 718 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions.  FASB ASC 718  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.
  13
  The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50 (Prior authoritative literature:  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,
whichever is more readily determinable in accordance with FASB ASC
718
 
 Revenue Recognition:Optex recognizes revenue based on the modified percentage of completion
method utilizing the units-of-delivery method, in accordance with FASB ASC
605-35 (Prior authoritative literature:  SOP 81-1 “Accounting for Performance of
Construction–Type and certain Production –Type Contracts”):
 
 ·
              The
      units-of-delivery method recognizes 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.
  Optex
contracts are fixed price production type contracts whereas a defined order
quantity is delivered to the customer in a continuous or sequential production
process to buyers 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 year ended September 27, 2009 Optex Systems Holdings
recognized income of $145,470 for unrecognized warranty costs due to an
improvement in the experience rate for warranties expiring in 2009 and for the
three months ended December 27, 2009, the company did not incur any warranty
expenses. 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 2008, Optex Systems, Inc. (Texas) experienced a
manufacturing control test failure related to the environmental testing of one
of its products. As a result of the environmental control test failure, Optex
implemented a manufacturing process change to eliminate the potential for
similar future failures. We believe our manufacturing 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 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.
 
 As of
December 27, 2009, Optex Systems Holdings has $81,530 in warranty reserves to
cover future warranty costs.  Future warranty costs were determined based
on estimated cost of replacement for expected returns factored by our most
recent experience rate of defects as a percentage of sales.  Prior to
fiscal year 2008, all warranty costs were expensed as incurred as product was
replaced with no reserve for warranties against deliveries in the covered
period.
 
 Estimated Costs
at Completion 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 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.
  14
  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 estimates at completion of the particular contract or
product order.
 
 For the
fiscal quarter ended December 27, 2009 and year ended September 27, 2009,
estimated loss reserves were $1.2 million and $1.3 million, respectively. 
Decreases in estimated loss reserves from the year ended September 27, 2009 of
$0.1 million is attributable to shipments against these loss programs in the
first fiscal quarter of 2010.
 
 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
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative literature:  FASB
Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”). FASB ASC 260-10-55 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. FASB ASC
260-10-55 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 adopted these provisions at the
beginning of the interim period ended December 27, 2009.  Adoption of FASB
ASC 260-10-55 did not have a material effect on Optex Systems Holdings’
financial statements.
 
 In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative literature:  SFAS
No. 165, "Subsequent
Events"). FASB ASC 855-10 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. FASB ASC
855-10 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 FASB ASC 855-10 did not have a material effect on Optex
Systems  Holdings’ financial statements.
 
 In June
2009, FASB issued ASC 105-10 (Prior authoritative literature:  SFAS No.
168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10
establishes the FASB Accounting Standards Codification TM (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.  FASB ASC 105-10 is effective for financial
statements issued for fiscal years and interim periods ending after September
15, 2009.  Optex Systems Holdings adopted these provisions at the beginning
of the interim period ended December 27, 2009.  Adoption of FASB ASC
105-10 did not have a material effect on Optex Systems Holding’s financial
statements.
  15
  In
December 2007,FASB issued FASB ASC 805 (Prior authoritative literature: 
SFAS No. 141(R),“Business
Combinations”) and FASB ASC 810-10-65 (Prior authoritative
literature:  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. FASB ASC 805 and FASB
ASC 810-10-65 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.  The adoption of FASB ASC 805 and FASB ASC
810-10-65 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
  In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative literature:  SFAS
No. 161, "Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133 ”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 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 27, 2009.  The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems  Holdings’ financial position, results of
operations, or cash flows.
 
 In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature:  SFAS No.
163, "Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60  "). FASB ASC 944 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. FASB
ASC 944 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal
years.  Optex Systems Holdings adopted these provisions at the beginning of
the interim period ended December 27, 2009.  The adoption of issued FASB
ASC 944 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
 
 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 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.
  Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
required for smaller reporting companies.
  16
  Item
4T. Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by our Quarterly Report on Form 10-Q for the quarter
ended December 27, 2009, 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 upon the
evaluation described above, our Principal Executive Officer and our Principal
Financial Officer concluded that, as of December 27, 2009, our disclosure
controls and procedures were effective.
  Management’s
Report on Internal Control Over Financial Reporting
 
 During
the first fiscal quarter, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
 
 PART
II - OTHER INFORMATION
  Item
1. Legal Proceedings.
  Currently
we are not aware of any litigation pending or threatened by or against the
Company.
  Item 1A. Risk Factors
  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.
  17
  Risks Related to our
Business
 
 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 December 27, 2009, we had approximately
$1.2 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
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.
  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 December 27, 2009, and as a result,
determined that no impairment of goodwill had occurred.  There have been no
material changes to our assumptions or estimates that would result in
impairment.  However, 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.
 
 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
December 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
be entitled 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.
  18
  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 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.
  Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
  None.
 
 Item
3. Defaults Upon Senior Securities.
  None.
  Item
4. Submission of Matters to a Vote of Security Holders.
 
 None.
 
 Item
5. Other Information.
  None.
  Item
6. Exhibits
  (a) 
    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)*
  19
 
 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)*10.16
                
                Amendment
      to Lease (6)14.1
                
                Code
      of Ethics (1)16
                
                Letter
      re: Change in Certifying Accountant21.1
                
                List
      of Subsidiaries – Optex Systems, Inc.
(1)
 
 *
              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,
  2010.(6)
                Incorporated
      by reference from our Form 8-K filed on January 11,
  2010
 
 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
  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:
      February 10, 2010
                By:
                /s/
      Stanley A. HirschmanStanley
      A. Hirschman
                  Principal
      Executive Officer
 
 OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      February 10, 2010
                By:
                /s/
      Karen HawkinsKaren
      Hawkins
                  Principal
      Financial Officer
  20