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 June 28, 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: 972-238-1403
 
 (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 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 x  No o
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of August 4, 2009: 141,464,940 shares of common stock.
  1
  OPTEX
SYSTEMS HOLDINGS, INC.
 FORM
10-Q
 June
28, 2009
 
 INDEX
  PART
I-- FINANCIAL INFORMATION
  Item
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition
                  5Item
      3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  14Item
      4T.
                  Control
      and Procedures
                  14
  PART
II-- OTHER INFORMATION
  Item
      1
                  Legal
      Proceedings
                  14Item
      1A
                  Risk
      Factors
                  14Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  20Item
      3.
                  Defaults
      Upon Senior Securities
                  20Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  20Item
      5.
                  Other
      Information
                  20Item
      6.
                  Exhibits
      and Reports on Form 8-K
                  20
  SIGNATURE
  2
  Item 1. Financial
Information
   OPTEX
SYSTEMS HOLDINGS, INC.
 
 UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 AS OF
JUNE 28, 2009
 
  3
  OPTEX
SYSTEMS HOLDINGS, INC.
 
 
  BALANCE
      SHEETS AS OF JUNE 28, 2009 (UNAUDITED) AND SEPTEMBER 28, 2008
      (RESTATED)
                              
                              
                              F-1STATEMENTS
      OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 28, 2009 AND JUNE
      29, 2008 (UNAUDITED)
                              
                              
                              F-3STATEMENTS
      OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 28, 2009 AND JUNE 29,
      2008 (UNAUDITED)
                              
                              
                              F-4STATEMENT
      OF STOCKHOLDERS’ EQUITY (UNAUDITED)
                              
                              
                              F-6FINANCIAL
      STATEMENT FOOTNOTES (UNAUDITED)
                              
                              
                              F-7
  4
 
 Optex
      Systems Holdings, Inc.(formerly
      known as Sustut Exploration, Inc.Condensed
      Consolidated Balance Sheets
  June
      28,2009(unaudited)
                            
                            
                            September
      28, 2008(restated)ASSETSCurrent
      AssetsCash
      and Cash Equivalents
                            
                            $
                            492,325
                            
                            
                            $
                            170,183Accounts
      Receivable
                            
                            
                            3,228,098
                            
                            
                            
                            2,454,235Net
      Inventory
                            
                            
                            6,843,017
                            
                            
                            
                            4,547,726Prepaid
      Expenses
                            
                            
                            158,797
                            
                            
                            
                            307,507Total
      Current Assets
                            
                            $
                            10,722,237
                            
                            
                            $
                            7,479,651Property
      and EquipmentProperty,
      Plant and Equipment
                            
                            
                            1,341,271
                            
                            
                            
                            1,314,109Accumulated
      Depreciation
                            
                            
                            (1,073,745
                            )
                            
                            
                            (994,542
                            )Total
      Property and Equipment
                            
                            $
                            267,526
                            
                            
                            $
                            319,567Other
      AssetsSecurity
      Deposits
                            
                            
                            20,684
                            
                            
                            
                            20,684Intangibles,
      net of accumulated amortization of $1,553,394 and $370,371,
      respectively.
                            
                            
                            2,483,395
                            
                            
                            
                            1,100,140Goodwill
                            
                            
                            7,110,415
                            
                            
                            
                            10,047,065Total
      Other Assets
                            
                            $
                            9,614,494
                            
                            
                            $
                            11,167,889Total
      Assets
                            
                            $
                            20,604,257
                            
                            
                            $
                            18,967,107The
      accompanying notes are an integral part of these financial
      statements
 
 F-1
  Optex
      Systems Holdings, Inc.(formerly
      known as Sustut Exploration, Inc.)Balance
      Sheets – Continued  UnauditedJune
      28, 2009
                                                
                                                
                                                September
      28, 2008
                                                      (Restated)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      Payable
                                                
                                                $
                                                3,223,278
                                                
                                                
                                                $
                                                1,821,534Accrued
      Expenses
                                                
                                                
                                                628,492
                                                
                                                
                                                
                                                798,974Accrued
      Warranties
                                                
                                                
                                                314,446
                                                
                                                
                                                
                                                227,000Accrued
      Contract Losses
                                                
                                                
                                                687,111
                                                
                                                
                                                
                                                821,885Loans
      Payable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                373,974Interest
      on Loans Payable
                                                
                                                
                                                11,101
                                                
                                                
                                                
                                                -Income
      Tax Payable
                                                
                                                
                                                85,179
                                                
                                                
                                                
                                                4,425Total
      Current Liabilities
                                                
                                                $
                                                4,949,607
                                                
                                                
                                                $
                                                4,047,792Other
      LiabilitiesNote
      Payable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,000,000Accrued
      Interest on Note
                                                
                                                
                                                -
                                                
                                                
                                                
                                                336,148Due
      to Parent
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,300,151Total
      Other Liabilities
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                6,636,299Total
      Liabilities
                                                
                                                $
                                                4,949,607
                                                
                                                
                                                $
                                                10,684,091Stockholders'
      EquityOptex
      Systems Holdings, Inc. – (par $0.001, 300,000,000 authorized, 141,464,940
      and 113,333,282 shares issued and outstanding as of June 28, 2009 and
      September 28, 2008, respectively)
                                                
                                                
                                                141,465
                                                
                                                
                                                
                                                113,333Optex
      Systems Holdings, Inc.  Preferred Stock (.001 par 5,000
      authorized,  1027 series A preferred  issued and
      outstanding)
                                                
                                                
                                                1
                                                
                                                
                                                
                                                -Additional
      Paid-in-capital
                                                
                                                
                                                22,087,136
                                                
                                                
                                                
                                                14,080,383Retained
      Earnings (Deficit)
                                                
                                                
                                                (6,573,952
                                                )
                                                
                                                
                                                (5,910,700
                                                )Total
      Stockholders' Equity
                                                
                                                $
                                                15,654,650
                                                
                                                
                                                $
                                                8,283,016Total
      Liabilities and Stockholders' Equity
                                                
                                                $
                                                20,604,257
                                                
                                                
                                                $
                                                18,967,107The
      accompanying notes are an integral part of these financial
      statements
 
 F-2
 
 Optex
      Systems Holdings, Inc.(formerly
      known as Sustut Exploration, Inc.)Condensed
      Consolidated Statement of Operations  Unaudited
                                              Three
      months ended
                                            
                                            
                                            Unaudited
                                              Nine
      months endedJune
      28, 2009
                                            
                                            
                                            June
      29, 2008
                                            
                                            
                                            June
      28, 2009
                                            
                                            
                                            June
      29, 2008Revenues
                                            
                                            $
                                            6,983,930
                                            
                                            
                                            $
                                            3,881,053
                                            
                                            
                                            $
                                            20,956,300
                                            
                                            
                                            $
                                            13,925,073Total
      Cost of Sales
                                            
                                            
                                            6,417,926
                                            
                                            
                                            
                                            2,851,287
                                            
                                            
                                            
                                            18,874,888
                                            
                                            
                                            
                                            11,716,785Gross
      Margin
                                            
                                            $
                                            566,004
                                            
                                            
                                            $
                                            1,029,766
                                            
                                            
                                            $
                                            2,081,412
                                            
                                            
                                            $
                                            2,208,288General
      and AdministrativeSalaries
      and Wages
                                            
                                            
                                            176,869
                                            
                                            
                                            
                                            253,594
                                            
                                            
                                            
                                            524,911
                                            
                                            
                                            
                                            744,119Employee
      Benefits & Taxes
                                            
                                            
                                            29,716
                                            
                                            
                                            
                                            76,438
                                            
                                            
                                            
                                            229,342
                                            
                                            
                                            
                                            246,071Employee
      Stock Bonus Plan
                                            
                                            
                                            -
                                            
                                            
                                            
                                            100,174
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            279,034Amortization
      of Intangible
                                            
                                            
                                            101,159
                                            
                                            
                                            
                                            54,123
                                            
                                            
                                            
                                            303,475
                                            
                                            
                                            
                                            169,368Rent,
      Utilities and Building Maintenance
                                            
                                            
                                            50,838
                                            
                                            
                                            
                                            69,959
                                            
                                            
                                            
                                            163,273
                                            
                                            
                                            
                                            160,999Investor
      Relations
                                            
                                            
                                            88,326
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            88,326
                                            
                                            
                                            
                                            -Legal
      and Accounting Fees
                                            
                                            
                                            128,274
                                            
                                            
                                            
                                            20,166
                                            
                                            
                                            
                                            296,987
                                            
                                            
                                            
                                            117,695Consulting
      and Contract Service Fees
                                            
                                            
                                            43,210
                                            
                                            
                                            
                                            66,678
                                            
                                            
                                            
                                            177,788
                                            
                                            
                                            
                                            267,222Travel
      Expenses
                                            
                                            
                                            16,294
                                            
                                            
                                            
                                            28,376
                                            
                                            
                                            
                                            41,317
                                            
                                            
                                            
                                            116,338Corporate
      Allocations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            508,275
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,450,905Board
      of Director Fees
                                            
                                            
                                            37,500
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            87,500
                                            
                                            
                                            
                                            -Other
      Expenses
                                            
                                            
                                            87,749
                                            
                                            
                                            
                                            47,127
                                            
                                            
                                            
                                            183,686
                                            
                                            
                                            
                                            124,729Total
      General and Administrative
                                            
                                            $
                                            759,935
                                            
                                            
                                            $
                                            1,224,910
                                            
                                            
                                            $
                                            2,096,605
                                            
                                            
                                            $
                                            3,676,480Operating
      Income (Loss)
                                            
                                            $
                                            (193,931
                                            )
                                            
                                            $
                                            (195,144
                                            )
                                            
                                            $
                                            (15,193
                                            )
                                            
                                            $
                                            (1,468,192
                                            )Other
      ExpensesOther
      (Income) and Expense
                                            
                                            
                                            (351
                                            )
                                            
                                            
                                            3
                                            
                                            
                                            
                                            (1,434
                                            )
                                            
                                            
                                            (499
                                            )Interest
      (Income) Expense - Net
                                            
                                            
                                            -
                                            
                                            
                                            
                                            46,000
                                            
                                            
                                            
                                            184,202
                                            
                                            
                                            
                                            145,503Total
      Other
                                            
                                            $
                                            (351
                                            )
                                            
                                            $
                                            46,003
                                            
                                            
                                            $
                                            182,768
                                            
                                            
                                            $
                                            145,004Income
      (Loss) Before Taxes
                                            
                                            $
                                            (193,580
                                            )
                                            
                                            $
                                            (241,147
                                            )
                                            
                                            $
                                            (197,961
                                            )
                                            
                                            $
                                            (1,613,196
                                            )Income
      Taxes (Benefit)
                                            
                                            
                                            114,973
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            465,291
                                            
                                            
                                            
                                            -Net
      Income (Loss) After Taxes
                                            
                                            $
                                            (308,553
                                            )
                                            
                                            $
                                            (241,147
                                            )
                                            
                                            $
                                            (663,252
                                            )
                                            
                                            $
                                            (1,613,196
                                            )Basic
      and diluted loss per share
                                            
                                            $
                                            (0.00
                                            )
                                            
                                            $
                                            (0.00
                                            )
                                            
                                            $
                                            (0.01
                                            )
                                            
                                            $
                                            (0.01
                                            )Weighted
      Average Common Shares Outstanding (1)
                                            
                                            
                                            141,464,940
                                            
                                            
                                            
                                            113,333,282
                                            
                                            
                                            
                                            122,744,977
                                            
                                            
                                            
                                            113,333,282
  1.  The
      three months and nine months ended June 29, 2008 are shown depicting
      the effects of recapitalization on the equivalent shares issued
      as of the dates presented as if the March 30, 2009 reverse merger had
      occurred during those periods.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 Statement of Cash
Flows
  Unaudited
                                                  Nine
      months ended
                                                
                                                
                                                Unaudited
                                                  Nine
      months endedJune
      28, 2009
                                                
                                                
                                                June
      29, 2008Cash
      flows from operating activities:Net
      Loss
                                                
                                                $
                                                (663,252
                                                )
                                                
                                                $
                                                (1,613,196
                                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                
                                                $
                                                1,632,598
                                                
                                                
                                                $
                                                570,566Provision
      for (use of) allowance for inventory valuation
                                                
                                                
                                                185,636
                                                
                                                
                                                
                                                -Noncash
      interest expense
                                                
                                                
                                                180,382
                                                
                                                
                                                
                                                145,503Stock
      Option Compensation expense (1)
                                                
                                                
                                                15,174
                                                
                                                
                                                
                                                -(Increase)
      decrease  in accounts receivable
                                                
                                                
                                                (773,863
                                                )
                                                
                                                
                                                460,783(Increase)
      decrease in inventory (net of progress billed)
                                                
                                                
                                                (2,480,927
                                                )
                                                
                                                
                                                321,273(Increase)
      decrease in other current assets
                                                
                                                
                                                336,210
                                                
                                                
                                                
                                                (190,829
                                                )Increase
      (decrease) in accounts payable and accrued expenses
                                                
                                                
                                                1,230,803
                                                
                                                
                                                
                                                (510,043
                                                )Increase
      (decrease) in accrued warranty costs
                                                
                                                
                                                87,446
                                                
                                                
                                                
                                                -Increase
      (decrease) in due to parent
                                                
                                                
                                                1,428
                                                
                                                
                                                
                                                1,595,954Increase
      (decrease) in accrued estimated loss on contracts
                                                
                                                
                                                (134,774
                                                )
                                                
                                                
                                                (1,021,761
                                                )Increase
      (decrease) in income taxes payable
                                                
                                                
                                                85,179
                                                
                                                
                                                
                                                -Total
      adjustments
                                                
                                                $
                                                365,292
                                                
                                                
                                                $
                                                1,371,446Net
      cash used in operating activities
                                                
                                                $
                                                (297,960
                                                )
                                                
                                                $
                                                (241,750
                                                )Cash
      flows from investing activities:Purchases
      of property and equipment
                                                
                                                
                                                (27,162
                                                )
                                                
                                                
                                                (103,974
                                                )Net
      cash used in investing activities
                                                
                                                $
                                                (27,162
                                                )
                                                
                                                $
                                                (103,974
                                                )Cash
      flows from financing activities:Private
      Placement, net of issuance costs
                                                
                                                
                                                874,529
                                                
                                                
                                                
                                                -Proceeds
      (to) from Loans Payable - Qioptic
                                                
                                                
                                                (227,265
                                                )
                                                
                                                
                                                -Net
      cash provided by financing activities
                                                
                                                $
                                                647,264
                                                
                                                
                                                
                                                -Net
      increase (decrease) in cash and cash equivalents
                                                
                                                
                                                322,142
                                                
                                                
                                                
                                                (345,724
                                                )Cash
      and cash equivalents at beginning of period
                                                
                                                
                                                170,183
                                                
                                                
                                                
                                                504,753Cash
      and cash equivalents at end of period
                                                
                                                $
                                                492,325
                                                
                                                
                                                $
                                                159,029
  F-4
 
 Optex
      Systems Holdings, Inc.Statements
      of Cash Flows (continued)
  Unaudited
                                      Nine
      months ended
                                    
                                    
                                    Unaudited
                                      Nine
      months endedJune
      28, 2009
                                    
                                    
                                    June
      29, 2008Noncash
      investing and financing activities:Optex
      Delaware purchase of Optex Systems from IRSNLiabilities
      not assumedLoan
      Payable
                                    
                                    $
                                    2,000,000
                                    
                                    
                                    
                                    -Accrued
      Interest on Loan Payable
                                    
                                    
                                    345,648
                                    
                                    
                                    
                                    -Income
      Taxes Payable attributable to Irvine
                                    
                                    
                                    4,425
                                    
                                    
                                    
                                    -Due
      to Parent (IRSN)
                                    
                                    
                                    4,301,579
                                    
                                    
                                    
                                    -Total
      liabilities not assumed
                                    
                                    $
                                    6,651,652
                                    
                                    
                                    
                                    -Debt
      Incurred for Purchase (converted to Series A preferred
    stock)
                                    
                                    
                                    (6,000,000
                                    )
                                    
                                    
                                    -Additional
      Purchased Intangible Assets
                                    
                                    
                                    2,936,650Decrease
      to Goodwill
                                    
                                    
                                    (2,936,650
                                    )
                                    
                                    
                                    -Recapitalization
      of Stockholders' Equity in Connection with sale to Optex Systems Inc.
      – Delaware
                                    
                                    
                                    (1,102,566
                                    )
                                    
                                    
                                    -Effect
      on additional paid in capital
                                    
                                    $
                                    (450,914
                                    )
                                    
                                    
                                    -Conversion
      of Debt to Series A Preferred StockAdditional
      Paid in Capital (6,000,000 Debt Retirement plus accrued interest of
      $159,780)
                                    
                                    
                                    6,159,780
                                    
                                    
                                    
                                    -Issuance
      of Common shares in exchange for Investor Relations
    ServicesAdditional
      Paid in Capital (1,250,000 shares issued at $0.001 par)
(1)
                                    
                                    
                                    187,500
                                    
                                    
                                    
                                    -Supplemental
      cash flow information:Cash
      paid for interest
                                    
                                    
                                    3,817
                                    
                                    
                                    
                                    -Cash
      paid for taxes
                                    
                                    
                                    380,112
                                    
                                    
                                    
                                    -(1)See
      Note 11 - Subsequent Events regarding change in Investor Relations.
      700,000 of these shares were returned to the Company subsequent to the
      quarter end.
                                      
                                      The
      accompanying notes are an integral part of these financial
      statements
  F-5
  Optex
      Systems Holdings, Inc.(formerly
      known as Sustut Exploration, Inc.)Statement
      of Stockholders' Equity  Common
                                                              
                                                              
                                                              Series
      A
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              Additional
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              TotalShares
                                                              
                                                              
                                                              Preferred
                                                              
                                                              
                                                              Common
                                                              
                                                              
                                                              Preferred
                                                              
                                                              
                                                              Paid
      in
                                                              
                                                              
                                                              Retained
                                                              
                                                              
                                                              StockholdersOutstanding
                                                              
                                                              
                                                              Shares
                                                              
                                                              
                                                              Stock
                                                              
                                                              
                                                              Series
      A Stock
                                                              
                                                              
                                                              Capital
                                                              
                                                              
                                                              Earnings
                                                              
                                                              
                                                              EquityBalance
      at September 28, 2008
                                                              
                                                              
                                                              113,333,282
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              113,333
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              14,080,383
                                                              
                                                              
                                                              $
                                                              (5,910,700
                                                              )
                                                              
                                                              $
                                                              8,283,016Net
      Liabilities not Assumed in Optex Texas Acquisition
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              651,652
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              651,652Conversion
      of $6,000,000 of Debt and Interest to Series A preferred
      shares
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,027
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              6,159,780
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              6,159,781Sustut
      Exploration Reorganization
                                                              
                                                              
                                                              19,999,991
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              20,000
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              167,500
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              187,500Stock
      Option Compensation Expens
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              15.174
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              15,174Private
      Placement  - Sale of Stock
                                                              
                                                              
                                                              8,131,667
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              8,132
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,012,647
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,020,779Net
      Earnings (Loss) from continuing operations
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (663,252
                                                              )
                                                              
                                                              
                                                              (663,252
                                                              )Balance
      at June 28, 2009
                                                              
                                                              
                                                              141,464,940
                                                              
                                                              
                                                              
                                                              1,027
                                                              
                                                              
                                                              $
                                                              141,465
                                                              
                                                              
                                                              $
                                                              1
                                                              
                                                              
                                                              $
                                                              22,087,136
                                                              
                                                              
                                                              $
                                                              (6,573,952
                                                              )
                                                              
                                                              $
                                                              15,654,650The
      accompanying notes are an integral part of these financial
      statements
 
 F-6
 
 OPTEX
SYSTEMS HOLDINGS, INC.
 (formerly
known as Sustut Exploration, Inc.)
 Notes
to Condensed Consolidated Financial Statements
 
 Note 1 - Organization and
Operations
 
 On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.) , a Delaware corporation (the “Company” ), along with Optex Systems, Inc.
, a privately held Delaware corporation which is the Company’s wholly-owned
subsidiary (“Optex Delaware”), entered into a Reorganization Agreement and Plan
of Reorganization, pursuant to which Optex Delaware was acquired by the Company
in a share exchange transaction.  The Company became the surviving
corporation. At the closing, the Company 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 Corp.
(“IRSN”), Longview Fund, L.P. (“Longview”) and Alpha Capital Anstalt (“Alpha”)
formed Optex Delaware, which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation and wholly owned
subsidiary of IRSN, (“Optex Texas”) in a transaction that was consummated via
purchase at a public auction.  After this asset purchase, Optex Texas
remained a wholly-owned subsidiary of IRSN.  Although Optex Delaware
is the legal acquirer of Optex Texas in the transaction, Optex Texas is
considered the accounting acquirer since the acquisition by Optex Delaware was
deemed to be the purchase of a business in accordance with SFAS 141 “Business
Combination” and EITF 98-3 “Determining Whether a Non-monetary Transaction
Involves Receipt of Productive Assets or of a Business
..”  Accordingly, in subsequent periods the financial statements
presented will be those of the accounting acquirer.
 
 Optex
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 IRSN, and Optex Texas was automatically converted to a Subchapter
“C” Corporation.  On December 29, 2006, the remaining 30% equity
interest in Optex Texas was purchased by IRSN.
 
 On
February 20, 2009, Sileas Corp. (“Sileas”), 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 Delaware, representing 90% of
the aggregate equity interests in Optex Delaware, in a private transaction (the
“Acquisition”).  See Note 4.
 
 Optex
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 the Company.  Sileas is
the majority owner of the Company owning approximately 72% of the Company. The
Company plans to carry on the business of Optex Delaware as its sole line of
business and all of the Company’s operations are conducted by and through Optex
Delaware.  Accordingly, in subsequent periods the financial statements
presented will be those of the accounting acquirer.  The financial
statements of the Company 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 the nine months ended June 28,
2009, the Company operated with 107 full-time equivalent employees.
 
 The
Company 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. The Company also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. The Company’s 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, the Company’s ISO certification status was upgraded
from  9001:2000 to 9001:2008 which is significant because it brings
the Company 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 the Company and its wholly-owned subsidiary, Optex
Delaware.  All significant inter-company balances and transactions
have been eliminated in consolidation.
 
 F-7
 The
accompanying financial statements include the historical accounts of Optex
Delaware.  As a result of the October 14, 2008 transaction described
in Note 1 above, the accompanying financial statements also include the
historical accounts of Optex Texas.
 
 Although,
Optex Texas 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 Texas accounts have been
presented on the basis of push down accounting in accordance with Staff
Accounting Bulletin No. 54  Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase .
SAB 54 states that the push down basis of accounting should be used in a
purchase transaction in which the entity becomes wholly-owned. Under the push
down basis of accounting certain transactions incurred by the parent company,
which would otherwise be accounted for in the accounts of the parent, are
“pushed down” and recorded on the financial statements of the subsidiary.
Accordingly, items resulting from the Optex Texas purchase transaction such as
goodwill, debt incurred by the parent to acquire the subsidiary and other costs
related to the purchase have been  recorded on the
financial statements of the Company.
 
 The
consolidated financial statements presented as of the period ended March 29,
2009 include the equity transactions of the Reorganization Agreement executed
March 30, 2009, which precipitated the change in year end.
 
 Upon
completing the business combination with Sustut on March 30, 2009, the Company
elected to change its fiscal year to match that of Optex Delaware. Accordingly,
all activity of the combined companies was presented as of the quarter’s end of
the accounting acquirer, which was March 29, 2009.
 
 Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior on March 29th so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the Reorganization.
 
 The
condensed consolidated financial statements of the Company included herein have
been prepared by the Company, 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 the Company 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 the Company’s Forms 8-K and other
reports filed with the SEC.
 
 The
accompanying unaudited interim financial statements reflect all adjustments of a
normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
of the Company for the interim periods presented. The results of operations for
these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the fiscal year taken as a whole. Certain
information that is not required for interim financial reporting purposes has
been omitted.
  Use of
Estimates: 
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
 
 Inventory:  Inventory
is recorded at the lower of cost or market value, and adjusted as appropriate
for decreases in valuation and obsolescence. Adjustments to the valuation and
obsolescence reserves are made after analyzing market conditions, current and
projected sales activity, inventory costs and inventory balances to determine
appropriate reserve levels. Cost is determined using the first-in first-out
(FIFO) method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts.  Payments
received for such undelivered inventory are classified as unliquidated progress
payments and deducted from the gross inventory balance.  At June 28,
2009, and September 28, 2008 inventory included:
 
 As
      of 6/28/2009
                                    
                                    
                                    As
      of 9/28/2008Raw
      Materials
                                    
                                    $
                                    6,939,094
                                    
                                    
                                    $
                                    4,199,657Work
      in Process
                                    
                                    
                                    3,529,351
                                    
                                    
                                    
                                    5,575,520Finished
      Goods
                                    
                                    
                                    780,828
                                    
                                    
                                    
                                    28,014Gross
      Inventory
                                    
                                    $
                                    11,249,273
                                    
                                    
                                    $
                                    9,803,191Less:Unliquidated
      Progress Payments
                                    
                                    
                                    (3,546,890
                                    )
                                    
                                    
                                    (4,581,736
                                    )Inventory
      Reserves
                                    
                                    
                                    (859,366
                                    )
                                    
                                    
                                    (673,729
                                    )Net
      Inventory
                                    
                                    $
                                    6,843,017
                                    
                                    
                                    $
                                    4,547,726
  F-8
  Gross
inventory increased by $1,446,082 in the nine months ended June 28, 2009 in
order to support increased production rates in 2009 over 2008 across all of our
major product lines.  Unliquidated progress payments declined by
$1,034,846 as a result of increased shipments in previously progress billed
programs, and inventory reserves increased by $185,637 to accrue for estimated
inventory shrinkage associated with scrap, obsolescence and manufacturing
overhead adjustments anticipated during physical inventory valuation at year
end.
 
 Stock-Based
Compensation:In December 2004, FASB issued SFAS No. 123R,
Share-Based
Payment.  SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services.  It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.  SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions.  SFAS No. 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements.  That cost will be measured based on the
fair value of the equity or liability instruments issued.
 
 The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18,
“Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees.”  The measurement date for the fair
value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant or
vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement.  Stock-based compensation related to
non-employees is accounted for based on the fair value of the related stock or
options or the fair value of the services, which ever is more readily
determinable in accordance with SFAS 123R.
 
 Earnings per
Share: Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
year presented.  Diluted earnings per common share give the effect to
the assumed exercise of stock options when dilutive.  In a loss year,
the calculation for basic and diluted earnings per share is considered to be to
be the same, as the impact of potential common shares is
anti-dilutive.  At June 28, 2009 there were 2,681,649 stock options
that could dilute future earnings, as compared to zero stock options at June 29,
2008.
 
 Note
3 - Recent Accounting Pronouncements
  In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities”.  FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. We
have granted and expect to continue to grant restricted stock that contain
non-forfeitable rights to dividends and will be considered participating
securities upon adoption of FSP EITF 03-6-1. As participating securities, we
will be required to include these instruments in the calculation of our basic
earnings per share ("EPS"), and we will need to calculate basic EPS using the
"two-class method." Restricted stock is currently included in our dilutive EPS
calculation using the treasury stock method. The two-class method of computing
EPS is an earnings allocation formula that determines EPS for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings.  FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years. As
such, the Company is required to adopt these provisions at the beginning of the
fiscal year ending October 3, 2010.  The Company does not expect adoption
of FSP EITF 03-6-1 to have a material effect on the Company’s financial
statements.
 
 In May
2009, FASB issued SFAS No. 165, "Subsequent Events".  SFAS 165 establishes
principles and requirements for the reporting of events or transactions that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued.  SFAS 165 is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009. As such, the Company adopted these provisions at the beginning of the
interim period ended June 28, 2009.  Adoption of SFAS 165 did not have a
material effect on the Company’s financial statements.
 
 In June
2009, FASB issued Statement of Financial Accounting Standard No. 168, " The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162".  SFAS 168
replaces Statement 162 and establishes the FASB Accounting Standards
CodificationTM (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP.  SFAS 168
is effective for financial statements issued for fiscal years and interim
periods ending after September 15, 2009. As such, the Company is required to
adopt these provisions at the beginning of the interim period ending September
27, 2009.  The Company does not expect adoption of SFAS 168 to have a
material effect its financial statements.
 
 F-9
 In June
2006, FASB issued Interpretation No. 48 “ Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 ”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “ Accounting for Income Taxes ”
. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
financial position, results of operations, or cash flows.
 
 In
September 2006, the FASB issued FASB Statement 157, “Fair Value Measurements”
(“FASB  No.  157”). FASB No. 157 defines fair value,
establishes a framework for measuring fair value under GAAP and expands
disclosures about fair value measurements.  FASB No. 157 applies under
other accounting pronouncements that require or permit fair value
measurements.  Accordingly, FASB No. 157 does not require any new fair
value measurements.  However, for some entities, the application of FASB
No. 157 will change current practice.  The changes to current practice
resulting from the application of FASB No. 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about
fair value measurements.  The provisions of FASB No. 157 are effective as
of January 1, 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings.  However,
delayed application of this statement is permitted for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The
adoption of FASB No. 157 did not have a material impact on the Company's
financial position, results of operations, or cash flows.
  In
February 2007, Statement of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115 ,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the beginning of our fiscal year 2008, with early adoption
permitted.  The adoption of FASB No. 159 did not have a material
impact on the Company's financial position, results of operations, or cash
flows.
  In March
2007, EITF Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar
Life Insurance Agreements”.  EITF 06-10 provides guidance for
determining a liability for the postretirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the terms of
the collateral assignment agreement.  EITF 06-10 is effective for
fiscal years beginning after December 15, 2007.  The adoption of EITF
06-10 did not have a material impact on the Company's financial position,
results of operations, or cash flows.
 
 In
December 2007,FASB issued SFAS No. 141(R), Business Combinations and
SFAS No. 160, Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51 . These new standards will significantly
change the accounting for and reporting of business combinations and
non-controlling (minority) interests in consolidated financial statements.
Statement Nos. 141(R) and 160 are required to be adopted simultaneously and
are effective for the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its
financial statements. See Note 9 for adoption of SFAS 141R subsequent to
December 28, 2008.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007. The Company does not have any outstanding
stock options.
 
 In March
2008, FASB issued SFAS No. 161, " Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”.  SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 with early application encouraged. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
September 30, 2009. The Company is currently evaluating the impact of SFAS 161
on its financial statements but does not expect it to have a material
effect
 
 In May
2008, FASB issued SFAS No. 162, " The Hierarchy of Generally Accepted
Accounting Principles ”.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States.  SFAS 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The adoption of FASB
No. 162 did not have a material impact on the Company's financial position,
results of operations, or cash flows.
 
 F-10
 In May
2008, FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60
".  SFAS 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement.  SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal
years.  As such, the Company is required to adopt these provisions at
the beginning of the fiscal year ended September 30, 2011.  The
Company is currently evaluating the impact of SFAS 163 on its financial
statements but does not expect it to have a material effect.
 
 Note
4 — Acquisition of Substantially All of the Assets of Optex Texas
 
 Acquisition
of Assets of Optex Texas by Optex Delaware on October 14, 2008
 
 On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Delaware exchanged $15 million of IRSN debt owned by it and
assumed approximately $3.8 million of certain Optex Texas liabilities and all of
the assets of Optex Texas.  The $15 million of IRSN debt was
contributed by Longview and Alpha to Optex Delaware, as discussed below, in
exchange for a $6 million note payable from Optex Delaware and a $9 million
equity interest in Optex Delaware.  There was no contingent
consideration associated with the purchase.  Longview and Alpha, which
were secured creditors of IRSN, owned Optex Delaware until February 20,
2009, when Longview sold 100% of its equity interests in Optex Delaware to
Sileas, as discussed below.
 
 Optex
Delaware purchased all of the assets of Optex Texas, including: intellectual
property, production processes and know-how, and outstanding contracts and
customer relationships.  Optex Delaware also assumed certain
liabilities of Optex Texas consisting of accounts payable and accrued
liabilities.  The Company’s 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 the Company’s working capital availability as opposed to the limited
working capital that was available during the time period in which the assets
were owned by IRSN.
 
 Optex
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 the Company as of October 14, 2008 as follows:
 
 Assets:Current
      assets, consisting primarily of inventory of $5,383,929 and accounts
      receivable of $1,404,434
                        
                        $
                        7,330,910Identifiable
      intangible assets
                        
                        
                        4,036,789Purchased
      Goodwill
                        
                        
                        7,110,416Other
      non-current assets, principally property and equipment
                        
                        
                        343,898Total
      assets
                        
                        $
                        18,822,013Liabilities:Current
      liabilities, consisting of accounts payable of $1,953,833 and accrued
      liabilities of $1,868,180
                        
                        
                        3,822,013Acquired
      net assets
                        
                        $
                        15,000,000
 
 The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
 TotalContracted
      Backlog - Existing Orders
                    
                    $
                    2,763,567Program
      Backlog - Forecasted IDIQ awards
                    
                    
                    1,273,222Total
      Intangible Asset to be amortized
                    
                    $
                    4,036,789
 
 Identifiable
intangible assets primarily consist of customer and program backlog and will be
amortized between general and administrative expenses and costs of sales
according to their respective estimated useful lives as follows:
 
 2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013Contracted
      Backlog amortized by delivery schedule
                    COS
                    
                    $
                    1,666,559
                    
                    
                    $
                    718,289
                    
                    
                    $
                    126,158
                    
                    
                    $
                    19,614
                    
                    
                    $
                    4,762Contracted
      Backlog amortized by delivery schedule
                    G&A
                    
                    
                    149,990
                    
                    
                    
                    64,646
                    
                    
                    
                    11,354
                    
                    
                    
                    1,765
                    
                    
                    
                    429Program
      Backlog amortized straight line across 5 years
                    G&A
                    
                    
                    254,645
                    
                    
                    
                    254,645
                    
                    
                    
                    254,645
                    
                    
                    
                    254,645
                    
                    
                    
                    254,645Total
      Amortization by Year
                    
                    
                    $
                    2,071,194
                    
                    
                    $
                    1,037,580
                    
                    
                    $
                    392,157
                    
                    
                    $
                    276,024
                    
                    
                    $
                    259,834
 
 F-11
 The
accompanying unaudited pro forma financial information for the three and nine
months ended June 28, 2009 and June 29, 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.
 
 Pro forma
revenue and earnings per share information is presented cumulatively in Note 5
regarding the subsequent acquisition of a controlling interest in Optex Delaware
by Sileas Corp. and the Reorganization Agreement.
 
 Secured
Promissory Note Issued in connection with Purchase by Optex
Delaware
 
 In
connection with the public sale of the Optex Texas assets to Optex Delaware,
Optex 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 March 27, 2009, Sileas and Alpha exchanged their
Notes plus accrued and unpaid interest for 1,027 shares of Optex 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 Delaware, in the “Acquisition”. As of the
date of this transaction, Sileas is the majority owner of the
Company.
 
 The
primary reasons for the Acquisition by Sileas was to effect synergies that the
management and corporate structure of Sileas could produce in the contract
bidding process in which the Company participates due to federal requirements
for small business set-asides on certain government contracts.
 
 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 (the “Issue Date”), Sileas, currently majority owner of the
Company, 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 the Company
sells or conveys all or substantially all its assets to a third party entity for
more than nominal consideration, other than a Reorganization into Sileas or
reincorporation in another jurisdiction, then this Note shall be immediately due
and owing without demand.  In the event that a Major Transaction
occurs prior to the maturity date resulting in the Borrower receiving Net
Consideration with a fair market value in excess of the principal and interest
due under the terms of this Secured Note, (the “Optex Consideration”), then in
addition to paying the principal and interest due, Sileas shall also pay an
amount equal to 90% of the Optex Consideration.  The obligations of
Sileas under the Note are secured by a security interest in the Company’s 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.
 
 The
Company has not guaranteed the note and Longview is not entitled to pursue the
Company in the event of a default by Sileas.  Therefore, there are no
actual or potential cash flow commitments from the Company.  In the
event of default by Sileas on its obligations under the note, Longview would
only be entitled to receive the Company common and preferred stock held by
Sileas.
 
 Note
5 –Reorganization Plan and Private Placement
 
 Reorganization/Share
Exchange
 
 On March
30, 2009, the Reorganization occurred whereby the then existing shareholders of
Optex Delaware exchanged their shares of Common Stock with the shares of Common
Stock of the Company as follows:   (i) the outstanding 85,000,000
shares of Optex Delaware Common Stock were exchanged by the Company
for 113,333,282 shares of Company Common Stock, (ii) the outstanding 1,027
shares of Optex Delaware Series A Preferred Stock be exchanged by the Company
for 1,027 shares of Company Series A Preferred Stock and such additional items
as more fully described in the Agreement and (iii) the 8,131,667 shares of Optex
Delaware Common Stock purchased in the private placement were exchanged by the
Company for 8,131,667 shares of Company Common Stock.  Following the
Reorganization, Optex Delaware remained a wholly-owned subsidiary of the
Company.
 
 F-12
 Shares
outstanding of the Company just prior to the close consisted of 19,999,991
shares of which 1,250,000 shares were issued on March 27, 2009 as payment for
Investor Relations Services, of which 700,000 were surrendered to the Company
upon termination of one of the Investor Relations contracts in June
2009.  See Note 11 – “Subsequent Events” for a further
discussion.  The total outstanding common shares of the Company
subsequent to the close of the reorganization is as follows:
 
 Reconciliation
      of Share activity reflecting Acquisition Activities on Stockholders’
      Equity at March 29, 2009  CommonShares
      Outstanding
                                                                
                                                                
                                                                Series
      APreferred
      Shares
                                                                
                                                                
                                                                CommonStock
                                                                
                                                                
                                                                PreferredSeries
      A Stock
                                                                
                                                                
                                                                Treasury
      StockOptex
      Texas
                                                                
                                                                
                                                                AdditionalPaid
      in Capital
                                                                
                                                                
                                                                RetainedEarnings
                                                                
                                                                
                                                                TotalStockholders
      EquityBalance
      at September 28, 2008 as reported on historical statements of Optex –
      Texas
                                                                
                                                                
                                                                10,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                164,834
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                (1,217,400
                                                                )
                                                                
                                                                $
                                                                15,246,282
                                                                
                                                                
                                                                $
                                                                (5,910,700
                                                                )
                                                                
                                                                $
                                                                8,293,016Optex
      Delaware Acquisition
                                                                
                                                                
                                                                (10,000
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (164,834
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,217,400
                                                                
                                                                
                                                                
                                                                (1,052,566
                                                                )Issuance
      of 50,000,000 Optex Delaware shares
                                                                
                                                                
                                                                50,000,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                50,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (50,000
                                                                )Stock
      split of 1.7:1 of common shares outstanding as of March 26,
      2009
                                                                
                                                                
                                                                35,000,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                35,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (35,000
                                                                )Reorganization
      of Optex Delaware Shares Outstanding
                                                                
                                                                
                                                                (85,000,000
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (85,000
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                85,000Reorganization
      Share Exchange (113,333,282 Sustut shares for 85,000,000 Optex System Inc.
      shares)
                                                                
                                                                
                                                                113,333,282
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                113,333
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (113,333
                                                                )Balance
      at September 28, 2008 as reported March 29, 2009 (1)
                                                                
                                                                
                                                                113,333,282
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                113,333
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                14,080,383
                                                                
                                                                
                                                                $
                                                                (5,910,700
                                                                )
                                                                
                                                                $
                                                                8,283,016Net
      Liabilities not Assumed in Optex Texas Acquisition
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                651,652
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                651,652Conversion
      of 6,000,000 Debt and Interest to Series A preferred
shares
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,027
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                1
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                6,159,780
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                6,159,781Sustut  Reorganization  (2)
                                                                
                                                                
                                                                19,999,991
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                20,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                167,500
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                187,500Private
      Placement Sale of Stock (2)
                                                                
                                                                
                                                                8,131,667
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                8,132
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,012,647
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,020,779Net
      Earnings (Loss) from continuing operations through March 29,
      2009
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (354,700
                                                                )
                                                                
                                                                
                                                                (354,700
                                                                )Balance
      at March 29, 2009
                                                                
                                                                
                                                                141,464,940
                                                                
                                                                
                                                                
                                                                1,027
                                                                
                                                                
                                                                $
                                                                141,465
                                                                
                                                                
                                                                $
                                                                1
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                22,071,962
                                                                
                                                                
                                                                $
                                                                (6,265,400
                                                                )
                                                                
                                                                $
                                                                15,948,028The
      accompanying notes are an integral part of these financial
      statements(1)After
      giving affect to the equivalent number of shares issued to existing Optex
      shareholders due to the reorganizations and change in the accounting
      acquirers’ period end.on March 30, 2009.(2)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-13
 
 Private
Placement
 
 Simultaneously
with the closing of the Reorganization Agreement, as of March 30, 2009 , the
Company accepted subscriptions from accredited investors for a total of 27.1
units (the "Units"), for $45,000.00 per Unit, with each Unit consisting of Three
Hundred Thousand (300,000) shares of common stock, no par value (the "Common
Stock") of the Company and warrants to purchase Three Hundred Thousand (300,000)
shares of Common Stock for $0.45 per share for a period of five (5) years from
the initial closing (the "Warrants"), which were issued by Sustut after the
closing referenced above.  Gross proceeds to the Company were
$1,219,750, and after deducting (i) a cash finders fee of $139,555 , (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, net proceeds were
$874,529.  The finder also received five year warrants to purchase
2.39 Units, at an exercise price of $49,500 per unit.
 
 The
following table represents the Reorganization and Private Placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirers’ period end:
  Optex
Systems Holdings, Inc.
 Balance
Sheet Adjusted for Reorganization and Private Placement
 Unaudited
      Quarterended
      March 29, 2009
                                                                
                                                                
                                                                ReorganizationAdjustments
      (1)
                                                                
                                                                
                                                                Private
      PlacementAdjustments
                                                                
                                                                Unaudited
      QuarterEnded
      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 $0.001, 300,000,000 authorized, 141,464,940
      shares issued and outstanding as of March 29, 2009)
                                                                
                                                                
                                                                113,333
                                                                
                                                                
                                                                
                                                                20,000
                                                                
                                                                
                                                                
                                                                8,132
                                                                
                                                                
                                                                141,465Optex
      Systems Holdings, Inc.  Preferred Stock (.001 par 5,000
      authorized,  1027 series A preferred issued and
      outstanding)
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1Additional
      Paid in Capital
                                                                
                                                                
                                                                20,891,815
                                                                
                                                                
                                                                
                                                                167,500
                                                                
                                                                
                                                                
                                                                1,012,647
                                                                
                                                                
                                                                22,071,962Retained
      Earnings
                                                                
                                                                
                                                                (6,265,400
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (6,265,400
                                                                )Total
      Stockholders Equity
                                                                
                                                                $
                                                                14,739,749
                                                                
                                                                
                                                                $
                                                                187,500
                                                                
                                                                
                                                                $
                                                                1,020,779
                                                                
                                                                $
                                                                15,948,028Total
      Liabilities and Stockholders Equity
                                                                
                                                                $
                                                                19,302,861
                                                                
                                                                
                                                                $
                                                                187,500
                                                                
                                                                
                                                                $
                                                                929,738
                                                                
                                                                $
                                                                20,420,099
  (1)  Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009
Reorganization. Other assets include $187,500 in prepaid expenses for
Investor Relation Services to be realized over the next 12 months. The
services were prepaid by the issue of 1,250,000 Sustut shares issued by Sustut
prior to March 30, 2009. The prepaid expense covers April 2009 through
April 2010 and will be reflected on the consolidate Statement of Operations for
the Company as expensed. See Note 11 - Subsequent Events. 700,000 of these shares were
returned to the Company subsequent to the quarter
end.
  The
expenses reflected by the Company on its Statement of Operations for the period
from April 1, 2009 through March 31, 2010 will be increased by $46,875 per
calendar quarter (as a non-cash expense) as a result of the issuance of the
1,250,000 shares for Investor Relations Services by Sustut and are carried on
the Sustut Balance Sheet as a prepaid expense. The same Investor Relations
agreements also call for an aggregate cash payment of $8,000 per month which
will increase the expense by an additional $24,000 per quarter. Therefore,
the total impact of the agreements for Investor Relations Services is $70,875
per quarter (pretax) including both the current cash expense and the
amortization of the prepaid expense which is carried on the Condensed
Consolidated Balance Sheet of the Company. See Note 11 - Subsequent Events.
700,000 of these shares were returned to the Company subsequent to the quarter
end.
  F-14
 The
accompanying unaudited pro forma financial information for the nine months ended
June 28, 2009 and June 29, 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 and six months ended June 28, 2009 and June 29, 2008 as if the
acquisition of Optex and Reorganization Plan had occurred on the first day of
each of the years.
 
 Unaudited
                    
                    
                    UnauditedThree
      Months Ended
                    
                    
                    Nine
      Months EndedJune
      28, 2009
                    
                    
                    June
      29, 2008
                    
                    
                    June
      29, 2009
                    
                    
                    June
      29, 2008Revenues
                    
                    
                    6,983,930
                    
                    
                    
                    3,881,053
                    
                    
                    
                    20,956,300
                    
                    
                    
                    13,925,073Net
      Income (Loss)
                    
                    
                    (308,553
                    )
                    
                    
                    145,877
                    
                    
                    
                    (653,750
                    )
                    
                    
                    (450,016
                    )Diluted
      earnings per share
                    
                    $
                    (0.00
                    )
                    
                    $
                    0.00
                    
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.00
                    )Weighted
      Average Shares Outstanding
                    
                    
                    141,464,940
                    
                    
                    
                    141,464,940
                    
                    
                    
                    141,464,940
                    
                    
                    
                    141,464,940
 
  The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from IRSN and the elimination of employee stock bonus
compensation previously pushed down from IRSN.  There is no expected
tax effect of the proforma adjustments for the periods affected in 2008 due
to net loss and accumulated retained deficit of IRSN.
 
 Note
6  Commitments and Contingencies
  Leases
 
 The
company leases its office and manufacturing facilities under two non-cancellable
operating leases expiring November 2009 and February 2010 in addition to
maintaining several non-cancellable operating leases for office and
manufacturing equipment.  Total expenses under these facility lease
agreements for the three and nine months ended June 28, 2009 was $77,350 and
232,343 respectively.  Total expenses for manufacturing and office
equipment for the three and nine months ended June 28, 2009 was $796 and
$2,464.  At June 28, 2009, the remaining minimum lease payments under
non-cancelable operating leases for equipment, office and facility space are as
follows:
  F-15
  Operating
      LeasesFiscal
      Years ending September2009
                    
                    $
                    119,4612010
                    
                    
                    79,8672011
                    
                    
                    16,7532012
                    
                    
                    -2013
                    
                    
                    -Thereafter
                    
                    
                    -Total
      minimum lease payments
                    
                    $
                    216,081
 
 Note
7 - Debt Financing
 
 Non-Related
parties
 
 Short
Term Note Payable/Longview Fund -
  On September 23, 2008 Optex Delaware borrowed $146,709 from Longview
and issued a promissory note dated September 23, 2008, to Longview in connection
therewith.   Pursuant to an Allonge No. 1 to Promissory Note, dated
January 20, 2009, the Maturity Date was extended until March 31,
2009.  On March 30, 2009 in conjunction with the Reorganization and
Private Placement, Longview Fund purchased 3.25 Units of the Private Placement
using $146,250 of the outstanding Note Payable as consideration for the
purchase. (See Note
5).
 
 Short
term note payable (Qioptic) - On
November 20, 2008, Optex Delaware issued a promissory note (“Note”) to Qioptiq
Limited (“Qioptiq”) in the amount of $117,780. The Note originated as a trade
payable as of September 28, 2008 in the amount of $227,265, and was paid in full
as of March 29, 2009.
 
 Note
8  –  Stockholders Equity
  Common
Stock:
 
 Stock
Split
 
 On March
26, 2009, Optex Delaware’s Board of Directors reconfirmed a 1.7:1 forward split
of its Common Stock to holders of record as of February 23,
2009.  Accordingly, as a result of the forward split, the 45,081,350
shares of Common Stock held by Sileas was split into
76,638,295  shares, and the 4,918,650 shares of Common Stock held by
Arland Holdings, Ltd. was split into 8,361,705  shares.
 
 As of
March 30, 2009, the Company was authorized to issue 300,000,000 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
      Holding, 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 Delaware as of March 30, 2009 were
exchanged for 113,333,282 shares of the Company (formerly Sustut Exploration,
Inc.).  An additional 8,131,667 shares were issued as a result of the
private placement closed concurrently with the Reorganization.
 
 Each
share of stock entitles the holder to one vote on matters brought to a vote of
the shareholders.
 
 The
company granted an officer at the consummation of the reorganization, the
following number of options:  an amount equal to one percent (1%) of
the issued and outstanding common shares of the Company immediately after giving
effect to the consummation of the Reorganization.  This resulted in a
grant of 1,414,649 shares with exercise price of $0.15 per share.  The
options vest 34% one year following the date of grant, and 33% on each of the
second and third anniversaries following the date of grant.  See Note
10 - Stock Based Compensation.
 
 Series
A Preferred Stock
 
 On March
24, 2009, the Company 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 the Company’s 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-16
 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 Capital Anstalt exchanged their promissory notes in
the total amount of $6,000,000 plus accrued and unpaid interest thereon into
1,027 shares of Series A Preferred Stock.  On March 30, 2009 shares of
Optex Systems, Inc. Series A Preferred Stock was exchanged on a 1:1 basis for
Series A Preferred Stock of the Company.
 
 Note 9—Earnings/Loss Per Share
  Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share is
computed by assuming that any dilutive convertible securities outstanding were
converted, with related preferred stock dividend requirements and outstanding
common shares adjusted accordingly.  In a loss year, the calculation
for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.  At June 28, 2009
there were 2,681,649 stock options that could dilute future earnings, as
compared to zero  stock options at June 29, 2008.
 
 The
following table sets forth the computation of basic and diluted net loss
attributable to common stockholders per share for the three and nine months
ended June 28, 2009, and June 29, 2008.
  Three
      months
                                Ended
                                June
      28,
                                2009
                              
                              
                              Three
      months
                                ended
                                June
      29,
                                2008
                              
                              
                              Nine
      months
                                ended
                                June
      28,
                                2009
                              
                              
                              Nine
      months
                                ended
                                June
      29,
                                2008Numerator:Net
      loss
                              
                              $
                              (308,553
                              )
                              
                              $
                              (241,147
                              )
                              
                              $
                              (663,252
                              )
                              
                              $
                              (1,613,196
                              )Denominator:Weighted
      average shares
                              
                              
                              141,464,940
                              
                              
                              
                              113,333,282
                              
                              
                              
                              122,744,977
                              
                              
                              
                              113,333,282Basic
      and diluted net loss per share
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.01
                              )
                              
                              $
                              (0.01
                              )
 
 Periods  ended
June 29, 2008 are shown depicting recapitalization and subsequent stock splits
of the entity.
 
 Note
10-Stock Based Compensation
 
 On March
26, 2009, the Board of Directors and Shareholders of Sustut adopted the 2009
Stock Option Plan providing for the issuance of up to 6,000,000 shares for the
purpose of having shares available for the granting of options to Company
officers, directors, employees and to independent contractors who provide
services to the Company.
 
 Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of the company or committee set up to act as a compensation committee
of the Board of Directors (the “Compensation Committee”) and terminate after the
earliest of the following events: expiration of the option as provided in the
option agreement, 90 days subsequent to the date of termination of the employee,
or ten years from the date of grant (five years from the date of grant for
incentive options granted to an employee who owns more than 10% of the total
combined voting power of all classes of the Company 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. The Company recognizes
compensation expense ratably over the requisite service period.
 
 F-17
 The
option price of each share of common stock shall be determined by the
Compensation Committee, provided that with respect to incentive stock options,
the option price per share shall in all cases be equal to or greater than 100%
of the fair value of a share of common stock on the date of the grant, except an
incentive option granted under the 2009 Stock Option Plan to a shareholder that
owns more than 10% of the total combined voting power of all classes of the
Company stock, shall have an exercise price of not less than 110% of the fair
value of a share of common stock on the date of grant. No participant may be
granted incentive stock options, which would result in shares with an aggregate
fair value of more than $100,000 first becoming exercisable in one calendar
year.
 
 On March
30, 2009, 1,414,649 stock options were granted to an officer of the company with
vesting rights of 34% after the first year, and 33% each after the second and
third years and carry a grant expiration date of seven years after
issuance.  On May 14, 2009, 1,267,000 stock options were issued to
other company employees, including 250,000 shares to one company
officer.  These stock options vest 25%   per year after
each year of employment and carry a grant expiration date of seven years after
issuance.  For shares granted as of May 14, 2009, the company
anticipates an annualized employee turnover rate of 3% per year, and as such
expect only 1,174,786 of the 1,267,000 shares to vest as of the end of the
contract term.  As of June 28, 2009 none of the stock options had
vested.
 
 For the
three months and nine months ended June 28, 2009, the Company recorded
compensation costs for options and shares granted under the plan amounting to
$15,174.  There were no stock options or shares granted or outstanding
prior to September 28, 2008, therefore no compensation expense was recorded in
2008.  The impact of this expense was immaterial to the basic and
diluted net loss per share for the three months and nine months ended June 28,
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 the Company’s common stock and the exercise
price at the date of exercise. For the three months ended June 28, 2009
estimated deferred tax assets were deemed immaterial and have not been recorded
for the tax effect of the financial statement expense. The tax effect of the
income tax deduction in excess of the financial statement expense, if any, will
be recorded as an increase to additional paid-in capital.  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 option
pricing model.  The fair value of the underlying shares was determined
based on the closing price of the Company’s publicly-traded shares as of June
26, 2009.   Further, the expected volatility was calculated using the
historical volatility of a diversified index of companies in
the  defense, homeland
security, and spaceindustry in accordance with Question 6 of SAB Topic
14.D.1.  In making this determination and trying to find another
similar company, the Company considered the industry, stage of life cycle, size
and financial leverage of such other entities.  Based on the
development stage of the Company, similar companies with enough historical data
were not available.   The Company utilized the three year
volatility of the SPADE Defense Index, which is a diversified index of 58
companies in the same industry as the Company.  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
granted.  The Company 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. The following weighted-average assumptions were utilized in the fair
value calculations for options granted:
 
 Nine
      months EndedJune 28, 2009Expected
      dividend yield
                  
                  
                  0
      %Expected stock price volatility
                  
                  
                  27.8
      %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)4.02
      for grant expected life of 7 years.
 
 The
Company has granted stock options to consultants, advisors and directors in the
following grants:
 
 Date of
                
                Shares
                
                
                Exercise
                
                
                Shares Outstanding
                
                Expiration
                
                VestingGrant
                
                Granted
                
                
                Price
                
                
                As of 06/28/09
                
                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
                
                
                
                316,750
                
                05/13/2016
                
                05/14/201005/14/09
                
                
                316,750
                
                
                
                0.15
                
                
                
                316,750
                
                05/13/2016
                
                05/14/201105/14/09
                
                
                316,750
                
                
                
                0.15
                
                
                
                316,750
                
                05/13/2016
                
                05/14/201205/14/09
                
                
                316,750
                
                
                
                0.15
                
                
                
                316750
                
                05/13/2016
                
                05/14/2013Total
                
                
                
                
                
                
                
                
                
                
                2,681,649
 
 F-18
 
 The
following table summarizes the status of the Company’s 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 June 29, 2008
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -Granted
      - 2009
                                      
                                      
                                      2,681,649
                                      
                                      
                                      $
                                      0.09
                                      
                                      
                                      
                                      5.38
                                      .
                                      
                                      $
                                      233,049Forfeited
      – 2009
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -Exercised
      – 2009
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -Outstanding
      as of June 28, 2009
                                      
                                      
                                      2,681,649
                                      
                                      
                                      $
                                      0.09
                                      
                                      
                                      
                                      5.38
                                      
                                      
                                      $
                                      233,049Exercisable
      as of June 28, 2009
                                      
                                      
                                      0
                                      
                                      
                                      $
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      $
                                      0
 The
weighted-average grant date fair value of options granted during the nine months
ended June 28, 2009 was $0.14. The total intrinsic value of options
exercised during the nine months June 28, 2009 was $ 0.0
 
 The
following table summarizes the status of the Company’s aggregate non-vested
shares granted under the 2009 Stock Option Plan (See Note 9):
 
 Number of
                    Non-vested
                    Shares
                    Subject to
                    Options
                  
                  
                  Weighted-
                    Average
                    Grant-Date
                    Fair ValueNon-vested
      as of June 28, 2009
                  
                  
                  0
                  
                  
                  $Non-vested
      granted — nine months ended June 28, 2009
                  
                  
                  2,681,649
                  
                  
                  $
                  .14Vested — nine
      months ended June 28, 2009
                  
                  
                  0
                  
                  
                  $
                  .00Forfeited — nine
      months ended June 28, 2009
                  
                  
                  0
                  
                  
                  $Non-vested
      as of June 28, 2009
                  
                  
                  2,681,649
                  
                  
                  $
                  .14
 
 As of
June 28, 2009, the unrecognized compensation cost related to non-vested
share based compensation arrangements granted under the plan that was
approximately $357,196.  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 year period ended
June 28, 2009 was $0.0.
 
 Note
11-Subsequent Events
 
 On June
26, 2009, the Company terminated its Investor Relations Agreement with American
Capital Ventures, Inc., and pursuant to this termination, American Capital
Ventures returned 700,000 of the 1,000,000 restricted shares of Company Common
Stock it received in support of the Investor Relations Agreement.
 
 Effective
as of June 29, 2009, the Company entered into a Consulting Agreement with ZA
Consulting, Inc. for the provision of consulting services to the Company’s
management including investor support; broker relations; conducting due
diligence meetings with brokers, analysts, institutional money managers and
financial media companies; attendance at investor conferences and trade shows;
and assistance in the preparation and dissemination of press releases and
stockholder communications.  ZA Consulting will also assist the
Company with corporate communications involving brand, product, and corporate
awareness.  The term of the Agreement is for one year terminating June
30, 2010.  For services rendered, ZA Consulting was paid $150,000 upon
execution of the Agreement and will receive $5,000 and 40,000 shares of
restricted Common Stock per month for the duration of the agreement
 
 F-19
 The
expenses reflected by the Company on its Statement of Operations for the period
from June 29, 2009 through June 27, 2010 will be increased by $36,000 over the
next twelve months due to amortization of the prepaid expense of $150,000 and
non cash related stock issues as a result of the change in firms.
 
 Subsequent
events were evaluated through August 12, 2009, the date the financial statements
were issued.
 
 Note
12-Restatement of September 28, 2008 financial statements
 
 As a
result of Securities and Exchange Commission (SEC) comments, we have reissued
the financial statements to restate the following:
 
 The
Company reclassified the asset impairment of goodwill from other expenses to an
operating expense.  This reclassification increased the loss from
operations by $1,586,416 to $4,653,743 with no change to the net
loss.
  Note 2
has been restated to accurately reflect the Company’s revenue recognition
policy.  Note 4 has been restated to accurately reflect the accounting
treatment of the Sileas Corp.’s stock purchase transaction with
Longview.  The above restatements have no affect on the balance
sheet, statements of stockholders’ equity and comprehensive income/(loss), net
loss  or cash flows for the year ended September 28,
2008.
 
 F-20
  ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  Management’s
Discussion and Analysis or Plan of Operations
 
 All
references to the “Company,” “we,” “our” and “us” for periods subsequent to the
closing of the Reorganization refer to Optex Systems Holdings, Inc., and
references to the “Company,” “we,” “our” and “us” for periods prior to the
closing of the Reorganization refer to Sustut Exploration, Inc.
 
 This management's discussion and
analysis reflects information known to management as at June 28, 2009. This
MD&A is intended to supplement and complement our audited consolidated
financial statements and notes thereto for the year ended September 28, 2008,
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. Additional information relating to the
company, including our most current annual information form, is available at
www.sec.gov.  The financial information in this MD&A has been
prepared in accordance with GAAP, unless otherwise indicated. In addition, we
use non-GAAP financial measures as supplemental indicators of our operating
performance and financial position. We use these non-GAAP financial measures
internally for comparing actual results from one period to another, as well as
for planning purposes. We will also report non-GAAP financial results as
supplemental information, as we believe their use provides more insight into our
performance. When non-GAAP measures are used in this MD&A, they are clearly
identified as a non-GAAP measure and reconciled to the most closely
corresponding GAAP measure.
 
 The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described.  This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
 
 Background
 
 On March
30, 2009, the Reorganization occurred whereby the then existing shareholders of
Optex Delaware exchanged their shares of Common Stock with the shares of Common
Stock of the Company as follows:   (i) the outstanding 85,000,000
shares of Optex Delaware Common Stock were exchanged by the Company
for 113,333,282 shares of Company Common Stock, (ii) the outstanding 1,027
shares of Optex Delaware Series A Preferred Stock be exchanged by the Company
for 1,027 shares of Company Series A Preferred Stock and such additional items
as more fully described in the Agreement and (iii) the 8,131,667 shares of Optex
Delaware Common Stock purchased in the private placement were exchanged by the
Company for 8,131,667 shares of Company Common Stock.  Optex Delaware
will remain a wholly-owned subsidiary of the Company.
 
 As a
result of the Reorganization, the Company changed its name to 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.
 
 Simultaneously
with the closing under the Reorganization Agreement (and the shares included
above), as of March 30, 2009, the Company accepted subscriptions from accredited
investors for a total 27.1 units (the "Units"), for $45,000.00 per Unit, with
each Unit consisting of Three Hundred Thousand (300,000) shares of common stock,
no par value of the Company and warrants to purchase Three Hundred Thousand
(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 the Company after the
closing referenced above.  Gross proceeds to the Company were
$1,219,750, and after deducting (i) a cash finders 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
Delaware, which was founded in 1987, is a Richardson, Texas – based ISO
9001:2008 certified concern, which 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 Delaware also manufactures and delivers numerous periscope
configurations, rifle and surveillance sights and night vision optical
assemblies.  Optex 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.
 
 Optex 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. The successful completion of the separation
from IRSN has enhanced its ability to serve its existing customers and will set
the stage for it to become a center of manufacturing excellence.  IRSN
is predominately a research and design company with capabilities enabling only
prototype or low quantity volumes.  Optex 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 General
Dynamics Land System Division (GDLS) and Tank-automotive and Armaments Command
(TACOM).  IRSN did not have any contracts or business relations with either
of these two customers.  Therefore the separation has allowed Optex
Delaware to fully focus on high volume manufacturing and the use of the six
sigma manufacturing methodology.  This shift in priorities has allowed
Optex Delaware to become a center of manufacturing excellence, characterized by
improved delivery performance, higher quality ratings, and reduced operational
costs.
 
 5
 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 to 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 the Company for materials and labor required to
complete the contracts.
 
 The
Company also anticipates the opportunity to integrate some of its night vision
and optical sights products into retail applications.  The Company
plans to carry on the business of Optex Delaware as its sole line of business,
and all of the Company’s operations are expected to be conducted by and through
Optex Delaware.
 
 Plan
of Operation
 
 Through a
private placement offering completed in conjunction with consummation of the
Reorganization Agreement, the Company has raised $1,219,750 ($874,529, net of
finders fees, issuance costs and satisfaction of indebtedness owed to an
investor) to fund operations.  The proceeds will be 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 first nine months of the current fiscal year.  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 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.
 
 
 Fiscal
      Year 2009
                                  
                                  
                                  Fiscal
      Year 2008Qtr
      1
                                  
                                  
                                  Qtr
      2
                                  
                                  
                                  Qtr3
                                  
                                  
                                  9
      months ended June 28, 2009
                                  
                                  
                                  Qtr
      1
                                  
                                  
                                  Qtr
      2
                                  
                                  
                                  Qtr3
                                  
                                  
                                  9
      months ended June 29, 2008Net
      Loss After Taxes - GAAP
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (0.3
                                  )
                                  
                                  $
                                  (0.3
                                  )
                                  
                                  $
                                  (0.6
                                  )
                                  
                                  $
                                  (0.7
                                  )
                                  
                                  $
                                  (0.7
                                  )
                                  
                                  $
                                  (0.2
                                  )
                                  
                                  $
                                  (1.6
                                  )Add:Interest
      Expense
                                  
                                  $
                                  0.1
                                  
                                  
                                  $
                                  0.1
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  0.2
                                  
                                  
                                  $
                                  0.1
                                  
                                  
                                  $
                                  0.1
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  0.2Federal
      Income Taxes
                                  
                                  
                                  0.2
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  0.4
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Depreciation
      & Intangible Amortization
                                  
                                  
                                  0.6
                                  
                                  
                                  
                                  0.5
                                  
                                  
                                  
                                  0.5
                                  
                                  
                                  
                                  1.6
                                  
                                  
                                  
                                  0.3
                                  
                                  
                                  
                                  0.2
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  0.6EBITDA
      -                Non
      GAAP
                                  
                                  $
                                  0.9
                                  
                                  
                                  $
                                  0.4
                                  
                                  
                                  $
                                  0.3
                                  
                                  
                                  $
                                  1.6
                                  
                                  
                                  $
                                  (0.3
                                  )
                                  
                                  $
                                  (0.4
                                  )
                                  
                                  $
                                  (0.1
                                  )
                                  
                                  $
                                  (0.8
                                  )
 
 6
 We have experienced substantial
improvement in our EBITDA as compared to our prior year
performance.  We have increased our EBITDA $2.4 million in the nine
months ending June 28 , 2009 as compared to 2008, primarily as a result of
increased revenue and lower general and administrative costs.  We
expect this trend to continue over the next 12 months as our product mix shifts
towards more profitable programs, our intangible expenses decrease, and we
continue to pursue cost reductions in our production and general and
administrative areas.
 
 Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates.   Shifts in gross margin
from quarter to quarter  are primarily attributable to the differing
product mix recognized as revenues during each respective
period.  During the three and nine months ended June 28, 2009, our
revenues on legacy periscope programs increased significantly over the prior
year while margins significantly decreased.  The legacy periscope
contracts were awarded January 2003, and due to significant material price
increases subsequent to the contract award date, we are experiencing a loss on
these contracts.  We have fully reserved for future contract losses on
this program, thus deliveries against these programs yield a product margin of
zero.   During 2009 we have recognized revenue of $3.7 million
from these legacy periscope programs, with a remaining backlog of $1.5 million,
$0.4 million of which should be recognized in 2009 and the remaining $1.1
million in the first three quarters of 2010.  We expect our product
margins on periscopes to increase over the next 12 months as the legacy programs
are completed and are replaced with new awards.
 
 Optex is aggressively pursuing
additional, potentially higher margin periscope business, and in May of 2009 was
awarded a multi-year Indefinite Delivery/Indefinite Quantity (IDIQ) type
contract with the first delivery order from TACOM division.  If all
government forecasted delivery orders against this IDIQ 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 Optex received an additional
$3.4 million dollar award from General Dynamics Land Systems to provide
product to begin with delivery starting in 2011 at the completion of our
current production contract.
 
 As a result of the October 14, 2009
acquisition of the assets of Optex Texas, our amortizable intangible assets
increased significantly over the prior year. The non cash amortization of
intangible assets has had a negative impact on our Gross Margin for 2009 as
compared to 2008.    In 2009 our anticipated intangible
amortization expense is $2 million and is expected to decline to $1 million in
2010.
 
 Expected
Backlog Delivery Schedule as of June 28, 2009 (in
millions):
 
 Year
                    
                    Backlog2009
                    
                    $
                    6.52010
                    
                    
                    17.82011
                    
                    
                    4.82012
                    
                    
                    2.52013
                    
                    
                    0.1Total
                    
                    $
                    31.7
 
 Virtually
all of our contracts are prime or subcontracted directly with the Federal
government and as such, are subject to Federal Acquisition Regulation (FAR)
Subpart 49.5, “Contract Termination Clauses” and more specifically FAR clauses
52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and
49.504 “Termination for convenience of the Government and
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 of convenience for default for our
existing contracts.  In the event a termination of convenience were to
occur, these FAR clauses provide for full recovery of all contractual costs and
profits reasonably occurred up to and as a result of the terminated
contract.
 
 In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
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 June 28, 2009, 12.3% of our outstanding backlog,
or $3.9 million of booked orders, fell under this criteria.  Our
experience has been that the historically negotiated price differentials have
been minimal (5% or less) and accordingly, we do not anticipate any significant
downward adjustments on these booked orders.
 
 7
 Three
Months Ended June 28, 2009 Compared to the Three Months Ended June 29,
2008
 
 Revenues.  In the three
months ended June 28, 2009 revenues increased by 79.5% over the respective prior
period per the table below:
  3
      mos ended 6/28/2009
                  
                  
                  3
      mos ended 6/29/2008
                  
                  
                  ChangeRevenue
                  
                  $
                  7.0
                  
                  
                  $
                  3.9
                  
                  
                  $
                  3.1Percent
      increase
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  79.5
                  %
 
 Revenues
increased significantly across all product lines during the three months ended
June 2009 as compared to the comparable period in 2008.  Significant
increases in sales of certain product lines is attributable to increased demand
by General Dynamics and U.S. government accelerated schedules, whereby, in
consideration for increased pricing, Optex agreed to accelerate the contract
delivery schedule and deliver at higher volumes to support increased military
service needs.    Other revenue increased due to the
delivery of higher quantities of certain assemblies in the current quarter over
the comparable period in 2008.
 
 During
the third quarter of 2009, we worked aggressively with one customer and resolved
technical field issues related to two of our major programs, and also completed
the First Article Testing and Acceptance requirements on a third, for which we
are currently awaiting government acceptance approval.  We do not foresee
any issue with obtaining the required approval in the near term.  With most
of the technical and start up issues behind us on these programs, we expect to
increase program deliveries during the last quarter of fiscal year 2009
continuing through 2010.
 
 Cost of Goods Sold. During
the quarter ended June 28, 2009, we recorded cost of goods sold of $6.4 million
as opposed to $2.9 million during the quarter ended June 29, 2008, an increase
of $3.5 million or 82.6%. This increase in cost of goods sold was primarily
associated with increased revenue on our periscope lines in support of higher
backlog and accelerated delivery schedules, in addition to increased intangible
amortization resulting from the acquisition of Optex - Texas assets from IRSN on
October 14, 2008. The gross margin during the quarter ended June 28, 2009 was
8.6% of revenues as compared to a gross margin of 25.6% for the quarter ended
June 29, 2008.  Product margins decreased substantially to 15.7% for
the quarter ended June 28, 2009 versus 25.6% for the quarter ended June 29, 2008
due to a shift in third quarter revenue mix toward less profitable contracts,
combined with increased labor costs related to the reallocation of labor costs
associated with 10 employees from general and administrative costs to
manufacturing overhead in 2009 as discussed further under the general and
administrative caption below.  Margins were further impacted by higher
intangible amortization allocable to cost of goods sold of $0.4 million, and
increased reserves for valuations and warranties of $0.1 million, resulting in
an overall increase in cost of goods sold of 7.1% of revenues in the quarter
ended June 28, 2009.
 
 G&A Expenses. During the
three months ended June 28, 2009, we recorded operating expenses of $ 0.8
million as opposed to $ 1.2 million during the three months ended June 29, 2008,
a decrease of $0.4 million or 33.3%.  The components of the
significant net decrease in general and administrative expenses as compared to
quarter ended June 29, 2008 are outlined below.
 
 ·
              Elimination
      of Corporate Cost allocations from IRSN of $0.5 million and the IRSN
      Employee Stock Bonus Plan (ESBP) of $0.1 million as a result of the
      ownership change..
 ·
              Increased
      costs of $0.2 million in legal, accounting fees, board of directors, and
      investor relations for Optex Delaware as a stand-alone entity from IRSN
      and the Reorganization.
 ·
              Lower
      Salaries and Wages and employee related costs of $0.1 million primarily
      due to the reclassification of 10 purchasing and planning employees from
      general and administrative to manufacturing overhead in cost of
      sales.  The annualized impact of the personnel move is expected
      to be a reduction in general and administrative expenses of approximately
      $0.5 million with an offsetting increase to cost of goods
      sold..
 ·
              Increased
      Amortization of Intangible Assets of $0.05 million as a result of the
      ownership change on  October 14,
2008.
 
 Loss from Operations. During
the three months ended June 28, 2009, we recorded a loss of $(0.2) million,
which was the same as the $(0.2) million loss during the three months ended June
29,.  The loss from operations includes a $0.4 million increase in
non-cash amortization of intangible assets as a result of the October 14, 2008
acquisition of the Company from IRSN.
 
 8
 Net Loss. During the three
months ended June 28, 2009, we recorded a net loss of $(0.3) million, as
compared to $(0.2) million for three months ended June 29, 2008, an increase of
$(0.1) million or 50.0%.  Federal Income Taxes expense increased by
$0.1 million in the three months ended June 28, 2009 as a result of increased
profit before intangible amortization expense (which is not deductible
for  income tax purposes), over the prior year quarter. In 2008, there
was no Federal Income Tax expense due to the loss from operations. Excluding the
impact of the increased intangible expenses of $0.1 million, we would have
recorded net income of $0.2 million for the three months ended June 28,
2009.
 
 Nine
months Ended June 28, 2009 Compared to the Nine months Ended June 29,
2008
 
 Revenues:In the nine months
ended June 28, 2009 revenues increased by 51.1% over the respective prior period
per the table below:
  9
      mos. ended 6/28/2009
                  
                  
                  9
      mos. ended 6/29/2008
                  
                  
                  ChangeRevenue
                  
                  $
                  21.0
                  
                  
                  $
                  13.9
                  
                  
                  $
                  7.1Percent
      increase
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  51.1
                  %
 
 Revenues
increased significantly across all product lines in the three months ended June
2009 as compared to the comparable period in 2008.  Significant
increase in sales of certain product lines is attributable to increased demand
by General Dynamics and U.S. government accelerated schedules, whereby, in
consideration for increased pricing, we agreed to accelerate the contract
delivery schedule and deliver at higher volumes to support increased military
service needs.  Other revenue increased due to the delivery of higher
quantities of certain assemblies in the current quarter over the comparable
period in 2008.
 
 During
the third quarter of 2009, we worked aggressively with one customer and resolved
technical field issues related to two of our major programs, and completed the
First Article Testing and Acceptance requirements on a third, for which we are
currently awaiting government acceptance approval.  We do not foresee any
issue with obtaining the required approval in the near term.  With most of
the technical and start up issues behind us on these programs, we expect to
increase program deliveries during the last quarter of fiscal year 2009
continuing through 2010.
 
 Cost of Goods Sold. During
the nine months ended June 28, 2009, we recorded cost of goods sold of $18.9
million as opposed to $11.7 million during the nine months ended June 29, 2008,
an increase of $7.2 million or 61.5%. This increase in cost of goods sold was
primarily associated with increased revenue on certain of our lines in support
of higher backlog and accelerated delivery schedules, in addition to increased
intangible amortization resulting from the acquisition of Optex Delaware from
IRSN on October 14, 2008. The gross margin during the nine months ended June 28,
2009 was 10.5% of revenues as compared to a gross margin of 15.8% for the nine
months ended June 29, 2008. Product gross margins were down 0.4% to 17.6% for
the nine months ended June 28, 2009 versus 18.0% for the nine months ended June
29, 2008 due to a shift in revenue mix toward less profitable contracts for
certain programs, combined with increased labor related to the reallocation of
costs associated with 10 employees from the general and administrative costs to
manufacturing overhead in 2009 as discussed further under the general and
administrative caption below.  Margins were further impacted by higher
intangible amortization allocable to cost of goods sold of $0.9 million, and
increased reserves for valuations and warranties of $0.3 million , resulting in
an overall increase in cost of goods sold of 7.1% of revenues in the nine months
ended June 28, 2009.
 
 G&A Expenses. During the
nine months ended June 28, 2009, we recorded operating expenses of $2.1 million
as opposed to $3.7 million during the nine months ended June 29, 2008, a
decrease of $1.6 million or 43.2%.  The components of the significant
net decrease in general and administrative expenses as compared to the nine
months ended June 29, 2008 are outlined below.
 
 ·
              Elimination
      of Corporate Cost allocations from IRSN of $1.5 million and the IRSN
      Employee Stock Bonus Plan (ESBP) of $0.3 million as a result of the
      ownership change..
 ·
              Increased
      costs of $0.4 million in legal, accounting fees, board of directors, and
      investor relations for Optex Delaware as a stand-alone entity from IRSN
      and the Reorganization.
 ·
              Lower
      Salaries and Wages and employee related costs of $0.3 million primarily
      due to the reclassification of 10 purchasing and planning employees from
      general and administrative to manufacturing overhead in cost of
      sales.  The annualized impact of the personnel move is expected
      to be a reduction in general and administrative expenses of approximately
      $.5 million with an offsetting increase to costs of goods sold. This
      decrease was partially offset by the implementation of a Management
      Incentive Bonus plan in 2009 of ($0.1) million for a net change of $0.2
      million to general and administrative salaries, wages and related employee
      expenses.
  9
  ·
              Increased
      Amortization of Intangible Assets of $0.1 million as a result of the
      ownership change as of October 14,
2008.
 
 Loss from Operations. During
the nine months ended June 28, 2009, we recorded earnings of $0.0 million as
opposed to a loss of $(1.4) million during the nine months ended June 29, 2008.
This improvement was primarily due to increased sales revenue in the nine months
ended June 28, 2009, combined with reduced general and administrative expenses
driven by the elimination of IRSN corporate costs pushed down to us in the nine
months ended June 29, 2008. The current year loss from operations also
includes $1.1 million of non cash amortization of intangible assets as a result
of the October 14, 2008 acquisition transaction.
 
 Net Loss . During the nine
months ended June 28, 2009, we recorded a net loss of $(0.7) million, as
compared to $(1.6) million for nine months ended June 29, 2008, a decrease in
net loss of $0.9 million or 56.3%. This decrease in net loss was principally the
result of reduced operating expenses related to the elimination of costs pushed
down from IRSN in the nine months ended June 29, 2008 combined with increased
revenue in nine months ended June 28, 2009. Federal Income Taxes expense
increased by $0.5 million in the nine months ended June 28, 2009 as a result of
increased profit before intangible amortization expense (which is not deductible
for income tax purposes), over the prior year. In 2008, there was no
Federal Income Tax expense due to the loss from operations. . Excluding the
impact of the increased intangible expenses of $1.5 million, we would have
recorded net income of $0.9 million for the nine months ended June 28,
2009.
 
 Liquidity
and Capital Resources
 
 We have
historically met our liquidity requirements from a variety of sources, including
government and customer funding through contract progress bills, short term
loans, and notes from related parties. 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. 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 would be derived from a
variety of sources including, but not limited to, cash flow from operations and
further private placement of our common stock and/or debt.
 
 For
the Nine Months Ended June 28, 2009
 
 Cash and Cash Equivalents. As
of June 28, 2009, we had cash and cash equivalents of $0.5 million, as compared
to cash and cash equivalents of $0.2 million as of September 28, 2008. The
increase in cash and cash equivalents was primarily due to the net proceeds
received by us in the private placement combined with accelerated collections on
government contracts as a result of discounted payment terms.
 
 Net Cash Used in Operating
Activities. Net cash used in operating activities totaled $0.3 million
for the nine months ended June 28, 2009, as compared to $0.2 million used for
the nine months ended June 29, 2008. The primary change was the timing of
purchases, accelerated collections on government contracts, and the timing of
payments to vendors.  Accelerated collections of government contracts
was accomplished by offering discounts for prompt payment.  Federal
Acquisition Regulation Clause 52.232-8  “Discounts for Prompt Payment”
permits the offer of minimal discounts on payment terms for government
contracts in order to expedite invoice payment.  Because many of our
programs incur significant long lead times from material acquisition through
production and shipment, it is the standard policy of Optex Delaware to
offer a 0.5% discount for all government invoices paid in net 10 days or
less.  The normal pay terms on these contracts is net 30.   The
foregone revenues as a result of the discounted payments equate to less than
0.1% of total revenue reported during the same period.  In the nine
months ending June, 28, 2009,our net inventory increased by $2.3 million to
support substantially increased production rates across all of our product
lines.  A large portion of these inventories are progress billable
costs and as such were billed to our customer as costs were
incurred.  As of June 28, 2009, our accounts receivable included
approximately $1.5 million in unpaid outstanding progress bills related to these
programs which we received in July 2009.  We do not anticipate further
increases to inventory to facilitate revenue growth; however, we expect our cash
flow from operations to remain relatively stable until at least mid 2010 when
our low margin legacy periscope programs end and other
significant programs reach level production rates.
 
 Net Cash Used in Investing
Activities. Net cash used in investing activities totaled $0.02 million
during the nine months ended June 28, 2009, as compared to net cash used in
investing activities of $0.1 million during the nine months ended June 29, 2008
and consisted of equipment purchases.  The Company’s business is
primarily labor intensive and we purchase equipment as it becomes
necessary.
 
 Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $0.6
million during the nine months ended June 28, 2009, as compared to zero during
the nine months ended June 29, 2008. The change of $0.7 million is due to
receipt of the private placement funds of $0.9 million offset by funds used to
repay outstanding loans of $(0.2) million. We raised funds through a private
placement for working capital needs and to hire additional
personnel.
 
 10
 Critical
Policies and Accounting Pronouncements
 
 Stock-Based
Compensation:In December 2004, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 123R, Share-Based
Payment.  SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services.  It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.  SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions.  SFAS No. 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements.  That cost will be measured based on the
fair value of the equity or liability instruments issued.
  The Company’s accounting policy for
equity instruments issued to consultants and vendors in exchange for goods and
services follows the provisions of EITF 96-18, “Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees.”  The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement.  Stock-based compensation related to non-employees is
accounted for based on the fair value of the related stock or options or the
fair value of the services, which ever is more readily determinable in
accordance with SFAS 123R.
  Revenue
Recognition.  The Company recognizes revenue based on the
modified percentage of completion method utilizing the units-of-delivery method,
in accordance with SOP 81-1:
  ·
              The units-of-delivery
      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.
   Our
contracts are fixed price production type contracts whereas a defined order
quantity is delivered to the customer in a continuous or sequential production
process in accordance with buyer specifications (build to print).  Our
deliveries against these contracts generally occur in monthly increments across
fixed delivery periods spanning from 3 to 36 months.
  Estimated Costs to Complete and
Accrued Loss on Contracts. The Company reviews and reports on the
performance of its contracts and production orders against the respective
resource plans for such contracts/orders. These reviews are summarized in the
form of estimates to complete ("ETC”s) and estimates at completion (“EAC”s).
EACs include the Company’s 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 EAC indicates a potential overrun (loss) against a fixed price
contract/order, management generally seeks to reduce costs and /or revise the
program plan in a manner consistent with customer objectives in order to
eliminate or minimize any overrun and to secure necessary customer agreement to
proposed revisions.
 
 If an EAC 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 EAC of the particular contract or
product order.
 
 Virtually
all of our contracts are prime or subcontracted directly with the Federal
government and as such, are subject to Federal Acquisition Regulation (FAR)
Subpart 49.5, “Contract Termination Clauses” and more specifically FAR
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 are generally, “flowed down” to us as subcontractors on other
military business.  It has been our experience that the termination for
convenience is rarely invoked, except where it has been mutually beneficial for
both parties.  We are currently not aware of any pending terminations of
convenience or default for our existing contracts.  In the event a
termination of convenience were to occur, these FAR clauses provide for full
recovery of all contractual costs and profits reasonably occurred up to and as a
result of the terminated contract.
 
 11
 In some
cases, Optex may receive orders subject to subsequent price negotiation on
contracts exceeding the $650,000 federal government simplified acquisition
threshold.  These “undefinitized” contracts are considered firm contracts
but as Cost Accounting Standards Board covered contracts, they are subject to
the Truth in Negotiations Act disclosure requirements and downward only price
negotiation.  As of June 28, 2009, $3.9 million, or 12.9%, of our booked
orders fell under this criteria.  Our experience has been that the
historically negotiated price differentials have been immaterial and
accordingly, we do not anticipate any significant downward adjustments on these
booked orders.
 
 Recent
Accounting Pronouncements.
 
 In June 2006, The FASB
issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income
Taxes”. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have a material impact on the
Company's consolidated financial position, results of operations, or cash
flows.
 
 In
September 2006, the FASB issued FASB No. 157, “Fair Value Measurements”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. While FASB No. 157 does not apply to transactions
involving share-based payment covered by FASB No. 123, it establishes a
theoretical framework for analyzing fair value measurements that is absent from
FASB No. 123. We have relied on the theoretical framework established by FASB
No. 157 in connection with certain valuation measurements that were made in the
preparation of these financial statements. FASB No. 157 is effective for years
beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
FASB issued an exposure draft that provides a one year deferral for
implementation of the Standard for non-financial assets and liabilities. The
Company is currently evaluating the impact FASB No. 157 will have on its
financial statements.
  In
February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the beginning of our fiscal year 2008, with early adoption
permitted. The Company is currently evaluating what effect the adoption of FASB
159 will have on its financial statements.
  In March
2007, the Financial Accounting Standards Board ratified “EITF” Issue No. 06-10,
"Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements”.  EITF 06-10 provides guidance for determining a liability
for the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement.  EITF 06-10 is effective for fiscal years beginning after
December 15, 2007.  The Company is currently evaluating the impact of
EITF 06-10 on its financial statements, but does not expect it to have a
material effect.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations and
SFAS No. 160, Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51. These new standards will significantly
change the accounting for and reporting of business combinations and
non-controlling (minority) interests in consolidated financial statements.
Statement Nos. 141(R) and 160 are required to be adopted simultaneously and
are effective for the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its
financial statements. See Note 14 to the financial statements for the year ended
September 28, 2008 for adoption of SFAS 141R subsequent to September 30,
2008.
  In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007. The Company does not have any outstanding
stock options.
  12
 In March
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161,
"Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”.  SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 with early application encouraged. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year
ended September 30, 2009. The Company is currently evaluating the impact of
SFAS 161 on its financial statements but does not expect it to have a material
effect.
 
 In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States.  SFAS 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company is currently evaluating the impact of SFAS
162 on its consolidated financial statements but does not expect it to have a
material effect.
 
 In May
2008, FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No.
60".  SFAS 163 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that
Statement.  SFAS 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and all interim periods within
those fiscal years.  As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended September 30,
2011.  The Company is currently evaluating the impact of SFAS 163 on
its financial statements but does not expect it to have a material
effect.
 
 In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”.  FSP EITF 03-6-1 clarifies that share-based payment
awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. We have granted and expect to continue to grant restricted stock
that contain non-forfeitable rights to dividends and will be considered
participating securities upon adoption of FSP EITF 03-6-1. As participating
securities, we will be required to include these instruments in the calculation
of our basic earnings per share ("EPS"), and we will need to calculate basic EPS
using the "two-class method." Restricted stock is currently included in our
dilutive EPS calculation using the treasury stock method. The two-class method
of computing EPS is an earnings allocation formula that determines EPS for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings.  FSP
EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ending October 3, 2010.  The Company does not
expect adoption of FSP EITF 03-6-1 to have a material effect on the Company’s
financial statements.
 
 In May 2009, “FASB issued SFAS No. 165,
"Subsequent
Events".  SFAS 165 establishes principles and requirements for the
reporting of events or transactions that occur after the balance sheet date, but
before financial statements are issued or are available to be issued.  SFAS
165 is effective for financial statements issued for fiscal years and interim
periods ending after June 15, 2009. As such, the Company adopted these
provisions at the beginning of the interim period ended June 28, 2009. 
Adoption of SFAS 165 did not have a material effect on the Company’s financial
statements.
   In June
2009, FASB issued SFAS No. 168, " The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No.
162".  SFAS 168 replaces Statement 162 and to establish the FASB
Accounting Standards CodificationTM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP.  SFAS 168 is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009. As such, the Company is required to adopt these provisions
at the beginning of the period ending September 27, 2009.  The Company does
not expect adoption of SFAS 168 to have a material effect its financial
statements.
 
 Cautionary
Factors That May Affect Future Results
 
 This
Quarterly Report on Form 10-Q and other written reports and oral statements made
from time to time by the Company 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
the Company’s 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 the Company’s
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.
  13
 The
Company does not assume the obligation to update any forward-looking statement.
You should carefully evaluate such statements in light of factors described in
the Company’s filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. In
various filings the Company 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.
 
 Item
4T.  Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by our Annual Report on Form 10-K for the year ended
December 31, 2008, management performed, with the participation of our Principal
Executive Officer and Principal Financial Officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our Principal Executive Officer and our Principal Financial Officer,
to allow timely decisions regarding required disclosures. Based on the
evaluation and the identification of the material weaknesses in our internal
control over financial reporting described below, our Principal Executive
Officer and our Principal Financial Officer concluded that, as of June 28, 2009,
our disclosure controls and procedures were effective.
  Management’s
Report on Internal Control Over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projection of any evaluation of effectiveness to
future periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
  Management
has conducted, with the participation of our Principal Executive Officer and our
Principal Financial Officer, an assessment, including testing of the
effectiveness, of our internal control over financial reporting as of June 28,
2009. Management’s assessment of internal control over financial reporting was
conducted using the criteria in Internal Control over Financial
Reporting - Guidance for Smaller Public Companiesissued by the Committee
of Sponsoring Organizations of the Treadway Commission.
  A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting as
required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified no
material weaknesses in our internal control over financial reporting as of June
28, 2009:
 
 This
quarterly report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Commission that permit us to
provide only management's report in this quarterly report.
  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
 
 14
 Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this Form 10-Q, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us , material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter market.
 
 Risks Related to our
Business
 
 We
expect that we will need to raise additional capital in the future; additional
funds may not be available on terms that are acceptable to us, or at
all.
 
 We
anticipate we will have to raise additional capital in the future to service our
debt and to finance our future working capital needs. We cannot assure you that
any additional capital will be available on a timely basis, on acceptable terms,
or at all. Future equity or debt financings may be difficult to obtain. If we
are not able to obtain additional capital as may be required, our business,
financial condition and results of operations could be materially and adversely
affected.
 
 We
anticipate that our capital requirements will depend on many factors,
including:
 
 ·
              our
      ability to fulfill backlog;
 
 ·
              our
      ability to procure additional production
  contracts;
 
 ·
              our
      ability to control costs;
 
 ·
              the
      timing of payments and reimbursements from government and other contracts,
      including but not limited to changes in federal government military
      spending and the federal government procurement
  process;
 
 ·
              increased
      sales and marketing expenses;
 
 ·
              technological
      advancements and competitors’ response to our
  products;
 
 ·
              capital
      improvements to new and existing
facilities;
 
 ·
              our
      relationships with customers and suppliers;
and
 
 ·
              general
      economic conditions including the effects of future economic slowdowns,
      acts of war or terrorism and the current international
      conflicts.
 
 Even if
available, financings can involve significant costs and expenses, such as legal
and accounting fees, diversion of management’s time and efforts, and substantial
transaction costs. If adequate funds are not available on acceptable terms, or
at all, we may be unable to finance our operations, develop or enhance our
products, expand our sales and marketing programs, take advantage of future
opportunities or respond to competitive pressures.
 
 
 Current
economic conditions may adversely affect our ability to continue
operations.
 
 Current
economic conditions may cause a decline in business and consumer spending and
capital market performance, which could adversely affect our business and
financial performance.  Our ability to raise funds, upon which we are
fully dependent to continue to expand our operations, may be adversely affected
by current and future economic conditions, such as a reduction in the
availability of credit, financial market volatility and recession.
 
 Our
ability to fulfill our backlog may have an effect on our long term ability to
procure contracts and fulfill current contracts.
 
 Our ability to fulfill our backlog may
be limited by our ability to devote sufficient financial and human capital
resources and limited by available material supplies.  If we do not
fulfill backlog in a timely manner, we may experience delays in product delivery
which would postpone receipt of revenue from those delayed
deliveries.  Additionally, if we are consistently unable to fulfill
our backlog, this may be a disincentive to customers to award large contracts to
us in the future until they are comfortable that we can effectively manage our
backlog.
 
 15
 Our
historical operations depend on government contracts and
subcontracts.  We face additional risks related to contracting with
the federal government, including federal budget issues and fixed price
contracts.
 
 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. Our exposure to the risks of cost overruns exists in
our products business due to the fact that our contracts are solely of a
fixed-price nature.  Some of those contracts are for products that are
new to our business and are thus subject to more potential for 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
cost 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.  As of June 28, 2009 we had approximately $0.7 million of
loss provision accrued for these fixed price contracts.
 
 If
we fail to scale our operations appropriately in response to growth and changes
in demand, we may be unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and adversely
affected.
 
 Our past
growth has placed, and any future growth in our historical business is expected
to continue to place, a significant strain on our management personnel,
infrastructure and resources. To implement our current business and product
plans, we will need to continue to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors will require
substantial management effort and additional capital. If we are unable to
effectively manage our expanding operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and
adversely affected.
 
 We
do not have long-term employment agreements with our key personnel, other than
our Chief Operating Officer. If we are not able to retain our key personnel or
attract additional key personnel as required, we may not be able to implement
our business plan and our results of operations could be materially and
adversely affected.
 
 We depend
to a large extent on the abilities and continued participation of our executive
officers and other key employees. The loss of any key employee could have a
material adverse effect on our business. We currently have only one employment
agreement with our Chief Operating Officer and do not presently maintain “key
man” insurance on any key employees. We believe that, as our activities increase
and change in character, additional, experienced personnel will be required to
implement our business plan. Competition for such personnel is intense and we
cannot assure you that they will be available when required, or that we will
have the ability to attract and retain them. In addition, we do not presently
have depth of staffing in our executive, operational and financial management.
Until additional key personnel can be successfully integrated with its
operations, the timing or success of which we cannot currently predict, our
results of operations and ultimate success will be vulnerable to difficulties in
recruiting a new executive management team and losses of key
personnel.
 
 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 September 28, 2008, based
on the fair market values established in connection with the Optex Delaware
acquisition as of October 14, 2008, and as a result, determined that the current
carrying value of goodwill had been impaired by $1.6
million.  Subsequent to the review, there have been no material
changes to our assumptions or estimates that would suggest any further
impairment is currently warranted.  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.
 
 16
 Certain
of our products are dependent on specialized sources of supply that are
potentially subject to disruption which could have a material, adverse impact on
our business.
 
 Optex has
selectively single sourced some of our material components in order to
mitigate excess procurement costs associated with significant tooling and
startup costs.  Furthermore, because of the nature of government
contracts, we are often required to purchase selected items from Government
approved suppliers, which may further limit our ability to utilize multiple
supply sources for these key components.  To the extent any of these
single sourced or government approved suppliers should have disruptions in
deliveries due to production, quality, or other issues, Optex may also
experience related production delays or unfavorable cost increases associated
with retooling and qualifying alternate suppliers.  The impact of
delays resulting from disruptions in supply for these items could negatively
impact our revenue, our customer reputation, and our results of
operations.  In addition, significant price increases from
single-source suppliers could have a negative impact on our profitability to the
extent that we are unable to recover these cost increases on our fixed price
contracts.  Essentially, all of our existing backlog requirements for
specialized sources of supply are currently covered by material contracts with
our suppliers.
 
 The defense technology supply industry is subject to technological
change and if we are not able to keep up with our competitors and/or they
develop advanced technology as response to our products, we may be at a
competitive disadvantage.
 
 The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition. Our
competitors could also develop new, more advanced technologies in reaction to
our products.  Currently accepted industry standards may change. Our
success depends substantially on our ability, on a cost-effective and timely
basis, to continue to enhance our existing products and to develop and introduce
new products that take advantage of technological advances and adhere to
evolving industry standards. An unexpected change in one or more of the
technologies related to our products, in market demand for products based on a
particular technology or of accepted industry standards could materially and
adversely affect our business. We may or may not be able to develop new products
in a timely and satisfactory manner to address new industry standards and
technological changes, or to respond to new product announcements by others. In
addition, new products may or may not achieve market acceptance.
 
 Unexpected
warranty and product liability claims could adversely affect our business and
results of operations.
 
 The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products.  We warrant the
quality of our products to meet customer requirements and be free of defects for
twelve months subsequent to delivery. On certain product lines the warranty
period has been extended to 24 months due to technical considerations incurred
during the manufacture of such products.  During June 2008, we
experienced an internal control test failure related to the laser filters used
on our glass periscope products.  As a result of the internal test
failure, Optex implemented a manufacturing process change to eliminate the
potential for future failures.  We believe the internal control test
environment to be significantly more stringent than that which would occur under
field conditions, however as a result of the internal test failure and
manufacturing process change, we extended our warranty for all glass periscopes
shipped prior to the implemented change by an additional 12 months. As of the
date of this report, Optex has not received any warranty claims as a result of
the condition.  We establish reserves for warranty
claims.  There can be no assurance that this reserve will be
sufficient if we were to experience an unexpectedly high incidence of problems
with our products.  Significant increases in the incidence of such
claims may adversely affect our sales and our reputation with
consumers.  Costs associated with warranty and product liability
claims could materially affect our financial condition and results of
operations.
 
 We
derive almost all of our revenue from two customers and the loss of either
customer or both customers could have a material adverse effect on our
revenues.
 
 At
present, we derive approximately 90% of the gross revenue from our business from
two customers, GDLS and TACOM, with which we have approximately 50 discrete
contracts which cover supply of vehicles, product lines and spare
parts. Procuring new customers and contracts may partially mitigate this
risk.    A decision by either GDLS or TACOM to cease issuing
contracts could have a significant material impact on our business and results
of operations.  There can be no assurance that we could replace these
customers on a timely basis or at all.
 
 We
do not possess any patents and rely solely on trade secrets to protect our
intellectual property.
 
 We
utilize several highly specialized and unique processes in the manufacture of
our products, for which we rely solely on trade secrets to protect our
innovations.  We cannot assure you that we will be able to maintain
the confidentiality of our trade secrets or that our non-disclosure agreements
will provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or other disclosure.  The confidentiality agreements that are designed
to protect our trade secrets could be breached, and we might not have adequate
remedies for the breach.  Additionally, our trade secrets and
proprietary know-how might otherwise become known or be independently discovered
by others.
 
 17
 It is
also possible that our trade secrets will otherwise become known or
independently developed by our competitors, many of which have substantially
greater resources, and may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with our
ability to make and sell some of our products. Although we believe that our
products do not infringe on the patents or other proprietary rights of third
parties, we cannot assure you that third parties will not assert infringement
claims against us or that such claims will not be successful.
 
 In
the future, we may look to acquire other businesses in our industry and the
acquisitions will require us to use substantial resources, among other
things.
 
 At some time in the future, we may
decide to pursue a consolidation strategy with other businesses in our
industry.  In order to successfully acquire other businesses, we would
be forced to spend significant resources in both acquisition and transactional
costs, which could divert substantial resources in terms of both financial and
personnel capital from our current operations.  Additionally, we might
assume liabilities of the acquired business, and the repayment of those
liabilities could have a material adverse impact on our cash
flow.  Furthermore, when a new business is integrated into our ongoing
business, it is very possible that there would be a period of integration and
adjustment required which could divert resources from ongoing business
operations.
 
 A
conversion of our Series A Preferred Stock could cause substantial dilution to
our existing Common Stock.
 
 As of June 28, 2009, we have
141,464,940 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 beneficially own
22.5% of our Common Stock.  This would greatly dilute the holdings of
our other stockholders.
 
 Risks
Relating to the Reorganization
 
 The Company’s directors and executive
officers beneficially own a substantial percentage of the Company’s outstanding
common stock, which gives them control over certain major decisions on which the
Company’s stockholders may vote, which may discourage an acquisition of the
Company .
 
 As a
result of the Reorganization, Sileas Corp. which is owned by  the
Company’s three officers (one of whom is also one of the Company’s three
directors), beneficially owns, in the aggregate, approximately 72% of the
Company’s outstanding common stock. The interests of the Company’s management
may differ from the interests of other stockholders. As a result, the Company’s
executive management will have the right and ability to control virtually all
corporate actions requiring stockholder approval, irrespective of how the
Company’s other stockholders may vote, including the following
actions:
 
 ·
              electing
      or defeating the election of
directors;
 
 ·
              amending
      or preventing amendment of the Company’s certificate of incorporation or
      bylaws;
 
 ·
              effecting
      or preventing a Reorganization, sale of assets or other corporate
      transaction; and controlling the outcome of any other matter submitted to
      the stockholders for vote.
 
 The
Company’s management’s beneficial stock ownership may discourage a potential
acquirer from seeking to acquire shares of the Company’s common stock or
otherwise attempting to obtain control of the Company, which in turn could
reduce the Company’s stock price or prevent the Company’s stockholders from
realizing a premium over the Company’s stock price.
 
 Public company compliance may make it
more difficult to attract and retain officers and directors
..
 
 The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, the Company expects these new rules and regulations to increase
compliance costs in 2010 and beyond and to make certain activities more time
consuming and costly. As a public entity, the Company also expects that these
new rules and regulations may make it more difficult and expensive for the
Company to obtain director and officer liability insurance in the future and it
may be required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. As a result,
it may be more difficult for the Company to attract and retain qualified persons
to serve as directors or as executive officers.
 
 18
 Risks
Relating to the Common Stock
 
 The Company’s stock price may be
volatile.
 
 The
market price of the Company’s common stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond the Company’s control, including the following:
 
 ·
              additions
      or departures of key personnel;
 
 ·
              limited
      “public float” following the Reorganization, in the hands of a small
      number of persons whose sales or lack of sales could result in positive or
      negative pricing pressure on the market price for the common
      stock;
 
 ·
              operating
      results that fall below
expectations;
 
 ·
              economic
      and other external factors, including but not limited to changes in
      federal government military spending and the federal government
      procurement process; and
 
 ·
              period-to-period
      fluctuations in the Company’s financial
results.
 
 In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of the Company’s common stock.
 
 There is currently no liquid trading
market for the Company’s common stock and the Company cannot ensure that one
will ever develop or be sustained .
 
 The
Company’s common stock is currently approved for quotation on the OTC Bulletin
Board trading under the symbol OPXS.OB.  However, there is limited trading
activity and not currently a liquid trading market.  There is no assurance
as to when or whether a liquid trading market will develop, and if such a market
does develop, there is no assurance that it will be maintained.
 Furthermore, for companies whose securities are quoted on the
Over-The-Counter Bulletin Board maintained by the National Association of
Securities Dealers, Inc. (the “OTCBB”), it is more difficult (1) to obtain
accurate quotations, (2) to obtain coverage for significant news events because
major wire services generally do not publish press releases about such
companies, and (3) to obtain needed capital.  As a result, purchasers of
the Company’s common stock may have difficulty selling their shares in the
public market, and the market price may be subject to significant
volatility.
 
 Offers or
availability for sale of a substantial number of shares of the Company’s common
stock may cause the price of the Company’s common stock to decline or could
affect the Company’s ability to raise additional working
capital.
 
 Under
Rule 144(i)(2), the Company’s stockholders can avail themselves of Rule 144 and
commence selling significant amounts of shares into the market one year after
the filing of “Form 10” information with the SEC as long as the other
requirements of Rule 144(i)(2) are met (we believe these conditions were
satisfied with the filing of our 8-K on April 3, 2009).  While
affiliates would be subject to volume limitations under Rule 144(e), which is
one percent of the shares outstanding as shown by our then most recent report or
statement published, nonaffiliates would then be able to sell their stock
without volume limitations.  If the Company’s current stockholders
seek to sell substantial amounts of common stock in the public market either
upon expiration of any required holding period under Rule 144 or pursuant to an
effective registration statement, it could create a circumstance commonly
referred to as “overhang,” in anticipation of which the market price of the
Company’s common stock could decrease substantially.  The existence of an
overhang, whether or not sales have occurred or are occurring, could also make
it more difficult for the Company to raise additional financing in the future
through sale of securities at a time and price that the Company deems
acceptable.
 
 The elimination of monetary liability
against the Company’s directors, officers and employees under Delaware law and
the existence of indemnification rights to the Company’s directors, officers and
employees may result in substantial expenditures by the Company and may
discourage lawsuits against the Company’s directors, officers and
employees.
  The
Company’s certificate of incorporation does not contain any specific provisions
that eliminate the liability of directors for monetary damages to the Company
and the Company’s stockholders; however, the Company provides such
indemnification to its directors and officers to the extent provided by Delaware
law. The Company may also have contractual indemnification obligations under its
employment agreements with its executive officers. The foregoing indemnification
obligations could result in the Company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which the Company may be unable to recoup. These provisions and resultant costs
may also discourage the Company from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties and may similarly discourage the
filing of derivative litigation by the Company’s stockholders against the
Company’s directors and officers even though such actions, if successful, might
otherwise benefit the Company and its stockholders.
 
 19
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
  See
below.
 
 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
  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:
      August 12, 2009
                By:
                /s/
      Stanley A. HirschmanStanley
      A. Hirschman
                  Principal
      Executive Officer
 
 OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      August 12, 2009
                By:
                /s/
      Karen HawkinsKaren
      Hawkins
                  Principal
      Financial Officer
  20