UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 AMENDMENT
NO. 2 TO FORM 10-Q/A
 
 
  x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended 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: 972-238-0722
 
 (Former
Name or Former Address if Changed Since Last Report)
 
 Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes  o  No  x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
 See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act (Check one):
 
 Large
Accelerated Filer o     Accelerated
Filer o     Non-Accelerated
Filer o     Smaller
Reporting Company x
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes   o   No  o Not
applicable.
 
 Indicate
by check mark whether the registrant is a shell company as defined in Rule
12b`-2 of the Exchange Act. Yes o  No x
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of August 4, 2009: 139,444,940 shares of common
stock.
  
  OPTEX
SYSTEMS HOLDINGS, INC.
 FORM
10-Q
 June
28, 2009
 
 INDEX
 
 PART
      I— FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition
                  5Item
      3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  21Item
      4T.
                  Control
      and Procedures
                  21PART
      II— OTHER INFORMATIONItem
      1
                  Legal
      Proceedings
                  21Item
      1A
                  Risk
      Factors
                  22Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  31Item
      3.
                  Defaults
      Upon Senior Securities
                  31Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  31Item
      5.
                  Other
      Information
                  31Item
      6.
                  Exhibits
      and Reports on Form 8-K
                  31SIGNATURE
                  32
  2
  Item 1. Financial
Information
 
 OPTEX
SYSTEMS HOLDINGS, INC.
 
 UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 AS OF
JUNE 28, 2009 (Restated)
  3
  OPTEX
SYSTEMS HOLDINGS, INC.
 
 BALANCE
      SHEETS AS OF JUNE 28, 2009 (SUCCESSOR) (UNAUDITED) (RESTATED) AND
      SEPTEMBER 28, 2008 (PREDECESSOR) (RESTATED)
                  F-1STATEMENTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 28, 2009 (SUCCESSOR) AND
      JUNE 29, 2008 (PREDECESSOR) (UNAUDITED) FOR THE PERIOD OCTOBER 15, 2008
      THROUGH JUNE 28, 2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008
      THROUGH OCTOBER 14, 2008 (PREDECESSOR) (UNAUDITED)
    (RESTATED)
                  F-3STATEMENTS
      OF CASH FLOWS FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28,
      2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14,
      2008 (PREDECESSOR) (UNAUDITED) (RESTATED)
                  F-4STATEMENTS
      OF STOCKHOLDERS’ EQUITY FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28,
      2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14,
      2008 (PREDECESSOR) (UNAUDITED) (RESTATED)
                  F-6FINANCIAL
      STATEMENT FOOTNOTES (UNAUDITED) (RESTATED)
                  F-7
  4
  Optex
Systems Holdings, Inc.
 (formerly
known as Sustut Exploration, Inc.)
 Condensed
Consolidated Balance Sheets
 
 Restated
                      
                      
                      RestatedSuccessor
                      
                      
                      PredecessorJune 28, 2009 (Unaudited)
                      
                      
                      September 28, 2008ASSETSCurrent
      AssetsCash
                      
                      $
                      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
                      
                      
                      2,483,395
                      
                      
                      
                      1,100,140Goodwill
                      
                      
                      7,110,415
                      
                      
                      
                      10,047,065Total
      Other Assets
                      
                      
                      9,614,494
                      
                      
                      
                      11,167,889Total
      Assets
                      
                      $
                      20,604,257
                      
                      
                      $
                      18,967,107
 
 The
accompanying notes are an integral part of these financial
statements
  F-1
  Optex
Systems Holdings, Inc.
 (formerly
known as Sustut Exploration, Inc.)
 Balance
Sheets – Continued
 
 RestatedSuccessor
                      
                      
                      RestatedJune 28, 2009
                        (Unaudited)
                      
                      
                      Predecessor
                        September 28, 2008LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      LiabilitiesAccounts
      Payable
                      
                      $
                      3,223,278
                      
                      
                      $
                      1,821,534Accrued
      Expenses
                      
                      
                      628,033
                      
                      
                      
                      798,974Accrued
      Warranties
                      
                      
                      314,446
                      
                      
                      
                      227,000Accrued
      Contract Losses
                      
                      
                      687,111
                      
                      
                      
                      821,885Loans
      Payable
                      
                      
                      459
                      
                      
                      
                      373,974Interest
      on Loans Payable
                      
                      
                      11,101Income
      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 value $0.001 per share, 200,000,000 shares
      authorized, 138,914,940 shares issued and outstanding as of June 28,
      2009)
                      
                      
                      138,915Optex
      Systems Holdings, Inc.  preferred stock (par value $0.001 per
      share, 5,000 shares authorized,  1,027 Series A Preferred shares
      issued and outstanding as of June 28, 2009)
                      
                      
                      1Optex
      Systems, Inc. – (Texas) (predecessor) common stock (no par 100,000 shares
      authorized, 18,870 shares issued and 10,000 shares outstanding as
      of  September 28, 2008)
                      
                      
                      
                      
                      
                      
                      164,834Optex
      Systems, Inc. (Texas) (predecessor) Treasury Stock (8,870 shares at cost
      as of  September 28, 2008)
                      
                      
                      -
                      
                      
                      
                      (1,217,400
                      )Additional
      Paid-in-capital
                      
                      
                      16,244,318
                      
                      
                      
                      15,246,282Retained
      Deficit
                      
                      
                      (728,584
                      )
                      
                      
                      (5,910,700
                      )Total
      Stockholders' Equity
                      
                      $
                      15,654,650
                      
                      
                      $
                      8,283,016Total
      Liabilities and Stockholders' Equity
                      
                      $
                      20,604,257
                      
                      
                      $
                      18,967,107
 
 The
accompanying notes are an integral part of these financial
statements
  F-2
  Optex
Systems Holdings, Inc.
 (formerly
known as Sustut Exploration, Inc.)
 Condensed
Consolidated Statements of Operations – Restated and Unaudited
 
 Successor
                      
                      
                      Predecessor
                      
                      
                      Successor
                      
                      
                      Predecessor
                      
                      
                      PredecessorThree Months ended
                        June 28, 2009
                      
                      
                      Three Months
                        ended June 29,
                        2008
                      
                      
                      For the period
                        October 15, 2008
                        through June 28,
                        2009
                      
                      
                      For the period
                        September 29,
                        2008 through
                        October 14, 2008
                      
                      
                      Nine Months
                        ended June 29,
                        2008Revenues
                      
                      $
                      6,983,930
                      
                      
                      $
                      3,881,053
                      
                      
                      $
                      20,084,362
                      
                      
                      $
                      871,938
                      
                      
                      $
                      13,925,073Total
      Cost of Sales
                      
                      
                      6,417,926
                      
                      
                      
                      2,851,287
                      
                      
                      
                      18,135,020
                      
                      
                      
                      739,868
                      
                      
                      
                      11,716,785Gross
      Margin
                      
                      
                      566,004
                      
                      
                      
                      1,029,766
                      
                      
                      
                      1,949,342
                      
                      
                      
                      132,070
                      
                      
                      
                      2,208,288General
      and AdministrativeSalaries
      and Wages
                      
                      
                      176,869
                      
                      
                      
                      253,594
                      
                      
                      
                      502,883
                      
                      
                      
                      22,028
                      
                      
                      
                      744,119Employee
      Benefits & Taxes
                      
                      
                      29,716
                      
                      
                      
                      76,438
                      
                      
                      
                      228,847
                      
                      
                      
                      495
                      
                      
                      
                      246,071Employee
      Stock Bonus Plan
                      
                      
                      -
                      
                      
                      
                      100,174
                      
                      
                      
                      4,812
                      
                      
                      
                      (4,812
                      )
                      
                      
                      279,034Amortization
      of Intangible
                      
                      
                      101,159
                      
                      
                      
                      54,123
                      
                      
                      
                      303,475
                      
                      
                      
                      -
                      
                      
                      
                      169,368Rent,
      Utilities and Building Maintenance
                      
                      
                      50,838
                      
                      
                      
                      69,959
                      
                      
                      
                      150,780
                      
                      
                      
                      12,493
                      
                      
                      
                      160,999Investor
      Relations
                      
                      
                      88,326
                      
                      
                      
                      -
                      
                      
                      
                      88,326
                      
                      
                      
                      -
                      
                      
                      
                      -Legal
      and Accounting Fees
                      
                      
                      128,274
                      
                      
                      
                      20,166
                      
                      
                      
                      296,627
                      
                      
                      
                      360
                      
                      
                      
                      117,695Consulting
      and Contract Service Fees
                      
                      
                      43,210
                      
                      
                      
                      66,678
                      
                      
                      
                      167,261
                      
                      
                      
                      10,527
                      
                      
                      
                      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
                      
                      
                      
                      167,531
                      
                      
                      
                      16,155
                      
                      
                      
                      124,729Total
      General and Administrative
                      
                      
                      759,935
                      
                      
                      
                      1,224,910
                      
                      
                      
                      2,039,359
                      
                      
                      
                      57,246
                      
                      
                      
                      3,676,480Operating
      Income (Loss)
                      
                      
                      (193,931
                      )
                      
                      
                      (195,144
                      )
                      
                      
                      (90,017
                      )
                      
                      
                      74,824
                      
                      
                      
                      (1,468,192
                      )Other
      ExpensesOther
      (Income) and Expense
                      
                      
                      (351
                      )
                      
                      
                      3
                      
                      
                      
                      (1,434
                      )
                      
                      
                      -
                      
                      
                      
                      (499
                      )Interest
      (Income) Expense - Net
                      
                      
                      -
                      
                      
                      
                      46,000
                      
                      
                      
                      174,710
                      
                      
                      
                      9,492
                      
                      
                      
                      145,503Total
      Other
                      
                      
                      (351
                      )
                      
                      
                      46,003
                      
                      
                      
                      173,276
                      
                      
                      
                      9,492
                      
                      
                      
                      145,004Income
      (Loss) Before Taxes
                      
                      
                      (193,580
                      )
                      
                      
                      (241,147
                      )
                      
                      
                      (263,293
                      )
                      
                      
                      65,332
                      
                      
                      
                      (1,613,196
                      )Income
      Taxes (Benefit)
                      
                      
                      114,973
                      
                      
                      
                      -
                      
                      
                      
                      465,291
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Income (Loss) After Taxes
                      
                      $
                      (308,553
                      )
                      
                      $
                      (241,147
                      )
                      
                      $
                      (728,584
                      )
                      
                      $
                      65,332
                      
                      
                      $
                      (1,613,196
                      )Basic
      and diluted loss per share (1)
                      
                      $
                      (0.00
                      )
                      
                      $
                      (24.11
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      6.53
                      
                      
                      $
                      (161.32
                      )Weighted
      Average Common Shares Outstanding
                      
                      
                      138,914,940
                      
                      
                      
                      10,000
                      
                      
                      
                      121,891,852
                      
                      
                      
                      10,000
                      
                      
                      
                      10,000
 
 The
accompanying notes are an integral part of these financial
statements
 
 (1) 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.
  F-3
  Optex
Systems Holdings, Inc.
 (formerly
known as Sustut Exploration, Inc.)
 Statements
of Cash Flows Restated and Unaudited
 
 Successor
                          
                          
                          Predecessor
                          
                          
                          PredecessorFor the period October 15,
                            2008 through June 28, 2009
                          
                          
                          For the period September 29,
                            2008 through October 14, 2008
                          
                          
                          Nine months ended
                            June 29, 2008Cash
      flows (to) from operating activities:Net
      Income (Loss)
                          
                          $
                          (728,584
                          )
                          
                          $
                          65,332
                          
                          
                          $
                          (1,613,196
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                          
                          
                          1,622,907
                          
                          
                          
                          9,691
                          
                          
                          
                          570,566Provision
      for (use of) allowance for inventory valuation
                          
                          
                          158,273
                          
                          
                          
                          27,363Noncash
      interest expense
                          
                          
                          170,882
                          
                          
                          
                          9,500
                          
                          
                          
                          145,503Stock
      option compensation expense
                          
                          
                          15,174
                          
                          
                          
                          -(Increase)
      decrease  in accounts receivable
                          
                          
                          (1,823,665
                          )
                          
                          
                          1,049,802
                          
                          
                          
                          460,783(Increase)
      decrease in inventory (net of progress billed)
                          
                          
                          (1,617,361
                          )
                          
                          
                          (863,566
                          )
                          
                          
                          321,273(Increase)
      decrease in other current assets
                          
                          
                          317,669
                          
                          
                          
                          18,541
                          
                          
                          
                          (190,829
                          )Increase
      (decrease) in accounts payable and accrued expenses
                          
                          
                          1,416,854
                          
                          
                          
                          (186,051
                          )
                          
                          
                          (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
                          
                          
                          (119,470
                          )
                          
                          
                          (15,304
                          )
                          
                          
                          (1,021,761
                          )Increase
      (decrease) in income taxes payable
                          
                          
                          85,179
                          
                          
                          
                          -Total
      adjustments
                          
                          
                          313,888
                          
                          
                          
                          51,404
                          
                          
                          
                          1,371,446Net
      cash (used in) provided by operating activities
                          
                          
                          (414,696
                          )
                          
                          
                          116,736
                          
                          
                          
                          (241,750
                          )Cash
      flows (to) from investing activities:Cash
      Received through Optex Systems, Inc. (Texas) acquisition
                          
                          
                          253,581
                          
                          
                          
                          -
                          
                          
                          
                          -Purchased
      of property and equipment
                          
                          
                          (13,824
                          )
                          
                          
                          (13,338
                          )
                          
                          
                          (103,974
                          )Net
      cash (used in) provided by  investing
activities:
                          
                          
                          239,757
                          
                          
                          
                          (13,338
                          )
                          
                          
                          (103,974
                          )Cash
      flows (to) from financing activities:Private
      Placement net of stock issuance cost
                          
                          
                          874,529
                          
                          
                          
                          -Repayment
      of Loans Payable
                          
                          
                          (207,265
                          )
                          
                          
                          (20,000
                          )Net
      cash (used in) provided by  financing
activities:
                          
                          
                          667,264
                          
                          
                          
                          (20,000
                          )
                          
                          
                          -Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          492,325
                          
                          
                          
                          83,398
                          
                          
                          
                          (345,724
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          -
                          
                          
                          
                          170,183
                          
                          
                          
                          504,753Cash
      and cash equivalents at end of period
                          
                          $
                          492,325
                          
                          
                          $
                          253,581
                          
                          
                          $
                          159,029
  F-4
  Optex
Systems Holdings, Inc.
 (formerly
known as Sustut Exploration, Inc.)
 Statements
of Cash Flows – Restated and Unaudited – continued
 
 Successor
                    
                    
                    Predecessor
                    
                    
                    PredecessorFor the period October 15,
                      2008 through June 28,
                      2009
                    
                    
                    For the period September
                      29, 2008 through October
                      14, 2008
                    
                    
                    Nine months
                      ended June 29,
                      2008Noncash
      investing and financingactivities:Optex
      Systems, Inc. (Delaware) (Successor) purchase of Optex Systems, Inc.
      (Texas) (Predecessor)Cash
      received
                    
                    $
                    253,581
                    
                    
                    
                    -
                    
                    
                    
                    -Accounts
      Receivable
                    
                    
                    1,404,434
                    
                    
                    
                    -
                    
                    
                    
                    -Inventory
                    
                    
                    5,383,929
                    
                    
                    
                    -
                    
                    
                    
                    -Intangibles
                    
                    
                    4,036,790
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      Assets
                    
                    
                    632,864
                    
                    
                    
                    -
                    
                    
                    
                    -Accounts
      Payable
                    
                    
                    (1,953,833
                    )
                    
                    
                    -
                    
                    
                    
                    -Other
      Liabilities
                    
                    
                    (1,868,180
                    )
                    
                    
                    -
                    
                    
                    
                    -Debt
                    
                    
                    (6,000,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Goodwill
                    
                    
                    7,110,415
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of Stock
                    
                    $
                    9,000,000
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Debt to Series A Preferred stockAdditonal
      Paid in Capital ($6,000,000 debt retirement plus accrued interest of
      $159,780)
                    
                    $
                    6,159,780
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of Common shares in exchange for Investor Relations
    ServicesAdditonal
      Paid in Capital (1,250,000 shares issued at $0.001 par)
                    
                    $
                    187,500
                    
                    
                    
                    -
                    
                    
                    
                    -Supplemental
      cash flow information:Cash
      paid for interest
                    
                    $
                    3,817
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      paid for taxes
                    
                    $
                    380,112
                    
                    
                    
                    -
                    
                    
                    
                    -
 
 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 and Comprehensive Income/(Loss) (Restated)
 
 Common
                            
                            
                            Series A
                            
                            
                            
                            
                            
                            Preferred
                            
                            
                            Treasury Stock
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            TotalShares
                            
                            
                            Preferred
                            
                            
                            Common
                            
                            
                            Series A
                            
                            
                            Optex Systems, Inc.
                            
                            
                            Paid in
                            
                            
                            Retained
                            
                            
                            StockholdersOutstanding
                            
                            
                            Shares
                            
                            
                            Stock
                            
                            
                            Stock
                            
                            
                            (Texas)
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            EquityPredecessor
      EntityBalance
      at September 28, 2008
                            
                            
                            10,000
                            
                            
                            
                            
                            
                            $
                            164,834
                            
                            
                            
                            
                            
                            $
                            (1,217,400
                            )
                            
                            $
                            15,246,282
                            
                            
                            $
                            (5,910,700
                            )
                            
                            $
                            8,283,016Net
      Income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            65,332
                            
                            
                            
                            65,332Balance
      at October 14, 2008
                            
                            
                            10,000
                            
                            
                            
                            -
                            
                            
                            $
                            164,834
                            
                            
                            $
                            -
                            
                            
                            $
                            (1,217,400
                            )
                            
                            $
                            15,246,282
                            
                            
                            $
                            (5,845,368
                            )
                            
                            $
                            8,348,348Successor
      EntityBalance
      at October 15, 2008
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Issuance
      of common stock (1)
                            
                            
                            113,333,282
                            
                            
                            
                            -
                            
                            
                            $
                            113,333
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            8,886,667
                            
                            
                            $
                            -
                            
                            
                            $
                            9,000,000Conversion
      of 6,000,000 Debt and Interest to Series A Preferred
shares
                            
                            
                            -
                            
                            
                            
                            1,027
                            
                            
                            
                            -
                            
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            6,159,780
                            
                            
                            
                            -
                            
                            
                            
                            6,159,781Sustut
      Exploration reorganization (2)
                            
                            
                            17,449,991
                            
                            
                            
                            -
                            
                            
                            
                            17,450
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            170,050
                            
                            
                            
                            -
                            
                            
                            
                            187,500Stock
      Option Compensation Expense
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            15,174
                            
                            
                            
                            -
                            
                            
                            
                            15,174Private
      Placement Sale of Stock (2)
                            
                            
                            8,131,667
                            
                            
                            
                            -
                            
                            
                            
                            8,132
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,012,647
                            
                            
                            
                            -
                            
                            
                            
                            1,020,779Net
      Earnings (Loss) from continuing operations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (728,584
                            )
                            
                            
                            (728,584
                            )Balance
      at June 28, 2009
                            
                            
                            138,914,940
                            
                            
                            
                            1,027
                            
                            
                            $
                            138,915
                            
                            
                            $
                            1
                            
                            
                            $
                            -
                            
                            
                            $
                            16,244,318
                            
                            
                            $
                            (728,584
                            )
                            
                            $
                            15,654,650
 
 The
accompanying notes are an integral part of these financial
statements
 
 (1)After
giving affect to the equivalent number of shares issued to existing Optex
shareholders due to the reorganization.
 
 (2)reorganization
and private placement transactions which occurred on March 30,
2009.
  F-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, along with Optex Systems, Inc. , a privately held
Delaware corporation which is Optex Systems  Holdings’ wholly-owned
subsidiary (also known as Successor), entered into a reorganization agreement
and Plan of reorganization, pursuant to which Optex Systems, Inc. (Delaware) was
acquired by Optex Systems Holdings in a share exchange
transaction.  Optex Systems Holdings became the surviving corporation.
At the closing, Optex Systems Holdings changed its name from Sustut Exploration
Inc. to Optex Systems Holdings, Inc. and its year end from December 31 to a
fiscal year ending on the Sunday nearest September 30.
 
 On
October 14, 2008, certain senior secured creditors of Irvine Sensors Corp.,
Longview Fund, L.P. and Alpha Capital Anstalt formed Optex Systems, Inc.
(Delaware), which acquired all of the assets and assumed certain liabilities of
Optex Systems, Inc., a Texas corporation and wholly owned subsidiary of Irvine
Sensors Corporation, (also known as Predecessor) in a transaction that was
consummated via purchase at a public auction.  Following this asset
purchase, Optex Systems, Inc. (Texas) remained a wholly-owned subsidiary of
Irvine Sensors Corporation.
 
 In
accordance with SFAS 141 “Business Combination” and
EITF 98-3 “Determining Whether
a Non-monetary Transaction Involves Receipt of Productive Assets or of a
Business” Optex Delaware’s purchase of substantially all of the assets
and assumption of certain liabilities represented the acquisition of a
business.  EITF 98-3 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.
 
 Optex
Systems, Inc. (Texas) was a privately held Subchapter “S” Corporation from
inception in 1987 until December 30, 2005 when 70% of the issued and outstanding
stock was acquired by Irvine Sensors Corporation, and Optex Systems, Inc.
(Texas) was automatically converted to a Subchapter “C”
Corporation.  On December 29, 2006, the remaining 30% equity interest
in Optex Systems, Inc. (Texas) was purchased by Irvine Sensors
Corporation.
 
 On
February 20, 2009, Sileas Corp., a newly-formed Delaware corporation, owned by
present members of the company’s management, purchased 100% of Longview's equity
and debt interest in Optex Systems, Inc. (Delaware), representing 90% of
the issued and outstanding common equity interests in Optex Systems, Inc.
(Delaware), in a private transaction (the “Acquisition”).  See Note
4.
 
 Optex
Systems, Inc. (Delaware) operated as a privately-held Delaware corporation until
March 30, 2009, when as a result of the reorganization agreement (described
above and also in Note 5), it became a wholly-owned subsidiary of Optex Systems
Holdings.  Sileas is the majority owner (parent) of Optex Systems
Holdings owning approximately 73% of Optex Systems Holdings. Optex Systems
Holdings plans to carry on the business of Optex Systems, Inc. (Delaware) as its
sole line of business and all of Optex Systems  Holdings’ operations
are conducted by and through Optex Systems, Inc.
(Delaware).  Accordingly, in subsequent periods the financial
statements presented will be those of the accounting acquirer.  The
financial statements of Optex Systems Holdings represent subsidiary statements
and do not include the accounts of its majority owner.
 
 The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet.  As of June 28, 2009, Optex Systems
Holdings operated with 107 full-time equivalent employees.
  F-7
  Optex
Systems Holdings manufactures optical sighting systems and assemblies, primarily
for Department of Defense applications.  Its products are installed on
a variety of U.S. military land vehicles such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Systems Holdings’
products consist primarily of build to customer print products that are
delivered both directly to the military and to other defense prime
contractors.
 
 In
February 2009, Optex Systems Holdings’ ISO certification status was
upgraded from  9001:2000 to 9001:2008 bringing Optex Systems Holdings
into compliance with the new ISO standards rewritten to align with ISO
14001.
 
 Note
2 - Accounting Policies
 
 Basis
of Presentation
 
 Principles of
Consolidation:The consolidated financial statements include
the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex
Systems, Inc. (Delaware).  All significant inter-company balances and
transactions have been eliminated in consolidation.
 
 The
accompanying financial statements include the results of operations and cash
flows  of Optex Systems, Inc. (Delaware), the accounting acquirer in
the Sustut reorganization and the Successor in the October 14, 2008 Optex
Systems, Inc. (Texas) asset purchase transaction, for the period from October
15, 2008 through June 28, 2009.  The accompanying financial
statements include the balance sheet at September 28, 2008 and the results
of operations, changes in stockholders’ equity and cash flows for the period
from September 29, 2008 through October 14, 2008 of Optex Systems, Inc. (Texas),
Predecessor.
 
 Although,
Optex Systems, Inc. (Texas) (predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements.  The Optex
Systems, Inc. (Texas) accounts have been presented on the basis of push
down accounting in accordance with Staff Accounting Bulletin No.
54  Application of
“Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired
by Purchase . SAB 54 states that the push down basis of accounting should
be used in a purchase transaction in which the entity becomes wholly-owned.
Under the push down basis of accounting certain transactions incurred by the
parent company, which would otherwise be accounted for in the accounts of the
parent, are “pushed down” and recorded on the financial statements of the
subsidiary. Accordingly, items resulting from the Optex Systems, Inc. (Texas)
purchase transaction such as goodwill, debt incurred by the parent to acquire
the subsidiary and other costs related to the purchase have been  recorded on the
financial statements of Optex Systems Holdings.
 
 Upon
completing the business combination with Sustut on March 30, 2009, Optex Systems
Holdings elected to change its fiscal year to match that of Optex Systems, Inc.
(Delaware). Accordingly, all activity of the combined companies was presented as
of the quarter’s end of the accounting acquirer, which was March 29,
2009.
 
 Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior (on March 29, 2009) so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the reorganization.
 
 The
condensed consolidated financial statements of Optex Systems Holdings included
herein have been prepared by Optex Systems Holdings, without audit, pursuant to
the rules and regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements prepared in conjunction
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Optex Systems Holdings believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the annual audited financial statements and the notes thereto included in
Optex Systems Holdings’ Forms 8-K and other reports filed with the
SEC.
 
 The
accompanying unaudited interim financial statements reflect all adjustments of a
normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
of Optex Systems Holdings for the interim periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other interim period or for the fiscal year taken as a whole.
Certain information that is not required for interim financial reporting
purposes has been omitted.
  F-8
  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 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:
 
 Successor
                        As of June
                        28, 2009
                      
                      
                      Predecessor
                        As of
                        September
                        28, 2008Raw
      Materials
                      
                      $
                      6,939,094
                      
                      
                      $
                      5,575,520Work
      in Process
                      
                      
                      3,529,351
                      
                      
                      
                      4,199,657Finished
      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
 
 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.
  F-9
  Earnings per
Share: Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
year presented. Diluted earnings per common share give the effect to the assumed
exercise of stock options when dilutive. In a loss year, the calculation for
basic and diluted earnings per share is considered to be to be the same, as the
impact of potential common shares is anti-dilutive. For the period October 15,
2008 through June 28, 2009 there were 2,681,649 stock options issued and
outstanding that could dilute future earnings. For the period September 29, 2008
through October 14, 2008 and for the nine months ended June 29, 2008, there were
no stock options that could dilute future earnings
 
 Note
3 - Recent Accounting Pronouncements
  In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. As
participating securities, we will be required to include these instruments in
the calculation of our basic earnings per share, and we will need to calculate
basic earnings per share using the "two-class method." Restricted stock is
currently included in our dilutive earnings per share calculation using the
treasury stock method. The two-class method of computing earnings per share is
an earnings allocation formula that determines earnings per share for each class
of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. As such,
Optex Systems Holdings is required to adopt these provisions at the beginning of
the fiscal year ending October 3, 2010. Optex Systems Holdings does not expect
adoption of FSP EITF 03-6-1 to have a material effect on Optex
Systems  Holdings’ financial statements.
 
 In May
2009, FASB issued SFAS No. 165, "Subsequent Events". SFAS 165
establishes principles and requirements for the reporting of events or
transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. SFAS 165 is effective for
financial statements issued for fiscal years and interim periods ending after
June 15, 2009. As such, Optex Systems Holdings adopted these provisions at the
beginning of the interim period ended June 28, 2009. Adoption of SFAS 165 did
not have a material effect on Optex Systems  Holdings’ financial
statements.
 
 In June
2009, FASB issued Statement of Financial Accounting Standard No. 168, " The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles -
a replacement of FASB Statement No. 162". SFAS 168 replaces Statement 162
and establishes the FASB Accounting Standards CodificationTM (Codification) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. SFAS 168 is effective for financial statements issued
for fiscal years and interim periods ending after September 15, 2009. As such,
Optex Systems Holdings is required to adopt these provisions at the beginning of
the interim period ending September 27, 2009. Optex Systems Holdings does not
expect adoption of SFAS 168 to have a material effect its financial
statements.
 
 In June
2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No.109 ”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes
”. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on Optex
Systems  Holdings’ financial position, results of operations, or cash
flows.
 
 In
September 2006, the FASB issued FASB Statement 157, “Fair Value Measurements”.
FASB No. 157 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB No.
157 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB No. 157 does not require any new fair
value measurements. However, for some entities, the application of FASB No. 157
will change current practice. The changes to current practice resulting from the
application of FASB No. 157 relate to the definition of fair value, the methods
used to measure fair value and the expanded disclosures about fair value
measurements. The provisions of FASB No. 157 are effective as of January 1,
2008, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. However, delayed application of
this statement is permitted for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years. The adoption of FASB No. 157 did not have a material impact on Optex
Systems  Holdings’ financial position, results of operations, or cash
flows.
  F-10
  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 Optex
Systems Holdings’ financial position, results of operations, or cash
flows.
  In March
2007, EITF issued No. 06-10, "Accounting for Collateral
Assignment Split-Dollar Life Insurance Agreements”.  EITF 06-10
provides guidance for determining a liability for the postretirement benefit
obligation as well as recognition and measurement of the associated asset on the
basis of the terms of the collateral assignment agreement. EITF 06-10 is
effective for fiscal years beginning after December 15, 2007. The adoption of
EITF 06-10 did not have a material impact on Optex Systems Holdings’
financial position, results of operations, or cash flows.
 
 In
December 2007, FASB issued SFAS No. 141(R), “Business Combinations” and
SFAS No. 160, “Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51”. These new standards will significantly change
the accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. Statement Nos. 141(R)
and 160 are required to be adopted simultaneously and are effective for the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited. Optex Systems Holdings is currently evaluating the
impact of adopting SFAS Nos. 141(R) and SFAS 160 on its financial
statements.
  In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007. Optex Systems Holdings does not have any
outstanding stock options issued before December 31, 2007.
 
 In March
2008, FASB issued SFAS No. 161, " Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”. SFAS 161 requires enhanced disclosures about an entity’s derivative
and hedging activities. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008 with
early application encouraged. As such, Optex Systems Holdings is required to
adopt these provisions at the beginning of the fiscal year ended September 30,
2009. Optex Systems Holdings is currently evaluating the impact of SFAS 161 on
its financial statements but does not expect it to have a material
effect.
 
 In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the united States. SFAS 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption of FASB No. 162 did
not have a material impact on Optex Systems  Holdings’ financial
position, results of operations, or cash flows.
 
 In May
2008, FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60 ". SFAS
163 interprets Statement 60 and amends existing accounting pronouncements to
clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, Optex Systems Holdings is
required to adopt these provisions at the beginning of the fiscal year ended
September 30, 2011. Optex Systems Holdings is currently evaluating the impact of
SFAS 163 on its financial statements but does not expect it to have a material
effect.
  F-11
  Note
4 — Acquisition of Substantially All of the Assets of Optex Systems, Inc.
(Texas)
 
 Acquisition
of Assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware) on
October 14, 2008
 
 On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), Arland Holdings, Ltd. as discussed below,
in exchange for a $6 million note payable from Optex Systems, Inc. (Delaware)
and a $9 million equity interest in Optex Systems, Inc. (Delaware) (which
consisted of the issuance by Optex Systems, Inc. (Delaware) of 45,081,350 and
4,918,650 shares of its common stock to each of Longview Fund and Alpha,
respectively). On October 30, 2008, Alpha sold its Optex Systems, Inc.
(Delaware) common stock to Arland Holdings, Ltd. There was no contingent
consideration associated with the purchase. Longview and Arland Holdings, Ltd.,
owned Optex Systems, Inc. (Delaware) until February 20, 2009, when Longview sold
100% of its equity interests in Optex Systems, Inc. (Delaware) to Sileas, as
discussed below.
 
 Optex
Systems, Inc. (Delaware) purchased all of the assets of Optex Systems, Inc.
(Texas), including: intellectual property, production processes and know-how,
and outstanding contracts and customer relationships. Optex Systems, Inc.
(Delaware) also assumed certain liabilities of Optex Systems, Inc. (Texas)
consisting of accounts payable and accrued liabilities. Optex Systems Holdings’
management intends to improve the business’s ability to serve its existing
customers and to attract new customers by providing quality products and
superior service which will be achieved by improving Optex Systems Holdings’
working capital availability as opposed to the limited working capital that was
available during the time period in which the assets were owned by Irvine
Sensors Corporation.
 
 Optex
Systems, Inc. (Delaware) has allocated the consideration for its acquisition of
the Purchased Assets among tangible and intangible assets acquired and
liabilities assumed based upon their fair values. Assets that met the criteria
for recognition as intangible assets apart from goodwill were also valued at
their fair values.
 
 The
purchase price was assigned to the acquired interest in the assets and
liabilities of Optex Systems Holdings as of October 14, 2008 as
follows:
 
 Assets:Current
      assets, consisting primarily of inventory of $5,383,929 and accounts
      receivable of $1,404,434
                    
                    $
                    7,330,910Identifiable
      intangible assets
                    
                    
                    4,036,789Purchased
      Goodwill
                    
                    
                    7,110,416Other
      non-current assets, principally property and equipment
                    
                    
                    343,898Total
      assets
                    
                    $
                    18,822,013Liabilities:Current
      liabilities, consisting of accounts payable of $1,953,833 and accrued
      liabilities of $1,868,180
                    
                    
                    3,822,013Acquired
      net assets
                    
                    $
                    15,000,000
 
 The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
 TotalContracted
      Backlog - Existing Orders
                    
                    $
                    2,763,567Program
      Backlog - Forecasted Indefinite Delivery/Indefinite Quantity
      awards
                    
                    
                    1,273,222Total
      Intangible Asset to be amortized
                    
                    $
                    4,036,789
 
  F-12
  Identifiable
intangible assets primarily consist of customer and program backlog and will be
amortized between general and administrative expenses and costs of sales
according to their respective estimated useful lives as follows:
 
 2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013Contracted
      backlog amortized by delivery schedule
                      
                      COS
                      
                      $
                      1,666,559
                      
                      
                      $
                      718,289
                      
                      
                      $
                      126,158
                      
                      
                      $
                      19,614
                      
                      
                      $
                      4,762Contracted
      backlog amortized by delivery schedule
                      
                      G&A
                      
                      
                      149,990
                      
                      
                      
                      64,646
                      
                      
                      
                      11,354
                      
                      
                      
                      1,765
                      
                      
                      
                      429Program
      backlog amortized straight line across 5 years
                      
                      G&A
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645
                      
                      
                      
                      254,645Total
      Amortization by Year
                      
                      
                      
                      $
                      2,071,194
                      
                      
                      $
                      1,037,580
                      
                      
                      $
                      392,157
                      
                      
                      $
                      276,024
                      
                      
                      $
                      259,836
 
 The
accompanying unaudited pro forma financial information for the consolidated
predecessor and successor three and nine months ended June 28, 2009 and
successor three and nine months ended June 29, 2008 present the historical
financial information of the accounting acquirer. The pro forma financial
information is presented for informational purposes only. Such information is
based upon the standalone historical results of each entity and does not reflect
the actual results that would have been reported had the acquisition been
completed when assumed, nor is it indicative of the future results of operations
for the combined enterprise.
 
 Pro forma
revenue and earnings per share information is presented cumulatively in Note
5.
 
 Secured
Promissory Note Issued in Connection with Purchase by Optex Systems, Inc.
(Delaware) (Successor)
 
 In
connection with the public sale of the Optex Systems, Inc. (Texas) (Predecessor)
assets to Optex Systems, Inc. (Delaware) (Successor), Optex Systems, Inc.
(Delaware) delivered to Longview and Alpha Secured Promissory Notes, due
September 19, 2011, in the principal amounts of $5,409,762 and $540,976,
respectively. On February 20, 2009, Longview sold its Optex Systems, Inc.
(Delaware) promissory note to Sileas, as described below. On March 27, 2009,
Sileas and Alpha exchanged their Notes plus accrued and unpaid interest thereon
for 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock.
 
 Acquisition
by Sileas on February 20, 2009
 
 On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware), in the
“Acquisition”. As of the date of this transaction, Sileas is the majority owner
of Optex Systems Holdings.
 
 Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
 
 As a
result of the transaction described above between Sileas and Longview Fund, LP
on February 20, 2009, Sileas, currently majority owner of Optex Systems
Holdings, executed and delivered to Longview, a Secured Promissory Note due
February 20, 2012 in the principal amount of $13,524,405. The Note bears simple
interest at the rate of 4% per annum, and the interest rate upon an event of
default increases to 10% per annum. In the event Optex Systems Holdings sells or
conveys all or substantially all its assets to a third party entity for more
than nominal consideration, other than a reorganization into Sileas or
reincorporation in another jurisdiction, then this Note shall be immediately due
and owing without demand. In the event that a Major Transaction occurs prior to
the maturity date resulting in the Borrower receiving Net Consideration with a
fair market value in excess of the principal and interest due under the terms of
this Secured Note, (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay an amount equal to 90% of the
Optex Consideration. The obligations of Sileas under the Note are secured by a
security interest in Optex Systems Holdings’ common and preferred stock
owned by Sileas that was granted to Longview pursuant to a Stock Pledge
Agreement delivered by Sileas to Longview and also by a lien on all of the
assets of Sileas.
 
 Optex
Systems Holdings has not guaranteed the note and Longview is not entitled to
pursue Optex Systems Holdings in the event of a default by Sileas. Therefore,
there are no actual or potential cash flow commitments from Optex Systems
Holdings. In the event of default by Sileas on its obligations under the note,
Longview would only be entitled to receive Optex Systems Holdings common and
preferred stock held by Sileas.
  F-13
  Note
5 –reorganization Plan and Private Placement
 
 Reorganization/Share
Exchange
 
 On March
30, 2009, the reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of common stock with the
shares of common stock of Optex Systems Holdings as follows: (i) the outstanding
85,000,000 shares of Optex Systems, Inc. (Delaware) common stock were exchanged
by Optex Systems Holdings for 113,333,282 shares of Company common stock, (ii)
the outstanding 1,027 shares of Optex Systems, Inc. (Delaware) Series A
preferred stock were exchanged by Optex Systems Holdings for 1,027 shares of
Company Series A preferred stock and (iii) the 8,131,667 shares of Optex
Systems, Inc. (Delaware) common stock purchased in the private placement were
exchanged by Optex Systems Holdings for 8,131,667 shares of Company common
stock. Following the reorganization, Optex Systems, Inc. (Delaware) remained a
wholly-owned subsidiary of Optex Systems Holdings.
 
 Shares
outstanding of Optex Systems Holdings just prior to the close consisted of
17,441,991 shares of which 1,250,000 shares were issued on March 27, 2009 as
payment for Investor Relations Services, of which 700,000 were surrendered to
Optex Systems Holdings upon termination of one of the Investor Relations
contracts in June 2009. See Note 11 – “Subsequent Events” for a further
discussion of the termination of the relationship with one of Optex
Systems Holdings’ investor relations firms and appointment of a replacement
service provider.
 
 Private
Placement
 
 Prior to
the closing of the reorganization agreement, as of March 30, 2009 , Optex
Systems Holdings accepted subscriptions from accredited investors for a total of
27.1 units, for $45,000 per unit, with each unit consisting of 300,000 shares of
common stock, of Optex Systems Holdings and warrants to purchase 300,000 shares
of common stock for $0.45 per share for a period of five years from the initial
closing, which were issued by Optex Systems Holdings after the closing
referenced above. Gross proceeds to Optex Systems Holdings were $1,219,750, and
after deducting (i) a cash finder’s fee of $139,555, (ii) non-cash consideration
of indebtedness owed to an investor of $146,250, and (iii) stock issuance costs
of $59,416, net proceeds were $874,529. The finder also received five year
warrants to purchase 2.39 units, at an exercise price of $49,500 per
unit.
 
 The
following table represents the reorganization and Private Placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirers’ period
end:
  F-14
  Optex
Systems Holdings, Inc.
 Balance
Sheet Adjusted for reorganization and Private Placement
  Unaudited
                        Quarter
                        Ended March 29,
                        2009
                      
                      
                      reorganization
                        Adjustments
                        (1)
                      
                      
                      Private
                        Placement
                        Adjustments
                      
                      
                      Unaudited Quarter
                        Ended March 29,
                        2009AssetsCurrent
      Assets
                      
                      $
                      8,880,436
                      
                      
                      $
                      187,500
                      
                      
                      $
                      929,738
                      
                      
                      $
                      9,997,674Non-current
      Assets
                      
                      
                      10,422,425
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,422,425Total
      Assets
                      
                      $
                      19,302,861
                      
                      
                      $
                      187,500
                      
                      
                      $
                      929,738
                      
                      
                      $
                      20,420,099LiabilitiesLoans
      Payable
                      
                      
                      146,709
                      
                      
                      
                      
                      
                      
                      
                      (146,250
                      )
                      
                      
                      459Other
      Current Liabilities
                      
                      
                      4,416,403
                      
                      
                      
                      -
                      
                      
                      
                      55,209
                      
                      
                      
                      4,471,612Total
      Liabilities
                      
                      $
                      4,563,112
                      
                      
                      $
                      -
                      
                      
                      $
                      (91,041
                      )
                      
                      $
                      4,472,071EquityOptex
      Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
      authorized, 138,914,940 shares issued and outstanding as of March 29,
      2009)
                      
                      
                      113,333
                      
                      
                      
                      17,450
                      
                      
                      
                      8,132
                      
                      
                      
                      138,915Optex
      Systems Holdings, Inc.  preferred stock (par value $0.001per
      share, 5,000 shares authorized,  1027 shares of Series A
      Preferred issued and outstanding)
                      
                      
                      1
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1Additional
      Paid in Capital
                      
                      
                      15,046,446
                      
                      
                      
                      170,050
                      
                      
                      
                      1,012,647
                      
                      
                      
                      16,229,144Retained
      Earnings
                      
                      
                      (420,031
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (420,031
                      )Total
      Stockholders Equity
                      
                      $
                      14,739,749
                      
                      
                      $
                      187,500
                      
                      
                      $
                      1,020,779
                      
                      
                      $
                      15,948,028Total
      Liabilities and Stockholders Equity
                      
                      $
                      19,302,861
                      
                      
                      $
                      187,500
                      
                      
                      $
                      929,738
                      
                      
                      $
                      20,420,099
 
 (1) Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009 reorganization. Other
assets include $187,500 in prepaid expenses for investor relation services to be
realized over the next 12 months. The services were prepaid by the issue of
1,250,000 Sustut shares issued by Sustut prior to March 30, 2009. The prepaid
expense covers April 2009 through April 2010 and will be reflected on the
consolidated Statement of Operations for Optex Systems Holdings as expensed. See
Note 11 - Subsequent Events. 700,000 of these shares were returned to Optex
Systems Holdings subsequent to the quarter end.
  The
expenses reflected by Optex Systems Holdings on its Statement of Operations for
the period from April 1, 2009 through March 31, 2010 will be increased by
$46,875 per calendar quarter (as a non-cash expense) as a result of the issuance
of the 1,250,000 shares for Investor Relations Services by Sustut and are
carried on the Sustut Balance Sheet as a prepaid expense. The same Investor
Relations agreements also call for an aggregate cash payment of $8,000 per month
which will increase the expense by an additional $24,000 per quarter. Therefore,
the total impact of the agreements for Investor Relations Services is $70,875
per quarter (pretax) including both the current cash expense and the
amortization of the prepaid expense which is carried on the Condensed
Consolidated Balance Sheet of Optex Systems Holdings. See Note 11 - Subsequent
Events. 700,000 of these shares were returned to Optex Systems Holdings
subsequent to the quarter end.
 
 The
accompanying unaudited pro forma financial information for the consolidated
successor and predecessor nine months ended June 28, 2009 and successor nine
months ended 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 Systems, Inc. (Texas) and reorganization Plan had occurred
on the first day of each of the years.
  F-15
  Unaudited
                  
                  
                  UnauditedThree Months Ended
                  
                  
                  Nine Months EndedJune 28,
                    2009
                  
                  
                  June 29,
                    2008
                  
                  
                  June 28,
                    2009
                  
                  
                  June 29,
                    2008Revenues
                  
                  
                  6,983,930
                  
                  
                  
                  3,881,053
                  
                  
                  
                  20,956,300
                  
                  
                  
                  13,925,073Net
      Income (Loss)
                  
                  
                  (308,553
                  )
                  
                  
                  35,877
                  
                  
                  
                  (653,750
                  )
                  
                  
                  (780,016
                  )Diluted
      earnings per share
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.01
                  )Weighted
      Average Shares Outstanding
                  
                  
                  138,914,940
                  
                  
                  
                  138,914,940
                  
                  
                  
                  138,914,940
                  
                  
                  
                  138,914,940
 
 The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from Irvine Sensors Corporation and the elimination
of employee stock bonus compensation previously allocated from Irvine Sensors
Corporation to reflect the costs of the ongoing entity.  There is no
expected tax effect of the proforma adjustments for the periods affected in 2008
due to net loss and accumulated retained deficit of Irvine Sensors
Corporation.
 
 Note
6 Commitments and Contingencies
  Leases
 
 Optex
Systems Holdings leases its office and manufacturing facilities under two
non-cancellable operating leases expiring November 2009 and February 2010 in
addition to maintaining several non-cancellable operating leases for office and
manufacturing equipment.  Optex Systems Holdings is in negotiation to
enter into new leases for the facilities; however, in the event the negotiations
are not successful, Optex Systems Holdings believes it can secure replacement
facilities upon similar terms in the surrounding vicinity.  Total
expenses under these facility lease agreements for the three and 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, respectively.  At June 28,
2009, the remaining minimum lease payments under non-cancelable operating leases
for equipment, office and facility space are as follows:
  Operating
                    LeasesFiscal
      Years:2009
                  
                  $
                  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 Systems, Inc. (Delaware) borrowed
$146,709 from Longview and issued a promissory note dated September 23, 2008, to
Longview in connection therewith.   Pursuant to an Allonge No. 1 to
Promissory Note, dated January 20, 2009, the Maturity Date was extended until
March 31, 2009.  On March 30, 2009 in conjunction with the
reorganization and Private Placement, Longview Fund purchased 3.25 units of the
Private Placement using $146,250 of the outstanding Note Payable as
consideration for the purchase. (See Note 5).
 
 Short
term note payable (Qioptic) - On
November 20, 2008, Optex Systems, Inc. (Delaware) issued a promissory note to
Qioptiq Limited in the amount of $117,780. The Note originated as a trade
payable as of September 28, 2008 in the amount of $227,265, and was paid in full
as of March 29, 2009.
  F-16
  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, Optex Systems, Inc. (Delaware) was authorized to issue
200,000,000 shares of $0.001 par value common stock, of which 85,000,000 shares
were issued and outstanding as follows:
 
 Sileas
      Corporation
                    
                    
                    76,638,295Arland
      Holdings, Ltd.
                    
                    
                    8,361,705Total
      Outstanding
                    
                    
                    85,000,000
 
 Reorganization
& Private Placement:
 
 On March
29, 2009, as a result of the reorganization agreement and private placement, the
85,000,000 outstanding shares of Optex Systems, Inc. (Delaware) as of March 30,
2009 were exchanged for 113,333,282 shares of Optex Systems Holdings (formerly
Sustut Exploration, Inc.). An additional 8,131,667 shares were issued as a
result of the private placement closed prior to the reorganization.
 
 Each
share of stock entitles the holder to one vote on matters brought to a vote of
the shareholders.
 
 The
company granted an officer at the consummation of the reorganization, options:
to purchase 1,414,649 shares with exercise price of $0.15 per share. The options
vest 34% one year following the date of grant, and 33% on each of the second and
third anniversaries following the date of grant. See Note 10 - Stock Based
Compensation.
 
 Series
A preferred stock
 
 On March
24, 2009, Optex Systems Holdings filed a Certificate of Designation with the
Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”.
This Certificate of Designation was approved by Optex
Systems  Holdings’ Board of Directors and Shareholders at a Board
Meeting and Shareholders Meeting held on February 25, 2009. The Certificate of
Designation sets forth the following terms for the Series A preferred stock: (i)
number of authorized shares: 1,027; (ii) per share stated value: $6,000; (iii)
liquidation preference per share: stated value; (iv) conversion price: $0.15 per
share as adjusted from time to time; and (v) voting rights: votes along with the
common stock on an as converted basis with one vote per share.
 
 The
Series A preferred stock entitles the holders to receive cumulative dividends at
the rate of 6% per annum payable in cash at the discretion of Board of
Directors. Each share of preferred stock is immediately convertible into common
shares at the option of the holder which entitles the holder to receive the
equivalent number of common shares equal to the stated value of the preferred
shares divided by the conversion price, which was initially set at $0.15 per
share.
 
 Holders
of preferred shares receive preferential rights in the event of liquidation.
Additionally the preferred stock shareholders are entitled to vote together with
the common stock on an ”as-converted” basis.
 
 On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total amount
of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of
Series A preferred stock. On March 30, 2009 shares of Optex Systems, Inc. Series
A preferred stock was exchanged on a 1:1 basis for Series A preferred stock of
Optex Systems Holdings.
  F-17
  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.
 
 Successor
                        
                        
                        Predecessor
                        
                        
                        Successor
                        
                        
                        Predecessor
                        
                        
                        PredecessorThree Months
                          ended June 28,
                          2009
                        
                        
                        Three Months
                          ended June 29,
                          2008
                        
                        
                        For the period
                          October 15, 2008
                          through June 28,
                          2009
                        
                        
                        For the period
                          September 29,
                          2008 through
                          October 14,
                          2008
                        
                        
                        Nine Months
                          ended June 29,
                          2008Numerator:Net
      loss
                        
                        $
                        (308,553
                        )
                        
                        $
                        (241,147
                        )
                        
                        $
                        (728,584
                        )
                        
                        $
                        65,332
                        
                        
                        $
                        (1,613,196
                        )Denominator:Weighted
      average shares
                        
                        
                        138,914,940
                        
                        
                        
                        10,000
                        
                        
                        
                        121,891,852
                        
                        
                        
                        10,000
                        
                        
                        
                        10,000Basic
      and diluted net loss per share
                        
                        $
                        (0.00
                        )
                        
                        $
                        (24.11
                        )
                        
                        $
                        (0.01
                        )
                        
                        $
                        6.53
                        
                        
                        $
                        (161.32
                        )
 
 Note
10-Stock Based Compensation
 
 On March
26, 2009, the Board of Directors and Shareholders of Sustut adopted the 2009
Stock Option Plan providing for the issuance of up to 6,000,000 shares
to Company officers, directors, employees and to independent contractors
who provide services to Optex Systems Holdings.
 
 Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or committee set up to act as a compensation
committee of the Board of Directors and terminate after the earliest of the
following events: expiration of the option as provided in the option agreement,
90 days subsequent to the date of termination of the employee, or ten years from
the date of grant (five years from the date of grant for incentive options
granted to an employee who owns more than 10% of the total combined voting power
of all classes of Optex Systems Holdings stock at the date of
grant).  In some instances, granted stock options are immediately
exercisable into restricted shares of common stock, which vest in accordance
with the original terms of the related options. Optex Systems Holdings
recognizes compensation expense ratably over the requisite service
period.
 
 The
option price of each share of common stock shall be determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share shall in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive option granted under the
2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings stock, shall have
an exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.
  F-18
  On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 were granted
to an officer of Optex Systems Holdings which vest as follows: 34% after
the first year, and 33% each after the second and third years.  These
options carry a grant expiration date of seven years after
issuance.  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, Optex Systems
Holdings anticipates an annualized employee turnover rate of 3% per year, and as
such anticipate that only 1,174,786 of the 1,267,000 shares will vest as of the
end of the contract term.  As of June 28, 2009 none of the stock
options had vested.
 
 For the
three months and nine months ended June 28, 2009, Optex Systems Holdings
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 Optex Systems Holdings’
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 Optex Systems Holdings’ 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 space industry in
accordance with Question 6 of SAB Topic 14.D.1.  In making this
determination and trying to find another similar company, Optex Systems Holdings
considered the industry, stage of life cycle, size and financial leverage of
such other entities.  Based on the development stage of Optex Systems
Holdings, similar companies with enough historical data were not
available.   Optex Systems Holdings utilized the three year
volatility of the SPADE Defense Index, which is a diversified index of 58
companies in the same industry as Optex Systems Holdings.  The
risk-free interest rate is based on the implied yield available on U.S. Treasury
issues with an equivalent term approximating the expected life of the options
depending on the date of the grant and expected life of the
options.  The expected life of options used was based on the
contractual life of the option granted.  Optex Systems Holdings
determined the expected dividend rate based on the assumption and expectation
that earnings generated from operations are not expected to be adequate to allow
for the payment of dividends in the near future. 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)
              4.07%
      for grant expected life of 7
years.
  F-19
  Optex
Systems Holdings has granted stock options to officers and employees as
follows:
 
 Date of
                        
                        Shares
                        
                        
                        Exercise
                        
                        
                        Shares Outstanding
                        
                        Expiration
                        
                        VestingGrant
                        
                        Granted
                        
                        
                        Price
                        
                        
                        As of 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
                        
                        
                        
                        316,750
                        
                        05/13/2016
                        
                        05/14/2013Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,681,649
 
 The
following table summarizes the status of Optex Systems Holdings’ aggregate
stock options granted under the incentive stock option plan:
  Number
                    
                    
                    Weightedof Shares
                    
                    
                    Average
                    
                    
                    WeightedRemaining
                    
                    
                    Intrinsic
                    
                    
                    Average
                    
                    
                    AggregateSubject to Exercise
                    
                    Options
                    
                    
                    Price
                    
                    
                    Life (Years)
                    
                    
                    ValueOutstanding
      as of 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
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
 
 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 Optex Systems Holdings’ 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
                      
                      
                      -
                      
                      
                      $Non-vested
      granted — nine months ended June 28, 2009
                      
                      
                      2,681,649
                      
                      
                      $
                      0.14Vested — nine
      months ended June 28, 2009
                      
                      
                      -
                      
                      
                      $
                      0.00Forfeited — nine
      months ended June 28, 2009
                      
                      
                      -
                      
                      
                      $Non-vested
      as of June 28, 2009
                      
                      
                      2,681,649
                      
                      
                      $
                      0.14
 
 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
 
 Investor
Relations:
 
 On June
26, 2009, Optex Systems Holdings terminated its Investor Relations Agreement
with American Capital Ventures, Inc., and pursuant to this termination, American
Capital Ventures returned 700,000 of the 1,000,000 restricted shares of Company
common stock it received pursuant to the agreement.
  F-20
  Effective
as of June 29, 2009, Optex Systems Holdings entered into a Consulting Agreement
with ZA Consulting, Inc. for the provision of consulting services to Optex
Systems  Holdings’ management including investor support; broker
relations; conducting due diligence meetings with brokers, analysts,
institutional money managers and financial media companies; attendance at
investor conferences and trade shows; and assistance in the preparation and
dissemination of press releases and stockholder communications.  ZA
Consulting will also assist Optex Systems Holdings with corporate communications
involving brand, product, and corporate awareness.  The term of the
Agreement is for one year terminating June 30, 2010.  For services
rendered, ZA Consulting was paid $150,000 upon execution of the Agreement and
will receive $5,000 per month for the duration of the agreement, and it received
480,000 shares of common stock which vest at the rate of 40,000 shares per
month.
  The
expenses reflected by Optex Systems Holdings on its Statement of Operations for
the period from June 29, 2009 through June 27, 2010 will be increased by $36,000
over the next twelve months due to amortization of the prepaid expense of
$150,000 and non cash related stock issues as a result of the change in
firms.
 
 Private
Placement:
 
 On June
29, 2009, 750,000 common shares were sold in a private transaction for gross
proceeds of $150,000.
 
 Lease
Agreement:
 
 On
October 27, 2009, Optex Systems Holdings borrowed $250,000 from Longview
pursuant to a promissory note, which originally expired on December 1, 2009, but
was extended until July 15, 2010.  The note bears interest at the rate
of 10% per annum, and all accrued and unpaid interest will be due upon
maturity.  Optex will make a prepayment equal to 50% of the then
outstanding principal amount plus accrued and unpaid interest thereon upon the
closing of a credit facility or other equity or debt financing from which the
net proceeds are at least $900,000, with any remaining unpaid balance due on
July 15, 2010.  In exchange for the extension, Optex Systems Holdings
granted Longview a warrant to purchase 100,000  shares of restricted
common stock with an exercise price of $0.15 per share and a term of three
years.
 
 Effective
as of January 4, 2010, Optex Systems Holdings, Inc. renewed its Richardson, TX
lease.  Under the terms of the amendment:
 
 ·
              The lease term is extended until
      July 31, 2015.
 ·
              The base rent is as follows:
      until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
      per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
      foot.
 ·
              A $195,352.00 improvement
      allowance is included.
 ·
              For the first two years of the
      extended term, the landlord has granted the option to take over additional
      space at similar terms as in the
  amendment.
 
 The
company has evaluated subsequent events for the period March 30, 2009 through
January 8, 2010, the date its financial statements were issued, and
concluded there were no other events or transactions occurring during this
period that required recognition of disclosure in its financial
statements.
 
 Note
12-Restatement of September 28, 2008 financial statements
  The
financial statements have been reissued for the correction of an error to
properly reflect the following:
 
 ·
              Optex Systems Holdings
      reclassified the asset impairment of goodwill from other expenses to an
      operating expense. This reclassification increased the loss from
      operations by $1,586,416 to $4,653,743 with no change to the net
      loss.
  F-21
  ·
              Note 2 has been restated to
      accurately reflect Optex Systems Holdings’ revenue recognition
      policy.
 
 ·
              Note 5 has been restated to
      properly state the pro forma earnings as if the acquisition of Optex
      Systems, Inc. (Texas) had occurred on the first day of each of the
      years.
 
 ·
              Note 7 has been restated to
      reflect the estimated general and administrative expenses assuming Optex
      Systems, Inc. (Texas) was operated on a stand-alone
      basis.
 
 ·
              Note 14 has been revised to
      reflect only those transactions related to the predecessor
      entity.
 
 The above
restatements had no effect on the balance sheet, statements of stockholders’
equity, net loss or cash flows for the year ended September 28,
2008.
 
 Note
13-Restatement of June 28, 2009 financial statements
 
 The
presentation of the October 14, 2008 Optex Systems, Inc. (Delaware) acquisition
of all the assets and certain liabilities of Optex Systems, Inc. (Texas) has
been restated to properly reflect Optex Systems, Inc. (Delaware) as the
successor entity and Optex Systems, Inc. (Texas) as the predecessor entity. The
acquisition of the assets and certain liabilities of Optex Systems, Inc. (Texas)
was deemed a business acquisition (See Note 1) therefore the activity of Optex
Systems, Inc. (Texas) is presented as the predecessor.  Additionally,
Optex Systems Holdings, Inc’s outstanding common stock and additional paid in
capital has been restated to properly reflect the number and dollar value of
Sustut Exploration Shares as of the date of reorganization.
 
 The
effect of the restatement is a reclassification of stockholders’ equity as
follows:
 
 OriginallyReported
                  
                  
                  RestatementAdditional
      Paid-in-Capital
                  
                  
                  22,087,136
                  
                  
                  
                  16,244,318Optex
      Systems Holdings, Inc. Common Stock
                  
                  
                  141,465
                  
                  
                  
                  138,915Retained
      Earnings
                  
                  
                  (6,573,952
                  )
                  
                  
                  (728,584
                  )
 
 Assets
and liabilities remained unchanged.  There is no effect on overall net
income and cash flows however the Statements of Operations and Cash Flows have
been restated to present the breakdown for the period between successor and
predecessor.
  Note 5
has been restated to reflect the estimated general and administrative expenses
assuming Optex Systems, Inc. (Texas) was operated on a stand alone
basis.
  F-22
  ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  Management’s
Discussion and Analysis or Plan of Operations
 
 This
management's discussion and analysis reflects information known to management as
at June 28, 2009. This MD&A is intended to supplement and complement our
audited financial statements and notes thereto for the year ended September 28,
2008 (Predecessor), prepared in accordance with U.S. generally accepted
accounting principles (GAAP). You are encouraged to review our financial
statements in conjunction with your review of this MD&A. The financial
information in this MD&A has been prepared in accordance with GAAP, unless
otherwise indicated. In addition, we use non-GAAP financial measures as
supplemental indicators of our operating performance and financial position. We
use these non-GAAP financial measures internally for comparing actual results
from one period to another, as well as for planning purposes. We will also
report non-GAAP financial results as supplemental information, as we believe
their use provides more insight into our performance. When non-GAAP measures are
used in this MD&A, they are clearly identified as a non-GAAP measure and
reconciled to the most closely corresponding GAAP measure.
 
 The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described.  This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
 
 Background
 
 On March
30, 2009, the reorganization was consummated pursuant to which the then existing
shareholders of Optex Systems, Inc. (Delaware) exchanged their shares of common
stock with the shares of common stock of Optex Systems Holdings as
follows:   (i) the outstanding 85,000,000 shares of Optex Systems,
Inc. (Delaware) common stock were exchanged by Optex Systems Holdings
for 113,333,282 shares of Company common stock, (ii) the outstanding 1,027
shares of Optex Systems, Inc. (Delaware) Series A preferred stock were
exchanged by Optex Systems Holdings for 1,027 shares of Company Series A
preferred stock, and (iii) the 8,131,667 shares of Optex Systems, Inc.
(Delaware) common stock purchased in the private placement were exchanged by
Optex Systems Holdings for 8,131,667 shares of Company common
stock.  Optex Systems, Inc. (Delaware) has remained a wholly-owned
subsidiary of Optex Systems Holdings.
 
 As a
result of the reorganization, Optex Systems Holdings changed its name from
Sustut Exploration Inc. to Optex Systems Holdings, Inc. and its year end from
December 31 to a fiscal year ending on the Sunday nearest September
30.
 
 Immediately
prior to the closing under the reorganization agreement (and the shares included
above), as of March 30, 2009, Optex Systems, Inc. (Delaware) accepted
subscriptions from accredited investors for a total 27.1 units, for $45,000 per
unit, with each unit consisting of 300,000 shares of common stock, no par value,
of Optex Systems, Inc. (Delaware) and warrants to purchase 300,000 shares of
common stock for $0.45 per share for a period of five (5) years from the initial
closing, which were issued by Optex Systems, Inc. (Delaware) after the closing
referenced above.  Gross proceeds to Optex Systems, Inc. (Delaware)
were $1,219,750, and after deducting (i) a cash finder’s fee of $139,555, (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, the net proceeds were
$874,529.  The finder also received five year warrants to purchase
2.39 units, at an exercise price of $49,500 per unit.
  5
  Optex
Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies
primarily for Department of Defense applications. Its products are installed on
a majority of types of U.S. military land vehicles, such as the Abrams and
Bradley fighting vehicles, light armored and armored security vehicles and have
been selected for installation on the Stryker family of vehicles. Optex Systems,
Inc. (Delaware) also manufactures and delivers numerous periscope
configurations, rifle and surveillance sights and night vision optical
assemblies.  Optex Systems, Inc. (Delaware) products consist
primarily of build-to-customer print products that are delivered both directly
to the armed services and to other defense prime
contractors.  Less than 1% of today’s revenue is resale of products
“substantially manufactured by others”.  In this case, the product
would likely be a simple replacement part of a larger system previously produced
by Optex Systems, Inc. (Delaware).
  Optex
Systems, Inc. (Delaware) delivers high volume products, under multi-year
contracts, to large defense contractors.  It has the reputation and
credibility with those customers as a strategic supplier. Irvine Sensors
Corporation (“Irvine Sensors Corporation”) is predominately a research and
design company with capabilities enabling only prototype or low quantity
volumes.  Optex Systems, Inc. (Delaware) is predominately a high volume
manufacturing company.  Therefore the systems and processes needed to meet
customer’s needs are quite different.  While both companies serve the
military market, the customers within these markets are different.  For
example, two of the largest customers for Optex are GDLS and TACOM.  Irvine
Sensors Corporation did not have any contracts or business relations with either
of these two customers.  Therefore the separation has allowed Optex
Systems, Inc. (Delaware) to fully focus on high volume manufacturing and
the use of the six sigma manufacturing methodology.   This shift in
priorities has allowed Optex Systems, Inc. (Delaware) to improve delivery
performance and reduce operational costs.
 
 Many of
our contracts allow for government contract financing in the form of contract
progress payments pursuant to Federal Acquisition Regulation
52.232-16. “Progress Payments”.  As a small business, and subject
to certain limitations, this clause provides for government payment of up to 90%
of incurred program costs prior to product delivery.  To the extent
our contracts allow for progress payments, we intend to utilize this benefit,
thereby minimizing the working capital impact on Optex Systems Holdings for
materials and labor required to complete the contracts.
 
 Optex
Systems Holdings also anticipates the opportunity to integrate some of its night
vision and optical sights products into commercial
applications.  Optex Systems Holdings plans to carry on the business
of Optex Systems, Inc. (Delaware) as its sole line of business, and all of Optex
Systems  Holdings’ operations are expected to be conducted by and
through Optex Systems, Inc. (Delaware).
 
 The
successful completion of the separation from Irvine Sensors
Corporation,  which was accomplished by Optex Delaware’s acquisition
of all of the assets and assumption of certain liabilities of Optex Systems,
Inc. (Texas), reduced the general and administrative costs allocated by Irvine
Sensors Corporation. These costs represented services paid by Irvine Sensors
Corporation for expenses incurred on Optex Texas’ behalf such as legal,
accounting and audit, consulting fees and insurance costs in addition to
significant amounts of Irvine Sensors Corporation’s general overhead allocated
to Optex -Texas.
 
 The
estimated total General and Administrative expenses assuming Optex Systems, Inc
(Texas) was operated under a stand-alone basis during the 2008 fiscal year
are:
 
 Accounting
      and Auditing Fees
                            
                            $
                            250,000Legal
      Fees
                            
                            
                            60,000Consulting
      Fees
                            
                            
                            60,000Workers
      Comp and General Insurance
                            
                            
                            70,000Total
                            
                            $
                            440,000
 
 As a
result of the  purchase of Optex Systems, Inc. (Texas) on October 14,
2008, these general and administrative costs are incurred and paid directly by
Optex Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected
in the financial statements to the extent incurred through June 28,
2009.
 
 The
liabilities not assumed relate to costs that would not have been incurred by
Optex Systems, Inc. (Texas) if they were operated on a stand alone
basis.  Among those liabilities not assumed by Optex Systems, Inc.
(Delaware) was a note due to Tim Looney.  The 2007 promissory note had
a principal amount of $2,000,000 together with accrued interest unpaid
aggregating to approximately $2,300,000.  The note was an amendment to
Looney’s earn-out agreement which was the consideration for Irvine Sensors
Corporation’s purchase of Optex Systems, Inc. (Texas).
  6
  The
promissory note was not assumed by Optex Systems, Inc. (Delaware) in the October
2008 transaction.  The note and accrued interest was reported on Optex
Systems, Inc. (Texas) financial statements as of September 28, 2008 as a result
of push down accounting for the acquisition of Optex Systems, Inc. (Texas) by
Irvine Sensors Corporation.  These costs would not be incurred by
Optex Systems, Inc. (Texas) if operated as a stand alone entity because it
relates to Irvine Sensors Corporation’s consideration for their purchase of
Optex Systems, Inc. (Texas). Since this was not an operating cost associated
with Optex Systems, Inc. (Texas) and they would not incur these costs if
operating as a stand alone entity, we expect no impact to the future operating
results or liquidity of the Company.
 
 Additionally,
as of September 28, 2008, Optex Systems, Inc. (Texas) reported $4.3 million of
liabilities attributable to corporate expenses allocated to Optex Systems, Inc.
(Texas) through an intercompany payable account “Due to Parent”.  The
outstanding “Due to Parent” balance was not acquired by the company in the
acquisition from Irvine Sensors Corporation.
 
 To the
extent that Optex Systems, Inc. (Delaware) has incurred these similar costs on
an ongoing basis, these amounts have been funded from the Optex Delaware’s own
operating cash flow.
 
 Plan
of Operation
 
 Through a
private placement offering completed prior to consummation of the reorganization
agreement, Optex Systems, Inc. (Delaware) raised $1,219,750 ($874,529, net of
finders fees, issuance costs and non cash consideration resulting from
satisfaction of indebtedness owed to an investor) to fund
operations.  The proceeds have been used as follows:
 
 Description
                      
                      OfferingAdditional
      Personnel
                      
                      $
                      150,000Legal
      and Accounting Fees
                      
                      $
                      100,000Investor
      Relations Fees
                      
                      
                      96,000Working
      Capital
                      
                      $
                      528,529Totals:
                      
                      $
                      874,529
 
 Results
of Operations
 
 Based on
the current level of deliverable backlog, we expect the next three months’
revenues to be consistent with the total for the periods September 29, 2008
through October 14, 2008 (Predecessor) and October 15, 2008 through June 28,
2009 (Successor).  In addition, future business includes expected
awards yet to be determined.  Although the current range of products
being manufactured is dependent on the receipt of continued and timely funding
to existing programs, the most recent proposed federal budget is not expected to
impact any of our existing programs in the near term.
 
 The
Revenue, Expenses and Income for the fourteen day period of Optex Systems, Inc.
(Texas) prior to the acquisition by Optex Systems, Inc. (Delaware) are
summarized below (in millions).
  Optex
      Systems, Inc. (Texas)
                        (Predecessor)Revenue
                      
                      $
                      0.9Cost
      of Sales
                      
                      
                      0.7Gross
      Margin
                      
                      
                      0.2General
      & Administrative
                      
                      
                      0.1Operating
      Income
                      
                      $
                      0.1Net
      Income
                      
                      $
                      0.1
  7


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.




September 29, 2008 through June 28, 2009
                  
                  
                  Predecessor - Fiscal Year 2008Predecessor - Qtr 1
                    (Sept 29, 2008
                    through Oct 14,
                    2008)
                  
                  
                  Successor- Qtr 1
                    (Oct 15, 2008
                    through Dec 27,
                    2008)
                  
                  
                  Qtr 2
                  
                  
                  Qtr 3
                  
                  
                  9 months ended June
                    28, 2009
                  
                  
                  Qtr 1
                  
                  
                  Qtr 2
                  
                  
                  Qtr 3
                  
                  
                  9 months ended June 29,
                    2008Net
      Loss After Taxes - GAAP
                  
                  $
                  (0.1
                  )
                  
                  $
                  0.1
                  
                  
                  $
                  (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
      & Amortization
                  
                  
                  
                  
                  
                  
                  0.6
                  
                  
                  
                  0.5
                  
                  
                  
                  0.5
                  
                  
                  
                  1.6
                  
                  
                  
                  0.3
                  
                  
                  
                  0.2
                  
                  
                  
                  0.1
                  
                  
                  
                  0.6EBITDA
      - Non GAAP
                  
                  $
                  (0.1
                  )
                  
                  $
                  1.0
                  
                  
                  $
                  0.4
                  
                  
                  $
                  0.3
                  
                  
                  $
                  1.6
                  
                  
                  $
                  (0.3
                  )
                  
                  $
                  (0.4
                  )
                  
                  $
                  (0.1
                  )
                  
                  $
                  (0.8
                  )





We have
experienced substantial improvement in our EBITDA as compared to our prior year
performance.  We have increased our EBITDA by $2.4 million in the nine
months ending June 28, 2009 as compared to the nine months ending 2008
(Predecessor), primarily as a result of increased revenue and lower general and
administrative costs.  We expect this trend to continue over the next
12 months as our product mix shifts towards more profitable programs and we
continue to pursue cost reductions in our production and general and
administrative areas.





Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates.   Shifts in gross margin
from quarter to quarter are primarily attributable to the differing product
mix recognized as revenues during each respective period.  During the
three and nine months, 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
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.





We
are aggressively pursuing additional, potentially higher margin periscope
business, and in May 2009, Optex Systems Holdings was awarded a multi-year
Indefinite Delivery/Indefinite Quantity type contract accompanied
by the first delivery order from TACOM.  If all government
forecasted delivery orders against this Indefinite Delivery/Indefinite Quantity
contract are awarded and if we were to share equally with the other supplier in
the awarded releases, the total value of the contract to us could be valued at
approximately $7.5 million over the next three years.  In June
2009, we received an additional $3.4 million dollar award from GDLS
and in September 2009, an additional $1.9 million award to provide product
beginning with delivery starting in 2011 at the completion of our current
production contract.


8





As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), our amortizable intangible assets increased significantly
over the prior year. The non cash amortization of intangible assets has had a
negative impact on our Gross Margin for 2009 as compared to
2008.    In 2009, our anticipated intangible amortization
expense is $2 million and is expected to decline to $1 million in
2010.





Backlog
as of June 28, 2009 was $31.7 million as compared to a backlog of $45.6 million
as of June 29, 2008.  The following table depicts the current expected
delivery by quarter of all contracts awarded as of June 28, 2009.





2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013Program Backlog (000's)
                  
                  Qtr 4
                  
                  
                  Qtr 1
                  
                  
                  Qtr 2
                  
                  
                  Qtr 3
                  
                  
                  Qtr 4
                  
                  
                  Qtr 1
                  
                  
                  Qtr 2
                  
                  
                  Qtr 3
                  
                  
                  Qtr 4
                  
                  
                  Qtr 1
                  
                  
                  Qtr 2
                  
                  
                  Qtr 3
                  
                  
                  Qtr 4
                  
                  
                  Qtr 1Howitzer
      Programs
                  
                  $
                  0.8
                  
                  
                  $
                  0.6
                  
                  
                  $
                  1.7
                  
                  
                  $
                  1.9
                  
                  
                  $
                  2.6
                  
                  
                  $
                  1.7
                  
                  
                  $
                  0.1
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Periscope
      Programs
                  
                  
                  2.2
                  
                  
                  
                  2.0
                  
                  
                  
                  2.1
                  
                  
                  
                  2.0
                  
                  
                  
                  1.3
                  
                  
                  
                  1.3
                  
                  
                  
                  0.6
                  
                  
                  
                  0.7
                  
                  
                  
                  0.5
                  
                  
                  
                  0.5
                  
                  
                  
                  0.9
                  
                  
                  
                  0.8
                  
                  
                  
                  -
                  
                  
                  
                  -Sighting
      Systems
                  
                  
                  1.2
                  
                  
                  
                  0.4
                  
                  
                  
                  0.2
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -All
      Other
                  
                  
                  1.6
                  
                  
                  
                  1.2
                  
                  
                  
                  1.1
                  
                  
                  
                  0.4
                  
                  
                  
                  0.2
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1Total
                  
                  $
                  5.8
                  
                  
                  $
                  4.2
                  
                  
                  $
                  5.1
                  
                  
                  $
                  4.4
                  
                  
                  $
                  4.2
                  
                  
                  $
                  3.1
                  
                  
                  $
                  0.8
                  
                  
                  $
                  0.8
                  
                  
                  $
                  0.6
                  
                  
                  $
                  0.6
                  
                  
                  $
                  1.0
                  
                  
                  $
                  0.9
                  
                  
                  $
                  0.1
                  
                  
                  $
                  0.1





Virtually
all of our contracts are prime or subcontracted directly with the Federal
government and, as such, are subject to Federal Acquisition Regulation Subpart
49.5, “Contract Termination Clauses” and more specifically Federal Acquisition
Regulation  clauses 52.249-2 “Termination for Convenience of the
Government Fixed-Price)”, and 49.504 “Termination of fixed-price contracts
for default”.  These clauses are standard clauses on our prime
military contracts and generally apply to us as subcontractors.  It
has been our experience that the termination for convenience is rarely invoked,
except where it is mutually beneficial for both parties.  We are
currently not aware of any pending terminations for convenience or for default
on our existing contracts.





By way of
background, Federal Acquisition Regulation is the principal set of regulations
that govern the acquisition process of government agencies and contracts with
the U.S. government. In general, parts of the Federal Acquisition Regulation are
incorporated into government solicitations and contracts by reference as terms
and conditions effecting contract awards and pricing solicitations.





In the
event a termination for convenience were to occur, these Federal Acquisition
Regulation  clause 52.249-2 provides for full recovery of all
contractual costs and profits reasonably occurred up to and as a result of the
terminated contract. In the event a termination for default were to
occur, we could be liable for any excess cost incurred by the government to
acquire supplies from another supplier similar to those terminated from
us. We would not be liable for any excess costs if the failure to perform
the contract arises from causes beyond the control and without the fault or
negligence of the company as defined by Federal Acquisition
Regulation clause 52.249-8. In addition, the Government may require us
to transfer title and deliver to the Government any completed supplies,
partially completed supplies and materials, parts, tools, dies, jigs, fixtures,
plans, drawings, information, and contract rights that we
have specifically produced or acquired for the terminated portion of this
contract. The Government shall pay contract price for completed supplies
delivered and accepted, and we and the Government would negotiate an agreed
upon amount of payment for manufacturing materials delivered and accepted and
for the protection and preservation of the property. Failure to agree on an
amount for manufacturing materials is subject to the Federal Acquisition
Regulation Disputes clause 52.233-1.




In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold.  These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold.  Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation.  As of June 28, 2009, 12.3% of our outstanding backlog,
or $3.9 million of booked orders, fell under this criterion.  Our
experience has been that the historically negotiated price differentials have
been minimal (5% or less) and accordingly, we do not anticipate any significant
downward adjustments on these booked orders.


9





Three
Months Ended June 28, 2009 (Successor) Compared to the Three Months Ended June
29, 2008 (Predecessor)





Revenues.  In the three
months ended June 28, 2009, revenues increased by 79.5% over the respective
prior period:





Product Line
                  
                  3 mos ended
                    6/28/2009
                    (Successor)
                  
                  
                  3 mos ended
                    6/29/2008
                    (Predecessor)
                  
                  
                  ChangeHowitzer
      Programs
                  
                  
                  0.9
                  
                  
                  
                  0.4
                  
                  
                  
                  0.5Periscope
      Programs
                  
                  
                  3.0
                  
                  
                  
                  1.7
                  
                  
                  
                  1.3Sighting
      Systems
                  
                  
                  1.4
                  
                  
                  
                  0.6
                  
                  
                  
                  0.8All
      Other
                  
                  
                  1.7
                  
                  
                  
                  1.2
                  
                  
                  
                  0.5Total
                  
                  
                  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 same period in 2008.  Significant
increases in sales of periscope product lines is attributable to increased
demand by GDLS and U.S. government accelerated schedules, whereby, in
consideration for increased pricing of approximately $1 million, Optex Systems,
Inc. (Delaware) agreed to accelerate the contract delivery schedule and deliver
at higher volumes to support increased military service needs. Of the total
periscope revenue increase, approximately 82% is attributable to increased
product levels, as compared to 18% due to accelerated pricing.  The
ramp up included the addition direct labor headcount of approximately 8
employees, combined with dual sourcing of material on several key components
needed to meet the increased production requirements.   Based on
our current backlog demand, we expect the periscope revenues to decline in the
last half of 2009 as the accelerated orders near completion; however we expect
the revenue on periscopes to remain strong in 2010 as we continue to quote and
receive awards for additional periscopes from multiple customers.





Revenues
in the Howitzer programs increased $0.5 million over the same quarter in the
prior year.  During the third quarter of 2009, we worked aggressively
with the US Government to resolve technical field issues related to two of our
Howitzer programs and completed the First Article Testing and Acceptance
requirements on a third, for which government acceptance approval was obtained
on August 25, 2009.   Technical issues experienced on the Howitzer product
lines relate to problems with the government technical data and drawing package
affecting the manufacturability of the products and the functionality of the
product during field use and testing. These issues were resolved through Optex
initiated engineering change proposals and customer changes to the statement of
work.  As of this date, the issues have been resolve and contract
schedules modified accordingly to implement the required changes. With most of
the technical and start up issues behind us on these programs, we expect to
increase program deliveries on these programs during the last quarter of fiscal
year 2009 continuing through 2010.





Sighting
Systems revenues increased $0.8 million over the prior year due to the delivery
of higher quantities of U.S. government and GDLS sighting systems in the current
quarter over prior quarter deliveries, offset with the reduction in shipments to
Textron related to a program that ended in 2008.





Increases
in the other product line of 42% or $0.5 million for the three months ending
June 28, 2009 are a result of increased foreign military sales for azimuth
mirror assemblies of $0.4 million combined with new business of $0.1 million in
window assemblies.


10





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 120.7%. This increase in cost of goods sold was primarily
associated with increased revenue on our periscope lines in support of higher
backlog and accelerated delivery schedules, in addition to increased intangible
amortization resulting from the acquisition of Optex Systems, Inc. (Texas)
(Predecessor) assets from Irvine Sensors Corporation on October 14, 2008. The
gross margin during the quarter ended June 28, 2009 (Successor) was 8.6% of
revenues as compared to a gross margin of 25.6% for the quarter ended June 29,
2008 (Predecessor).  Product margins decreased substantially to 15.7%
for the quarter ended June 28, 2009 (Successor) versus 25.6% for the quarter
ended June 29, 2008 (Predecessor) 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.  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 Irvine Sensors Corporation of $0.5 million and the Irvine
      Sensors Corporation Employee Stock Bonus Plan (ESBP) of $0.1 million as a
      result of the ownership
change.


·
            Increased costs of $0.2 million
      in legal, accounting fees, board of directors fees, and investor
      relations.


·
            Lower Salaries and Wages and
      employee related costs of $0.1 million primarily due to the
      reclassification of 10 purchasing and planning employees from general and
      administrative to manufacturing overhead in cost of sales.  The
      annualized impact of the personnel move is expected to be a reduction in
      general and administrative expenses of approximately $0.5 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 from operations of
$(0.2) million, which was the same as the $(0.2) million loss from operations
during the three months ended June 29, 2008.  The loss from operations
includes a $0.4 million increase in non-cash amortization of intangible assets
as a result of the October 14, 2008 acquisition of the assets of Optex Systems,
Inc. (Texas) (Predecessor).





Net Loss. During the three
months ended 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
$0.5 million over the prior year as a result of increased profit
before intangible amortization expense. The intangible amortization expense is
amortized over 5 years for book purposes and is deductable over 15 years for
income tax purposes. In 2008, there was no Federal Income Tax expense due to the
loss from operations. Excluding the impact of the increased intangible expenses
of $0.5 million, we would have recorded net income of $0.2 million for the three
months ended June 28, 2009.


11





Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through June 28, 2009 compared to the Predecessor nine month
period ended June 29, 2008.





Revenues the For the nine
months ended June 28, 2009 (Combined) revenues increased by 51.1% over the
respective prior period (Predecessor) per the table below:





Predecessor
                
                
                Successor
                
                
                Combined
                
                
                PredecessorSeptember 29,
                  2008 through
                  October 14,
                  2008
                
                
                October 15,
                  2008
                  through
                  June 28,
                  2009
                
                
                9 mos.
                  ended
                  June 28,
                  2008
                
                
                9 mos.ended
                  June 29, 2009
                
                
                ChangeRevenue
                
                $
                0.9
                
                
                $
                20.1
                
                
                $
                21.0
                
                
                $
                13.9
                
                
                $
                7.1Percent
      increase
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                51.1
                %





The table
below details the revenue changes by product line in the nine months ended June
28, 2009.





Product Line
                  
                  9 mos ended
                    6/28/2009
                    (Combined)
                  
                  
                  9 mos ended
                    6/29/2008
                    (Predecessor)
                  
                  
                  ChangeHowitzer
      Programs
                  
                  
                  1.6
                  
                  
                  
                  1.7
                  
                  
                  
                  (0.1
                  )Periscope
      Programs
                  
                  
                  12.1
                  
                  
                  
                  6.2
                  
                  
                  
                  5.9Sighting
      Systems
                  
                  
                  3.6
                  
                  
                  
                  3.2
                  
                  
                  
                  0.4All
      Other
                  
                  
                  3.7
                  
                  
                  
                  2.8
                  
                  
                  
                  0.9Total
                  
                  
                  21.0
                  
                  
                  
                  13.9
                  
                  
                  
                  7.1Percent
      increase
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  51.1
                  %





Revenues
increased significantly across most of the product lines during the nine months
ended June 2009 as compared to the same period in 2008.  Significant
increases in sales of periscope product lines is attributable to increased
demand by GDLS and U.S. government accelerated schedules, whereby, in
consideration for increased pricing of approximately $1 million, Optex Systems,
Inc. (Delaware) agreed to accelerate the contract delivery schedule and deliver
at higher volumes to support increased military service needs. Of the total
periscope revenue increase, approximately 82% is attributable to increased
product levels, as compared to 18% due to accelerated pricing.  The
ramp up included the addition direct labor headcount of approximately 8
employees, combined with dual sourcing of material on several key components
needed to meet the increased production requirements.   During
the first 9 months of 2009, Optex had delivered approximately 81% of the
accelerated units, with the remaining units to be delivered through the first
quarter of 2010.  Based on our current backlog demand, we expect the
periscope revenues to decline in the last half of 2009 as the accelerated orders
near completion; however we expect the revenue on periscopes to remain strong in
2010 as we continue to quote and receive awards for additional periscopes from
multiple customers.





Revenues
in the Howitzer programs declined slightly by ($0.1) million over the period in
the prior year.  During the third quarter of 2009, we worked
aggressively with the US Government to resolved technical field issues related
to two of our Howitzer programs and completed the First Article Testing and
Acceptance requirements on a third, for which government acceptance approval was
obtained on August 25, 2009.   Technical issues experienced on the Howitzer
product lines relate to problems with the government technical data and drawing
package affecting the manufacturability of the products and the functionality of
the product during field use and testing. These issues were resolved through
Optex initiated engineering change proposals and customer changes to the
statement of work.  As of this date, the issues have been resolve and
contract schedules modified accordingly to implement the required changes. With
most of the technical and start up issues behind us on these programs, we expect
to increase program deliveries on these programs during the last quarter of
fiscal year 2009 continuing through 2010.


12





Sighting
Systems revenues increased $0.4 million over the prior year due to the delivery
of higher quantities of U.S. government and GDLS sighting systems in the current
quarter over prior quarter deliveries, offset with the reduction in shipments to
Textron related to a program that ended in 2008.





Increases
in the other products of 32% or $0.9 million for the nine months ending June 28,
2009 are a result of increased foreign military sales for azimuth mirror
assemblies of $0.4 million combined with new business of $0.1 million in window
assemblies and increased volume on spare award awards in the current year over
prior year.





Currently
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability.  These issues have resulted in
increased labor and material costs due to higher scrap and extensive engineering
costs incurred during the start up phase of the programs.  In addition
some of our older “legacy” periscope programs are experiencing losses due to
significant material price increases since the initial 5 year contract award in
2004.  As of June 28, 2009 Optex Systems Holdings has reserved $0.6
million in contract loss reserves on Howitzer programs and $0.1 million on
periscope programs for a total of $0.7 million in contract loss
reserves.  The total remaining backlog on these loss programs as of
June 28, 2009 is $10.8 million.  We are expecting to ship $4.5 of the
loss contract backlog in the second half of 2009 and $4.5 million of the
existing loss contract backlog in 2010, with the remaining $1.8 million expected
to ship in the first quarter of 2011.  As these losses have been
previously recognized to the extent identified, future margins on these revenues
are expected to be zero.





Currently
we are not experiencing any negative impact due to changes in incremental
funding commitments by federal agencies.  There has been one delay in
the award of the second delivery order for the U.S. government periscope
contract subsequent to June 28, 2009, however as the contract is a dual award
between Optex Systems Holdings and a competitor with no volume guaranteed to any
single-source, we have not expended any resources in support of the yet to be
awarded portion of the contract.  We are anticipating a government
award on the contract in the second quarter of 2010.  However, delay
of the government procurement is not expected to negatively impacted Optex
Systems Holdings’ revenue in 2009, and due to other increased periscope orders
from non U.S. government contracts further delays in the award on the prime
government contract should not materially affect Optex Systems Holdings in the
next 12 months.





Cost of Goods Sold. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.8 million and during the Successor period from
October 15 through June 28, 2009 we recorded cost of goods sold of $18.0 million
for a total cost of good sold during the nine month period of $18.8 million as
compared, to $11.7 million during the nine months ended June 29, 2008, an
increase of $7.1 million or 60.7%. This increase in cost of goods sold was
primarily associated with increased revenue on certain of our product lines in
support of higher backlog and accelerated delivery schedules and increased
intangible amortization resulting from the acquisition of the assets of Optex
Systems, Inc. (Texas) (Predecessor) on October 14, 2008. The gross margin during
the Predecessor period beginning September 29, 2008 through October 14, 2008 was
$0.1 million and the gross margin for the Successor period beginning October 15,
2008 through June 28, 2009 was $1.9 million for a total of $2.0 million or 9.5%
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 period
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.  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 period ended June 28,
2009 as compared to the nine months ended June 29, 2008.


13


G&A Expenses. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through June 28, 2009, we recorded operating expenses of $2.0 million for a
total of $2.1 million for the nine months ended June 28, 2009 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 Irvine Sensors Corporation of $1.5 million and the Irvine
      Sensors Corporation Employee Stock Bonus Plan of $0.3 million as a result
      of the ownership change.


·
            Increased costs of $0.4 million
      in legal, accounting fees, board of director fees, and investor
      relations


·
            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 $0.5 million with an
      offsetting increase to costs of goods sold. This decrease was
      partially offset by the expense associated with 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.


·
            Increased Amortization of
      Intangible Assets of $0.1 million as a result of the ownership change as
      of October 14, 2008.





Income (Loss) from
Operations. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through June 28, 2009, we recorded a loss
from operations of $(0.09) million for a total net loss of $(0.02) million
during the nine month period as opposed to a loss from operations of $(1.5)
million during the nine months ended June 29, 2008. This improvement was
primarily due to increased sales revenue in the period ended June 28, 2009,
combined with reduced general and administrative expenses driven by the
elimination of Irvine Sensors Corporation 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 Income (Loss). During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
net income of $0.06 million for the period beginning October 15, 2008 through
June 28, 2009, we recorded a net loss of $(0.73) million for a total net loss of
$(0.67) million during the nine months ended June 28, 2009, as compared to
$(1.6) million for nine months ended June 29, 2008, a decrease in net loss of
$0.93 million or 58.1%. This decrease in net loss was principally the result of
reduced operating expenses related to the elimination of corporate cost
allocations from Irvine Sensors Corporation since the successor operating as a
stand-alone entity did not incur these costs in the nine months ended
June 29, 2008 combined with increased revenue in the period ending June 28,
2009. Federal Income Tax expense increased by $0.5 million over the prior year
as a result of increased profit before intangible amortization expense. The
intangible amortization expense is amortized over five years for book purposes
and is deductible over 15 years for income tax purposes. In 2008, there was
no Federal Income Tax expense due to the loss from operations. Excluding the
impact of the increased intangible expenses of $1.5 million, we would have
recorded net income of $0.8 million for the nine month period ending June 28,
2009.


14




Liquidity
and Capital Resources





In the
year ended 2008, Optex Systems, Inc. (Texas) working capital was significantly
constrained due a high level of loss programs and production increases across
multiple programs which necessitated the need for investment in inventories and
manpower resources required to meet the additional product demand.  As
Optex Systems, Inc. (Texas) was a wholly-owned subsidiary of Irvine Sensors
Corporation, access to additional outside funding apart from government progress
bills was severely limited.  Further, Optex Systems, Inc. (Texas) had
incurred significant costs on one of the Howitzer programs and was unable to
recover these costs until fiscal 2009 due to progress billing limitations prior
to first article inspection testing and approval which did not occur until
August of 2009.  During 2008, Optex Systems, Inc. (Texas) transferred
$0.7 million in cash to Irvine Sensors in support of intercompany services
provided by Irvine Sensors on behalf of Optex Systems, Inc. (Texas) that were
outside our control, including:  legal, accounting, and consulting
fees; Irvine Sensors Corporation travel expenses; and insurance
costs.





The
estimated total General and Administrative expenses assuming Optex Systems,
Inc. (Texas) was operated on a stand-alone basis during the 2008 fiscal
year are:




Year- EndedSeptember 28,
                      2008Accounting
      & Auditing Fees
                    
                    $
                    250,000Legal
      Fees
                    
                    
                    60,000Consulting
      Fees
                    
                    
                    60,000Workers
      Comp & General Insurance
                    
                    
                    70,000Total
                    
                    $
                    440,000




As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008, these
general and administrative costs are incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year and have been reflected in the
financial statements to the extent incurred through June 28, 2009.





Subsequent
to the asset acquisition from Irvine Sensors on October 14, 2008 and the reverse
merger and reorganization on March 30, 2009, Optex Systems Holdings raised
additional cash through a private equity sale that generated gross proceeds of
$1.0 million.  As a result of the new capital, Optex Systems Holdings
will be able acquire the necessary inventory and personnel resources required to
operate at the higher revenue levels, and improve the company’s working capital
position.





We have
historically met our liquidity requirements from a variety of sources, including
government and customer funding through contract progress bills, short term
loans, notes from related parties, and the sale of equity securities. Based upon
our current working capital position and potential for expanded business
revenues, we believe that our working capital is sufficient to fund our current
operations for the next 12 months. However, based on our strategy and the
anticipated growth in our business, we believe that our liquidity needs may
increase in the future. The amount of such increase will depend on many factors,
including the costs associated with the fulfillment of our projects, whether we
upgrade our technology, and the amount of inventory required for our expanding
business. If our liquidity needs do increase, we believe additional capital
resources will be derived from a variety of sources including, but not limited
to, cash flow from operations and further private placements of our common stock
and/or debt, including receivables funding through a commercial lender.





Predecessor
period of September 29, 2008 through October 14, 2008




Cash and Cash Equivalents. As
of October 14, 2008, Optex Systems, Inc. (Texas) (Predecessor) had cash and cash
equivalents of $0.3 million, an increase of $0.1 million from the year ended
September 29, 2008. The slight increase in cash over September 29, 2008 balances
were primarily due to the timing of cash receipts on accounts receivable
collections and supplier payments made as of the October 14th Optex
Systems, Inc. (Delaware) acquisition. The cash balance as of October 14, 2009 is
included as the beginning cash balance for Optex Systems, Inc. (Delaware)
(Successor) as of October 15, 2008.





Net Cash Provided by Operating
Activities. Net cash provided by operating activities totaled $0.1
million for the Predecessor period of September 29, 2008 through October 14,
2008. Cash provided by operating activities was primarily due to the timing of
purchases and accounts receivable collections during the 15 day period prior the
Delaware acquisition. During this period, our net inventory increased by $0.9
million to support substantially increased production rates across all of our
product lines and our accounts receivable decreased $(1.0) million due to timing
of collections from one of our major customers in the second week of October,
2008. Accounts payable and accrued expenses decreased by $(0.2) million due to
the timing of cash disbursements prior to the acquisition.





Net Cash Used in Investing
Activities. Net cash used in investing activities totaled $0.00 million
during the Predecessor period beginning September 29, 2008 and ending October
14, 2008. Optex Systems Holdings’ business is labor intensive and we purchase
equipment as it becomes necessary.





Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $0.0
million during the Predecessor period beginning September 29, 2008 and ending
October 14, 2008.





Successor
period of October 15, 2008 through June 28, 2009




Cash and Cash Equivalents. As
of June 28, 2009, we had cash and cash equivalents of $0.5 million. During the
Successor period of October 15, 2008 through June 28, 2009 we increased cash and
cash equivalents by $0.2 million primarily due to the net proceeds received by
us in the private placement. A portion of the private placement proceeds was
used to acquire additional inventory in support of the higher revenue and
production rates during the period and which are expected to continue through
year end.


15





Net Cash Used in Operating
Activities. Net cash used in operating activities during the Successor
period beginning October 15, 2008 and ending June 28, 2009 totaled $(0.4)
million. The primary uses of cash during this period relate to the timing of
purchases, accelerated collections on government contracts, and the timing of
payments to vendors. Accelerated collections of government contracts was
accomplished by offering nominal discounts for prompt payment. Federal
Acquisition Regulation Clause 52.232-8 “Discounts for Prompt Payment” permits
the offer of nominal discounts on payment terms for government contracts in
order to expedite invoice payment. Because many of our programs incur
significant, long lead times from material acquisition through production and
shipment, it is the standard policy of Optex Systems, Inc. (Delaware) to offer a
0.5% discount for all government invoices paid in net 10 days or less. The
normal payment terms on these contracts are net 30. The foregone revenues as a
result of the discounted payments equate to less than 0.1% of total revenue
reported during the same period. In the period beginning October 15, 2008 and
ending June, 28, 2009, our net inventory increased by $1.6 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 were paid in July 2009. We expect similar
cash flows from operations until at least mid 2010 when our low margin legacy
periscope programs are anticipated to end and are replaced with other
significant programs as they reach level production rates.





Net Cash Provided by Investing
Activities. In the Successor period beginning October 15, 2008 and ending
June 28, 2009, net cash provided by investing activities totaled $0.24 million
and consisted of cash acquired during the Optex Systems, Inc. (Delaware)
Predecessor acquisition as of October 14, 2009 of $0.25 million and cash used to
purchase equipment of $(0.01) million during the period.





Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $0.7
million during the period beginning October 15, 2008 through June 28, 2009, The
change of $0.7 million is due to receipt of the private placement funds of $0.9
million offset by funds used to repay outstanding loans of $(0.2) million. We
raised funds through a private placement for working capital needs, primarily
inventory purchases, and additional personnel so support increased revenue and
production rates during the period.




16




Critical
Policies and Accounting Pronouncements





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




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 methodrecognizes as revenue the
      contract price of units of a basic production product delivered during a
      period and as the cost of earned revenue the costs allocable to the
      delivered units; costs allocable to undelivered units are reported in the
      balance sheet as inventory or work in progress. The method is used in
      circumstances in which an entity produces units of a basic product under
      production-type contracts in a continuous or sequential production process
      to buyers' specifications.




Our
contracts are fixed price production type contracts whereas a defined order
quantity is delivered to the customer in a continuous or sequential production
process in accordance with buyer specifications (build to print). Our deliveries
against these contracts generally occur in monthly increments across fixed
delivery periods spanning from 3 to 36 months.





Warranty Costs:Some of
our customers require that we warranty the quality of our products to meet
customer requirements and be free of defects for up to fifteen months subsequent
to delivery. In the year ended September 28, 2008 and nine months ended June 28,
2009, the company incurred $227,000 and $87,446, respectively of warranty
expenses representing the estimated cost of repair or replacement for specific
customer returned products still covered under warranty as of the return date
and awaiting replacement, in addition to estimated future warranty costs for
shipments occurring during the twelve months proceeding September 28, 2008.
Future warranty costs were determined, based on estimated cost of replacement
for expected returns based upon our most recent experience rate of defects as a
percentage of sales. Prior to fiscal year 2008, all warranty expenses were
incurred as product was replaced with no reserve for warranties against
deliveries in the covered period.





On
certain periscope product lines the warranty period has been extended from 15 to
24 months due to technical considerations incurred during the manufacture of
such products. During June of 2008, Optex Systems, Inc. (Texas) experienced an
internal control test failure related to the laser filters used on one of the
periscope products. As a result of the internal test failure, Optex implemented
a manufacturing process change to eliminate the potential for future failures.
We believe the internal control test environment to be significantly more
stringent than that which would occur under field conditions, however as a
result of the internal test failure and manufacturing process change, we
extended our warranty for all product shipped prior to the implemented change.
As of the date of this report, Optex Systems Holdings has not received any
warranty claims as a result of the condition.


17




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 and estimates at completion. Estimates at
completion 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 estimate at completion indicates a potential
overrun (loss) against a fixed price contract/order, management generally seeks
to reduce costs and /or revise the program plan in a manner consistent with
customer objectives in order to eliminate or minimize any overrun and to secure
necessary customer agreement to proposed revisions.





If an
estimate at completion indicates a potential overrun against budgeted resources
for a fixed price contract/order, management first attempts to implement lower
cost solutions to still profitably meet the requirements of the fixed price
contract. If such solutions do not appear practicable, management makes a
determination whether to seek renegotiation of contract or order requirements
from the customer. If neither cost reduction nor renegotiation appears probable,
an accrual for the contract loss/overrun is recorded against earnings and the
loss is recognized in the first period the loss is identified based on the most
recent estimate at completion of the particular contract or product
order.





Government Contracts:
Virtually all of our contracts are prime or subcontracted directly with the
Federal government and as such, are subject to Federal Acquisition Regulation
Subpart 49.5, “Contract Termination Clauses” and more specifically Federal
Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the
Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for
default”.





Recent
Accounting Pronouncements.





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


18




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.




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.


19





In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies that share-based payment awards
that entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. We
have granted and expect to continue to grant restricted stock that contain
non-forfeitable rights to dividends and will be considered participating
securities upon adoption of FSP EITF 03-6-1. As participating securities, we
will be required to include these instruments in the calculation of our basic
earnings per share ("EPS"), and we will need to calculate basic EPS using the
"two-class method." Restricted stock is currently included in our dilutive EPS
calculation using the treasury stock method. The two-class method of computing
EPS is an earnings allocation formula that determines EPS for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. As such,
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.




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
this Form 10-Q. 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.


20




Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required for smaller reporting companies.





Item
4T. Controls and Procedures





Evaluation of Disclosure Controls
and Procedures





As of the
end of the period covered by our Quarterly Report on Form 10-Q for the quarter
ended June 28, 2009, management performed, with the participation of our
Principal Executive Officer and Principal Financial Officer, an evaluation of
the effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our Principal Executive Officer and our Principal Financial Officer,
to allow timely decisions regarding required disclosures.  Based upon the
evaluation described above, our Principal Executive Officer and our Principal
Financial Officer concluded that, as of June 28, 2009, our disclosure controls
and procedures were effective.





Changes
in  Internal Control Over Financial Reporting





During
the quarter ended June 28, 2009, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION




Item
1. Legal Proceedings.




Currently
we are not aware of any litigation pending or threatened by or against the
Company.


21




Item 1A. Risk Factors




RISK
FACTORS





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





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.


22





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





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





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





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





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





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





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





Approximately
95% of our contracts contain contract termination clauses for
convenience.  In the event these clauses should be invoked by our
customer, future revenues against these contracts could be affected, however
these clauses allow for a full recovery of any incurred contract cost plus a
reasonable fee up through and as a result of the contract
termination.  We are currently unaware of any pending terminations on
our existing contracts.  In some cases, contract awards may be issued
that are subject to renegotiation at a date (up to 180 days) subsequent to the
initial award date.  Generally, these subsequent negotiations have had
an immaterial impact (zero to 5%) on the contract price of the affected
contracts.  Currently, none of our awarded contracts are subject to
renegotiation.


23




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





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





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





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





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





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





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





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


24





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





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





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





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





25




Other
                
                SWS
      Trimac
                
                Subcontracted
      Electron Beam Welding
                
                Subcontracted
      welder that is the only qualified supplier for General Dynamics Land
      Systems muzzle reference system collimator assemblies.  This
      operation would take in excess of 6 months to identify and qualify an
      alternative supplier.
                
                Current
      Firm Fixed Price & Quantity Purchase orders are in place with the
      supplier to meet all contractual requirements.  Supplier is on
      schedule.




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





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





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





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





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





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


26




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





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





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





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





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





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





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





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





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





Lastly,
the preferred shareholders have the right, by majority vote of the shares of
preferred stock, to generally approve any issuances by us of equity and/or
indebtedness, which is not ordinary course trade
indebtedness.  Therefore, the preferred shareholders can effectively
bar us from entering into a transaction which they feel is not in their best
interests even if the transaction would otherwise be in the best interests of
Optex Systems Holdings and its common shareholders.


27





Risks
Relating to the Reorganization





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





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





·
            Confirming or defeating the
      election of directors;





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





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





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





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





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




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





The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, Optex Systems Holdings expects these new rules and regulations
to increase compliance costs in 2010 and beyond and to make certain activities
more time consuming and costly. As a public entity, Optex Systems Holdings also
expects that these new rules and regulations may make it more difficult and
expensive for Optex Systems Holdings to obtain director and officer liability
insurance in the future and it may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for Optex Systems Holdings to
attract and retain qualified persons to serve as directors or as executive
officers.


28


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





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





Risks
Relating to the common stock





Optex Systems Holdings’ stock price
may be volatile.





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





·
            additions or departures of key
      personnel;





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





·
            operating results that fall below
      expectations;





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





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





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





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





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


29





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





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





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





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





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


30





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




None.





Item
3. Defaults Upon Senior Securities.




None.




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





None.





Item
5. Other Information.




None.




Item
6. Exhibits




(a)      
Exhibits





Exhibit
              No.
            
            Description2.1
            
            Agreement
      and Plan of reorganization, dated as of the March 30, 2009, by and between
      registrant, a Delaware corporation and Optex Systems, Inc., a Delaware
      corporation (1).3.1
            
            Certificate
      of Incorporation, as amended, of Optex Systems Holdings,
    Inc.3.2
            
            Bylaws
      of Optex Systems Holdings (1).5.1
            
            Opinion
      as to Legality of the Shares (3)10.1
            
            Lease
      for 1420 Presidential Blvd., Richardson, TX (1).10.2
            
            Employment
      Agreement with Danny Schoening (1).10.3
            
            2009
      Stock Option Plan (1).10.4
            
            Form
      of Warrant (3)10.5
            
            Specimen
      Stock Certificate (3)10.6
            
            Contract
      W52H0905D0248 with Tank-automotive and Armaments Command, dated July 27,
      2005 (2)*10.7
            
            Contract
      W52H0909D0128 with Tank-automotive and Armaments Command, dated March 24,
      2009 (2)*10.8
            
            Contract
      W52H0905D0260 with Tank-automotive and Armaments Command, dated August 3,
      2005 (2)*




31




10.9
            
            PO#
      40050551 with General Dynamics, dated June 8, 2009 (2)*10.10
            
            Contract
      9726800650 with General Dynamics, dated April 9, 2007
  (2)*10.11
            
            Form
      of Subscription Agreement (5)10.12
            
            Single
      Source Supplier Purchase Orders with TSP Inc. (4)*10.13
            
            Single
      Source Supplier Purchase Orders with SWS Trimac (4)*10.14
            
            Since
      Source Supplier Purchase Orders with Danaher Controls
  (4)*10.15
            
            Single
      Source Supplier Purchase Orders with Spartech Polycast
  (4)*14.1
            
            Code
      of Ethics (1)16
            
            Letter
      re: Change in Certifying Accountant21.1
            
            List
      of Subsidiaries – Optex Systems, Inc.
(1)





*
            Portions of this exhibit have
      been omitted pursuant to a confidential treatment request, and information
      regarding this confidential treatment request is being separately
      submitted to the Commission.





(1)
            Incorporated by reference from
      our Current Report on Form 8-K dated April 3,
  2009.





(2)
            Incorporated by reference from
      our Amendment No. 1 to Registration Statement on Form S-1 filed on
      September 28, 2009





(3)
            Incorporated by reference from
      our Registration Statement on Form S-1 filed on May 19,
      2009





(4)
            Incorporated by reference from
      our Amendment No. 2 to Registration Statement on Form S-1 filed on
      November 12, 2009





(5)
            Incorporated by reference from
      our Form 10-K filed on January
11,2009.





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:
      January 12, 2011
                By:
                /s/ Stanley A. HirschmanStanley
      A. Hirschman
                  Principal
      Executive Officer





OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      January 12, 2011
                By:
                /s/ Karen HawkinsKaren
      Hawkins
                  Principal
      Financial Officer




32