UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





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





For
the quarterly period ended March 28, 2010





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




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





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





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




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




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




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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes 
 o 
 No  o




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





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 10, 2010: 139,444,940 shares of common stock.








OPTEX
SYSTEMS HOLDINGS, INC.


FORM
10-Q


March
28, 2010





INDEX




PART
      I— FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                
                3Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                4Item
      4T.
                Control
      and Procedures
                
                14PART
      II— OTHER INFORMATIONItem
      1
                Legal
      Proceedings
                
                14Item
      1A
                Risk
      Factors
                
                14Item
      2.
                Unregistered
      Sales of Equity Securities and Use of ProceedsItem
      6.
                Exhibits
                
                15SIGNATURE
                
                16


2


Item
1. Financial Information





OPTEX
SYSTEMS HOLDINGS, INC.





UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





AS OF
MARCH 28, 2010





BALANCE
      SHEETS AS OF MARCH 28, 2010 (SUCCESSOR) (UNAUDITED) AND SEPTEMBER 27,
      2009 (SUCCESSOR)
                        
                        F-1STATEMENTS
      OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 28, 2010
      (SUCCESSOR) AND THE THREE MONTHS ENDED MARCH 29, 2009 (SUCCESSOR) AND FOR
      THE PERIOD OCTOBER 15, 2008 THROUGH MARCH 29, 2009 (SUCCESSOR) AND FOR THE
      PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR)
      (UNAUDITED)
                        
                        F-3STATEMENTS
      OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 28, 2010
      (SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH MARCH 29, 2009
      (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
      (PREDECESSOR) (UNAUDITED)
                        
                        F-4FINANCIAL
      STATEMENT FOOTNOTES (UNAUDITED)
                        
                        F-6


3





Optex Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Balance Sheets





Successor
                
                
                SuccessorMarch28,2010
                  (Unaudited)
                
                
                September27,
                  2009ASSETSCurrent
      AssetsCash
                
                $
                897,110
                
                
                $
                915,298Accounts
      Receivable
                
                
                2,454,725
                
                
                
                1,802,429Net
      Inventory
                
                
                7,713,021
                
                
                
                8,013,881Deferred
      Tax Asset
                
                
                785,034
                
                
                
                711,177Prepaid
      Expenses
                
                
                340,726
                
                
                
                318,833Total
      Current Assets
                
                $
                12,190,616
                
                
                $
                11,761,618Property
      and EquipmentProperty
      Plant and Equipment
                
                $
                1,347,537
                
                
                $
                1,341,271Accumulated
      Depreciation
                
                
                (1,129,119
                )
                
                
                (1,094,526
                )Total
      Property and Equipment
                
                $
                218,418
                
                
                $
                246,745Other
      AssetsSecurity
      Deposits
                
                $
                20,684
                
                
                $
                20,684Intangibles
                
                
                1,446,806
                
                
                
                1,965,596Goodwill
                
                
                7,110,415
                
                
                
                7,110,415Total
      Other Assets
                
                $
                8,577,905
                
                
                $
                9,096,695Total
      Assets
                
                $
                20,986,939
                
                
                $
                21,105,058





The
accompanying notes are an integral part of these financial
statements


F-1





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Balance Sheets - Continued





Successor
                          
                          
                          SuccessorMarch28,2010
                            (Unaudited)
                          
                          
                          September27,
                            2009LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      Payable
                          
                          $
                          1,777,177
                          
                          
                          $
                          2,497,322Accrued
      Expenses
                          
                          
                          455,636
                          
                          
                          
                          671,045Accrued
      Warranties
                          
                          
                          25,000
                          
                          
                          
                          81,530Accrued
      Contract Losses
                          
                          
                          1,080,301
                          
                          
                          
                          1,348,060Credit
      Facility
                          
                          
                          848,771
                          
                          
                          
                          -Loans
      Payable
                          
                          $
                          125,000
                          
                          
                          $
                          -Total
      Current Liabilities
                          
                          $
                          4,311,885
                          
                          
                          $
                          4,597,957Stockholders'
      EquityOptex
      Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
      shares issued and outstanding as of September 27, 2009)
                          
                          $
                          139,445
                          
                          
                          $
                          139,445Optex
      Systems Holdings, Inc.  Preferred Stock ($0.001 par 5,000
      authorized,  1027 series A preferred issued issed and
      outstanding)
                          
                          
                          1
                          
                          
                          
                          1Additional
      Paid-in-capital
                          
                          
                          16,914,701
                          
                          
                          
                          16,643,388Retained
      Earnings (Deficit)
                          
                          
                          (379,093
                          )
                          
                          
                          (275,733
                          )Total
      Stockholders' Equity
                          
                          $
                          16,675,054
                          
                          
                          $
                          16,507,101Total
      Liabilities and Stockholders' Equity
                          
                          $
                          20,986,939
                          
                          
                          $
                          21,105,058





The
accompanying notes are an integral part of these financial
statements


F-2





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Operations (Unaudited)





Successor
                    
                    
                    Successor
                    
                    
                    Successor
                    
                    
                    Successor
                    
                    
                    PredecessorThree monthsended March 28,2010
                    
                    
                    Three monthsended March 29,2009
                    
                    
                    Six months endedMarch 28, 2010
                    
                    
                    For the period October15, 2008 throughMarch 29, 2009
                    
                    
                    For the periodSeptember 29,2008 throughOctober 14, 2008Revenues
                    
                    $
                    6,318,123
                    
                    
                    $
                    6,708,286
                    
                    
                    $
                    12,233,427
                    
                    
                    $
                    13,100,430
                    
                    
                    $
                    871,938Total
      Cost of Sales
                    
                    
                    5,587,479
                    
                    
                    
                    6,151,915
                    
                    
                    
                    10,747,884
                    
                    
                    
                    11,717,097
                    
                    
                    
                    739,868Gross
      Margin
                    
                    $
                    730,644
                    
                    
                    $
                    556,371
                    
                    
                    $
                    1,485,543
                    
                    
                    $
                    1,383,333
                    
                    
                    $
                    132,070General
      and AdministrativeSalaries
      and Wages
                    
                    $
                    180,708
                    
                    
                    $
                    189,167
                    
                    
                    $
                    345,859
                    
                    
                    $
                    326,014
                    
                    
                    $
                    22,028Employee
      Benefits & Taxes
                    
                    
                    60,712
                    
                    
                    
                    73,505
                    
                    
                    
                    109,238
                    
                    
                    
                    154,735
                    
                    
                    
                    495Employee
      Stock/Option Bonus Plan
                    
                    
                    24,937
                    
                    
                    
                    -
                    
                    
                    
                    47,437
                    
                    
                    
                    4,812
                    
                    
                    
                    (4,812
                    )Amortization
      of Intangible
                    
                    
                    79,823
                    
                    
                    
                    101,158
                    
                    
                    
                    159,645
                    
                    
                    
                    202,317
                    
                    
                    
                    -Rent,
      Utilities and Building Maintenance
                    
                    
                    51,077
                    
                    
                    
                    57,102
                    
                    
                    
                    104,552
                    
                    
                    
                    99,942
                    
                    
                    
                    12,493Investor
      Relations
                    
                    
                    114,665
                    
                    
                    
                    -
                    
                    
                    
                    202,070
                    
                    
                    
                    -
                    
                    
                    
                    -Legal
      and Accounting Fees
                    
                    
                    57,166
                    
                    
                    
                    92,493
                    
                    
                    
                    107,906
                    
                    
                    
                    168,353
                    
                    
                    
                    360Consulting
      and Contract Service Fees
                    
                    
                    30,615
                    
                    
                    
                    55,255
                    
                    
                    
                    86,031
                    
                    
                    
                    124,050
                    
                    
                    
                    10,527Travel
      Expenses
                    
                    
                    6,203
                    
                    
                    
                    11,704
                    
                    
                    
                    16,669
                    
                    
                    
                    25,023
                    
                    
                    
                    -Board
      of Director Fees
                    
                    
                    32,500
                    
                    
                    
                    37,500
                    
                    
                    
                    70,000
                    
                    
                    
                    50,000
                    
                    
                    
                    -Other
      Expenses
                    
                    
                    105,014
                    
                    
                    
                    87,111
                    
                    
                    
                    182,578
                    
                    
                    
                    124,174
                    
                    
                    
                    16,155Total
      General and Administrative
                    
                    $
                    743,420
                    
                    
                    $
                    704,995
                    
                    
                    $
                    1,431,985
                    
                    
                    $
                    1,279,420
                    
                    
                    $
                    57,246Operating
      Income (Loss)
                    
                    $
                    (12,776
                    )
                    
                    $
                    (148,624
                    )
                    
                    $
                    53,558
                    
                    
                    $
                    103,913
                    
                    
                    $
                    74,824Other
      ExpensesOther
      Income and Expense
                    
                    $
                    -
                    
                    
                    $
                    (647
                    )
                    
                    $
                    -
                    
                    
                    $
                    (1,083
                    )
                    
                    $
                    -Interest
      (Income) Expense - Net
                    
                    
                    35,444
                    
                    
                    
                    91,904
                    
                    
                    
                    38,899
                    
                    
                    
                    174,710
                    
                    
                    
                    9,492Total
      Other
                    
                    $
                    35,444
                    
                    
                    $
                    91,257
                    
                    
                    $
                    38,899
                    
                    
                    $
                    173,627
                    
                    
                    $
                    9,492Income
      (Loss) Before Taxes
                    
                    $
                    (48,220
                    )
                    
                    $
                    (239,881
                    )
                    
                    $
                    14,659
                    
                    
                    $
                    (69,714
                    )
                    
                    $
                    65,332Income
      Taxes (Benefit)
                    
                    
                    (56,154
                    )
                    
                    
                    86,664
                    
                    
                    
                    (73,857
                    )
                    
                    
                    350,318
                    
                    
                    
                    -Net
      Income (Loss) After Taxes
                    
                    $
                    7,934
                    
                    
                    $
                    (326,545
                    )
                    
                    $
                    88,516
                    
                    
                    $
                    (420,032
                    )
                    
                    $
                    65,332Less
      Preferred Stock Dividend
                    
                    $
                    (96,652
                    )
                    
                    $
                    -
                    
                    
                    $
                    (191,876
                    )
                    
                    $
                    -
                    
                    
                    $
                    -Net
      Loss Applicable to Common Shareholders
                    
                    $
                    (88,718
                    )
                    
                    $
                    (326,545
                    )
                    
                    $
                    (103,360
                    )
                    
                    $
                    (420,032
                    )
                    
                    $
                    65,332Basic
      and Diluted Loss per Share
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.00
                    )
                    
                    $
                    6.53Weighted
      Average Common Shares Outstanding
                    
                    
                    139,444,940
                    
                    
                    
                    113,614,399
                    
                    
                    
                    139,444,940
                    
                    
                    
                    113,473,841
                    
                    
                    
                    10,000





The
accompanying notes are an integral part of these financial
statements


F-3





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Cash Flows (Unaudited)





Successor
                  
                  
                  Successor
                  
                  
                  PredecessorSixmonthsendedMarch
                    28,2010
                  
                  
                  For the period
                      October 15,
                      2008 through March 29, 2009
                  
                  
                  Fortheperiod
                    September29,2008
                    throughOctober14,
                    2008Cash
      Flows from Operating Activities:Net
      Income (Loss)
                  
                  $
                  88,516
                  
                  
                  $
                  (420,032
                  )
                  
                  $
                  65,332Adjustments
      to Reconcile Net Loss to Net Cash Used in Operating
      Activities:Depreciation
      and Amortization
                  
                  
                  553,385
                  
                  
                  
                  1,086,403
                  
                  
                  
                  9,691Provision
      for Allowance for Inventory Valuation
                  
                  
                  18,067
                  
                  
                  
                  95,773
                  
                  
                  
                  27,363Noncash
      Interest Expense
                  
                  
                  3,921
                  
                  
                  
                  159,780
                  
                  
                  
                  9,500Stock
      Option Compensation Expense
                  
                  
                  47,437
                  
                  
                  
                  -
                  
                  
                  
                  -(Increase)
      Decrease  in Accounts Receivable
                  
                  
                  (652,296
                  )
                  
                  
                  (657,266
                  )
                  
                  
                  1,049,802(Increase)
      Decrease in Inventory (Net of Progress Billed)
                  
                  
                  282,793
                  
                  
                  
                  (1,177,967
                  )
                  
                  
                  (863,566
                  )(Increase)
      Decrease in Other Current Assets
                  
                  
                  6,712
                  
                  
                  
                  240,570
                  
                  
                  
                  18,541(Increase)
      Decrease in Deferred Tax Asset
                  
                  
                  (73,857
                  )
                  
                  
                  -
                  
                  
                  
                  -Increase
      (Decrease) in Accounts Payable and Accrued Expenses
                  
                  
                  (936,082
                  )
                  
                  
                  595,890
                  
                  
                  
                  (186,051
                  )Increase
      (Decrease) in Accrued Warranty Costs
                  
                  
                  (56,530
                  )
                  
                  
                  57,305
                  
                  
                  
                  -Increase
      (Decrease) in Due to Parent
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,428Increase
      (Decrease) in Accrued Estimated Loss on Contracts
                  
                  
                  (267,759
                  )
                  
                  
                  62
                  
                  
                  
                  (15,304
                  )Increase
      (Decrease) in Income Taxes Payable
                  
                  
                  -
                  
                  
                  
                  350,318
                  
                  
                  
                  -Total
      Adjustments
                  
                  $
                  (1,074,209
                  )
                  
                  $
                  750,868
                  
                  
                  $
                  51,404Net
      Cash (Used)/Provided by Operating Activities
                  
                  $
                  (985,693
                  )
                  
                  $
                  330,836
                  
                  
                  $
                  116,736Cash
      Flows from Investing Activities:Cash
      Received through Optex Texas acquisition
                  
                  $
                  -
                  
                  
                  $
                  253,581
                  
                  
                  $
                  -Purchased
      of Property and Equipment
                  
                  
                  (6,266
                  )
                  
                  
                  (17,725
                  )
                  
                  
                  (13,338
                  )Net
      Cash Used in Investing Activities
                  
                  $
                  (6,266
                  )
                  
                  $
                  235,856
                  
                  
                  $
                  (13,338
                  )Cash
      Flows from Financing Activities:Private
      Placement Net of Stock Issuance Cost
                  
                  
                  
                  
                  
                  
                  874,529Proceeds
      (to) from Credit Facility (net)
                  
                  
                  848,771Proceeds
      from Loans Payable
                  
                  
                  250,000
                  
                  
                  
                  (207,265
                  )
                  
                  
                  (20,000
                  )Repayments
      on Loans Payable
                  
                  
                  (125,000
                  )Net
      Cash (Used in) Provided by Financing Activities
                  
                  $
                  973,771
                  
                  
                  $
                  667,264
                  
                  
                  $
                  (20,000
                  )Net
      Increase (Decrease) in Cash and Cash Equivalents
                  
                  $
                  (18,188
                  )
                  
                  $
                  1,233,956
                  
                  
                  $
                  83,398Cash
      and Cash Equivalents at Beginning of Period
                  
                  
                  915,298
                  
                  
                  
                  -
                  
                  
                  
                  170,183Cash
      and Cash Equivalents at End of Period
                  
                  $
                  897,110
                  
                  
                  $
                  1,233,956
                  
                  
                  $
                  253,581





The
accompanying notes are an integral part of these financial
statements


F-4





Optex
Systems Holdings, Inc.


(formerly
known as Sustut Exploration, Inc.)


Condensed
Consolidated Statements of Cash Flows - continued (Unaudited)





Successor
                
                
                Successor
                
                
                PredecessorSixmonthsendedMarch28,2010
                
                
                FortheperiodOctober15,2008through
                  March29,2009
                
                
                Fortheperiod
                  September29,2008
                  through
                  October14,2008Noncash
      Investing and Financing Activities:Optex
      Delaware (Successor) Purchase of Optex Texas (Predecessor)Cash
      Received
                
                
                -
                
                
                
                253,581
                
                
                
                -Accounts
      Receivable
                
                
                -
                
                
                
                1,404,434
                
                
                
                -Inventory
                
                
                -
                
                
                
                5,383,929
                
                
                
                -Intangibles
                
                
                -
                
                
                
                4,036,790
                
                
                
                -Other
      Assets
                
                
                -
                
                
                
                632,864
                
                
                
                -Accounts
      Payable
                
                
                -
                
                
                
                (1,953,833
                )
                
                
                -Other
      Liabilities
                
                
                -
                
                
                
                (1,868,180
                )
                
                
                -Debt
                
                
                -
                
                
                
                (6,000,000
                )
                
                
                -Goodwill
                
                
                -
                
                
                
                7,110,415
                
                
                
                -Issuance
      of Stock
                
                $
                -
                
                
                $
                9,000,000
                
                
                $
                -Conversion
      of Debt to Series A Preferred StockAdditonal
      Paid in Capital (6,000,000 Debt Retirement plus Accrued Interest of
      $159,780)
                
                $
                -
                
                
                $
                6,159,780
                
                
                $
                -Issuance
      of Common Shares in Exchange for Investor Relations
    ServicesAdditonal
      Paid in Capital (1,250,000 shares issued at $0.0001 par)
                
                $
                -
                
                
                $
                187,500
                
                
                $
                -Issuance
      of Warrants as Debt Issuance CostAdditonal
      Paid in Capital (1,100,000 warrants)
                
                $
                32,000
                
                
                $
                -
                
                
                $
                -Supplemental
      Cash Flow Information:Cash
      Paid for Interest
                
                $
                34,978
                
                
                
                3,817
                
                
                $
                -Cash
      Paid for Taxes
                
                $
                119,847
                
                
                $
                -
                
                
                $
                -





The
accompanying notes are an integral part of these financial
statements


F-5


Note 1 - Organization and
Operations





On March
30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration,
Inc.), a Delaware corporation (“Optex Systems Holdings” or “Successor”), along
with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems,
Inc. (Delaware)”), which is a wholly-owned subsidiary of Optex
Systems Holdings, 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, there was a name
change from Sustut Exploration Inc. to Optex Systems Holdings, Inc., and its
year end changed from December 31 to a fiscal year ending on the Sunday
nearest September 30.





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





In
accordance with FASB ASC 805 (Prior authoritative literature:  SFAS
No. 141(R),“Business
Combinations”and EITF 98-3 “Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets or of a Business”), Optex
Systems, Inc. (Delaware)’s purchase of substantially all of the assets and
assumption of certain liabilities represented the acquisition of a
business.  FASB ASC 805 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.





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





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





The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet.  As of March 28, 2010, Optex Systems
Holdings operated with  99 full-time equivalent
employees.





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





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


F-6





Note
2 - Accounting Policies





Basis
of Presentation





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





The
accompanying financial statements include the results of operations and cash
flows of Optex Systems, Inc. (Delaware), the accounting acquirer in the Sustut
reorganization and the successor in the October 14, 2008 Optex Systems, Inc.
(Texas) asset purchase transaction, for the three and six months ending March
28, 2010, the three months ended March 29, 2009 and the period from October 15,
2008 through March 29, 2009 and the results of operations and cash flows for the
period from September 29, 2008 through October 14, 2008 of Optex Systems, Inc.
(Texas), Predecessor.  The accompanying financial statements include the
balance sheets at March 28, 2010 and September 27, 2009 for Optex Systems, Inc.
(Delaware), the accounting acquirer.





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





Although,
Optex Systems, Inc. (Texas) (Predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements.  The Optex Systems,
Inc. (Texas) accounts have been presented on the basis of push down accounting
in accordance with FASB ASC 805-50-S99 (Prior authoritative
literature:  Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase).
FASB ASC 805-50-S99 states that the push down basis of accounting should be used
in a purchase transaction in which the entity becomes wholly-owned by another
entity. Under the push down basis of accounting certain transactions incurred by
the parent company, which would otherwise be accounted for in the accounts of
the parent, are “pushed down” and recorded on the financial statements of the
subsidiary. Accordingly, items resulting from the Optex Systems, Inc. (Texas)
purchase transaction, such as goodwill, debt incurred by the parent to acquire
the subsidiary and other costs related to the purchase have beenrecorded on the
financial statements of Optex Systems Holdings.





The
condensed consolidated financial statements of Optex Systems Holdings included
herein have been prepared by Optex Systems Holdings, without audit, pursuant to
the rules and regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements prepared in conjunction
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Optex Systems Holdings believes
that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the annual audited financial statements and the notes thereto
included in the Optex Systems Holdings’ Form 10-K and other reports filed
with the SEC.





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





Use
ofEstimates:  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates.





Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted, as
necessary, for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts.  Payments received
for such undelivered inventory are classified as unliquidated progress payments
and deducted from the gross inventory balance. As of March 28, 2010 and
September 27, 2009, inventory included:


F-7





As of
                        March 28, 2010
                        (unaudited)
                      
                      
                      As of
                        September 27, 2009Raw
      Materials
                      
                      $
                      5,992,250
                      
                      
                      $
                      7,161,241Work
      in Process
                      
                      
                      4,929,339
                      
                      
                      
                      4,043,308Finished
      Goods
                      
                      
                      277,342
                      
                      
                      
                      245,056Gross
      Inventory
                      
                      $
                      11,198,931
                      
                      
                      $
                      11,449,605Less:Unliquidated
      Progress Payments
                      
                      
                      (2,913,017
                      )
                      
                      
                      (2,880,898
                      )Inventory
      Reserves
                      
                      
                      (572,893
                      )
                      
                      
                      (554,826
                      )Net
      Inventory
                      
                      $
                      7,713,021
                      
                      
                      $
                      8,013,881





Stock-Based
Compensation:In
December 2004, FASB issued FASB ASC 718 (Prior authoritative
literature:  SFAS No. 123R,“Share-Based
Payment”).  FASB ASC 718 establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, but primarily focuses on transactions whereby an entity obtains
employee services for share-based payments. FASB ASC 718 requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements.  That cost will be measured based on the fair
value of the equity or liability instruments issued. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity
instruments.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50 (Prior authoritative literature:  EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”and EITF 00-18, “Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees”).The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting agreement. 
Stock-based compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable in accordance with FASB ASC
718.





Income
Tax/Deferred Tax:FASB ASC 740 (Prior Authoritative
Literature: SFAS No. 109, “Accounting for Income
Taxes”), requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on differing treatment of items for financial
reporting and income tax reporting purposes.  The deferred tax balances are
adjusted to reflect tax rates by tax jurisdiction, based on currently enacted
tax laws, which will be in effect in the years in which the temporary
differences are expected to reverse.  Under FASB ASC 740, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.  Optex
Systems Holdings has recognized deferred income tax benefits on net operating
loss carry-forwards to the extent Optex Systems Holdings believes it will be
able to utilize them in future tax filings.  The difference between the
income tax expense and pretax accounting income is primarily attributable to
$116,938 and $231,883 of deductible expenses representing permanent timing
differences between book income and taxable income for the amortization of
goodwill during the three and six months ending March 28, 2010,
respectively.  This expense is deductible over 15 years for income tax
purposes but is not amortized for accounting purposes.  The tax effect of
this permanent timing difference is a reduction in income tax expense of $39,759
and $78,840 for the three and six months ended March 28, 2010,
respectively.




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




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


F-8




For the
three and six months ended March 28, 2010, 1,027 shares of Series A Preferred
Stock, 2,655,649 stock options and 9,948,667 warrants were excluded as
antidilutive. There were no dilutive convertible securities issued and
outstanding for the periods ended March 29, 2009 (Successor) or October 14, 2008
(Predecessor).




Reclassification:  Certain
expenses reflected in the financial statements for the three and six months
ended March 29, 2009 have been reclassified to conform with the current year
presentation.





Note
3 - Recent Accounting Pronouncements





In
February 2010, FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised
financial statements.  Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of GAAP. All of the amendments in ASU 2010-09 are effective upon
issuance of the final ASU, except for the use of the issued date for conduit
debt obligors, which is effective for interim or annual periods ending after
June 15, 2010.  The Company adopted ASU2010-09 in February 2010 and therefore omitted the disclosure
previously required as referenced above.





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 indebtedness 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 indebtedness was contributed by
Longview and Alpha to Optex Systems, Inc. (Delaware), in exchange for a $6
million note payable from Optex Systems, Inc. (Delaware) and a $9 million equity
interest in Optex Systems, Inc. (Delaware) (which consisted of the issuance by
Optex Systems, Inc. (Delaware) of 45,081,350 and 4,918,650 shares of its common
stock to each of Longview Fund and Alpha, respectively). On October 30, 2008,
Alpha sold its Optex Systems, Inc. (Delaware) common stock to Arland Holdings,
Ltd. There was no contingent consideration associated with the purchase.
Longview and Arland Holdings, Ltd. owned Optex Systems, Inc. (Delaware) together
until February 20, 2009, when Longview sold 100% of its equity and debt
interests in Optex Systems, Inc. (Delaware) to Sileas, as discussed
below.





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.





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) issued 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) secured
promissory note to Sileas, as described below. On March 27, 2009, Sileas and
Alpha exchanged these secured promissory notes plus accrued and unpaid interest
of $159,780 for 1,027 shares of Optex Systems, Inc. (Delaware) Series A
preferred stock.


F-9





Acquisition
by Sileas on February 20, 2009





On
February 20, 2009, Sileas purchased 100% of the equity (which at the time
represented 90% of the issued and outstanding equity interests of Optex Systems,
Inc. (Delaware)) and debt interest in Optex Systems, Inc. (Delaware) held by
Longview,. As of the date of this transaction, Sileas became the majority owner
of Optex Systems Holdings.





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





As a
result of the transaction between Sileas and Longview, on February 20, 2009,
Sileas (which is 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. This secured promissory note bears simple
interest at the rate of 4% per annum, and the interest rate increases to 10% per
annum upon the occurrence of an event of default thereunder. 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 due to a
reorganization into Sileas or reincorporation in another jurisdiction, then this
secured promissory note shall be immediately due and owing without demand. In
the event that such a major transaction occurs prior to the maturity date
resulting in Sileas receiving net consideration with a fair market value in
excess of the principal and interest due under the terms of this secured
promissory note (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay to Longview an amount equal to
90% of the Optex Consideration. The obligations of Sileas under this secured
promissory note are secured by a security interest in Optex
Systems Holdings’ common and preferred stock owned by Sileas that was
granted to Longview and also by a lien on all of the assets of Sileas (which
consist solely of the Optex Systems Holdings common and preferred stock held by
Sileas).





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





Note
5 –Reorganization Plan and Private Placement





Reorganization/Share
Exchange





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





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





Private
Placement





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





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


F-10





Optex
Systems Holdings, Inc.


Balance
Sheet Adjusted for Reorganization and Private Placement




Unaudited
                    Quarter
                    Ended March 29,
                    2009
                  
                  
                  Reorganization
                    Adjustments
                    (1)
                  
                  
                  Private
                    Placement
                    Adjustments
                  
                  
                  Unaudited Quarter
                    Ended March 29,
                    2009AssetsCurrent
      Assets
                  
                  $
                  8,880,436
                  
                  
                  $
                  187,500
                  
                  
                  $
                  929,738
                  
                  
                  $
                  9,997,674Non
      current Assets
                  
                  
                  10,422,425
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,422,425Total
      Assets
                  
                  $
                  19,302,861
                  
                  
                  $
                  187,500
                  
                  
                  $
                  929,738
                  
                  
                  $
                  20,420,099LiabilitiesLoans
      Payable
                  
                  
                  146,709
                  
                  
                  
                  
                  
                  
                  
                  (146,250
                  )
                  
                  
                  459Other
      Current Liabilities
                  
                  
                  4,416,403
                  
                  
                  
                  -
                  
                  
                  
                  55,209
                  
                  
                  
                  4,471,612Total
      Liabilities
                  
                  $
                  4,563,112
                  
                  
                  $
                  -
                  
                  
                  $
                  (91,041
                  )
                  
                  $
                  4,472,071EquityOptex
      Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
      authorized, 138,914,940 shares issued and outstanding as of March 29,
      2009)
                  
                  
                  113,333
                  
                  
                  
                  17,450
                  
                  
                  
                  8,132
                  
                  
                  
                  138,915Optex
      Systems Holdings, Inc.  preferred stock (par value $0.001 per
      share, 5,000 shares authorized,  1027 shares of Series A
      Preferred issued and outstanding)
                  
                  
                  1
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1Additional
      Paid in Capital
                  
                  
                  15,046,446
                  
                  
                  
                  170,050
                  
                  
                  
                  1,012,647
                  
                  
                  
                  16,229,143Retained
      Earnings
                  
                  
                  (420,031
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (420,031
                  )Total
      Stockholders Equity
                  
                  $
                  14,739,749
                  
                  
                  $
                  187,500
                  
                  
                  $
                  1,020,779
                  
                  
                  $
                  15,948,028Total
      Liabilities and Stockholders Equity
                  
                  $
                  19,302,861
                  
                  
                  $
                  187,500
                  
                  
                  $
                  929,738
                  
                  
                  $
                  20,420,099





(1) Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009 reorganization. Other
assets include $187,500 in prepaid expenses for investor relation services to be
realized over the next 12 months. The services were prepaid by the issuance of
1,250,000 Sustut shares by Sustut prior to March 30, 2009. The original prepaid
expense covered April 2009 through April 2010.  On June 29, 2009 700,000 of
these shares were returned to Optex Systems Holdings due to the cancellation of
one of the investor relations agreements.  The amortized expense related to
the remaining 550,000 shares has been reflected on the Consolidated Statement of
Operations for Optex Systems Holdings as expensed.




The
accompanying unaudited pro forma financial information for the consolidated
successor three and six months ended March 28, 2010 and three and six months
ended March 29, 2009 (Combined Successor and Predecessor) 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 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 six months ended March 29, 2009 as if the acquisition of Optex Systems, Inc.
(Texas) and reorganization plan had occurred on the first day of the
year.


F-11





UnauditedSix Months EndedMarch29,2009Revenues
                  
                  
                  13,972,368Net
      Income (Loss) attributable to common shareholders
                  
                  
                  (345,200
                  )Diluted
      earnings per share
                  
                  $
                  (0.00
                  )Weighted
      Average Shares Outstanding
                  
                  
                  138,914,940





The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from Irvine Sensors Corporation and the elimination
of employee stock bonus compensation previously allocated from Irvine Sensors
Corporation to reflect the costs of the ongoing entity.





Note
6 - Commitments and Contingencies




Leases





As of
March 28, 2010, Optex Systems Holdings leased its office and manufacturing
facilities under a non-cancellable operating lease expiring July 31, 2015 in
addition to maintaining several non-cancellable operating leases for office and
manufacturing equipment.    Total expense under facility lease
agreements as of the three and six months ended March 28, 2010 was $64,988 and
$142,338 and total expense for manufacturing and office equipment was $7,194 and
15,328, respectively. Total expense under facility lease agreements for the
three and six months ended March 29, 2009 was $56,978 and $170,935,
respectively.  Total expense for manufacturing and office equipment for the
three and six months ended March 29, 2009 was $5,598 and $11,195.





As of
March 28, 2010, the remaining minimum lease payments under the non-cancelable
operating leases for equipment, office and facility space are as
follows:





OperatingLeasesFiscal
      Year2010
                        
                        $
                        49,1272011
                        
                        
                        251,1522012
                        
                        
                        236,1122013
                        
                        
                        231,5742014
                        
                        
                        241,7482015
                        
                        
                        201,457Total
      minimum lease payments
                        
                        $
                        1,211,170





Pursuant
to the terms of the amendment to the facilities lease, there is no base rent
payment due from January 1, 2010 through July 31, 2010, and the total value of
this rent abatement is $133,898.  The value of the deferred rent expense
will be amortized monthly at a rate of $1,998 per month over the life of the
lease.  The total unamortized deferred rent as of March 28, 2010 is
$51,390.


F-12





Note
7 - Debt Financing





Related
Parties





Short Term Note
Payable/Longview Fund -    On October 27, 2009, Optex
Systems Holdings borrowed $250,000 from the Longview Fund pursuant to a
promissory note, with an original maturity date of December 1, 2009, which was
extended to July 15, 2010 pursuant to an allonge dated January 5, 2010. 
The note bears interest at the rate of 10% per annum, and all accrued and unpaid
interest thereon will be due upon maturity.  The note requires Optex
Systems Holdings to make a prepayment equal to 50% of the then outstanding
principal amount plus accrued and unpaid interest thereon upon the closing of a
credit facility or other equity or debt financing from which the net proceeds to
Optex Systems Holdings are at least $900,000, with any remaining unpaid balance
due on July 15, 2010.  In exchange for the allonge, Optex Systems Holdings
granted Longview a warrant to purchase 100,000 shares of its restricted common
stock with an exercise price of $0.15 per share and with a term of three
years.  In conjunction with the Peninsula Bank financing (below) on March
22, 2010, Optex Systems Holdings paid to Longview a principal prepayment of
$125,000 and $10,000 in accrued interest.  The remaining principal amount
of the note of $125,000 plus accrued interest thereon is due on July 15,
2010.





Credit
Facility - Peninsula Bank Business Funding





Effective
March 10, 2010, Optex Systems, Inc. (Delaware) entered into a Loan and Security
Agreement (“Agreement”) with Peninsula Bank Business Funding, a division of the
Private Bank of the Peninsula (“Lender”).





The
Agreement provides for a revolving line of credit of up to $2,000,000, based
upon advances to be made against percentages of eligible receivables as set
forth in the Agreement.  The material terms of the Agreement are as
follows:





·
            The interest rate for all
      advances shall be the greater of 8.5% and the then in effect prime rate
      plus 3.5% and subject to a minimum quarterly interest payment of
      $16,000.


·
            Interest shall be paid monthly in
      arrears.


·
            The expiration date of the
      Agreement is March 4, 2011, at which time any outstanding advances, and
      accrued and unpaid interest thereon, will be due and
      payable.


·
            In connection with the entry into
      the Agreement by the Lender, Optex Systems, Inc.(Delaware) paid the Lender
      a facility fee of $20,000 and issued a warrant to Lender to purchase
      1,000,000 shares of its common stock. The warrant bears an exercise price
      of $0.10 per share and expires on March 3,
  2016.


·
            The obligations of Optex Systems,
      Inc. (Delaware) to the Lender are secured by a first lien on all of its
      assets (including intellectual property assets should it have any in the
      future) in favor of the
Lender.


·
            The Agreement contains
      affirmative and negative covenants that require Optex Systems, Inc.
      (Delaware) to maintain certain minimum cash and EBITDA levels on a
      quarterly basis and contains other customary covenants.  The
      Agreement also contains customary events of default.  Upon the
      occurrence of an event of default that remains uncured after any
      applicable cure period, the Lender’s commitment to make further advances
      may terminate, and the Lender would also be entitled to pursue other
      remedies against Optex Systems, Inc. (Delaware) and the pledged
      collateral.


·
            Pursuant
      to a guaranty executed by Optex Systems Holdings in favor of Lender, Optex
      Systems Holdings has guaranteed all obligations of Optex Systems, Inc.
      (Delaware) to Lender.





Note
8 – Intangible Assets and Goodwill





On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities (see Note 4).
Optex Systems, Inc. (Delaware) has allocated the consideration for its
acquisition of the Purchased Assets among tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Assets that met
the criteria for recognition as intangible assets apart from goodwill were also
valued at their fair values.





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





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


F-13





Goodwill
was tested for impairment as of March 28, 2010 using a fair value approach and
based on the review, no impairment was required.





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





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




The
amortization of identifiable intangible assets associated with the Optex Systems
Inc. (Texas) acquisition on October 14, 2008 expensed for the three and six
months ended March 28, 2010 was $259,395 and $518,790, respectively.  The
intangible amortization allocable to manufacturing cost of sales was $179,572
and $359,144, and the intangible amortization allocable to general and
administrative was $79,821 and 159,642 for the three and six months ending March
28, 2010, respectively. The amortization of identifiable intangible assets
expensed for the three and six months ended March 29, 2009 was $517,798 and
$1,035,596, respectively.  The intangible amortization allocable to
manufacturing cost of sales was $416,639 and $833,280, respectively, and the
intangible amortization allocable to general and administrative was $101,159 and
$202,316 for the three and six months ending March 29, 2009, respectively. The
identifiable intangible assets and recorded goodwill are amortized over five
years for book purposes and over 15 years for income tax purposes.  As
of the March 28, 2010, the total unamortized balance of intangible assets was
$1,446,806.  The amortizable intangible assets were tested for impairment
as of September 27, 2009 utilizing undiscounted, projected cash flows and based
upon this analysis, no impairment was noted. Subsequent to the review, there
have been no material changes to our assumptions or estimates that would result
in impairment.  However, we intend to continue to monitor the value of our
intangible assets and goodwill in order to identify any impairment that may
occur in the future.





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





2010
                                      
                                      
                                      2011
                                      
                                      
                                      2012
                                      
                                      
                                      2013Customer
      backlog amortized by delivery schedule
                                      
                                      COS
                                      
                                      $
                                      359,145
                                      
                                      
                                      $
                                      126,158
                                      
                                      
                                      $
                                      19,614
                                      
                                      
                                      $
                                      4,762Customer
      backlog amortized by delivery schedule
                                      
                                      G&A
                                      
                                      
                                      32,323
                                      
                                      
                                      
                                      11,354
                                      
                                      
                                      
                                      1,765
                                      
                                      
                                      
                                      427Program
      backlog amortized straight line across 5 years
                                      
                                      G&A
                                      
                                      
                                      127,323
                                      
                                      
                                      
                                      254,645
                                      
                                      
                                      
                                      254,645
                                      
                                      
                                      
                                      254,645Total
      Amortization by Year
                                      
                                      
                                      
                                      $
                                      518,791
                                      
                                      
                                      $
                                      392,157
                                      
                                      
                                      $
                                      276,024
                                      
                                      
                                      $
                                      259,834





Note
9-Stock Based Compensation





Option
Agreements:





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


F-14





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





The
option price of each share of common stock is determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share will in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive stock option granted under
the 2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings’ stock, will have
an exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.





On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 per share were
granted to an officer of Optex Systems Holdings.  These options vest as
follows: 34% after the first year, and 33% each after the second and third
years.  These options have a seven year term from the date of
issuance.  On May 14, 2009, 1,267,000 stock options were issued to other
Optex Systems Holdings employees, including options to purchase 250,000 shares
to one executive officer.  These stock options vest 25% per year after
each year of employment and have a seven year term from the date of
issuance.  For shares granted as of May 14, 2009, Optex Systems Holdings
anticipates an annualized employee turnover rate of 3% per year, and as such
anticipates that only 1,174,786 of the 1,267,000 shares will vest as of the end
of the contract term.  As of March 28, 2010, none of the stock options had
vested and 26,000 shares had been forfeited due to employee
turnover.





Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $24,937 and $47,437 for the three and six months
ended March 28, 2010, respectively.  There were no stock options or shares
granted or outstanding as of March 29, 2009; therefore, no compensation expense
was recorded during that period.  The impact of this expense was immaterial
to the basic and diluted net loss per share for the three and six months ended
March 28, 2010.  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 six months ended March
28, 2010, estimated deferred tax assets related to option compensation costs
were $16,129 and have been recorded to reflect the tax effect of the financial
statement expense.  There was no similar tax effect related to option
compensation costs for the six months ended March 29, 2009 related to these
stock options.  No tax deduction is allowed for incentive stock options.
Accordingly, no deferred tax asset is recorded for GAAP expense related to these
options.





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


F-15





Year endedSeptember27, 2009Expected
      dividend yield
                
                0
      %Expected
      stock price volatility
                
                23.6
      %Risk-free
      interest rate  (1)
                
                2.8%-4.07
      %Expected
      life of options
                
                4.5
      to 7 Years





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


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





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





Date of
                          
                          Shares
                          
                          
                          Exercise
                          
                          
                          Shares Outstanding
                          
                          Expiration
                          
                          VestingGrant
                          
                          Granted
                          
                          
                          Price
                          
                          
                          As of 03/28/10
                          
                          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
                          
                          
                          
                          310,250
                          
                          05/13/2016
                          
                          05/14/201005/14/09
                          
                          
                          316,750
                          
                          
                          
                          0.15
                          
                          
                          
                          310,250
                          
                          05/13/2016
                          
                          05/14/201105/14/09
                          
                          
                          316,750
                          
                          
                          
                          0.15
                          
                          
                          
                          310,250
                          
                          05/13/2016
                          
                          05/14/201205/14/09
                          
                          
                          316,750
                          
                          
                          
                          0.15
                          
                          
                          
                          310,250
                          
                          05/13/2016
                          
                          05/14/2013Total
                          
                          
                          2,681,649
                          
                          
                          
                          
                          
                          
                          
                          2,655,649





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




Number
                        
                        
                        Weightedof Shares
                        
                        
                        Average
                        
                        
                        WeightedRemaining
                        
                        
                        Intrinsic
                        
                        
                        Average
                        
                        
                        AggregateSubject to Exercise
                        
                        Options
                        
                        
                        Price
                        
                        
                        Life (Years)
                        
                        
                        ValueOutstanding
      as of September 27, 2009
                        
                        
                        2,667,649
                        
                        
                        $
                        0.21
                        
                        
                        
                        5.14
                        
                        
                        $
                        560,206Granted
      – 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
      – 2010
                        
                        
                        (12,000
                        )
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
      – 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      as of March 28, 2010
                        
                        
                        2,655,649
                        
                        
                        $
                        -
                        
                        
                        
                        4.64
                        
                        
                        $
                        -Exercisable
      as of March 28, 2010
                        
                        
                        0
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -





The
weighted-average grant date fair value of options granted during the six months
ended March 28, 2010 was $0.14, and the total intrinsic value of options
exercised during the six months ended March 28, 2010 was $0.





The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan:


F-16





Number of
                    Non-
                    vested
                    Shares
                    Subject to
                    Options
                  
                  
                  Weighted-
                    Average
                    Grant-
                    Date
                    Fair ValueNon-vested
      as of September 27, 2009
                  
                  
                  2,667,649
                  
                  
                  $
                  0.14Non-vested
      granted — six months ended March 28, 2010
                  
                  
                  -
                  
                  
                  $
                  0.00Vested —  six
      months ended March 28, 2010
                  
                  
                  -
                  
                  
                  $
                  0.00Forfeited — six
      months ended March 28, 2010
                  
                  
                  (12,000
                  )
                  
                  $
                  0.14Non-vested
      as of March 28, 2010
                  
                  
                  2,655,649
                  
                  
                  $
                  0.14





As of
March 28, 2010, the unrecognized compensation cost related to non-vested share
based compensation arrangements granted under the plan that was approximately
$276,852.  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 six months ended March 28, 2010 was
$0.





During
the fiscal year ended September 27, 2009, Optex Systems Holdings issued 480,000
shares of common stock at a market value of $0.30 per share for a total $144,000
and paid $150,000 cash to a vendor in support of an investor relations agreement
executed on June 29, 2009. Pursuant to the agreement, the shares are earned over
the life of the contract at the rate of 40,000 shares per month through June
2010.  During the three and six months ended March 28, 2010, Optex Systems
Holdings expensed $36,000 and $72,000, respectively, for shares earned and the
unamortized balance of shares issued against the contract is $36,000 to be
expensed through the third fiscal quarter of 2010.





There
were no stock options issued to Optex Systems, Inc. (Texas) employees or equity
instruments issued to consultants and vendors during the six months
ended March 29, 2009.





Warrant
Agreements:





Optex
Systems Holdings calculates the fair value of warrants issued with debt or
preferred stock using the Black-Scholes-Merton valuation method. The total
proceeds received in the sale of debt or preferred stock and related warrants
are allocated among these financial instruments based on their relative fair
values. The discount arising from assigning a portion of the total proceeds to
the warrants issued is recognized as interest expense for debt from the date of
issuance to the earlier of the maturity date of the debt or the conversion dates
using the effective yield method.





As of
March 28, 2010, Optex Systems Holdings had the following warrants
outstanding:





Grant Date
                          
                          Warrants
                            Granted
                          
                          
                          Exercise
                            Price
                          
                          
                          Outstanding asof03/28/10
                          
                          Expiration
                            Date
                          
                          TermPrivate
      Placement  Stock Holders
                          3/30/2009
                          
                          
                          8,131,667
                          
                          
                          $
                          0.450
                          
                          
                          
                          8,131,667
                          
                          3/29/2014
                          
                          5 yearsFinder
      Fee on Private Placement
                          3/30/2009
                          
                          
                          717,000
                          
                          
                          $
                          0.165
                          
                          
                          
                          717,000
                          
                          3/29/2014
                          
                          5
      yearsLongview
      Fund Allonge Agreement
                          1/5/2010
                          
                          
                          100,000
                          
                          
                          $
                          0.150
                          
                          
                          
                          100,000
                          
                          1/4/2013
                          
                          3
      yearsPeninsula
      Bank Holding Co - Line of Credit
                          3/4/2010
                          
                          
                          1,000,000
                          
                          
                          $
                          0.100
                          
                          
                          
                          1,000,000
                          
                          3/3/2016
                          
                          6
      yearsTotal
      Warrants
                          
                          
                          
                          9,948,667
                          
                          
                          
                          
                          
                          
                          
                          9,948,667





During
the three and six months ended March 28, 2010 Optex Systems Holdings recorded a
total of $3,395 in interest expense related to the outstanding warrants and has
an unamortized interest balance of $28,605.  These warrants are not
included in the computation of weighted average of shares as it would be
anti-dilutive.





Note
10–Stockholders Equity




Common
stock:





Optex
Systems, Inc. (Texas) was authorized to issue 100,000 shares of no par common
stock.  At September 28, 2008, there were 18,870 shares issued and 10,000
shares outstanding.


F-17


The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Systems, Inc. (Texas) as
it existed prior to the acquisition by Irvine Sensors Corporation, since Optex
Systems, Inc. (Texas) is presenting its financial statements as a separate,
stand-alone entity.





On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), in exchange for a $6 million note payable from
Optex Systems, Inc. (Delaware) and a $9 million equity interest in Optex
Systems, Inc. (Delaware) (which consisted of the issuance by Optex Systems, Inc.
(Delaware) of 45,081,350 and 4,918,650 shares of its common stock to each of
Longview Fund and Alpha, respectively). On October 30, 2008, Alpha sold its
Optex Systems, Inc. (Delaware) common stock to Arland Holdings, Ltd. There was
no contingent consideration associated with the purchase. In February 20, 2009,
Longview sold 100% of its equity and debt interests in Optex Systems, Inc.
(Delaware) to Sileas (representing 90% of the then outstanding equity interests
in Optex Systems, Inc. (Delaware)), and Sileas became the majority owner of
Optex Systems Holdings.





Stock
Split





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





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





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





Reorganization
& Private Placement:





As a
result of the reorganization agreement and private placement, the 85,000,000
outstanding shares of common stock of Optex Systems, Inc. (Delaware) outstanding
as of March 30, 2009 were exchanged for 113,333,282 shares of common stock of
Optex Systems Holdings (formerly Sustut Exploration, Inc.). An additional
8,131,667 shares of Optex Systems Holdings common stock were issued in
connection with the private placement closed prior to the
reorganization.





On June
29, 2009, 750,000 shares of Optex Systems Holdings common stock were sold to in
a private transaction for gross proceeds of $150,000.





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





The
company granted an officer at the consummation of the reorganization options to
purchase 1,414,649 shares with an exercise price of $0.15 per share. The options
vest 34% one year following the date of grant, and 33% on each of the second and
third anniversaries following the date of grant. 480,981 of these options vested
on March 30, 2010, subsequent to the March 28, 2010 quarter end. See Note 9 -
Stock Based Compensation.





Series
A preferred stock





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


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
principal amount of $6,000,000 plus accrued and unpaid interest thereon into
1,027 shares of Series A preferred stock. On March 30, 2009, shares of Optex
Systems, Inc. (Delaware) Series A preferred stock were exchanged on a 1:1 basis
for shares of Series A preferred stock of Optex Systems Holdings.  As
of the three and six months ended March 28, 2010, Optex Systems Holdings
recorded $96,652 and $191,876 of dividends payable on Series A preferred shares,
respectively.





Cancellation
of Common Stock





On June
29, 2009, Optex Systems Holdings cancelled an investor relations agreement
resulting in the return of 700,000 shares of common stock previously issued by
Sustut prior to the reverse merger on March 30, 2009.  The shares were
valued at $105,000, returned to Optex System Holdings, and then cancelled (see
also Note 9 regarding new investor relations shares issued).




F-18




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 March 28, 2010. This MD&A is intended to supplement and complement our
audited financial statements and notes thereto for the fiscal year ended
September 27, 2009, prepared in accordance with U.S. generally accepted
accounting principles (GAAP). You are encouraged to review our financial
statements in conjunction with your review of this MD&A. The financial
information in this MD&A has been prepared in accordance with GAAP, unless
otherwise indicated. In addition, we use non-GAAP financial measures as
supplemental indicators of our operating performance and financial position. We
use these non-GAAP financial measures internally for comparing actual results
from one period to another, as well as for planning purposes. We will also
report non-GAAP financial results as supplemental information, as we believe
their use provides more insight into our performance. When non-GAAP measures are
used in this MD&A, they are clearly identified as a non-GAAP measure and
reconciled to the most closely corresponding GAAP measure.





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


4


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 exchange of
shares referenced above), as of March 30, 2009, Optex Systems, Inc. (Delaware)
accepted subscriptions from accredited investors for a total 27.1 units, at a
purchase price of $45,000 per unit, with each unit consisting of 300,000 shares
of common stock, no par value, of Optex Systems, Inc. (Delaware) and warrants to
purchase 300,000 shares of common stock for $0.45 per share for a period of five
(5) years from the initial closing, which were issued by Optex Systems, Inc.
(Delaware) after the closing referenced above.  Gross proceeds to
Optex Systems, Inc. (Delaware) were $1,219,750, and after deducting (i) a cash
finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed to an
investor of $146,250, and (iii) stock issuance costs of $59,416, the net
proceeds were $874,529.  The finder also received five year warrants
to purchase 2.39 units, at an exercise price of $49,500 per unit.





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





Many of
our contracts allow for government contract financing in the form of contract
progress payments pursuant to Federal Acquisition Regulation
52.232-16, “Progress Payments”.  As a small business, and subject
to certain limitations, this clause provides for government payment of up to 90%
of incurred program costs prior to product delivery.  To the extent
our contracts allow for progress payments, we intend to utilize this benefit,
thereby minimizing the working capital impact on Optex Systems Holdings for
materials and labor required to complete the contracts.





Optex
Systems Holdings also anticipates the opportunity to integrate some of its night
vision and optical sights products into commercial
applications.  Optex Systems Holdings plans to carry on the business
of Optex Systems, Inc. (Delaware) as its sole line of business, and all of Optex
Systems Holdings’ operations are expected to be conducted by and through
Optex Systems, Inc. (Delaware).





The
business which is now carried on through Optex Systems, Inc. (Delaware) differs
from the business of Irvine Sensors Corporation, which was the former owner of
the assets through its subsidiary, Optex Systems, Inc.
(Texas).   Optex Systems, Inc. (Delaware) delivers high volume
products, under multi-year contracts, to large defense
contractors.  It has the reputation and credibility with those
customers as a strategic supplier. Irvine Sensors Corporation is predominately a
research and design company with capabilities enabling only prototype or low
quantity volumes.  Optex Systems, Inc. (Delaware) is predominately a high
volume manufacturing company.  Therefore the systems and processes needed
to meet customer’s needs are quite different.  While both companies serve
the military market, the customers within these markets are different.  For
example, two of the largest customers for Optex are General Dynamics Land
Systems and U.S. Army Tank-armaments and Automotive Command.  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 focus on high volume manufacturing and the use
of the six sigma manufacturing methodology.   This shift in priorities has
allowed Optex Systems, Inc. (Delaware) to improve delivery performance and
reduce operational costs.





The
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), eliminated 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 Systems, Inc. (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


5


As a
result of the  purchase of Optex Systems, Inc. (Texas) on October 14,
2008, these general and administrative costs are incurred and paid directly by
Optex Systems, Inc. (Delaware) and have been reflected in the 2009 and 2010
financial results to the extent incurred for the periods presented
herein.





The
liabilities of Optex Systems, Inc. (Texas) not assumed by Optex Systems, Inc.
(Delaware) 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 Looney promissory note had a principal amount
of $2,000,000 together with accrued interest unpaid aggregating to approximately
$2,300,000.  The note was an amendment to Looney’s earn-out agreement
which was the consideration for Irvine Sensors Corporation’s purchase of Optex
Systems, Inc. (Texas).





The 2007
Looney 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 Optex Systems, Inc. (Delaware).





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 Optex Systems, Inc.
(Delaware) 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 Systems Inc.
(Delaware)’s own operating cash flow.





Plan
of Operation





Through a
private placement offering completed prior to the 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 of this placement 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





During
the quarter ended March 28, 2010, we experienced reductions in forecasted sales
volume due to changes in incremental funding commitments by federal agencies.
 We are currently evaluating the impact that anticipated reductions in
government defense spending budgets will have on Optex Systems Holdings. After
the 2011 Congressional budget is published in late May 2010, our major customers
are expected to provide updated volume expectations for the coming
year.  Due to new periscope orders from non-traditional sources and an
aggressive pursuit of increased market share for all of our existing product
lines, we expect to mitigate some of the decreased U.S. government requirements
with other new business.





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).


6




Optex
      Systems, Inc. (Texas)
                    (Predecessor)Revenue
                  
                  $
                  0.9Cost
      of Sales
                  
                  
                  0.7Gross
      Margin
                  
                  
                  0.2General
      & Administrative
                  
                  
                  0.1Operating
      Income
                  
                  $
                  0.1Net
      Income
                  
                  $
                  0.1





The table
below summarizes our quarterly and year to date operating results in terms of
both a GAAP net income measure and a non GAAP EBITDA measure. We use EBITDA as
an additional measure for evaluating the performance of our business as “net
income” includes the significant impact of noncash intangible amortization on
our income performance. Consequently, in order to have a meaningful measure of
our operating performance on a continuing basis, we need to evaluate an income
measure which does not take into account this intangible amortization. We have
summarized the quarterly revenue and margin below along with a reconciliation of
the GAAP net loss to the non GAAP EBITDA calculation for comparative purposes
below. We believe that including both measures allows the reader to have a
“complete picture” of our overall performance.




Successor
                    Qtr
      1, 2010
                  
                  
                  Successor
                    Qtr
      2, 2010
                  
                  
                  Successor
      - Six
                    months
      endedMarch
      28, 2010
                  
                  
                  Predecessor
                    Qtr1,
      2009
                    (September
      29, 2008 through October 14, 2008)
                  
                  
                  Successor
                    Qtr1,
      2009
                    (October
      15, 2008through
      December27,
      2008)
                  
                  
                  Successor
                    Qtr2,
      2009
                  
                  
                  Combined
      - Six months ended March 29, 2009Net
      Loss Applicable to Common Shareholders - GAAP
                  
                  $
                  -
                  
                  
                  $
                  (0.1
                  )
                  
                  $
                  (0.1
                  )
                  
                  $
                  (0.1
                  )
                  
                  $
                  0.1
                  
                  
                  $
                  (0.3
                  )
                  
                  $
                  (0.3
                  )Add:Interest
      Expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.2Preferred
      Stock Dividend
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.2
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Federal
      Income Taxes (Benefit)
                  
                  
                  -
                  
                  
                  
                  (0.1
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  -
                  
                  
                  
                  0.2
                  
                  
                  
                  0.1
                  
                  
                  
                  0.3Depreciation
      & Amortization
                  
                  
                  0.3
                  
                  
                  
                  0.3
                  
                  
                  
                  0.6
                  
                  
                  
                  -
                  
                  
                  
                  0.6
                  
                  
                  
                  0.5
                  
                  
                  
                  1.1EBITDA
      - Non GAAP
                  
                  $
                  0.4
                  
                  
                  $
                  0.2
                  
                  
                  $
                  0.6
                  
                  
                  $
                  (0.1
                  )
                  
                  $
                  1.0
                  
                  
                  $
                  0.4
                  
                  
                  $
                  1.3





Our
EBITDA declined by $0.7 million in the six months ended March 28, 2010 as
compared to the prior year performance for the same period.  The
EBITDA reduction for the period was primarily attributable to the lower sales
revenue of $1.7 million, lower product margins related to the mix of product
lines shipped, and higher general and administrative spending of $0.1
million.  We continue to pursue cost efficiencies in our production
and general and administrative areas.





Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates.  Shifts in gross margin from
quarter to quarter are primarily attributable to the differing product mix
recognized as revenues during each respective period.  Certain
periscope contracts were awarded January 2003, and due to significant material
price increases subsequent to the contract award date, we are experiencing a
loss on these contracts.  We have fully reserved for future contract
losses on this program, thus deliveries against these programs yield a product
margin of zero.  During the three and six months ended March 28, 2010,
we recognized revenue of $0.4 and $1.1 million, respectively, from these legacy
periscope programs, with a remaining backlog of $0.1 million, which should be
recognized in the third quarter of 2010.  We expect our product
margins on periscopes to increase each quarter as the legacy programs are
completed and are replaced with new awards.





We
are aggressively pursuing additional, potentially higher margin periscope
business, and in May 2009, Optex Systems Holdings was awarded a multi-year
Indefinite Delivery/Indefinite Quantity type contract accompanied
by the first delivery order from U.S. Army Tank-armaments and Automotive
Command.   In June 2009, we received an additional $3.4 million dollar
award from General Dynamics Land Systems and in September 2009, we received an
additional $1.9 million award to provide product beginning with delivery
starting in 2011 at the completion of our current production
contract.  The total orders recorded for all product lines in the six
months ended March 28, 2010 was $8.3 million of which $5.5 million related to
periscope business from several customers.





As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), Optex Systems, Inc. (Delaware)’s amortizable intangible
assets increased significantly in 2009 over prior years. We expect the
intangible amortization expense to decline $1.0 million in the year ended
September 27, 2010 from $2.0 million in the year ended September 27,
2009.


7





Backlog
as of March 28, 2010 was $22.5 million as compared to a backlog of $33.3 million
as of March 29, 2009.  The following table depicts the current
expected delivery by quarter of all contracts awarded as of March 28,
2010.





FY2011
                  
                  
                  FY2012
                  
                  
                  FY2013Program
      Backlog (millions)
                  
                  Qtr
      3
                  
                  
                  Qtr
      4
                  
                  
                  Qtr
      1
                  
                  
                  Qtr
      2
                  
                  
                  Qtr
      3
                  
                  
                  Qtr
      4
                  
                  
                  Qtr
      1
                  
                  
                  Qtr
      2
                  
                  
                  Qtr
      3
                  
                  
                  Qtr
      4
                  
                  
                  Qtr
      1
                  
                  
                  Qtr
      2Howitzer
      Programs
                  
                  $
                  1.3
                  
                  
                  $
                  2.2
                  
                  
                  $
                  1.4
                  
                  
                  $
                  0.5
                  
                  
                  $
                  0.4
                  
                  
                  $
                  0.1
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Periscope
      Programs
                  
                  $
                  2.6
                  
                  
                  $
                  2.2
                  
                  
                  
                  1.7
                  
                  
                  
                  1.9
                  
                  
                  
                  0.9
                  
                  
                  
                  0.8
                  
                  
                  
                  0.7
                  
                  
                  
                  1.2
                  
                  
                  
                  0.9
                  
                  
                  
                  0.6
                  
                  
                  
                  0.3
                  
                  
                  
                  0.2Sighting
      Systems
                  
                  $
                  0.1
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -All
      Other
                  
                  
                  1.1
                  
                  
                  
                  0.5
                  
                  
                  
                  0.3
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  -
                  
                  
                  
                  0.1
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  5.1
                  
                  
                  $
                  4.9
                  
                  
                  $
                  3.4
                  
                  
                  $
                  2.5
                  
                  
                  $
                  1.4
                  
                  
                  $
                  1.0
                  
                  
                  $
                  0.8
                  
                  
                  $
                  1.3
                  
                  
                  $
                  0.9
                  
                  
                  $
                  0.7
                  
                  
                  $
                  0.3
                  
                  
                  $
                  0.2





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





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





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





In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold.  These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold.  Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation.  As of March 28, 2010, none of our outstanding backlog
fell under this criterion.





Three
Months Ended March 28, 2010 (Successor) Compared to the Three Months Ended March
29, 2009 (Successor)





Revenues.  In the three
months ended March 28, 2010, revenues decreased by 6.0% from the respective
prior period in 2009:





Product
      Line
                                                                          
                                                                          Three months ended
                                                                            03/28/2010
                                                                          
                                                                          
                                                                          Three months ended
                                                                            03/29/2009
                                                                          
                                                                          
                                                                          Change(Successor)
                                                                          
                                                                          
                                                                          (Combined)Howitzer
      Programs
                                                                          
                                                                          $
                                                                          1.6
                                                                          
                                                                          
                                                                          $
                                                                          0.2
                                                                          
                                                                          
                                                                          $
                                                                          1.4Periscope
      Programs
                                                                          
                                                                          
                                                                          3.2
                                                                          
                                                                          
                                                                          
                                                                          4.3
                                                                          
                                                                          
                                                                          
                                                                          (1.1
                                                                          )Sighting
      Systems
                                                                          
                                                                          
                                                                          0.3
                                                                          
                                                                          
                                                                          
                                                                          1.2
                                                                          
                                                                          
                                                                          
                                                                          (0.9
                                                                          )All
      Other
                                                                          
                                                                          
                                                                          1.2
                                                                          
                                                                          
                                                                          
                                                                          1.0
                                                                          
                                                                          
                                                                          
                                                                          0.2Total
                                                                          
                                                                          $
                                                                          6.3
                                                                          
                                                                          
                                                                          $
                                                                          6.7
                                                                          
                                                                          
                                                                          $
                                                                          (0.4
                                                                          )Percent
      increase (decrease)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          -6.0
                                                                          %


8


Periscope
revenues decreased 25.6% during the three months ended March 28, 2010 as
compared to the three months ended March 29, 2009.  During the first
half of fiscal year 2009, periscope production from one of our major periscope
contracts had been accelerated to compensate for production delays that occurred
during the last quarter of fiscal year 2008.  The delay was a result
of a manufacturingcontrol test failure
related to the environmental testing of one of the
products.  Subsequent to the environmental control test failure, we
implemented a manufacturing process change to eliminate the potential for future
failures and increased the production rate in the first six months of fiscal
2009 to compensate for the previous delay.  Based on our current
backlog demand and a recent decline of new federal government orders deliverable
in the remaining quarters of fiscal 2010, we expect the periscope product line
deliveries to continue to decline an additional 8% to 17% in the second half of
fiscal year 2010 as compared to revenues in the same period in
2009.  We continue to quote and receive awards for additional
periscopes from multiple customers and are aggressively pursuing increased
market share in the periscope market by drawing business away from our
competitors; however, we cannot yet determine if we will be successful in
gaining sufficient new additional periscope business to offset the downturn
caused by the decline in new federal government orders.





Revenues
from the Howitzer programs increased $1.4 million or 700% over the same quarter
in the prior year.  During the third quarter of 2009, we worked
aggressively with the federal government to resolve technical field issues
related to two of our Howitzer programs and completed the First Article Testing
and Acceptance requirements on a third program, for which government acceptance
approval was obtained on August 25, 2009.   These issues were resolved
through internal engineering change proposals and customer changes to the
statement of work, and contract schedules modified accordingly to implement the
required changes. With the successful implementation of these changes in place,
we are in full scale production on these units and expect deliveries on these
programs to continue at the higher production rates until the second fiscal
quarter of 2011 when production rates will begin to wind down with anticipated
completion by the fourth quarter of fiscal year 2011.





Sighting
systems revenues decreased $0.9 million or 75.0% over the three months ended
March 29, 2009 as our federal government delivery order on back up sighting
units was completed in the last fiscal quarter of 2009.  We currently
do not have a follow-on delivery order for additional sighting units; however,
the primary contract ordering period does not expire until December 31,
2012.  We continue to ship sighting systems pursuant to other
contracts to both U.S. federal government and non-U.S. government customers and
continue to pursue business on several substantial programs for commander weapon
sighting systems and M36 thermal sighting units, which if successfully
consummated, would yield deliveries in fiscal year 2011.





Increases
in the other product line of $0.2 million or 20.0% for the three months ending
March 28, 2010 are a result of increased sales of PVS-4 and TVS-5 night vision
eyepiece and objective lens assemblies to the federal government over the same
period in 2009. 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 five year contract award in
2004.  As of March 28, 2010, Optex Systems Holdings has reserved $1.1
million in contract loss reserves on these programs with a remaining backlog of
$5.9 million.  We are expecting to ship $3.6 million of the existing loss
contract backlog in fiscal year 2010, with the remaining $2.3 million expected
to ship in early fiscal year 2011.  As these losses have been previously
recognized to the extent identified, and future margins on these revenues are
expected to be zero.





Cost of Goods Sold. During
the quarter ended March 28, 2010, we recorded cost of goods sold of $5.6 million
as opposed to $6.2 million during the quarter ended March 29, 2009 (Combined
Predecessor and Successor), a decrease of $0.6 million or 9.7%. This decrease in
cost of goods sold was primarily associated with decreased revenue on our glass
periscope line from the prior year quarter, in addition to decreased intangible
amortization in the second quarter of fiscal 2010 as compared to the second
quarter of fiscal 2009 associated with the Optex Systems, Inc. (Texas)
acquisition on October 14, 2008. The gross margin during the quarter ended March
28, 2010 was 11.6% of revenues as compared to a gross margin of 8.3% for the
quarter ended March 29, 2009.  Product margins decreased to 14.3% for the
quarter ended March 28, 2010 versus 16.4% for the quarter ended March 29, 2009
due to a shift in revenue mix toward less profitable contracts.  Gross
margins were favorably impacted by a decrease in intangible amortization
allocable to cost of goods sold of $0.2 million, and lower reserves for
valuations and warranties of $0.1 million.  Amortization of intangibles and
inventory reserve adjustments accounted for 3.6% of cost of goods sold in the
quarter ended March 28, 2010 as compared to 8.1% in quarter ended March 29,
2009.





G&A Expenses. During the
three months ended March 28, 2010, we recorded operating expenses of $0.74
million as opposed to $0.70 million during the three months ended March 29,
2009, an increase of $0.04 million or 5.7%.  The bulk of the increased
general and administrative costs is related to increased investor relations
fees.


9


Operating Income (Loss).
During the three months ended March 28, 2010, we recorded an operating loss of
$0.01 million, as compared to an operating loss of $0.15 million during the
three months ended March 29, 2009.  The operating loss is lower in the
quarter ended March 28, 2010 as compared to the prior year quarter due to higher
gross margin of $0.2 million attributable to lower intangible amortization,
inventory and warranty reserves, partially offset by higher general and
administrative spending of $0.1 million for investor relations
costs.





Net Income (Loss) applicable to
common shareholders. During the three months ended March 28, 2010, we
recorded a net loss of $0.09 million, as compared to a net loss of $0.33 million
for three months ended March 29, 2009, representing a reduction in net loss of
$0.24 million or 72.7%.  The decrease in net loss is primarily attributable
to improved gross margins and reduced income taxes for the effect of temporary
and permanent timing differences related to intangible amortization and changes
in reserve balances. The intangible amortization expense is amortized over 5
years for book purposes and over 15 years for income tax purposes.





Six
Months Ended March 28, 2010 (Successor) Compared to the Six Months Ended March
29, 2009 (Combined Predecessor and Successor)





Revenues.  In the six
months ended March 28, 2010, revenues decreased by 12.9% from the respective
prior period in 2009:





Product
      Line
                  
                  Six
      months ended
                    03/28/2010
                  
                  
                  Six
      months ended
                    03/29/2009
                  
                  
                  Change(Successor)
                  
                  
                  (Combined)Howitzer
      Programs
                  
                  $
                  2.6
                  
                  
                  $
                  0.7
                  
                  
                  $
                  1.9Periscope
      Programs
                  
                  
                  6.4
                  
                  
                  
                  9.1
                  
                  
                  
                  (2.7
                  )Sighting
      Systems
                  
                  
                  0.7
                  
                  
                  
                  2.2
                  
                  
                  
                  (1.5
                  )All
      Other
                  
                  
                  2.5
                  
                  
                  
                  2.0
                  
                  
                  
                  0.5Total
                  
                  $
                  12.2
                  
                  
                  $
                  14.0
                  
                  
                  $
                  (1.8
                  )Percent
      increase (decrease)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -12.9
                  %





Revenues
decreased by $2.7 million, or 29.7%, on our periscope line during the six months
ended March 28, 2010 as compared to the six months ended March 29, 2009. 
During the first six months of fiscal year 2009, periscope production from one
of our major periscope contracts had been accelerated to compensate for
production delays that occurred during the last six months of fiscal year
2008.  The delay was a result of a manufacturing control test failure
related to the environmental testing of one of the products.  Subsequent to
the environmental control test failure, Optex Systems Holdings implemented a
manufacturing process change to eliminate the potential for future failures and
increased the production rate in the first six months of fiscal 2009 to
compensate for the previous delay.  Based on our current backlog
demand and a recent decline of new U.S. government orders deliverable in the
remaining quarters of fiscal 2010, we expect the periscope product line
deliveries to continue to decline an additional 8% to 17% in the second half of
fiscal year 2010 as compared to the same period in 2009.  We continue
to quote and receive awards for additional periscopes from multiple customers
and are aggressively pursuing increased market share of the periscopes business
from our competitors.





Revenues
from the Howitzer programs increased $1.9 million, or 271.4%, over the same six
months in the prior year.  During the first six months of 2009, we worked
aggressively with the federal government to resolve technical field issues
related to two of our Howitzer programs and completed the First Article Testing
and Acceptance requirements on a third program, for which government acceptance
approval was obtained on August 25, 2009.  These issues were resolved
through our initiated engineering change proposals and customer changes to the
statement of work, and contract schedules modified accordingly to implement the
required changes. With the successful implementation of these changes in place,
Optex Systems Holdings is in full scale production on these units and expects to
program deliveries on these programs to continue at the higher production rates
until the second fiscal quarter of 2011 when production rates will begin to wind
down with anticipated completion by the  fourth quarter of fiscal year
2011.





Sighting
systems revenues decreased $1.5 million, or 68.2%, over the six months ended
March 29, 2009 as our U.S. government delivery order on back up sighting units
was completed in the last fiscal six months of 2009.  We currently do not
have a follow-on delivery order for additional sighting units; however, the
primary contract ordering period does not expire until December 31, 2012. 
Thus, we expect additional volume awards for the contract in the next
year.  We continue to ship sighting systems pursuant to other
contracts to both federal government and non-U.S. government customers and
continue to pursue business on several substantial programs for commander weapon
sighting systems and M36 thermal sighting units, which if successfully
consummated, would yield deliveries in fiscal year 2011.


10


Increases
in the other product line of $0.5 million, or 25.0%, for the six months ending
March 28, 2010 are a result of increased sales of PVS-4 and TVS-5 night vision
eyepiece and objective lens assemblies to the federal government.  We
expect revenues to continue at the same level in the next quarter and then
decline in the fourth quarter of fiscal 2010 as the current federal government
contract on these units completes.





Currently,
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability.  These issues have resulted in increased
labor and material costs due to higher scrap and extensive engineering costs
incurred during the start up phase of the programs.  In addition some of
our older “legacy” periscope programs are experiencing losses due to significant
material price increases since the initial 5 year contract award in 2004. 
As of March 28, 2010, Optex Systems Holdings has reserved $1.1 million in
contract loss reserves on these programs with a remaining backlog of $5.9
million.  We are expecting to ship $3.6 million of the existing loss
contract backlog in 2010, with the remaining $2.3 million expected to ship in
early fiscal year 2011.  As these losses have been previously recognized to
the extent identified, and future margins on these revenues are expected to be
zero.





Cost of Goods Sold. During
the six months ended March 28, 2010, we recorded cost of goods sold of $10.7
million as opposed to $12.5 million during the six months ended March 29, 2009
(Combined Predecessor and Successor), a decrease of $1.8 million or 14.4%. This
decrease in cost of goods sold was primarily associated with decreased revenue
on our glass periscope and sighting system product lines from the prior year six
months, in addition to decreased intangible amortization in the second six
months of fiscal 2010 as compared to the second six months of fiscal 2009
associated with the Optex Systems, Inc. (Texas) acquisition on October 14, 2008.
The gross margin during the six months ended March 28, 2010 (Successor) was
12.3% of revenues as compared to a gross margin of 10.7% for the six months
ended March 29, 2009 (Combined Predecessor and Successor).  Product margins
decreased to 15.6% for the six months ended March 28, 2010 (Successor) versus
17.9% for the six months ended March 29, 2009 (Combined Predecessor and
Successor) due to a shift in first six months revenue mix toward less profitable
contracts.  Gross margins were favorably impacted by a decrease in
intangible amortization allocable to cost of goods sold of $0.5 million, and
lower reserves for valuations and warranties of $0.1 million.  Amortization
of intangibles and inventory reserve adjustments accounted for 4.7% of cost of
goods sold in the six months ended March 28, 2010 as compared to 8.0% in six
months ended March 29, 2009.





G&A Expenses. During the
six months ended March 28, 2010, we recorded operating expenses of $1.4 million
as opposed to $1.3 million (Combined Predecessor and Successor) during the six
months ended March 29, 2009, an increase of $0.1 million or 7.7%.  The bulk
of the increased general and administrative costs was related to increased
investor relations fees.





Operating Income (Loss).
During the six months ended March 28, 2010, we recorded operating income of $0.1
million, as compared to operating income of $0.2 million during the six months
ended March 29, 2009.  Operating income is lower in the current six months
as compared to the prior year six months due to lower revenues of $1.8 million,
combined with changes in product mix and intangible allocations affecting the
current six months gross margin and higher general and administrative spending
of $0.1 million for investor relations costs.





Net Income (Loss) applicable to
common shareholders. During the six months ended March 28, 2010, we
recorded a net loss of $0.1 million, as compared to $0.4 million for the six
months ended March 29, 2009, a reduction in net loss of $0.3 million or
75.0%.  The decrease in net loss is primarily attributable to reduced
income taxes for the effect of temporary and permanent timing differences
related to intangible amortization and changes in reserve balances. The
intangible amortization expense is amortized over 5 years for book purposes and
over 15 years for income tax purposes.





Liquidity
and Capital Resources





On
October 27, 2009, Optex Systems Holdings secured a short term note payable from
the Longview Fund in the amount of $250,000 bearing interest at 10% per
annum. On March 22, 2010, Optex Systems Holdings repaid $125,000 in
principal plus $10,000 in accrued interest on the outstanding Longview note. The
note matures July 15, 2010, and the remaining principal amount and accrued and
unpaid interest thereon will be repaid on or before the maturity
date.  On March 10, 2010, the Company also entered into a revolving
credit facility with Peninsula Business Bank which provides up to $2,000,000 in
financing against eligible receivables, and as of March 28, 2010, the
outstanding balance under this line was $848,771.


11


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 at least 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 obtained 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.





Cash
Flows for the Period from September 28, 2009 through March 28, 2010





Cash and Cash Equivalents. As
of March 28, 2010, we had cash and cash equivalents of $0.9 million. During the
period from September 28, 2009 through March 28, 2010, we decreased cash and
cash equivalents by $0.02 million primarily due to the timing of accounts
receivable collections and supplier payments in support of increased
inventory.





Net Cash Used in Operating
Activities. Net cash used in operating activities during the period from
September 28, 2009 to March 28, 2010 totaled $1.0 million. The primary uses of
cash during this period relate to reductions in accounts payable of $0.9 million
in support of inventory purchased in the first six months of fiscal year 2010
for new periscope orders and higher production volume on our Howitzer programs,
which generally contain higher material content than other product lines. 
In addition, we experienced an overall shift in revenues and accounts receivable
in the current quarter from government to non government customers.  Our
non-U.S. government customers increased to 60% of revenue for the six months
ended March 28, 2010 as compared to 49% of total revenues for the fiscal year
ended September 27, 2009.  These customers generally pay more slowly than
the U.S. government, often beyond the 30 day terms and up to 45-50 days as
compared to direct U.S. government shipments which typically pay in 30 days or
less.  During the period from September 28, 2009 through March 28, 2010,
our net inventory decreased by $0.3 million.  We expect the cash used in
operating activities to decline significantly during the balance of fiscal 2010
as inventory balances on Howitzer programs decrease and current outstanding
receivables are collected.  The second half of fiscal 2010 is expected to
provide increased cash from operating activities as several of our progress
billed programs reach full liquidation and the material purchases on our
Howitzer programs near completion.





Net Cash (Used) Provided by
Investing Activities. In the six months ended March 28, 2010, net cash
used by investing activities totaled $0.01 million and consisted of fixed asset
purchases during the period.  We expect this number to increase in the
second half of 2010 as additional capital projects are planned in support of
current cost reduction initiatives.





Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $1.0
million during the six months ended March 28, 2010 as a result of the net
proceeds of $0.85 million from the revolving credit facility we entered into
during the second quarter of the fiscal year, and the net $0.13 million ($0.25
million less repayments) provided under the Longview Fund note.  These
funds were used to secure inventory from several key suppliers in support of new
periscope orders and higher purchasing and production volume on our Howitzer
programs during the period.





Critical
Policies and Accounting Pronouncements





Our
significant accounting policies are fundamental to understanding our results of
operations and financial condition.  Some accounting policies require
that we use estimates and assumptions that may affect the value of our assets or
liabilities and financial results. These policies are described in “Critical
Policies and Accounting Pronouncements” and Note 2 (Accounting Policies) to
Financial Statements in our Annual Report on Form 10-K for the year ended
September 27, 2009.





Recent
Accounting Pronouncements





In
February 2010, FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised
financial statements.  Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of GAAP. All of the amendments in ASU 2010-09 are effective upon
issuance of the final ASU, except for the use of the issued date for conduit
debt obligors, which is effective for interim or annual periods ending after
June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and therefore
has omitted the disclosure previously required as referenced
above.


12


Cautionary
Factors That May Affect Future Results





This
Quarterly Report on Form 10-Q and other written reports and oral statements made
from time to time by Optex Systems Holdings may contain so-called
“forward-looking statements,” all of which are subject to risks and
uncertainties. You can identify these forward-looking statements by their use of
words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects”
and other words of similar meaning. You can identify them by the fact that they
do not relate strictly to historical or current facts. These statements are
likely to address Optex Systems Holdings’ growth strategy, financial results and
product and development programs. You must carefully consider any such statement
and should understand that many factors could cause actual results to differ
from Optex Systems Holdings’ forward-looking statements. These factors include
inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward-looking
statement can be guaranteed and actual future results may vary
materially.





Optex
Systems Holdings does not assume the obligation to update any forward-looking
statement. You should carefully evaluate such statements in light of factors
described in this Form 10-Q. In various filings Optex Systems Holdings has
identified important factors that could cause actual results to differ from
expected or historic results. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete list of all potential risks or
uncertainties.


13


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 March 28, 2010, 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 March 28, 2010, our disclosure controls
and procedures were effective.





Changes
in  Internal Control Over Financial Reporting




During
the quarter ended March 28, 2010, 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.





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





Item 1A. Risk Factors





RISK
FACTORS




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





Risks Related to our
Business





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





Future
general political and economic conditions, which cannot be accurately predicted,
may directly and indirectly affect the quantity and allocation of expenditures
by federal agencies. Even the timing of incremental funding commitments to
existing, but partially funded, contracts can be affected by these factors.
Therefore, cutbacks or re-allocations in the federal budget could have a
material adverse impact on our results of operations. Obtaining government
contracts may also involve long purchase and payment cycles, competitive
bidding, qualification requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification development, price
negotiations and milestone requirements. In addition, our government contracts
are primarily fixed price contracts, which may prevent us from recovering costs
incurred in excess of budgeted costs. Fixed price contracts require us to
estimate the total project cost based on preliminary projections of the
project’s requirements. The financial viability of any given project depends in
large part on our ability to estimate such costs accurately and complete the
project on a timely basis. Some of those contracts are for products that
are new to our business and are thus subject to unanticipated impacts to
manufacturing costs.  Given the current economic conditions, it is also
possible that even if our estimates are reasonable at the time made, that prices
of materials are subject to unanticipated adverse fluctuation.  In the
event our actual costs exceed fixed contractual costs of our product contracts,
we will not be able to recover the excess costs which could have a material
adverse effect on our business and results of operations.  We examine these
contracts on a regular basis and accrue for anticipated losses on these
contracts, if necessary.  As of March 28, 2010, we had approximately $1.1
million of loss provision accrued for these fixed price
contracts.


14


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.





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
March 28, 2010, we had 139,444,940 shares of our common stock issued and
outstanding, as well as 1,027 shares of our Series A preferred stock issued and
outstanding.  The Series A preferred stock is convertible into 41,080,000
shares of our common stock, and upon conversion, the Series A preferred stock
would represent 21.7% of our outstanding common stock.  This would greatly
dilute the holdings of our existing common stockholders.  In addition, the
preferred shareholders vote on a one-to-one basis with our common shareholders
on an as converted basis.





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





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





Item
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)


15





10.5
            
            Specimen
      Stock Certificate (3)10.6
            
            Contract
      W52H0905D0248 with Tank-automotive and Armaments Command, dated July 27,
      2005 (2)*10.7
            
            Contract
      W52H0909D0128 with Tank-automotive and Armaments Command, dated March 24,
      2009 (2)*10.8
            
            Contract
      W52H0905D0260 with Tank-automotive and Armaments Command, dated August 3,
      2005 (2)*10.9
            
            PO#
      40050551 with General Dynamics, dated June 8, 2009 (2)*10.10
            
            Contract
      9726800650 with General Dynamics, dated April 9, 2007
  (2)*10.11
            
            Form
      of Subscription Agreement (5)10.12
            
            Single
      Source Supplier Purchase Orders with TSP Inc. (4)*10.13
            
            Single
      Source Supplier Purchase Orders with SWS Trimac (4)*10.14
            
            Since
      Source Supplier Purchase Orders with Danaher Controls
  (4)*10.15
            
            Single
      Source Supplier Purchase Orders with Spartech Polycast
  (4)*10.16
            
            Amendment
      to Lease (6)10.17
            
            Loan
      and Security Agreement with Peninsula Bank Business
  Funding10.18
            
            Guaranty
      executed in favor of Peninsula Bank Business Funding14.1
            
            Code
      of Ethics (1)16
            
            Letter
      re: Change in Certifying Accountant21.1
            
            List
      of Subsidiaries – Optex Systems, Inc.
(1)





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


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


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


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


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


(5)
            Incorporated by reference from
      our Form 10-K filed on January 11,
2010.


(6)
            Incorporated by reference from
      our Form 8-K filed on January 11,
2010





31.1 and
31.2 Certifications pursuant to Section 302 of Sarbanes Oxley Act of
2002





32.1 and
32.2 Certifications pursuant to Section 906 of Sarbanes Oxley Act of
2002





SIGNATURES





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




OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      May 12, 2010
              By:
              /s/
      Stanley A. HirschmanStanley
      A. Hirschman
                Principal
      Executive Officer


16





OPTEX
      SYSTEMS HOLDINGS, INC.Date:
      May 12, 2010
              By:
              /s/
      Karen HawkinsKaren
      Hawkins
                Principal
      Financial Officer


17