Document:

UNCONDITIONAL
GUARANTY

       

      For and
in consideration of the loan by Peninsula
Bank Business Funding, a division of The Private Bank of the Peninsula
(“Bank”), to Optex Systems, Inc., a Delaware corporation (“Borrower”), which
loan is made pursuant to a Loan and Security Agreement between Borrower and Bank
dated of even date (the “Agreement”), and acknowledging that Bank would not
enter into the Agreement without the benefit of this Guaranty, the undersigned
guarantor (“Guarantor”) hereby unconditionally and irrevocably guarantees the
prompt and complete payment of all amounts that Borrower owes to Bank and
performance by Borrower of the Agreement and any other agreements between
Borrower and Bank, as amended from time to time (collectively referred to as the
“Agreements”), in strict accordance with their respective terms, including
without limitation all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to the Agreements, whether absolute or
contingent, due or to become due, now existing or hereafter arising, including
any interest that accrues after the commencement of an Insolvency Proceeding
affecting Borrower, and including any debt, liability, or obligation owing from
Borrower to others that Bank may have obtained for valid consideration by
assignment or otherwise (collectively, the “Obligations” or the
“obligations”).  All terms used without definition in this Guaranty shall
have the meaning assigned to them in the Agreement.

       

      1. 
         Guaranty.  If
Borrower does not pay any amount or perform its obligations in strict accordance
with the Agreements, Guarantor shall immediately pay all amounts due thereunder
(including, without limitation, all principal, interest, fees, and reasonable
attorneys’ costs and fees) and otherwise to proceed to complete the same and
satisfy all of Borrower’s obligations under the Agreements.

       

      2. 
         Enforceability. 
If there is more than one guarantor, the obligations hereunder are joint and
several, and whether or not there is more than one guarantor, the obligations
hereunder are independent of the obligations of Borrower and any other person or
entity, and a separate action or actions may be brought and prosecuted against
Guarantor whether action is brought against Borrower or whether Borrower be
joined in any such action or actions.  Guarantor waives the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
thereof, to the extent permitted by law.  Guarantor’s liability under this
Guaranty is not conditioned or contingent upon the genuineness, validity,
regularity or enforceability of the Agreements.

       

      3. 
         Powers of Bank. 
Guarantor authorizes Bank, without notice or demand and without affecting its
liability hereunder, from time to time to (a) renew, extend, or otherwise
change the terms of the Agreements or any part thereof; (b) take and hold
security for the payment of this Guaranty or the Agreements, and exchange,
enforce, waive and release any such security; and (c) apply such security
and direct the order or manner of sale thereof as Bank in its sole discretion
may determine.

       

      4. 
         Waivers. 
Guarantor waives any right to require Bank to (a) proceed against Borrower
, any guarantor or any other person; (b) proceed against or exhaust any
security held from Borrower; or (c) pursue any other remedy in Bank’s power
whatsoever.  Bank may, at its election, exercise or decline or fail to
exercise any right or remedy it may have against Borrower or any security held
by Bank, including without limitation the right to foreclose upon any such
security by judicial or nonjudicial sale, without affecting or impairing in any
way the liability of Guarantor hereunder.  To the maximum extent permitted
by law, Guarantor waives any defense arising by reason of any disability or
other defense of Borrower or by reason of the cessation from any cause
whatsoever of the liability of Borrower.  Guarantor waives any setoff,
defense or counterclaim that Borrower may have against Bank.  Guarantor
waives any defense arising out of the absence, impairment or loss of any right
of reimbursement or subrogation or any other rights against Borrower. 
Until all of the amounts that Borrower owes to Bank have been paid in full,
Guarantor shall have no right of subrogation or reimbursement, contribution or
other rights against Borrower, and Guarantor waives any right to enforce any
remedy that Bank now has or may hereafter have against Borrower.  Guarantor
waives all rights to participate in any security now or hereafter held by
Bank.  Guarantor waives all presentments, demands for performance, notices
of nonperformance, protests, notices of protest, notices of dishonor, and
notices of acceptance of this Guaranty and of the existence, creation, or
incurring of new or additional indebtedness.  Guarantor assumes the
responsibility for being and keeping itself informed of the financial condition
of Borrower and of all other circumstances bearing upon the risk of nonpayment
of any indebtedness or nonperformance of any obligation of Borrower, warrants to
Bank that it will keep so informed, and agrees that absent a request for
particular information by Guarantor, Bank shall not have any duty to advise
Guarantor of information known to Bank regarding such condition or any such
circumstances.  Until the Obligations have been satisfied in full,
Guarantor waives the benefits of California Civil Code Sections 2799, 2808,
2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2847, 2848, 2849,
2850, and 3433.

       

      
        
           

        

        
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      5. 
         Waivers Regarding
Subrogation and Election of Remedies.  Guarantor acknowledges that,
to the extent Guarantor has or may have certain rights of subrogation or
reimbursement against Borrower for claims arising out of this Guaranty, those
rights may be impaired or destroyed if Bank elects to proceed against any real
property security of Borrower by non-judicial foreclosure.  That impairment
or destruction could, under certain judicial cases and based on equitable
principles of estoppel, give rise to a defense by Guarantor against its
obligations under this Guaranty.  Guarantor waives that defense and any
others arising from Bank’s election to pursue non-judicial foreclosure. 
Without limiting the generality of the foregoing, Guarantor waives any and all
benefits and defenses under California Code of Civil Procedure
Sections 580a, 580b, 580d and 726, to the extent they are applicable. 
The undersigned understands that, absent this waiver, Bank's election of
remedies, including but not limited to its decision to proceed to non-judicial
foreclosure on any real property securing the Obligations, could preclude Bank
from obtaining a deficiency judgment against Borrower and the undersigned
pursuant to California Code of Civil Procedure sections 580a, 580b, 580d or 726
and could also destroy any subrogation rights which the undersigned has against
Borrower.  The undersigned further understands that, absent this waiver,
California law, including without limitation,  California Code of
Civil Procedure sections 580a, 580b, 580d or 726, could afford the undersigned
one or more affirmative defenses to any action maintained by Bank against the
undersigned on this Guaranty.  The undersigned waives any and all rights
and provisions of California Code of Civil Procedure sections 580a, 580b, 580d
and 726, including, but not limited to any provision thereof
that:  (i) may limit the time period for Bank to commence a lawsuit
against Borrower or the undersigned to collect any Obligations owing by Borrower
or the undersigned to Bank; (ii) may entitle Borrower or the undersigned to a
judicial or nonjudicial determination of any deficiency owed by Borrower or the
undersigned to Bank, or to otherwise limit Bank's right to collect a deficiency
based on the fair market value of such real property security; (iii) may limit
Bank's right to collect a deficiency judgment after a sale of any real property
securing the Obligations; (iv) may require Bank to take only one action to
collect the Obligations or that may otherwise limit the remedies available to
Bank to collect the Obligations.  Guarantor waives all rights and defenses
that Guarantor may have because Borrower’s debt is secured by real
property.  This means, among other things:  (1) Bank may collect
from Guarantor without first foreclosing on any real or personal property
collateral pledged by Borrower.  (2) If Bank forecloses on any real
property collateral pledged by Borrower:  (A) The amount of the debt
may be reduced only by the price for which that collateral is sold at the
foreclosure sale, even if the collateral is worth more than the sale
price.  (B) Bank may collect from Guarantor even if Bank, by foreclosing on
the real property collateral, has destroyed any right Guarantor may have to
collect from Borrower.  This is an unconditional and irrevocable waiver of
any rights and defenses Guarantor may have because Borrower’s debt is secured by
real property.  These rights and defenses include, but are not limited to,
any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code
of Civil Procedure.  Guarantor waives all rights and defenses arising out
of an election of remedies by Bank, even though that election of remedies, such
as a non-judicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor’s rights of subrogation and
reimbursement against the principal by the operation of Section 580d of the Code
of Civil Procedure or otherwise.

       

      6. 
         Borrower’s
Insolvency.  If Borrower becomes insolvent or is adjudicated
bankrupt or files a petition for reorganization, arrangement, composition or
similar relief under any present or future provision of the United States
Bankruptcy Code, or if such a petition is filed against Borrower, and in any
such proceeding some or all of any indebtedness or obligations under the
Agreements are terminated or rejected or any obligation of Borrower is modified
or abrogated, or if Borrower’s obligations are otherwise avoided for any reason,
Guarantor agrees that Guarantor’s liability hereunder shall not thereby be
affected or modified and such liability shall continue in full force and effect
as if no such action or proceeding had occurred.  This Guaranty shall
continue to be effective or be reinstated, as the case may be, if any payment
must be returned by Bank upon the insolvency, bankruptcy or reorganization of
Borrower, Guarantor, any other guarantor, or otherwise, as though such payment
had not been made.

       

      7. 
         Reinstatement. 
Notwithstanding any prior revocation, termination, surrender or discharge of
this Guaranty (or of any lien, pledge or security interest securing this
Guaranty) in whole or part, the effectiveness of this Guaranty, and of all
liens, pledges and security interests securing this Guaranty, shall
automatically continue or be reinstated, as the case may be, in the event that
any payment received or credit given by the Bank in respect of the Obligations
is returned, disgorged or rescinded as a preference, impermissible setoff,
fraudulent conveyance, or diversion of trust funds under any applicable state or
federal law, including, without limitation, laws pertaining to bankruptcy or
insolvency, in which case this Guaranty, and all liens, pledges and security
interests securing this Guaranty, shall be enforceable against the undersigned
as if the returned, disgorged or rescinded payment or credit had not been
received or given by the Bank, and whether or not the Bank relied upon this
payment or credit or changed its position as a consequence of it. In the event
of continuation or reinstatement of this Guaranty and the liens, pledges and
security interests securing it, the undersigned agree(s) upon demand by the Bank
to execute and deliver to the Bank those documents which the Bank determines are
appropriate to further evidence (in the public records or otherwise) this
continuation or reinstatement, although the failure of the undersigned to do so
shall not affect in any way the reinstatement or continuation. If the
undersigned do(es) not execute and deliver to the Bank upon demand such
documents, the Bank and each Bank officer is irrevocably appointed (which
appointment is coupled with an interest) the true and lawful attorney of the
undersigned (with full power of substitution) to execute and deliver such
documents in the name and on behalf of the undersigned.

       

      
        
           

        

        
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      8. 
         Subordination. 
Any indebtedness of Borrower now or hereafter held by Guarantor is hereby
subordinated to any indebtedness of Borrower to Bank; and such indebtedness of
Borrower to Guarantor shall be collected, enforced and received by Guarantor as
trustee for Bank and be paid over to Bank on account of the indebtedness of
Borrower to Bank but without reducing or affecting in any manner the liability
of Guarantor under the other provisions of this Guaranty.

       

      9. 
         Representations and
Warranties.  Guarantor represents and warrants to Bank that
(i) Guarantor has taken all necessary and appropriate action to authorize
the execution, delivery and performance of this Guaranty and has obtained all
consents (including any shareholder consents) required for the execution of this
Guaranty and Borrower’s execution of the Loan Documents; (ii) execution,
delivery and performance of this Guaranty do not conflict with or result in a
breach of or constitute a default under Guarantor’s certificate/articles of
incorporation or bylaws or other organizational documents or agreements to which
it is party or by which it is bound, and (iii) this Guaranty constitutes a
valid and binding obligation, enforceable against Guarantor in accordance with
its terms.

       

      10. 
       Affirmative
Covenants.  Guarantor covenants and agrees that Guarantor shall do
all of the following:

       

      10.1. 
         Guarantor shall maintain
its corporate existence, remain in good standing in the jurisdiction of its
incorporation, and continue to qualify in each jurisdiction in which the failure
to so qualify could have a material adverse effect on the financial condition,
operations or business of Guarantor.  Guarantor shall maintain in force all
licenses, approvals and agreements, the loss of which could have a material
adverse effect on its financial condition, operations or business.

       

      10.2. 
         Guarantor shall maintain
its and each of its Subsidiaries’ corporate existence and good standing in its
jurisdiction of incorporation and maintain qualification in each jurisdiction in
which it is required under applicable law.  Guarantor shall maintain, and
shall cause each of its Subsidiaries to maintain, in force all licenses,
approvals and agreements, the loss of which could have a Material Adverse
Effect.

       

      10.3. 
         Guarantor shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA.  Guarantor
shall comply, and shall cause each Subsidiary to comply, with all statutes,
laws, ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect.

       

      10.4. 
         Guarantor shall comply
with all statutes, laws, ordinances, directives, orders, and government rules
and regulations to which it is subject if non-compliance with such laws could
materially adversely affect the financial condition, operations or business of
Guarantor.

       

      10.5. 
         At any time and from time
to time Guarantor shall execute and deliver such further instruments and take
such further action as may reasonably be requested by Bank to effect the
purposes of this Guaranty.

       

      10.6. 
         All payments made by
Guarantor hereunder will be made free and clear of, and without deduction or
withholding for, any present or future taxes, levies, imposts, duties, fees,
assessments or other charges of whatever nature now or hereafter imposed by any
governmental authority or by any political subdivision or taxing authority
thereof or therein with respect to such payments (but excluding any tax imposed
on or measured by the net income or profits of a Bank pursuant to the laws of
the jurisdiction in which it is organized or the jurisdiction in which the
principal office or applicable lending office of such Bank is located or any
subdivision thereof or therein) and all interest, penalties or similar
liabilities with respect thereto (all such non-excluded taxes, levies, imposts,
duties, fees, assessments or other charges being referred to collectively as
“Taxes”).  If any Taxes are so levied or imposed, Guarantor agrees to pay
the full amount of such Taxes, and such additional amounts as may be necessary
so that every payment of all amounts due under this Guaranty, after withholding
or deduction for or on account of any Taxes, will not be less than the amount
provided for herein and in the Loan Documents.

       

      
        
           

        

        
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      11. 
       Miscellaneous. 
Guarantor agrees to pay reasonable attorneys’ fees and all other costs and
expenses which may be incurred by Bank in the enforcement of this
Guaranty.  No terms or provisions of this Guaranty may be changed, waived,
revoked or amended without Bank’s prior written consent.  Should any
provision of this Guaranty be determined by a court of competent jurisdiction to
be unenforceable, all of the other provisions shall remain effective.  This
Guaranty, together with any agreements (including without limitation any
security agreements or any pledge agreements) executed in connection with this
Guaranty, embodies the entire agreement among the parties hereto with respect to
the matters set forth herein, and supersedes all prior agreements among the
parties with respect to the matters set forth herein.  No course of prior
dealing among the parties, no usage of trade, and no parol or extrinsic evidence
of any nature shall be used to supplement, modify or vary any of the terms
hereof.  There are no conditions to the full effectiveness of this
Guaranty.  Bank may assign this Guaranty without in any way affecting
Guarantor’s liability under it.  This Guaranty shall inure to the benefit
of Bank and its successors and assigns.  This Guaranty is in addition to
the guaranties of any other guarantors and any and all other guaranties of
Borrower’s indebtedness or liabilities to Bank.

       

      12. 
       Applicable Law; Waiver of
Jury Trial.  This Guaranty shall be governed by the laws of the
State of California, without regard to conflicts of laws
principles.  GUARANTOR WAIVES ANY RIGHT TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS.  Guarantor submits to the exclusive jurisdiction of the state
and federal courts located in Santa Clara County, California for purposes of
this Guaranty and the Agreement.  If the jury waiver set forth in this
Section is not enforceable, then any dispute, controversy or claim arising out
of or relating to this Agreement or any of the transactions contemplated herein
shall be settled by judicial reference pursuant to Code of Civil Procedure
Section 638 et seq. before a referee sitting without a jury, such referee to be
mutually acceptable or, if no referee is mutually acceptable, then as appointed
by the Presiding Judge of the California Superior Court for Santa Clara
County.  This provision shall not restrict any person from exercising
nonjudicial remedies under applicable law.

       

      IN
WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of
March 4, 2010.

       

      
        
          
            
              
                
                  	 
      	
                          OPTEX
      SYSTEMS  HOLDINGS, INC.,

                          a
      Delaware corporation

                        
	 
      	 
      	 
      
	 
      	
                          By:

                        	   
      
	 
      	
                          Name:

                        	 
        
	 
      	
                          Title:

                        	 
        

                

              

            

          

        

      

       

      
        
           

        

        
          4THIS
WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF OR IN ACCORDANCE WITH
APPLICABLE LAW.

    WARRANT
TO PURCHASE STOCK

     

    
      
        
          	
                  Company:

                	
                  Optex
      Systems Holdings, Inc.

                
	
                  Initial
      Number of Shares:

                	
                  1,000,000

                
	
                  Class
      of Stock:

                	
                  Common

                
	
                  Exercise
      Price:

                	
                  $0.10

                
	
                  Issue
      Date:

                	
                  March
      4, 2010

                
	
                  Expiration
      Date:

                	
                  March
      3, 2016

                

        

      

    

     

    THIS
WARRANT CERTIFIES THAT, for good and valuable consideration, the receipt of
which is hereby acknowledged, PENINSULA BANK HOLDING CO. or registered assignee
(“Holder”) is entitled to purchase the number of fully paid and nonassessable
shares (the “Shares”) of Common Stock of Optex Systems Holdings, Inc. (the
“Company”), in the number, at the price, and for the term specified above,
subject to the provisions and upon the terms and conditions set forth in this
warrant.

     

    ARTICLE
1.         EXERCISE

     

    1.1           Method of
Exercise.  Holder may exercise this Warrant for up to the
number of Shares set forth above by delivering this Warrant and a duly executed
Notice of Exercise in substantially the form attached as Appendix 1 to the
principal office of the Company.  Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate price for the Shares being purchased (the
“Warrant Price”).

     

    1.2           Conversion
Right.  This Warrant may also be exercised at any time or times
on or after the Issue Date, in whole or in part by means of a “cashless
exercise” in which the Holder shall be entitled to receive a certificate for the
number of Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where:

     

     (A)
= the VWAP (as defined below) on the Trading Day immediately preceding the date
of such election;

     

     (B)
= the Exercise Price of this Warrant, as adjusted; and

     

     (X)
= the number of Shares issuable upon exercise of this Warrant in accordance with
the terms of this Warrant by means of a cash exercise rather than a cashless
exercise.

     

     “VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if prices for
the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted
average price of the Common Stock for such date (or the nearest preceding date)
on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted
on the OTC Bulletin Board and if prices for the Common Stock are then reported
in the “Pink Sheets” published by the Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as determined by
an independent appraiser or investment banking firm selected in good faith by
the Company and Holder.

     

    1.3           Delivery of Certificate and
New Warrant.  Promptly after Holder exercises or converts this
Warrant, the Company shall deliver to Holder certificates for the Shares
acquired and, if this Warrant has not been fully exercised or converted and has
not expired, a new Warrant representing the Shares not so
acquired.

    
      
         

      

      
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    1.4           Replacement of
Warrants.  On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and,
in the case of loss, theft or destruction, on delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of
mutilation, or surrender and cancellation of this Warrant, the Company at its
expense shall execute and deliver, in lieu of this Warrant, a new warrant of
like tenor.

     

    ARTICLE
2.         ADJUSTMENTS TO THE
SHARES.

     

    2.1           Stock Dividends, Splits,
Etc.  If the Company declares or pays a dividend on its common
stock payable in common stock, or other securities, subdivides the outstanding
common stock into a greater amount of common stock, then upon exercise of this
Warrant, for each Share acquired, Holder shall receive, without cost to Holder,
the total number and kind of securities to which Holder would have been entitled
had Holder owned the Shares of record as of the date the dividend or subdivision
occurred.

     

    2.2           Reclassification, Exchange
or Substitution.  Upon any reclassification, exchange,
substitution, or other event that results in a change of the number and/or class
of the securities issuable upon exercise or conversion of this Warrant, Holder
shall be entitled to receive, upon exercise or conversion of this Warrant, the
number and kind of securities and property that Holder would have received for
the Shares if this Warrant had been exercised immediately before such
reclassification, exchange, substitution, or other event.  Upon the
closing of any sale, license, or other disposition of all or substantially all
of the assets (including intellectual property) of the Company, or any
reorganization, consolidation, or merger of the Company where the holders of the
Company’s securities before the transaction beneficially own less than 50% of
the outstanding voting securities of the surviving entity after the transaction,
the successor entity shall assume the obligations of this Warrant, and this
Warrant thereafter shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing.  The Exercise
Price shall be adjusted accordingly.  The Company or its successor
shall promptly issue to Holder a new Warrant for such new securities or other
property.  The new Warrant shall provide for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Article 2 including, without limitation, adjustments to the Exercise
Price and to the number of securities or property issuable upon exercise of the
new Warrant.  The provisions of this Section 2.2 shall similarly
apply to successive reclassifications, exchanges, substitutions, or other
events.

     

    2.3           Adjustments for
Combinations, Etc.  If the outstanding Shares are combined or
consolidated, by reclassification or otherwise, into a lesser number of shares,
the Exercise Price shall be proportionately increased.

     

    2.4           No
Impairment.  The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out all the provisions of
this Article 2 and in taking all such action as may be necessary or
appropriate to protect Holder’s rights under this Article against
impairment.  If the Company takes any action affecting the Shares
other than as described above that adversely affects Holder’s rights under this
Warrant, the Exercise Price shall be adjusted downward and the number of Shares
issuable upon exercise of this Warrant shall be adjusted upward in such a manner
that the aggregate Warrant Price of this Warrant is unchanged.

     

    2.5           Certificate as to
Adjustments.  Upon each adjustment of the Exercise Price, the
Company, at its expense, shall promptly compute such adjustment, and furnish
Holder with a certificate of its Chief Financial Officer setting forth such
adjustment and the facts upon which such adjustment is based.  The
Company shall, upon written request, furnish Holder a certificate setting forth
the Exercise Price in effect upon the date thereof and the series of adjustments
leading to such Exercise Price.

     

    ARTICLE
3.         REPRESENTATIONS AND
COVENANTS OF THE COMPANY.

     

    3.1           Representations and
Warranties.  The Company hereby represents and warrants to the
Holder that all Shares that may be issued upon the exercise of the purchase
right represented by this Warrant, shall, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable, and free of any liens and
encumbrances except for restrictions on transfer provided for herein or under
applicable federal and state securities laws.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    3.2          [Intentionally
Omitted.]

     

    3.3          Notice of Certain
Events.  If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to register its securities; (d) to effect any
reclassification or recapitalization of common stock; or (e) to merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up, then, in connection with each such event, the Company shall give Holder
(1) at least 20 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (a) , (b) and (c) above; and (2) in the case of the matters
referred to in (d) and (e) above at least 20 days prior written notice of
the date when the same will take place (and specifying the date on which the
holders of common stock will be entitled to exchange their common stock for
securities or other property deliverable upon the occurrence of such
event).

     

    ARTICLE
4.        MISCELLANEOUS.

     

    4.1          Term.  This
Warrant is exercisable, in whole or in part, at any time and from time to time
on or before the Expiration Date set forth above.

     

    4.2          Legends.

     

    
      	
               
      

            	
              (a)

            	
              This
      Warrant shall be imprinted with a legend in substantially the following
      form:

            

    

     

    THIS
SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR IN ACCORDANCE WITH APPLICABLE
LAW.

     

    
      (b)
  Certificates
for the Shares acquired upon exercise of this Warrant shall be imprinted with a
legend in substantially the following form:

    

     

    “THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT
PURPOSES AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE.  THE SHARES MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL SUCH SHARES ARE
FIRST REGISTERED UNDER THE SECURITIES ACT OF 1933, ALL APPLICABLE STATE
SECURITIES LAWS AND ALL RULES AND REGULATIONS PROMULGATED THEREUNDER OR UNLESS
AND UNTIL THE HOLDER HEREOF PROVIDES (i) INFORMATION REASONABLY NECESSARY TO
CONFIRM THAT SUCH REGISTRATION IS NOT REQUIRED OR (ii) AN OPINION OF COUNSEL TO
THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.”

     

    4.3          Compliance with Securities
Laws on Transfer.  This Warrant and the Shares issuable upon
exercise this Warrant (and the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) may not be transferred or assigned in whole or
in part without compliance with applicable federal and state securities laws by
the transferor and the transferee.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    4.4           Transfer
Procedure.  Subject to the provisions of Section 4.3,
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder, if applicable),
provided that no such notice shall be required for a transfer to an affiliate of
Holder.

     

    4.5           Notices.  All
notices and other communications from the Company to the Holder, or vice versa,
shall be deemed delivered and effective when given personally or mailed by
first-class registered or certified mail, postage prepaid, at such address as
may have been furnished to the Company or the Holder, as the case may be, in
writing by the Company or such Holder from time to time.

     

    4.6           Waiver.  This
Warrant and any term hereof may be changed, waived, discharged or terminated
only by an instrument in writing signed by the party against which enforcement
of such change, waiver, discharge or termination is sought.

     

    4.7           Attorneys’
Fees.  In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys’ fees.

     

    4.8           Governing
Law.  This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.

     

    
      
        
          
            	
                    OPTEX
      SYSTEMS HOLDINGS, INC.

                  
	 
      	 
      
	
                    By:

                  	
                       

                  
	 
      	 
      
	
                    Name:

                  	
                       

                  
	 
      	 
      
	
                    Title:

                  	
                       

                  

          

        

      

    

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    APPENDIX
1

     

    NOTICE OF
EXERCISE

     

    1.           The
undersigned hereby elects to purchase ______________ shares of the Common Stock
of OPTEX SYSTEMS HOLDINGS, INC. pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in
full.

     

    1.           The
undersigned hereby elects to convert the attached Warrant into Shares in the
manner specified in the Warrant.  This conversion is exercised with
respect to ______________ of the Shares covered by the Warrant.

     

    [Strike
paragraph that does not apply.]

     

    2.           Please
issue a certificate or certificates representing said shares in the name of the
undersigned or in such other name as is specified below:

     

    PENINSULA
BANK HOLDING CO. or Registered Assignee

    c/o The
Private Bank of the Peninsula

    400
Emerson Street

    Palo
Alto, CA 94301

     

    3.      
    The undersigned represents it is acquiring the shares
solely for its own account and not as a nominee for any other party and not with
a view toward the resale or distribution thereof except in compliance with
applicable securities laws.

     

    
      
        	
                PENINSULA
      BANK HOLDING CO.,  or Registered Assignee

              
	 
      
	
                   

              
	
                (Signature)

              
	 
      
	
                   

              
	
                (Date)

              

      

    

     

    
      
         

      

      
        1

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