false FY 0001397016

 2025-03-30

 2025-12-16

 srt: PresidentMember

 OPXS:USGovernmentMember

 OPXS:USPrimeMilitaryContractorsMember

 OPXS:ForeignMilitaryContractorsMember

 OPXS:CommercialCustomersMember

 country: US

 us-gaap: NonUsMember

 OPXS:USGovernmentAgenciesMember

 OPXS:MajorUSDefenseContractorThreeMember

 OPXS:MajorUSDefenseContractorFourMember

 OPXS:AllOtherCustomersMember

 OPXS:USGovernmentAgenciesMember

 OPXS:MajorUSDefenseContractorThreeMember

 OPXS:MajorUSDefenseContractorFourMember

 OPXS:OneMajorCommercialCustomerMember

 OPXS:AllOtherCustomersMember

 OPXS:EightCustomersMember

 OPXS:USGovernmentAgenciesMember

 OPXS:MajorUSDefenseContractorThreeMember

 OPXS:MajorUSDefenseContractorFourMember

 OPXS:MajorUSDefenseContractorFiveMember

 OPXS:MajorUSDefenseContractorSixMember

 OPXS:MajorUSDefenseContractorSevenMember

 OPXS:SevenCustomersMember

 OPXS:USGovernmentAgenciesMember

 OPXS:MajorUSDefenseContractorThreeMember

 OPXS:MajorUSDefenseContractorFourMember

 OPXS:MajorUSDefenseContractorFiveMember

 OPXS:ForeignMilitaryCustomerMember

 srt: MinimumMember

 srt: MaximumMember

 us-gaap: TransferredOverTimeMember

 us-gaap: TransferredOverTimeMember

 OPXS:OptexSystemsIncMember

 OPXS:OptexSystemsIncMember

 OPXS:OptexSystemsIncMember

 OPXS:OptexSystemsIncMember

 OPXS:UnvestedRectrictedStockUnitsMember

 OPXS:UnvestedRectrictedStockMember

 OPXS:UnvestedRectrictedStockUnitsMember

 OPXS:UnvestedRectrictedStockMember

 OPXS:OpticalMember

 OPXS:DomesticMilitaryCustomersMember

 OPXS:ForeignMilitaryCustomersMember

 OPXS:USDefenseContractorOneMember

 OPXS:USGovernmentMember

 OPXS:USDefenseContractorTwoMember

 OPXS:CommercialCustomersMember

 OPXS:SubcontractedCustomersMember

 OPXS:ExternalCustomersMember

 OPXS:MilitaryContractsMember
 OPXS:IntersegmentSalesRevenueNetMember

 OPXS:USGovernmentMember

 srt: MinimumMember

 srt: MaximumMember

 us-gaap: MachineryAndEquipmentMember

 us-gaap: MachineryAndEquipmentMember

 us-gaap: LeaseholdImprovementsMember

 us-gaap: LeaseholdImprovementsMember

 us-gaap: MachineryAndEquipmentMember

 us-gaap: LeaseholdImprovementsMember

 us-gaap: MachineryAndEquipmentMember

 us-gaap: LeaseholdImprovementsMember

 2024-01-18
 2024-01-18

 2024-01-18

 us-gaap: ComputerSoftwareIntangibleAssetMember

 2025-09-30

 2024-09-28

 OPXS:OneNonCancellableOfficeEquipmentLeaseMember

 OPXS:OneNonCancellableOfficeEquipmentLeaseMember

 OPXS:FacilityLeaseAgreementMember

 OPXS:FacilityLeaseAgreementMember

 OPXS:OptexRichardsonMember

 OPXS:AppliedOpticsCenterMember

 OPXS:OfficeEquipmentLeaseMember

 OPXS:CommonAreaMaintenanceEstimateMember

 2023-03-22
 2023-03-22

 2023-03-22

 2025-05-21
 2025-05-21

 2025-05-21

 2024-05-01
 2024-05-01

 OPXS:OneNewEmployeeMember

 2024-06-04
 2024-06-04

 2024-06-04
 2024-06-04

 OPXS:OneNewEmployeeMember

 2023-08-14

 2023-08-14
 2023-08-14

 OPXS:TwoEmployeesMember

 2025-05-01
 2025-05-01

 2020-04-29
 2020-04-29

 2021-01-01
 2021-01-01

 2022-01-01
 2022-01-01

 2023-01-01
 2023-01-01

 2023-02-16
 2023-02-16

 OPXS:IndependentBoardMember

 2023-05-09
 2023-05-09

 OPXS:IndependentBoardMember

 2024-01-01
 2024-01-01

 OPXS:IndependentBoardMember

 2025-01-01
 2025-01-01

 2023-05-09
 2023-05-09

 2025-01-01
 2025-01-01

 srt: ChiefExecutiveOfficerMember

 srt: ChiefFinancialOfficerMember

 us-gaap: ShareBasedCompensationAwardTrancheOneMember

 2023-10-24
 2023-10-24

 us-gaap: ShareBasedCompensationAwardTrancheThreeMember

 2023-12-22
 2023-12-22

 us-gaap: ShareBasedCompensationAwardTrancheThreeMember

 2023-12-29
 2023-12-29

 2024-01-08
 2024-01-08

 OPXS:ShareBasedCompensationAwardTrancheFourMember

 2024-03-11
 2024-03-11

 2024-03-13
 2024-03-13

 OPXS:ShareBasedCompensationAwardTrancheFiveMember

 2024-05-17
 2024-05-17

 2024-05-17
 2024-05-17

 us-gaap: ShareBasedCompensationAwardTrancheOneMember

 us-gaap: ShareBasedCompensationAwardTrancheTwoMember

 us-gaap: ShareBasedCompensationAwardTrancheThreeMember

 OPXS:ShareBasedCompensationAwardTrancheFourMember

 OPXS:ShareBasedCompensationAwardTrancheFiveMember

 us-gaap: ShareBasedCompensationAwardTrancheOneMember

 us-gaap: ShareBasedCompensationAwardTrancheTwoMember

 us-gaap: ShareBasedCompensationAwardTrancheThreeMember

 OPXS:ShareBasedCompensationAwardTrancheFourMember

 OPXS:ShareBasedCompensationAwardTrancheFiveMember

 OPXS:ThreeIndependentBoardMembersMember

 OPXS:MrChadGeorgeMember

 OPXS:MrChadGeorgeMember

 2025-08-12
 2025-08-12

 2025-08-12

 OPXS:DaleLehmannMember

 OPXS:RimmyMalhotraMember

 OPXS:DaytonJuddMember

 OPXS:DaleLehmannMember

 OPXS:RimmyMalhotraMember

 OPXS:DaytonJuddMember

 OPXS:NewEmploymentAgreementMember

 OPXS:DannySchoeningMember

 OPXS:DannySchoeningMember

 OPXS:Integer

 utr:sqft

 UNITED
STATES

 SECURITIES
AND EXCHANGE COMMISSION

 WASHINGTON,
D.C. 20549

 FORM

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For
the fiscal year ended September 28, 2025

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For
the transition period from ___ until ___

 Commission
File Number 001-41644

 OPTEX
SYSTEMS HOLDINGS, INC.

 (Exact
name of registrant as specified in its charter)

 Delaware

 90-0609531

 (State or other jurisdiction of

 incorporation organization)

 (I.R.S. 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) 764-5700

 Securities
Registered under Section 12(b) of the Act

 Title
 of each class

 Trading
 Symbol(s)

 Name
 of each exchange on which registered

 Stock, $0.001 par value

 OPXS

 The
 Nasdaq Stock Market LLC

 Securities
Registered under Section 12(g) of the Act

Stock, par value $.001 per share

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No

by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 post such files). Yes No

by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 Large
 accelerated filer

 Accelerated
 filer

 Non-accelerated
 filer

 Smaller
 reporting company

 Emerging
 Growth Company

 If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.

 If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.

by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).

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

 The
aggregate market value of the 4,748,418 shares of voting stock held by non-affiliates of the registrant based on the Nasdaq closing price
on March 30, 2025 was $ 25,591,141.

the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

 Shares
 Outstanding

 Title
 of Class

 Stock

 6,937,358

 DOCUMENTS
INCORPORATED BY REFERENCE

 Portions
of the registrant's definitive proxy statement for the annual meeting of stockholders to be filed pursuant to Regulation 14A or
an amendment to this Annual Report on Form 10-K are incorporated by reference into Items 10, 11, 12, 13, and 14 of Part III of this report.
The registrant expects to file its definitive proxy statement or an amendment to this Annual Report on Form 10-K with the Securities
and Exchange Commission within 120 days of September 28, 2025.

 TABLE
OF CONTENTS

 Item
 1.

 Business

 Item
 1A.

 Risk Factors

 Item
 1C.

 Cybersecurity

 Item
 2.

 Properties

 Item
 3.

 Legal Proceedings

 Item
 4.

 Mine Safety Disclosures

 Item
 5.

 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item
 7.

 Management's Discussion and Analysis of Financial Conditions and Results of Operations

 Item
 8.

 Financial Statements and Supplementary Data

 Item
 9.

 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 Item
 9A.

 Controls and Procedures

 Item
 10.

 Directors, Executive Officers and Corporate Governance

 Item
 11.

 Executive Compensation

 Item
 12.

 Security Ownership of Certain Beneficial Owners

 Item
 13.

 Certain Relationships and Related Transactions, and Director Independence

 Item
 14.

 Principal Accountant Fees and Services

 PART
 IV

 Item
 15.

 Exhibits

 Cautionary
Note Regarding Forward-Looking Information

 This
Annual Report on Form 10-K by Optex Systems Holdings, Inc. ("Optex Systems Holdings," the "Company," "we,"
"us," or "our"), in particular Part II Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contains certain "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Any statements contained in this Annual Report on Form 10-K that are not statements of historical
fact may be deemed to be forward-looking statements. When used in this Annual Report on Form 10- K and other reports, statements, and
information we have filed with the Securities and Exchange Commission ("Commission" or "SEC"), in our press releases,
presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words
or phrases "believes," "may," "will," "expects," "should," "continue,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions and variations thereof are intended to identify such forward-looking statements.

 These
forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not
limited to, any statements regarding growth strategy; product and development programs; financial performance and financial condition
(including revenue, net income, profit margins and working capital); orders and backlog; expected timing of contract deliveries to customers
and corresponding revenue recognition; increases in the cost of materials and labor; costs remaining to fulfill contracts; contract loss
reserves; labor shortages; follow-on orders; supply chain challenges; the continuation of historical trends; the sufficiency of our cash
balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations,
financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future
of the defense industry.

 We
caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results
may differ materially depending on a variety of important factors. Such risks and uncertainties include, but are not limited to, continued
funding of defense programs and military spending, the timing of such funding, general economic and business conditions, including unforeseen
weakness in the Company's markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology
and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in
product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. government's
interpretation of federal procurement rules and regulations, changes in spending due to policy changes in any new federal presidential
administration, market acceptance of the Company's products, shortages in components, production delays due to performance quality
issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in
realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations,
increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated
costs under fixed-price service and system integration engagements, changes in the market for microcap stocks regardless of growth and
value and various other factors beyond our control. Some of these risks and uncertainties are identified in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and the section " Item 1A Risk Factors " in this Annual
Report on Form 10-K and you are urged to review those sections. 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.

 We
do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors
described in this Annual Report on Form 10-K.

 PART
I

 Item
1. Business

Lines of Business

 We
manufacture optical sighting systems and assemblies for the U.S. Department of Defense ("DoD"), foreign military applications,
commercial markets, and consumer markets. Our 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 the Stryker family of vehicles. We also manufacture and
deliver numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Our 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 our revenue is related to the 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 us.

 We
continue to field new product opportunities from both domestic and international customers. We believe that given continuing unrest in
multiple global "hot spots", the need for precision optics continues to increase. Most of these requirements are for observation
and situational awareness applications; however, we continue to see requests for higher magnification and custom reticles in various
product modifications. The basic need to protect the soldier while providing information about the mission environment continues to be
the primary driver for these requirements.

 Recent
Events

 Appointment
of Chief Executive Officer

 In
response to the notification by Danny Schoening that he intends to resign from the position of Chief Executive Officer of the Company,
effective as of December 20, 2025 (the "Effective Date"), on December 5, 2025, the Board of Directors of the Company (the
"Board") appointed Chad George, the Company's President, to assume the additional role of Chief Executive Officer to
fill the vacancy left by Mr. Schoening, effective as of the Effective Date.

 Mr.
George, 48, has served as President of the Company since August 11, 2025. Previously, he spent 20 years in senior operations and supply
chain roles in the defense sector. Between January 2022 and August 2025, he served as Vice President of Operations and Supply Chain at
Leonardo DRS, where he played a key role in streamlining production processes and enhancing strategic sourcing capabilities. He also
worked as Factory Manager and Operations Leader at Raytheon from April 2009 through March 2021. He holds a Bachelor's Degree in
Industrial Engineering from Oklahoma State University and a Master of Business Administration from the University of Texas at Dallas.

 In
connection with the appointment, the Company entered into a new employment agreement with Mr. George as of the Effective Date (the "New
Employment Agreement"). Pursuant to the agreement, Mr. George will serve as the Company's President and Chief Executive Officer
through December 31, 2028. Thereafter, the term of the agreement will automatically extend for successive additional 12-month periods
unless Mr. George or the Company provides written notice of termination at least 90 days prior to the end of the term then in effect.

 Mr.
George's initial annual base salary under the new agreement is $300,000, which may be increased by the Compensation Committee and/or
by the Board in their sole discretion but may not be decreased without Mr. George's consent. Mr. George's base salary will
increase at 3.5% annually in accordance with the then-current Company policy. Mr. George will be eligible for a performance bonus based
upon a one-year operating plan adopted by the Company's Board. The bonus will be based on financial and/or operating metrics decided
annually by the Board or the Compensation Committee and tied to such one-year plan. The target bonus will equate to 30% of Mr. George's
base salary. The Board will have discretion in good faith to alter the performance bonus upward or downward by 20%. Mr. George is entitled
to 200 hours paid vacation and paid time off (PTO) each year and all other benefits accorded to our other senior executives.

 The
employment agreement may be terminated by either party upon written notice. Other events of termination consist of: (i) death or permanent
disability of Mr. George; (ii) termination by the Company for cause (including in connection with the conviction of a felony, commission
of fraudulent, illegal or dishonest acts, certain willful misconduct or gross negligence, continued failure to perform material duties
or cure material breach after written notice, violation of securities laws and material breach of the employment agreement), (iii) termination
by the Company without cause and (iv) termination by Mr. George for good reason (including continued breach by the Company of its material
obligations under the agreement after written notice, the requirement for Mr. George to move more than 100 miles away for his employment
without consent, and merger or consolidation that results in more than 66% of the combined voting power of the Company's then outstanding
securities or those of its successor changing ownership or the sale of all or substantially all of its assets, without the surviving
entity assuming the obligations under the agreement). For a termination by the Company for cause or upon death or permanent disability
of Mr. George, Mr. George will be paid accrued and unpaid salary and any bonus earned through the date of termination. For a termination
by the Company without cause or by Mr. George with good reason, Mr. George will also be paid six months' base salary in effect.

 Increase
in Board Size and Election of New Director

 Concurrently
with Mr. George's appointment as Chief Executive Officer, the Board elected Mr. George to serve as a director of the Board, effective
as of the Effective Date, until the Company's 2026 annual meeting of shareholders and until his successor has been elected and
qualified. In connection with Mr. George's election as a director of the Board, the Board increased the total number of Board seats
from four to five.

 The
New Employment Agreement requires Mr. George to fulfill his duties as a director without additional compensation.

 Resignation
of Chief Executive Officer

 On
December 4, 2025, Mr. Schoening notified the Company that he intends to resign, effective as of the Effective Date, from the position
of Chief Executive Officer of the Company. Mr. Schoening will remain on the Board, will continue to serve in the position of Chairman
of the Board, and will continue to serve as the Company's Facilities Security Officer ("FSO").

 Appointment
of New President

 Effective
August 11, 2025, the Board appointed Mr. George as the Company's new President.

 In
connection with Mr. George's appointment as President, the Board granted him 10,000 shares of restricted stock under an exemption
from registration effective August 11, 2025, which will vest on January 1, 2026.

 Amendment
to Bylaws

 Effective
August 10, 2025, the Board amended the Company's Bylaws to, among other things, (i) create a new Chief Executive Officer position,
allowing for the offices of Chief Executive Officer and President to be held by different individuals, with the Chief Executive Officer
being the principal executive officer of the Company, (ii) add deadlines and procedural requirements for shareholders to follow in making
(A) proposals for consideration at an annual meeting, (B) nominations for directors to be elected at an annual meeting, and (C) nominations
for directors to be elected at a special meeting, (iii) add a new article to provide for indemnification of directors and officers to
the fullest extent permitted by Delaware law, and (iv) add a forum selection clause.

 Recent
Orders

 On
 December 15, 2025, the Company announced it was awarded a new contract for optical sub-assemblies. The order value is $2.3 million
 with deliveries from April 2026 through December 2026. The units will be manufactured at the Applied Optics Center segment
 ("Applied Optics Center" or "AOC") location in Dallas, Texas.

 On
 August 5, 2025, the Company announced it was awarded a firm fixed price purchase order from General Dynamics Land Systems - Canada.
 This $1.6 million award for laser protected periscopes will be delivered in fiscal year 2026. The periscopes will be manufactured
 at the Optex Systems – Richardson segment ("Optex Richardson") location in Richardson, Texas.

 On
 July 22, 2025 the Company announced it was awarded an up to $10.2 million, five-year requirement-type contract by the Army Contracting
 Command - Detroit Arsenal for Abrams-based optical sighting systems. The contract estimates the first-year order amount to exceed
 $4.3 million with deliveries scheduled to begin in fiscal year 2026. The units will be manufactured at the Optex Richardson location.

 On
 July 7, 2025 the Company announced it was awarded a $2.8 million purchase order from a major U.S. prime contractor in support of
 the XM30 Combat Vehicle. This contract will provide 13 sighting systems in support of the next milestone with deliveries in fiscal
 2026. The units will be manufactured at the Optex Richardson location.

 On
 April 9, 2025 the Company announced it was awarded a new contract for laser filter units associated with the XM157 Next Generation
 Fire Control Scope. The order value is $5.7 million with deliveries between August 2025 through December 2026. The units will be
 manufactured at the Applied Optics Center location.

 On
 March 19, 2025 the Company announced it was awarded a $4.2 million firm fixed price purchase order from BAE Systems in support of
 the Bradley A4 Follow-On Production award for laser protected periscopes and optical sighting systems. This order will be manufactured
 at the Optex Richardson location and delivered over 28 months.

 On
 December 11, 2024 the Company announced it was awarded a three-year, Indefinite Delivery Indefinite Quantity (IDIQ) contract for
 Optically Improved Periscopes from DLA Land and Marine with a maximum value of $6.5 million and two additional option years. The
 units will be manufactured at the Optex Richardson location.

 On
 December 10, 2024 the Company announced it was awarded a new contract for Laser Filter Units and Window Assemblies supporting Night
 Vision devices utilized by the U.S. Armed Forces. The order value is $2.0 million with deliveries covering March 2025 through February
 2026. The units will be manufactured at the Applied Optics Center location.

 Products

 Our
products are installed on various types of U.S. military land vehicles, such as the Abrams, and Bradley and Stryker families of fighting
vehicles, as well as light armored and armored security vehicles. We also manufacture and deliver numerous periscope configurations,
rifle and surveillance sights and night vision optical assemblies. We deliver our products both directly to the federal government and
to prime contractors.

 In
addition, the Company offers military specification ("mil-spec") quality High Efficiency Anti-Reflective Coatings for Infrared
applications in both the military and commercial markets. These coatings are manufactured at the Applied Optics Center in Dallas, Texas.

 We
deliver high volume products, under multi-year contracts, to large defense contractors and government customers. Increased emphasis in
the past several years has been on new opportunities to promote and deliver our products in foreign military sales, where U.S.-manufactured
combat and wheeled vehicles are supplied (and upgraded) in cooperation with the DoD. We have a reputation for quality and credibility
with our customers as a strategic supplier. We also anticipate the opportunity to integrate some of our night vision and optical sights
products into commercial applications.

 Specific
product categories by product line include:

 Line

 Category

 Laser
 & Non-Laser Protected Plastic & Glass Periscopes ("ICWS"), Electronic M17 Day/Thermal Periscopes, Digital Periscopes,
 Vision Blocks

 Sighting

 Back
 Up Sights, Digital Day and Night Sighting Systems ("DDAN"), M36 Thermal Periscope, Unity Mirrors, Optical Weapon System
 Support and Maintenance ("OWSS"), Commander Weapon Station Sight ("CWSS"), Sight Assembly Refurbishment ("GOI
 MOD/Aquila"), XM30 Driver Periscope Assembly

 Howitzers

 M137
 Telescope, M187 Mount, M119 Aiming Device, XM10 Aiming Circle

 Other

 Muzzle
 Reference Systems ("MRS"), Binoculars, Collimators, Speedtracker, Optical Lenses & Elements, Windows and Optex Outdoors
 products

 Laser
 Interference Filter ("LIF"), Optical Assemblies, Laser Filter Units ("LFU"), Reticles, Day Windows, Binoculars,
 Specialty Thin Film Coatings.

 Contracts

 Our
government contracts allow for Federal Acquisition Regulation ("FAR") 52.243-1 which entitles the contractor to an "equitable adjustment" for contract or statement
of work changes affecting cost or time of performance. In essence, an equitable price adjustment request is a request for a contract
price modification (generally an increase) that allows for the contractor to be "made whole" for additional costs incurred
which were necessitated by some modification of the contract effort. This modification may come from an overt change in U.S. government
requirements or scope, or it may come from a change in the conditions surrounding the contract (e.g., differing site conditions or late
delivery of U.S. government-furnished property) which result in statement of work additions, deletions, part substitutions, schedule
or other changes to the contract which impact the contractor's overall cost to complete.

 Each
contract with our customers has specific quantities of material that need to be purchased, assembled, and then shipped. Prior to bidding
for a contract, we contact potential sources of material and receive qualified quotations for each material. In some cases, the entire
volume is given to a single supplier and in other cases, the volume might be split between several suppliers. If a contract has a single
source supplier and that supplier fails to meet their obligations (e.g., quality, delivery), then we would attempt to find an acceptable
alternate supplier, and if successful, we would then renegotiate contractual deliverables (e.g., specifications, delivery or price).
As of December 3, 2025, approximately 83% of our material requirements are single-sourced across 104 suppliers representing approximately
96% of our active supplier order values. Single-sourced component requirements span across all of our major product lines. Of these single-sourced
components, we have material contracts (purchase orders) with firm pricing and delivery schedules in place with each of the suppliers
to supply the parts necessary to satisfy our current contractual needs. See " Item 1.A. Risk Factors – Risks Relating to
Our Business – Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could
have a material, adverse impact on our business " for a description of certain supplier risks we face, which description is
incorporated herein by reference.

 Approximately
99% of our contracts contain 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
costs plus a reasonable fee up through and as a result of the contract termination. We currently have eight subcontract customer
awards, representing $1.1 million of our current backlog, which are associated with two government prime contracts pending
termination. We are currently in negotiation with the customer regarding the final termination claim amount, but expect to recover
all of our incurred costs to date, plus a reasonable fee, against these 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 (0% to 5%) on the contract price of the affected contracts.
Currently, none of our awarded contracts are subject to renegotiation.

 We
are subject to, and must comply with, various laws and governmental regulations that impact, among other things, our revenue, operating
costs, profit margins and the internal organization and operation of our business. The material laws and regulations affecting our U.S.
government business are summarized in the table below.

 Law/Regulation

 Summary

 Federal
 Acquisition Regulation (FAR)

 The
 principal set of rules is the Federal Acquisition Regulation System. This system consists of sets of regulations issued by agencies
 of the federal government of the United States to govern what is called the "acquisition process," which is the process
 through which the government acquires goods and services. That process consists of three phases: (1) need recognition and acquisition
 planning, (2) contract formation, and (3) contract administration. This system regulates the activities of government personnel in
 carrying out that process. It does not regulate the purchasing activities of private sector firms, except to the extent that those
 activities involve government solicitations and contracts by reference.

 International
 Traffic in Arms Regulations (ITAR)

 United
 States government regulations that control the export and import of defense-related articles and services on the United States Munitions
 List. These regulations implement the provisions of the Arms Export Control Act.

 Truth
 in Negotiations Act (TINA)

 A
 public law enacted for the purpose of providing for full and fair disclosure by contractors in the conduct of negotiations with the
 government. The most significant provision included is the requirement that contractors submit certified cost and pricing data for
 negotiated procurements above a defined threshold of $2.5 million for contracts entered into after June 30, 2018. The law requires
 contractors to provide the government with an extremely broad range of cost or pricing information relevant to the expected costs
 of contract performance, and it requires contractors and subcontractors to submit cost or pricing data to the government and to certify
 that, to the best of their knowledge and belief, the data are current, accurate, and complete. A contracting officer may still request
 cost or price data, if necessary, without certification, to determine whether the proposed cost or price is fair and reasonable for
 contracts which are below the threshold.

 We
are responsible for full compliance with the FAR. Upon award, the contract may identify certain regulations
that we need to meet. For example, a contract may allow progress billing pursuant to specific FAR clauses incorporated into the contract.
Other contracts may call for specific first article acceptance and testing requirements. The FAR will identify the specific regulations
that we must follow based on the type of contract awarded and contains guidelines and regulations for managing a contract after award,
including conditions under which contracts may be terminated, in whole or in part, at the government's convenience or for default.
These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting and general
business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees and, among
other things and impose accounting rules that define allowable and unallowable costs governing our right to reimbursement under certain
contracts.

 First
Article Acceptance and Testing requirements consist of specific steps which could be comprehensive and time consuming. The dimensions
and material specifications of each piece of the assembly must be verified, and some products may have in excess of 100 assembled parts.
Once the individual piece parts are verified to be compliant to the specification, the assembly processes are documented and verified.
A sample of the production (typically three units) is verified to meet final performance specifications. Once the units meet the final
performance specification, they are then subjected to accelerated life testing, a series of tests which simulate the lifetime use of
the product in the field. This consists of exposing the units to thermal extremes, humidity, mechanical shock, vibration, and other physical
exposure tests. Once completed, the units undergo a final verification process to ensure that no damage has occurred as a result of the
testing and that they continue to meet the performance specification. All of the information and data is recorded into a final first
article inspection and test report and submitted to the customer along with the test units for final approval. First Article Acceptance
and Testing is generally required on new contracts/product awards but may also be required on existing products or contracts where there
has been a significant gap in production, or where the product has undergone significant manufacturing process, material, tooling, equipment
or product configuration changes.

 We
are also subject to laws, regulations and executive orders restricting the use and dissemination of information deemed classified for
national security purposes and the exportation of certain products and technical data as covered by the International Traffic in Arms
Regulation ("ITAR"). In order to import or export items listed on the United States Munitions List, we are required to be registered with
the Directorate of Defense Trade Controls office. The registration is valid for one year, and the registration fees are established based
on the number of license applications submitted the previous year. We currently have an approved and current registration on file with
the Directorate of Defense Trade Controls office. Once the registration is approved, each import/export license must be filed separately.
License approval requires the company to provide proof of need, such as a valid contract or purchase order requirement for the specific
product or technical data requested on the license and requires a detailed listing of the items requested for export/import, the end-user,
the end-user statement, the value of the items, consignees/freight forwarders and a copy of a valid contract or purchase order from the
end-user. The approval process for the license can vary from several weeks to six months or more. The licenses we currently use are the
Department of State licenses: DSP-5 (permanent export), DSP-6 (license revisions) and DSP-73 (temporary export) and Department of Commerce:
BIS-711 (export).

 The
above licenses are valid for 48 months from date that each license is issued. A summary of our active ITAR licenses is presented below
(updated as of December 3, 2025):

 Fiscal Year

 Number of

 Total Contract Value of

 Active ITAR Licenses

 of Expiration

 Licenses

 Licenses

 DSP-5

 Issued 2022

 2026

 $
 321,722

 Issued 2023 (none issued)

 N/A

 —

 —

 Issued 2024

 2028

 125,577

 Issued 2025

 2029

 99,350

 Total DSP-5 Licenses

 $
 546,649

 DSP-6 (no active licenses)

 N/A

 —

 $
 —

 DSP-73 (no active licenses)

 N/A

 —

 $
 —

 BIS-711

 Issued 2022

 2026

 9,372

 Issued 2023

 2027

 1,359,344

 Issued 2024

 2028

 1,270,327

 Issued 2025

 2029

 72,240

 Total BIS-711 Licenses

 $
 2,711,283

 Total All Licenses

 $
 3,257,932

 These
licenses are subject to termination if a licensee is found to be in violation of the Arms Export Control Act or the ITAR requirements.
If a licensee is found to be in violation, in addition to a termination of its licenses, it can be subject to fines and penalties by
the government.

 Our
contracts may also be governed by the Truth in Negotiation Act ("TINA") requirements where certain of our contracts or proposals exceed
the TINA threshold ($2.5 million for awards after June 30, 2018), and/or are deemed as sole source, or non-competitive awards, covered
under this act. For these contracts, we must provide a vast array of cost and pricing data in addition to certification that our pricing
data and disclosure materials are current, accurate and complete upon conclusion of the negotiation. Due to the additional disclosure
and certification requirements, if a post contract award audit were to uncover that the pricing data provided was in any way not current,
accurate or complete as of the certification date, we could be subjected to a defective pricing claim adjustment with accrued interest.
We have no history of defective pricing claim adjustments and have no outstanding defective pricing claims pending. Additionally, as
a result of this requirement, contract price negotiations may span from two to six months and can result in un-definitized or not to
exceed ceiling priced contracts subject to future downward negotiations and price adjustments. Currently, we do not have any un-definitized
contracts subject to further price negotiation.

 Our
failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition
of fines and penalties, the loss of security clearances, the loss of our U.S. government contracts or our suspension or debarment from
contracting with the U.S. government generally, any of which could have a material adverse effect our business, financial condition,
results of operations and cash flows. We are currently in compliance with all applicable regulations and do not have any pending claims
as a result of noncompliance.

 The
terms of our significant contracts with a total award value of more than $1.0 million as of December 4, 2025, are as follows:

 Location

 Customer

 Contract/PO

 Type

 Award

 Delivery Period

 OPX

 DLA Land and Maritime (1)

 SPE7LX21D0057

 IDIQ

 $
 7.4

 $
 0.7

 Dec 2024 - Jun 2025

 OPX

 General Dynamics Land Systems - Canada (2)

 PO 35713970

 FFPQ

 1.7

 1.7

 Oct 2025 - Sept 2026

 OPX

 US Army (3)

 W912CH-25-D-0066

 Collimators

 IDIQ

 4.3

 4.3

 Jul 2025 - Jul 2030

 OPX

 U.S. Prime Contractor (4)

 PO 40471011

 FFPQ

 2.6

 2.5

 Jul 2025 - Apr 2026

 AOC

 U.S. Prime Contractor (5)

 PO 835

 Laser Filter Units

 FFPQ

 5.7

 4.1

 Aug 2025 - Dec 2026

 OPX

 BAE Systems (6)

 PO 392878

 Periscopes & Optical Sighting Systems

 FFPQ

 4.3

 4.3

 Mar 2025 - Jul 2027

 OPX

 DLA Land and Maritime (7)

 SPE7LX25D0023

 IDIQ

 3.8

 1.1

 Dec 2024 - Dec 2027

 AOC

 U.S. Prime Contractor (8)

 PO 921493

 Light Interference Filters

 FFPQ

 1.3

 0.5

 Mar 2025 - Feb 2026

 OPX

 DLA Land and Maritime (9)

 SPE7LX24D0030

 IDIQ

 2.8

 0.3

 Jan 2024 - Jan 2029

 AOC

 U.S. Prime Contractor (10)

 NHAGP00452

 Light Interference Filters

 FFPQ

 1.0

 0.4

 Jun 2025 - Apr 2026

 OPX

 U.S. Prime Contractor (11)

 PO 50896

 FFPQ

 1.1

 1.1

 Jun 2026 - Oct 2026

 (1)

 Prime contract awarded on January 6, 2021. This is a long-term, IDIQ contract with firm fixed pricing for the duration
of the contract with a base period of three years plus two firm fixed priced option years for a potential total of five years for periscopes
valued up to $14.4 million. On October 7, 2024, second option was exercised by DLA Land and Maritime, extending the ordering period from
January 6, 2025 through January 5, 2026.

 (2)

 Subcontract awarded on August 5, 2025 for periscope assemblies with firm fixed pricing for the duration of the contract.
The award has a maximum order value of $1.7 million.

 (3)

 Prime contract with direct solicitation for W56HZV-23-R-0159 for Collimators awarded on July 22, 2025. This is a
long-term IDIQ contract with firm fixed pricing for the duration of the contract with potential revenue up to $10.2 million.

 (4)

 awarded on July 7, 2025 for periscope assemblies supporting XM30 Combat Vehicles with firm fixed pricing for the duration of the
 contract. The award has a maximum order value of $2.6 million.

 (5)

 purchase order awarded on April 9, 2025 by a U.S. prime contractor in support of U.S. government contracts.

 (6)

 Subcontract with BAE Systems in support of government contract W56HZV-22-D-0083 & W912CH25F0096 for periscopes
& optical subassemblies. The purchase order was awarded on March 19, 2025 for $4.3 million with final revision dated November 5, 2025.

 (7)

 Subcontract awarded on December 11, 2024. This is a long-term IDIQ contract with firm fixed pricing for the duration
of the contract with a base period of three years plus two firm fixed priced option years for a potential total of five years for periscopes
valued up to $6.5 million.

 (8)

 purchase order awarded on December 10, 2024 by a U.S. prime contractor in support of U.S. government contracts.

 (9)

 Subcontract awarded on January 31, 2024 for periscopes and direct vision blocks. This is a three-year IDIQ contract
with two option years and firm fixed pricing for the duration of the contract. The award has a maximum order value of $2.8 million.

 (10)

 purchase order awarded on February 14, 2025 by a U.S. prime contractor in support of U.S. government contracts.

 (11)

 purchase order awarded on November 19, 2025 by a U.S. prime contractor in support of U.S. government contracts.

 Market
Opportunity — U.S. Military

the twelve months ended September 28, 2025, approximately 90% of our business was in support of U.S. military products. The purpose of including the chart below is to provide the reader with historical trend data and projected U.S. military
defense and procurement spending over time. However, the Company cannot provide any assurances that the historical trend data is predictive
of future spending.

 In
the chart below, for fiscal year 2026, the Government Publishing Office ("GPO") projects total DoD spending at $961.7
billion, an overall increase of 11.6% over estimated fiscal year 2025 spending. For defense procurement spending, a subset of total
defense spending, the GPO projects an overall increase of $30.8 billion, or 17.7%, in fiscal year 2026 as compared to the estimated
spending in fiscal year 2025.

 Source:
Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, "Program Acquisition Cost by Weapon System, United
States Department of Defense, Fiscal Year 2026 Budget Request", July 2025.

 The
table below depicts the DoD budget request for fiscal year 2026 for major ground system programs. The last two years have
experienced a significant reduction in spending for U.S. ground system military programs. The total fiscal year 2026 budget request
for major ground system programs decreased by 10.8% from the fiscal year 2025 levels and by 16.5% from the fiscal year 2024 levels.
Although it is difficult to directly tie the budget request to specific components provided by Optex Richardson, we provide
periscopes, collimator assemblies, vision blocks and laser interface filters to the U.S. armed forces on almost all of the ground
system platforms categorized below and budget requests for at least two of the major platforms (AMPV and M1) are showing growth of
39.2% and 43.6% respectively in fiscal year 2026.

 Source:
Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, "Program Acquisition Cost by Weapon System, United
States Department of Defense, Fiscal Year 2026 Budget Request", July 2025.

 The
table below depicts the DoD budget request for fiscal year 2026 for major ground system programs. The last three years have experienced
a significant reduction in spending for U.S. ground system military programs. The total fiscal year 2026 budget request for major ground
system programs decreased by 27% from the fiscal year 2025 levels and by 36% from the fiscal year 2024 levels. Although it is difficult
to directly tie the budget request to specific components provided by Optex Richardson, we provide periscopes, collimator assemblies,
vision blocks and laser interface filters to the U.S. armed forces on almost all of the ground system platforms categorized below.

 ($ in Millions)

 FY2022

 FY2023

 FY2024

 FY2025

 FY2026

 ARMY

 Abrams Tank Modification/Upgrade (M-1)

 $
 1,264.3

 $
 1,297.7

 $
 1,421.3

 $
 1,051.4

 $
 1,464.0

 Armored Multi-Purpose Vehicle (AMPV)

 984.6

 1,237.0

 603.9

 393.8

 565.4

 Paladin Integrated Management (PIM)

 662.9

 1,026.8

 783.2

 611.1

 262.7

 Family of Medium Tactical Vehicles (PIM)

 144.4

 233.9

 230.5

 262.0

 107.9

 Family Of Heavy Tactical Vehicles (FHTV)

 214.0

 326.3

 283.2

 220.2

 148.5

 Next Generation Squad Weapon (NGSW)

 127.6

 199.6

 343.4

 389.4

 395.5

 XM30 Combat Vehicle

 194.9

 519.1

 565.0

 499.5

 387.4

 M10 Booker (Mobile Protected Firepower)

 -

 410.5

 482.2

 487.2

 81.5

 Stryker

 1,112.7

 1,275.0

 694.2

 503.3

 145.6

 USMC

 Amphibious Combat Vehicle (ACV)

 591.9

 605.4

 632.8

 857.0

 835.4

 Total Ground Systems Vehicles (millions)

 $
 5,297.3

 $
 7,131.3

 $
 6,039.7

 $
 5,274.9

 $
 4,393.9

 Sources:
Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, "Program Acquisition Cost by Weapon System, United
States Department of Defense, Fiscal Year 2026 Budget Request", July 2025, "Program Acquisition Cost by Weapon System, United
States Department of Defense, Fiscal Year 2025 Budget Request", March 2024 and "Program Acquisition Cost by Weapon System,
United States Department of Defense, Fiscal Year 2024 Budget Request", April 2023.

 The proposed 2026 Department of Defense Budget indicates an overall decrease in ground system vehicle program spending
(or requests therefor) since fiscal year 2023. There is generally a six- to eighteen-month delay between U.S. defense
budget requests and program delivery orders related to our products from government agencies and our prime defense customers. In addition,
DoD budget requests are often changed throughout the congressional National Defense Authorization Act ("NDAA") Budgeting and Budget appropriations process. The DoD budget requests
exclude any foreign military sales as they are funded separately from the annual NDAA budgets. We are carefully watching the projected
trends in both DoD military spending and FMS as defense allocation priorities change, as well as challenges which are presented from
the global recession and changes in political climate to ascertain any potential impact to the Company's future revenue.

 A
substantial portion of our revenue is derived from U.S. government contracts, which are subject to annual congressional
appropriations. Failure to pass the annual appropriations by October 1, the start of the new fiscal year, often results in a
continuing resolution ("CR") which can delay new contract awards, exercising of contract options, and starting of new
program initiatives, which could materially and adversely affect our future revenues. From October 1, 2025 to November 12, 2025, the
federal government of the United States was in a shutdown as Congress failed to pass appropriations legislation for the 2026 fiscal
year. On November 10, 2025, Congress passed a CR, which funds the government at existing spending levels through January 30, 2026,
by which time the legislature must approve the annual appropriations bill or an additional CR to avoid another government shutdown.
As a result of the 2025 government shutdown and CR through January 2026, the Company has experienced a slow-down of contract awards.
While we are unable to predict the outcome past January 2026, we anticipate the funding delays may affect our revenue during the
second through fourth quarters of fiscal year 2026. See " Item 1.A. Risk Factors – Risks Relating to Our Business
– A delay in the completion of the U.S. government's budget and appropriation process could delay procurement of our
products and services and have an adverse effect on our future revenues."

 The
Applied Optics Center supports numerous other military platforms outside of the ground system vehicles budget, such as infantry rifle
scopes, night vision monoculars, infantry and navy binoculars, night goggles, and infrared aircraft filters. The Applied Optics Center
has seen a substantial increase in orders from new and existing customers in support of the other platforms, which we expect to offset
the impact of the ground systems reductions to their base revenue.

 Market
Opportunity — Foreign Military

 Our
products directly support FMS combat vehicles globally, including Canada, the Kingdom of Saudi Arabia, Kuwait, Morocco, Egypt, South
America, and Israel. We have increased efforts to promote our proven military products, as well as newly improved product solutions directly
to foreign military representatives and domestic defense contractors supporting the FMS initiatives.

 We
were successful with the Israeli Ministry of Defense ("IMOD") in refurbishing a small quantity of their Night Vision
Rifle Scopes. Given this success, in November 2022, the IMOD awarded us a $3.4 million follow on contract to continue this activity
through fiscal year 2026. We began deliveries against the contract during the first quarter of fiscal year 2024. If we successfully
execute this contract, we would expect another contract award of similar size and duration in fiscal year 2026 or 2027.

 We
are also exploring possibilities to adapt some of our products for commercial use in those markets that demonstrate potential for solid
revenue growth, both domestically and internationally.

 Market
Opportunity — Commercial

 Our
products are currently sold to military and related government markets. We believe there may be opportunities to commercialize various
products we presently manufacture to address other markets. Our initial focus will be directed in four product areas.

 Big
 Eye Binoculars — While the military application we produce is based on mature military designs, we own all castings, tooling
 and glass technology. The big eye binocular technology is potentially applicable to other commercial
uses where high magnification and resolution is required.

 Thin
 Film Coatings — The acquisition of the Applied Optics Center also creates a new sector of opportunity for commercial products
 for us. Globally, commercial optical products use thin film coatings to create product differentiation. These coatings can be used
 for redirecting light (mirrors), blocking light (laser protection), absorbing select light (desired wavelengths), and many other
 combinations. They are used in telescopes, rifle scopes, binoculars, microscopes, range finders, protective eyewear, photography,
 etc. Given this broad potential, the commercial applications are a key opportunity going forward.

 Optical
 Assemblies – Through the Applied Optics Center, we are utilizing our experience in military sighting systems to pursue commercial
 opportunities associated with products that incorporate multi-lens optical cell assemblies, bonded optical elements and mechanical
 assemblies. There are a wide variety of products in the medical, machine vision, automotive and outdoor recreation fields that can
 benefit from our capabilities. Support to domestic customers for these type products has driven significant increases in Applied
 Optics Segment sales during the last five years.

 Optex
 Outdoors – This launch brings military-grade optical technology directly to civilian marksmen and extreme long-range competitors,
 expanding Optex's reach beyond its traditional military market. The Optex Outdoors webstore offers a curated selection of advanced
 optical products, including riflescope prisms, chronographs, and stabilized viewing products—designed specifically for the
 needs of elite shooters and outdoor enthusiasts. Each product is engineered and built in Richardson, Texas.

 Customer
Base

 We
serve customers in four primary categories: as prime defense contractor (Defense Logistics Agency ("DLA") Land and Maritime,
DLA Land at Aberdeen, DLA Aviation, U.S. Army, Navy and Marine Corps), as defense subcontractor (General Dynamics, L-3 Communications,
Elbit Systems, BAE, Sig Sauer, Vortex Optics, Trijicon Inc. and Ducommun Aerostructures), as a military supplier to foreign governments
(Israel, Australia, South America and Canada) and as a commercial optical assembly supplier (Nightforce Optics, Lightforce USA, Inc.
and Gables Engineering). During the twelve months ended September 28, 2025, we derived approximately 70% of our gross business revenue
from five major customers: U.S. government agencies (29%) and four U.S. defense contractors (19%, 10%, 6% and 6%). We have approximately
120 discrete contracts for items that are utilized in vehicles, optical product lines and as spare parts. Due to the high percentage
of prime and subcontracted U.S. defense revenues, large customer size and the fact that there are multiple contracts with each entity,
which are not interdependent, we are of the opinion that this provides us with a fairly well diversified revenue pool.

 Marketing
Plan

 We
believe we are well positioned to service both U.S. and foreign military needs by our focus on delivering products that satisfy the following
factors important to the U.S. military:

 reliability — failure can cost lives

 Speed
 to delivery and adherence to delivery schedule

 System
 life cycle extension

 Low
 cost/best value

 Visual
 aids for successful execution of mission objectives

 Mission
 critical products specifically related to soldier safety.

 Potential
Entrants — Low Risk to us. In order to enter this market, potential competitors must overcome several barriers to entry. The first
hurdle is that an entrant would need to prove to the government agency in question the existence of a government approved accounting
system for larger contracts. Second, the entrant would need to develop the processes required to produce the product. Third, the entrant
would then need to produce the product and submit successful test requirements (many of which require lengthy government consultation
for completion). Finally, in many cases, the customer has an immediate need and therefore cannot wait for this qualification cycle and
therefore must issue the contracts to existing suppliers. Given the expense and time commitment of development and qualification testing,
the barrier to entry is high for new competitors.

 Buyers
— Medium Risk to us. In most cases the buyers (usually government agencies or defense contractors) have two fairly strong suppliers.
It is in their best interest to keep at least two, and therefore, in some cases, the contracts are split between suppliers. In the case
of larger contracts, the customer can request an open book policy on costs and expects a reasonable margin to have been applied.

 Substitutes
— Low Risk to us. We have both new vehicle contracts and replacement part contracts for the same product. Three combat vehicles
have a long history of service in the U.S. Army. The first M-1 Abrams Tank entered service with the Army in 1980; the M-2/M-3 Bradley
Fighting Vehicle in 1981; and the Stryker Combat Vehicle in 2001. Since it was first fielded in 1980, the Abrams tank has undergone near-continuous
upgrades and improvements and is the principal battle tank of the United States Army and Marine Corps, and the armies of Egypt, Kuwait,
Saudi Arabia, Iraq and Australia. On average, there has been a new improvement package every seven years. The XM30 Mechanized Infantry
Combat Vehicle, formerly known as the Optionally Manned Combat Vehicle, is the U.S. Army's sixth attempt to replace the Bradley
fighting vehicle. The latest Army "light tank" is the M10 Booker Combat Vehicle, formerly known as the Mobile Protected Firepower
System, and is much smaller than the Abrams main battle tank. The Abrams, XM30, M10 Booker and Stryker vehicles are the only tanks currently
in production by the government. Optex Richardson provides periscopes and optical sighting systems in support of all four vehicle platforms.
We expect that these tanks will continue to be used through approximately 2040.

 Suppliers
— Low to Medium Risk to us. The suppliers of standard processes (e.g., casting, machining and plating) need to be very competitive
to gain and/or maintain contracts. Those suppliers of products that use top secret clearance processes have a slight advantage; however,
there continues to be multiple avenues of supply and therefore only moderate power.

 Consistent
with our marketing plan and business model, the AOC acquisition strengthened our overall position by decreasing the bargaining power
of their suppliers through the backwards integration of a key supplier and created additional barriers of entry for potential competitors.

 The
following matrix reflects the current focus of our four basic approaches for sales and development:

 1)

 Sell
 existing products to existing customers.

 2)

 Sell
 existing products to new customers.

 3)

 Develop
 new products to meet the needs of our existing customers.

 4)

 Develop
 new products to meet the needs of new customers.

 Existing
 Customers

 New
 Customers

 New
 Products

 US
 Army Central Command - Binoculars

 GDLS
 - DDAN, OWSS, XM30

 Israel
 - GOI MOD/Aquila

 U.S.
 Prime Contractor - XM10 Aiming Circle

 Commercial
- Optical Lens, Reticles,

 DLC
coatings, IR Opto-Mechanical Assembly, Micro Optical Systems

 Commercial
 - Optical Lens, Spotting Scopes, Monocular Lens, Chronographs, Optical Wedges

 U.S.
 Prime Contractor – Aerospace and Space

 U.S.
 Prime Contractor – Drone Technology

 Existing
 Products

 US
 Army Central Command - Periscopes, Back Up Sights,

 Commercial
 - Optical Lens, Spotting Scopes Monocular Lens

 Binoculars,
 Vision Blocks,

 Laser
 Filter Units

 U.S.
 Prime Contractor – Laser Filter Units

 GDLS
 - Periscopes, Collimators

 BAE
 - Periscopes

 L3
 - Laser Interface Filters

 DLA
 - Optical Elements

 Operations
Plan

 Our
operations plan can be broken down into three distinct areas: material management, manufacturing space planning and efficiencies associated
with economies of scale.

 Materials
Management

 The
largest portion of our costs is materials. Our continuous improvements to effectively manage material costs include the following activities:

 -

 Successful
 completion of annual surveillance audit for ISO 9001:2008 certificate, with no major nonconformance issues

 -

 Weekly
 cycle counts on inventory items

 -

 Weekly
 material review board meeting on non-moving piece parts

 -

 Kanban
 kitting on products with consistent ship weekly ship quantities

 -

 Daily
 cross functional floor meetings focused on delivery, yields and labor savings

 -

 Redesigned
 floor layout using tenant improvement funds

 -

 Daily
 review of yields and product velocity

 -

 Bill
 of material reviews prior to work order release

 -

 Supplier
 management and notification tools for on time delivery and quality tracking

 Future
continuous improvement opportunities include the full implementation and training of the shop floor control module within our ERP system.
We have begun testing and implementation within selected process.

 Manufacturing
Space Planning

 We
currently lease 93,967 square feet of manufacturing space (see "Properties"). Our current facilities are sufficient to meet
our immediate production needs without excess capacity. As our processes are primarily labor driven, we are able to easily adapt to changes
in customer demand by adjusting headcounts, overtime schedules and shifts in line with production needs. In the event additional floor
space is required to accommodate new contracts, Optex has the option to lease adjacent floor space at the current negotiated lease cost
per square foot. Consistent with the space planning, we will drive economies of scale to reduce support costs on a percentage of sales
basis. These cost reductions can then be either passed through directly to the bottom line or used for business investment.

 Our
manufacturing process is driven by the use of six sigma techniques and process standardization. Our activities in this area have included
the use of six sigma projects in several production areas which has led to improved output and customer approval on the aesthetics of
the work environment. In addition, we use many tools including 5S programs, six sigma processes, and define, measure, analyze, improve,
control (DMAIC) problem solving techniques, to identify bottlenecks within the process flow, reduce cost and improve product yields.
Successful results can then be replicated across the production floor and drive operational improvements.

 Economies
of Scale

 Plant
efficiencies fluctuate as a function of program longevity, complexity and overall production volume. Our internal processes are primarily
direct labor intensive and can be more easily adapted to meet fluctuations in customer demand; however, our material purchases, subcontracted
operations and manufacturing support costs are extremely sensitive to changes in volume. As our volume increases, our support labor,
material and scrap costs decline as a percentage of revenue as we are able to obtain better material pricing, and scrap, start up and
support labor (fixed) costs and they are spread across a higher volume base. Conversely, as production volumes decline, our labor and
material costs per unit of production generally increase. Additional factors that contribute to economies of scale relate to the longevity
of the program. Long running, less complex programs (e.g., periscopes) do not experience as significant of an impact on labor costs as
production volumes change, as the associated workforce is generally less specialized and can be ramped quickly as headcounts shift. Our
more complex thin laser filter coatings, Howitzer and thermal day/night programs are more significantly impacted by volume changes as
they require a highly specialized workforce and ramp time is longer as the training is more complex. We continually monitor customer
demand over a rolling twelve-month window and in order to anticipate any changes in necessary manpower and material which allows us to
capitalize on any benefits associated with increased volume and minimize any negative impact associated with potential declines in product
quantities.

 Sources
and Availability of Raw Materials

 Disclosure
responsive to this item is incorporated herein by reference to " Risk Factors – Risks Related to Our Business – Certain
of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse
impact on our business."

 Intellectual
Property

 Trade
Secrets and Know-How

 We
utilize several highly specialized and unique processes in the manufacture of our products. While we believe that these trade secrets
have value, it is probable that our future success will depend primarily on the innovation, technical expertise, manufacturing and marketing
abilities of our personnel. We cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our
non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or other disclosure. The confidentiality agreements that are designed to protect our trade
secrets could be breached, and we might not have adequate remedies for the breach. Additionally, our trade secrets and proprietary know-how
might otherwise become known or be independently discovered by others.

 Patents

 We
possess five utility patents and three design patents. Two new patents have been reviewed by the U.S. Patent and Trademark Office and approved in fiscal year 2025. These are for U.S. Patent No. 12,352,533 titled "Improved Next Shot Compensation System for Weapons"
and for our Laser Filter Antenna, which is awaiting a U.S. Patent number.

 The
following patents generally expire 20 years after issuance.

 On
November 6, 2025, we received a notice of allowance for our U.S. Patent Application No. 18/809,740 filed on August 20, 2024 on the Laser
Filter Antenna. The U.S. Patent number is pending receipt of our payment of the Issue Fee which is due by January 9, 2026.

 On
July 8, 2025, we were issued U.S. Patent No. 12,352,533 titled "Next Shot Compensation System for Weapons" which is a filtered
unit to prevent light having a threshold wavelength from passing through the filter unit; and one or more radar antennae deposited on
a surface of the filter unit, wherein the one or more radar antennae are configured to capture a velocity of a projectile fired from
the weapon.

 On
April 4, 2023, we were issued U.S. Patent No. 11,619,824 B2 titled "Selectable Offset Image Wedge" which is a mechanical
wedge used to offset the image anywhere in the selectable range of circular travel within the defined offset field of view. This application
is a continuation-in-part of U.S. Patent No. 10,324,298 and claims priority to U.S. Patent No. 10,324,298, issued on June 18, 2019.

 On
November 4, 2021 we were issued U.S. Patent No. 2021/0341746A1 titled "Selectable Offset Image Wedge" which is a mechanical
wedge used to offset the image anywhere in the selectable range of circular travel within the defined offset field of view. This application
is a continuation-in-part of U.S. Patent No. 10,324,298 and claims priority to U.S. Patent No. 10,324,298, issued on June 18, 2019.

 On
June 18, 2019 we were issued U.S. Patent No. 10,324,298 titled "Offset Image Wedge with Dual Capability and Alignment Technique".
The invention relates to an offset image wedge for use on a bore-sighted rifle mounted directly onto the scope via a clamp mounting device.
The wedge allows for a dual image which can be aligned in the field and provides the user with a choice of either a bore-sighted image
or an offset image without removing the wedge.

 On
July 11, 2017, we were issued U.S. Patent No. D791,852 S, for our Red Tail Digital Spotting Scope. We have a retail sales
relationship with Cabela's Inc. and Amazon, to distribute these scopes. They are currently the only digital spotting scope
offered by Cabela's Inc. Our Red Tail Digital Spotting Scopes also received a favorable review from Trigger Magazine in
2017.

 In
May 2015, we announced the issuance to us of U.S. Patent No. 13,792,297 titled "ICWS Periscope". This invention improves
previously accepted levels of periscope performance that, in turn, improves soldier's safety.

 In
December 2013, Optex Systems, Inc. was issued U.S. Patent No. 23,357,802 titled "Multiple Spectral Single Image Sighting System
Using Single Objective Lens Set." The technology platform, designed for our DDAN program, is applicable to all ground combat vehicles
used by the US and foreign militaries. This invention presents a single image to both day and night sensors using precision optics, which
in turn allows the user to individually observe day, night, or day and night simultaneously. In addition, it has proven to be especially
useful in light transition points experienced at dusk and dawn. We are in production and currently delivering sighting systems with this
advanced technology, a significant upgrade in the goal of supporting our customers as they modernize the worldwide inventory of aging
armored vehicles. This technology is applicable to many sighting systems, and it has already been designed for implementation on the
Light Armored Vehicles, the Armored Security Vehicle, the Amphibious Assault Vehicle, and the M60 Main Battle Tank. DDAN technology has
advanced the capabilities of these installed weapon systems and is the first in a series of patents we have applied for to protect our
Intellectual Property portfolio in support of the warfighters who use these systems.

 Licenses

 In
May 2012, we purchased a perpetual, non-exclusive license, with a single up-front license fee of $200,000 to use Patent 7,880,792 "Optical
and Infrared Periscope with Display Monitor" (issued in 2011 and owned by Synergy International Optronics, LLC). We believe the
purchase of the license agreement may allow us to extend and expand our market potential for the M113APC vehicle type which has the highest
number of commonly used armored vehicles in the world. The current estimated active M113 APC worldwide inventory is over 80,000 units.
This licensing of this patent allows us to develop additional products for this vehicle type, including the M17 Day/Thermal and M17 Day/Night
periscopes. We are actively marketing the new periscopes internationally and completed our first international shipment utilizing this
technology in March 2014. We continue to prototype these products and demonstrate them to potential customers.

 On
June 29, 2023, the "Effective Date", we executed a License agreement LA12342 with Pratt & Whitney Division ("P&W")
of Raytheon Technologies Corporation for a six-year term from the Effective date. The agreement allows the Company the use of P&W's
proprietary technology to perform the application and inspection of proprietary coatings on a selection of vane part numbers for the
upturned exhaust system (UESII) utilized on Sikorsky's Blackhawk aircraft variants. The license grant is exclusive to the Applied
Optics Center for the application and inspection of coatings for the end customer, provided that AOC is able to sufficiently meet the
end customer volume demand for the licensed items during the term. In consideration of the license rights, AOC agrees to pay P&W
a royalty of $200 per vain, or $2000 per shipset of 10 vanes to which the coating is applied. On the 2 nd anniversary of the
Effective date, and every two years thereafter during the term of the agreement, the royalty rate shall be increased by 3%. Semiannual
payments are to be paid within 15 days of June 30 th and December 31 st throughout the duration of the agreement.

 Our
competitors, many of which have substantially greater resources, may have applied for or obtained, or may in the future apply for and
obtain, patents that will prevent, limit or interfere with our ability to make and sell some of our products. Although we believe that
our products do not infringe on the patents or other proprietary rights of third parties, we cannot assure you that third parties will
not assert infringement claims against us or that such claims will not be successful.

 Competition

 The
markets for our products are competitive. We compete primarily on the basis of our ability to design and engineer products to meet performance
specifications set by our customers. Our customers include military and government end users as well as prime contractors that purchase
component parts or subassemblies, which they incorporate into their end products. Product pricing, quality, customer support, experience,
reputation and financial stability are also important competitive factors.

 There
are a limited number of competitors in each of the markets for the various types of products that we design, manufacture and sell. At
this time, we consider our primary competitor for the Optex Richardson site to be Gus Periscopes. The Applied Optics Center thin film
and laser coatings products compete primarily with Materion-Barr, G&H Artemis and Alluxa.

 Our
competitors are often well entrenched, particularly in the defense markets. While we believe that the quality of our technologies and
product offerings provides us with a competitive advantage over certain manufacturers, some of our competitors have substantially greater
financial and other resources than we do to spend on the research and development of their technologies and for funding the construction
and operation of commercial scale plants.

 We
expect our competitors to continue to improve the design and performance of their products. We cannot assure investors that our competitors
will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features,
or that new technology or processes will not emerge that render our products less competitive or obsolete. Increased competitive pressure
could lead to lower prices for our products, thereby adversely affecting our business, financial condition and results of operations.
Also, competitive pressures may force us to implement new technologies at a substantial cost, and we may not be able to successfully
develop or expend the financial resources necessary to acquire new technology. We cannot assure you that we will be able to compete successfully
in the future.

 Employees
and Human Capital

 We
had 132 full-time equivalent employees as of September 28, 2025, which include a small temporary work force to handle peak loads as needed.
We are in compliance with local prevailing wage, contractor licensing and insurance regulations, and have good relations with our employees,
who are not currently unionized. We use outside consultants for various services. We have not experienced any work stoppages and are
not a party to a collective bargaining agreement. Management considers labor relations to be good.

 We
are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that
is designed to attract, develop and retain top talent through offering our employees an engaging work experience that contributes to
their career development. We recognize that our success is based on the collective talents and dedication of those we employ, and we
are highly invested in their success. We value our employees and believe that employee loyalty and enthusiasm are key elements of our
operating performance.

 Corporate
History

 Optex
Systems Holdings, Inc. is a Delaware corporation originally organized in Delaware as Sustut Exploration, Inc. in April 2006. Optex Systems,
Inc. is a Delaware corporation organized in September 2008. In March 2009, Optex Systems, Inc. engaged in a reverse merger with Sustut
Exploration, Inc., in connection with which the latter was renamed Optex Systems Holdings, Inc. and the former became a wholly-owned
subsidiary of Optex Systems Holdings, Inc.

 Internet
Address

 The
Company maintains an internet website at the following address: www.optexsys.com. The information on the Company's website
is not incorporated by reference in this Annual Report on Form 10-K.

 Item
1A. 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 Annual Report, 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 face. If any of these risks actually materializes, 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, our industry and companies that have securities trading on an 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 and foreign governments. 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 or foreign government
budgets 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. Even if our estimates are reasonable at the time made, prices of materials are subject to unanticipated adverse fluctuation, and
are affected by inflationary pressures. In the event our actual costs exceed the fixed costs determined under 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.

 We
have several multiyear IDIQ contracts at fixed prices which have open ordering periods and are currently at low profit rates or in a
loss condition. These contracts are typically three-year IDIQ contracts with two optional award years, and as such, we are obligated
to accept new task awards against these contracts until the contract expiration. Should contract costs continue to increase above the
negotiated selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the
losses could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked
immediately on new task order awards. As of September 28, 2025, there was $132 thousand in accrued loss provisions for loss contracts
or cost overruns.

 Approximately
99% of our contracts contain 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 costs plus
a reasonable fee up through and as a result of the contract termination. We currently have eight customer awards, representing $1.1 million
of our current backlog, which are associated with two government prime contracts pending termination. We are currently in negotiation
with the customer regarding the final termination claim amount, but expect to recover all of our incurred cost to date, plus a reasonable
fee, against these 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.

 We
have sought to minimize the adverse impact from the slower pace of U.S. military orders on our results of operations by seeking to obtain
foreign military orders, expanding our customer base as well as seeking new commercial business. We do not expect these markets to completely
mitigate the negative impact of lower U.S. defense spending.

 A
delay in the completion of the U.S. government's budget and appropriation process could delay procurement of our products and services
and have an adverse effect on our future revenues.

 The
funding of U.S. government programs is subject to an annual congressional budget authorization and appropriations process. In years when
the U.S. government does not complete its appropriations before the beginning of the new fiscal year on October 1, government operations
are typically funded pursuant to a CR, which allows federal government agencies to operate at spending levels approved in the previous
appropriations cycle, but does not authorize new spending initiatives. When the U.S. government operates under a CR, delays can occur
in the procurement of the products, services and solutions that we provide and may result in new initiatives being canceled. We have
on occasion experienced delays in contract awards which affect our future revenues as a result of this annual appropriations cycle, and
we could experience similar declines in revenues from future delays in the appropriations process. When the U.S. government fails to
complete its appropriations process or to provide for a CR, a full or partial federal government shutdown may result. A federal government
shutdown could result in delays or cancellations of key programs and during extended government shutdown periods, the delay of contract
payments, which could have a negative effect on our cash flows and adversely affect our future results. We refer also to "Item
1. Business – Market Opportunity: U.S. Military" of this Annual Report on Form 10-K for a description of current trends in
U.S. government military spending and its potential impact on the Company.

 Our
results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on
our customers' businesses and levels of business activity.

 The
volatile global economic and political environment has created market uncertainty. A slowdown in the financial markets or other economic
conditions, including but not limited to global supply chain issues, inflation, fuel and energy costs, freight costs, lack of available
credit, sovereign debt crises, interest rates, and tax rates, may adversely affect the Company's growth and profitability. In response
to inflationary pressures, between January 2022 and July 2023, the U.S. Federal Reserve incrementally raised interest rates, resulting
in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. While the
U.S. Federal Reserve lowered interest rates slightly during 2025, future increases in interest rates may again result in an increase
in the cost of borrowing for us, our customers, our suppliers and other companies relying on debt finance. Prolonged inflationary conditions
and prolonged periods of high interest rates could further negatively affect U.S. and international commerce and exacerbate or prolong
the period of high energy prices and supply chain constraints. In addition, the continuing conflict in the Middle East could affect oil
prices and have other, potentially recessionary, effects on the global economy. At this time, the extent and duration of global economic
and political events and their effects on the economy and the Company are impossible to predict.

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

 Significant
fluctuations in customer demand place a significant strain on our management personnel, infrastructure and resources. To implement our
current business and product plans, we need to appropriately manage our cost base, as well as train, manage and motivate our workforce,
while continuing to maintain our critical operational and financial systems and our manufacturing and service capabilities. All of these
endeavors require substantial management effort and potential capital. If we are unable to effectively manage our operations to our customer
demand levels, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities,
and our current or future business could be materially and adversely affected.

 Low
unemployment and tight labor markets may adversely affect our labor costs and our ability to hire and retain a sufficient workforce required
to meet the backlog and customer demands. If we are not able to maintain a sufficient workforce and attract and retain additional personnel
as required, we may not be able to implement our business plan and our results of operations could be materially and adversely affected.

 We
compete with several other large defense contractors, as well as homebuilding, industrial manufacturing and warehousing industries within
the immediate area of our manufacturing facilities for both lower and higher skill level manufacturing employees. The limited supply
of available workers for hire, combined with increasing competition among other local industries, may result in increased production
costs associated with higher wages, employee bonuses, overtime premiums and enhanced employee benefits in addition to cost increases
associated with employee recruitment, employee turnover, training and learning curve inefficiencies. We may be unable to fill the labor
positions required to meet our customer demands in a timely or cost-effective manner, which would impede our ability to meet current
or increasing production levels in line with our customer expectations and adversely affect our ability to grow revenue or maintain our
current margin levels.

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

 Our
ability to fulfill our backlog may be limited by our ability obtain material supplies and to devote sufficient financial and human capital
resources. Disruptions in our supply chain and transportation delays, combined with inflationary pressures and tight labor market conditions
could impede our ability to meet customer requirements. If we do not fulfill our backlog in a timely manner, we may experience delays
in product delivery which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable
to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable
that we can effectively manage our backlog.

 We
do not have employment agreements with our key personnel, other than our Chief Executive Officer, Chief Financial Officer, and President
and our management has minimal unencumbered equity ownership in us. If we are not able to retain our key personnel or attract additional
key personnel as required, we may not be able to implement our business plan and our results of operations could be materially and adversely
affected.

 We
depend to a large extent on the abilities and continued participation of our executive officers and other key employees. The loss of
either executive officer or any other key employee could have a material adverse effect on our business. We currently have only two employment
agreements. We presently maintain "key man" insurance on the Chief Executive Officer. We believe that experienced personnel
will continue to be required to implement our business plan. Competition for such personnel is intense, and we cannot assure you that
they will be available when required, or that we will have the ability to attract and retain them. In addition, due to our small size,
we do not presently have depth of staffing in our executive, operational and financial management areas in order to have an effective
succession plan should the need arise. Thus, in the event of the loss of one or more of our management employees, our results of operations
could be vulnerable to challenges associated with recruiting additional key personnel.

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

 We
expect recent supply chain disruptions driven by Russia's invasion of Ukraine and the related sanctions, combined with raw material
shortages, labor shortages, and transportation delays, to continue for the foreseeable future. These conditions have strained our suppliers
and extended supplier delivery lead times, affecting their ability to sustain operations. We have experienced market wide material shortages
for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we have seen substantial
increases in the costs of aluminum, steel and acrylic commodities and experienced supplier schedule delays for other key components which
were driven by supplier labor and material shortages. In several cases, spotty supply and material shortages have resulted in stocking
higher inventory "safety stock" levels to ensure adequate lead time to replenish critical supplies.

 We
have selectively single-sourced some of our material components in order to mitigate excess procurement costs associated with significant
tooling and startup costs. Furthermore, because of the nature of government contracts, we are often required to purchase selected items
from U.S. government approved suppliers, which may further limit our ability to utilize multiple supply sources for these key components.

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

 Each
contract has a specific quantity of material which needs to be purchased, assembled, and shipped. Prior to bidding on a contract, we
contact potential sources of material and receive qualified quotations for this material. In some cases, the entire volume is given to
a single supplier and in other cases, the volume might be split between several suppliers.

 If
a contract has a single source supplier and that supplier fails to meet their obligations (e.g., quality, delivery), then we would seek
to find an alternate supplier and bring this information back to the final customer. Contractual deliverables would then generally be
re-negotiated (e.g., specifications, delivery, price). As of September 28, 2025, approximately 83% of our material requirements were single-sourced
across 104 suppliers representing approximately 96% of our active supplier order values. Single-sourced component requirements span across
all of our major product lines.

 We
consider it a material financial or schedule risk if we believe it will take us at least three months to identify and qualify a suitable
replacement for specialized single source suppliers. In the table below, we identify those specialized single source suppliers with respect
to which we face such a material risk and the product lines supported by those materials utilized by us as of September 28, 2025.

 Line

 Supply
 Item

 Risk

 Purchase
 Orders

 Sighting
 Systems DDAN

 Digital
 camera system

 Alternative
 source would take in excess of six months to qualify

 firm fixed price & quantity purchase orders are in place with the supplier to meet all contractual requirements.

 Steel
 castings

 Several suppliers qualified and vetted. Risk is overloading current supplier capacity.

 firm fixed price & quantity purchase orders are in place with the supplier to meet all contractual requirements.

 Vision
 Blocks

 Military
 Spec welded housings for vision blocks

 Would
 take approximately 8-10 months to re-qualify a new supplier source.

 Currently
 working with single source for purchasing material on a forecast projection basis.

 Vision
 Blocks

 Large/Small/Customs
 Blocks

 Would
 take approximately 4-6 months to re-qualify a new supplier source.

 Currently
 working with single source for purchasing material on a forecast projection basis

 MRS

 Aluminum
 Castings for Housing

 Would take approximately six months to re-qualify a new supplier source and cost/time for new tooling. Looking at investment
 castings (3D printing) as mitigation.

 Currently,
 ordering for a single source, new casting tool and FAT will be required to qualify a new source.

 Big
 Eye

 Sand
 castings for big eye binocular parts

 Would take approximately six months to re-qualify a new supplier source and cost/time for new tooling. Looking at investment
 castings (3D printing) as mitigation.

 firm fixed price & quantity purchase orders are in place with the supplier to meet all contractual requirements.

 Beamsplitter

 Glass
 tight dimensions and Special Coating

 Limited
 number of suppliers that can meet tight customer specifications without deviation

 firm fixed price & quantity purchase orders are in place with the supplier to meet all contractual requirements.

 M22/M24
 Binocular

 Spare
 Components

 Sole
 source provider. Only approved source due to proprietary rights. Alternate source cannot be developed.

 firm fixed price and quantity purchase orders are in place with the supplier to meet all contractual requirements. Supplier is on
 schedule.

 LIF
 Assembly

 Container
 Wrench and Retaining Ring

 Mold
 tooling was manufactured by and used by one source. Tooling would not fit other potential supplier's equipment. Finding another
 source would be very expensive and take approximately 1 year to transition

 firm fixed price and quantity purchase orders are in place with the supplier to meet all contractual requirements. Supplier is on
 schedule.

 LIF
 Assembly

 Rubber
 Seal

 Mold
 tooling was manufactured by and used by one source. Tooling would not fit other potential supplier's equipment. Finding another
 source would be very expensive and take approximately 1 year to transition

 firm fixed price and quantity purchase orders are in place with the supplier to meet all contractual requirements. Supplier is on
 schedule.

 Assorted
 LFU Assemblies

 Anti-Reflective
 Device

 Sole
 source provider. Only one approved government source of supply at this time

 firm fixed price and quantity purchase orders are in place with the supplier to meet all contractual requirements. Supplier is on
 schedule.

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

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

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

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

 We
rely on the proper function, availability and security of information technology systems to operate our business and a cyber-attack or
other breach of these systems could have a material adverse effect on our business, financial condition or results of operations.

 We
rely on information technology systems to process, transmit, and store electronic information in our day-to-day operations. Similar to
other companies, the size and complexity of our information technology systems make them vulnerable to a cyber-attack, malicious intrusion,
breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment
of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes
in information processing technology, evolving systems and regulatory standards.

 On
July 13, 2021, we experienced a ransomware attack. While that attack did not have material adverse consequences, similar attacks, if
not caught and effectively addressed in a timely manner, could have a material adverse effect on our business, financial condition and
results of operations.

 Any
failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions
or other breaches, could result in the unauthorized access to personally identifiable information, theft of intellectual property or
other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. Any
of these events may cause us to have difficulty preventing, detecting, and controlling fraud, be subject to legal claims and liability,
have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of
a data privacy breach or theft of intellectual property, or suffer other adverse consequences, any of which could have a material adverse
effect on our business, financial condition or results of operations.

 We
derive almost all of our revenue from a small number of customers and the loss of any of these customers could have a material adverse
effect on our revenues.

 The
Company's revenues for fiscal year ended September 28, 2025 were derived from sales to U.S. government agencies (29%), four major
U.S. defense contractors (19%, 10%, 6% and 6%) and all other customers (30%). Approximately 95% of total Company revenue is generated
from domestic customers and 5% is derived from foreign customers. In particular, a decision by one of our major defense contract customers,
U.S. government agencies or other major customers to cease issuing contracts to us could have a significant material impact on our business
and results of operations given that they represent over 70% of our gross business revenue. There can be no assurance that we could replace
these customers on a timely basis or at all.

 We
have approximately 120 discrete contracts with major defense contractors, the U.S. government (primarily Defense Logistics Agencies (DLA)),
and other prime U.S. defense contractors. If they choose to terminate these contracts, we are entitled to fully recover all contractual
costs and reasonable profits incurred up to or as a result of the terminated contract.

 We
possess only eight patents and rely primarily on trade secrets to protect our intellectual property.

 We
utilize several highly specialized and unique processes in the manufacture of our products, for which we rely solely on trade secrets
to protect our innovations. We cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our
non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or other disclosure. The non-disclosure agreements that are designed to protect our trade secrets
could be breached, and we might not have adequate remedies for the breach. It is also possible that our trade secrets will otherwise
become known or independently developed by our competitors, many of which have substantially greater resources than us, and these competitors
may have applied for or obtained, or may in the future apply for or obtain, patents that will prevent, limit or interfere with our ability
to make and sell some of our products. Although based upon our general knowledge (and we have not conducted patent searches), we believe
that our products do not infringe on the patents or other proprietary rights of third parties; however, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will not be successful.

 We
may need to raise additional capital in the future beyond any cash flow from our existing business; additional funds may not be available
on terms that are acceptable to us, or at all.

 We
may need to raise additional capital in the future to finance our future working capital needs. We cannot assure you that any additional
capital will be available on a timely basis, on acceptable terms, or at all. Future equity or debt financings may be difficult to obtain.
If we are not able to obtain additional capital as may be required, our business, financial condition and results of operations could
be materially and adversely affected.

 We
anticipate that our capital requirements will depend on many factors, including:

 our
 ability to fulfill backlog;

 our
 ability to procure additional production contracts;

 our
 ability to control costs;

 the
 timing of payments and reimbursements from government and other contracts, including but not limited to changes in federal government
 military spending and the federal government procurement process;

 increased
 sales and marketing expenses;

 technological
 advancements and competitors' response to our products;

 capital
 improvements to new and existing facilities;

 our
 relationships with customers and suppliers; and

 general
 economic conditions including the effects of future economic slowdowns, acts of war or terrorism and the current international conflicts.

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

 Risks
Related to our Credit Facility and Liquidity

 Our
level of debt and restrictions in our credit agreement could negatively affect our operations and limit our liquidity and our ability
to react to changes in the economy.

 Our
Loan Agreement with Texas Capital Bank contains restrictive covenants that require us to maintain a fixed charge coverage ratio of at
least 1.25:1 and a total leverage ratio of 3.00:1, which we may fail to meet if there is a material decrease in our profitability or
liquidity. In addition, the Loan Agreement contains restrictive covenants governing indebtedness, liens, fundamental changes (including
changes in management), investments, and restricted payments (including cash dividends). The borrowings under the Loan Agreement are
secured by substantially all of our operating assets as collateral.

 A
breach of any of the restrictions and covenants could result in a default under our Loan Agreement, which, if not cured or waived, could
cause any outstanding indebtedness under the agreement (or under any future financing arrangements) to become immediately due and payable,
and result in the termination of commitments to extend further credit. We may not have sufficient funds on hand to repay the loan, and
if we are forced to refinance these borrowings on less favorable terms, or are unable to refinance at all, our results of operations
and financial condition could be materially adversely affected by increased costs and rates.

 If
our debt level significantly increases in the future, it could have significant consequences on our ongoing operations including requiring
us to dedicate a significant portion of our cash flow from operations to servicing debt rather than using it to execute our strategic
initiatives; limiting our ability to obtain additional debt financing for future working capital, capital expenditures, or other worthwhile
endeavors; and limiting our ability to react to changes in the market.

 Risks
Related to Our Stock

 Our
stock typically trades in low volumes daily which could lead to illiquidity, volatility, or depressed stock price.

 Our
stock is listed on Nasdaq, but typically trades in low daily volumes. Because of a history of low trading volume, our stock is relatively
illiquid and its price may be volatile. This may make it more difficult for our stockholders to resell shares when desired or at attractive
prices. Some investors view low-volume stocks as unduly speculative and therefore not appropriate candidates for investment. Also, due
to the low volume of shares traded on any trading day, persons buying or selling in relatively small quantities may easily influence
prices of our stock.

 Any
analysts covering our stock could negatively impact the stock price.

 The
trading market for our common stock will likely be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market or our competitors. If any such analysts downgrade their evaluation of our stock, the price of our
stock could decline. Furthermore, if our operating results fail to meet analysts' expectations, our stock price would likely decline.

 Our
stock price has been and will likely continue to be extremely volatile, and, as a result, stockholders may not be able to resell shares
at or above their purchase price, and we may be more vulnerable to securities class action litigation.

 Since
our common stock was listed on Nasdaq in March 2023, our stock price, as reported by Nasdaq, has ranged from a low of $2.87 to a high
of $17.76. As a result, the market price and trading volume of our common stock is likely to be similarly volatile in the future, and
investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases
unrelated to our results of operations or prospects, and could lose part or all of their investment.

 In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has
often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities
litigation in the future. If we were to become involved in securities litigation, it could result in substantial costs, divert management's
attention and resources from our business and adversely affect our business.

 We
are a " smaller reporting company " as defined in SEC regulations, and a "baby shelf" issuer based on our public float, which may make our common stock less attractive to investors
due to the reduced disclosure requirements of smaller reporting companies and certain limitations on our ability to raise capital as a
"baby shelf" issuer.

 We
are a "smaller reporting company" as defined under SEC regulations and we may, and do, take advantage of certain exemptions
from reporting requirements that are applicable to other public companies that are not smaller reporting companies including, among other
things, reduced financial disclosure requirements including being permitted to provide only two years of audited financial statements
and reduced disclosure obligations regarding executive compensation. As a result, our stockholders may not have access to certain information
that they may deem important. We could remain a smaller reporting company indefinitely. As a smaller reporting company, investors may
deem our stock less attractive and, as a result, there may be less active trading of our common stock, and our stock price may be more
volatile.

 We have a public float of less than $75 million, which
classifies us a "baby shelf" issuer. Our status as a "baby shelf" issuer limits our ability to raise significant
equity capital under a shelf registration statement in a public offering and may restrict our financing options and flexibility. These
constraints could lead to higher costs and potential delays in accessing additional capital.

 General
Risk Factors

 Changes
in current economic conditions may adversely affect our ability to continue operations.

 Changes
in current economic conditions may cause a decline in business, consumer and defense spending and capital market performance, which could
adversely affect our business and financial performance. Our ability to raise funds, which could be required for business continuity
or expansion of our operations, may be adversely affected by current and future economic conditions, such as a reduction in the availability
of credit, financial market volatility and economic recession.

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

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

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

 We
provide indemnification to our directors and officers to the extent provided by Delaware law. The foregoing indemnification obligation
could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors
and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders
against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.

 Our
stock price is speculative, and there is a risk of litigation.

 The
trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as
the following:

 revenue
 or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;

 speculation
 in the press or investment community;

 wide
 fluctuations in stock prices, particularly with respect to the stock prices for other defense industry companies;

 announcements
 of technological innovations by us or our competitors;

 new
 products or the acquisition of significant customers by us or our competitors;

 changes
 in investors' beliefs as to the appropriate price-earnings ratios for us and our competitors;

 changes
 in management;

 sales
 of common stock by directors and executive officers;

 rumors
 or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and other rapid-dissemination
 methods;

 conditions
 and trends in the defense industry generally;

 the
 announcement of acquisitions or other significant transactions by us or our competitors;

 adoption
 of new accounting standards affecting our industry;

 general
 market conditions;

 domestic
 or international terrorism and other factors; and

 other
 factors as described in this section.

 Fluctuations
in the price of our common stock may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently
pending against us and we are not aware that any such lawsuit is threatened to be filed in the future, there is no assurance that we
will not be sued based on fluctuations in the price of our common stock. Defending against such suits could result in substantial cost
and divert management's attention and resources. In addition, any settlement or adverse determination of such lawsuits could subject
us to significant liability.

 Item
1C. Cybersecurity

 Cybersecurity
Risk Management and Strategy

 We
recognize the increasing volume and sophistication of cyber threats and take our responsibility to protect the information and systems
under our purview seriously. We consider cybersecurity threat risks alongside other Company risks as part of our overall risk assessment
process. Our cybersecurity processes aim to provide a comprehensive approach to assess, identify, manage, mitigate, and respond to cybersecurity
threats.

 We
maintain a cybersecurity risk program predicated on a risk-based approach. We use cost-effective controls that are commensurate with
the risk and sensitivity of our specific information systems, control systems and enterprise data. Our cybersecurity program incorporates
best practices and industry standards from multiple sources and is designed to comply with applicable regulations. The cybersecurity
program includes, but is not limited to, the following elements: risk assessment, policies and procedures, training and awareness, auditing,
log collection and analysis, threat hunting and intelligence surveillance, compliance monitoring and testing, and incident response.

 Our
internal professionals collaborate with external subject matter specialists, as necessary. All third parties engaged for such matters
are subjected to scrutiny to ensure they satisfy our security standards. We periodically review our third-party engagements to ensure
that the providers maintain the necessary levels of protection and competency, as well as to oversee and identify potential cybersecurity
risks and/or threats from such engagements.

 We
describe how risks from cybersecurity threats could materially affect us, including our business strategy, results of operations, or
financial condition, as part of our risk factor disclosures at Part I, Item 1A, "Risk Factors" of this Annual Report on Form
10-K.

 Cybersecurity
Governance

 Cybersecurity
is an important part of our risk management processes and an area of focus for our Board
and management. Our Board is responsible for oversight of our cybersecurity risk, including the effectiveness of cybersecurity risk management
policies and protocols, while our FSO and IT Manager are responsible for assessing and managing cybersecurity risk. We use a third-party
service which monitors the Company's security threats twenty-four hours each day throughout the year. Any detected deviation from
the expected operating parameters will initiate a communication to our IT Manager for investigation and remediation of the detected deviation
in a timely manner. Our IT Manager has over 30 years of IT and cybersecurity experience.

 Our
IT Manager provides timely reports on cyber security incidents to the FSO, Danny Schoening, who also serves as the Chief Executive Officer
and as Chairman of the board of directors. These reports may in turn be presented to the full board depending on the severity of the
incident. In the event of a major incident, the Company's Incident Response policy will be executed and the appropriate parties
notified.

 Item
2. Properties

 We
are headquartered in Richardson, TX and lease approximately 93,967 combined square feet of facilities between Richardson, Texas and Dallas,
Texas. We operate with a single shift, and capacity could be expanded by adding a second shift.

 We
renewed the lease on our 49,100 square foot, Richardson, Texas facility, which houses our Optex Richardson segment and our corporate
headquarters, effective as of January 11, 2021, for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028.
Our Applied Optics Center, which houses our AOC segment, is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space.
The Applied Optics Center lease was renewed on January 11, 2021 for eighty-six (86) months, commencing on November 1, 2021 and
ending on December 31, 2028. The Applied Optics Center amendment provides for a five-year renewal option at the end of the lease
term at the greater of the then "prevailing rental rate" or the then current base rent rate.

 Item
3. Legal Proceedings

 From
time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving
patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact
on our business, results of operations, financial condition or cash flows.

 Item
4. Mine Safety Disclosures

 Not
applicable.

 PART
II

 Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Market
information

 Our
common stock is listed on the Nasdaq Capital Market under the symbol "OPXS".

 On
December 16, 2025, the closing price for our common stock was $14.31 per share.

 Securities
outstanding and holders of record

 On December 16, 2025, there were approximately 87 shareholders of record
for our common stock and 6,937,358 shares of our common stock issued and outstanding.

 Dividends

 We
have in the past paid dividends but we have no plans to do so in the foreseeable future.

 Unregistered
Sales of Equity Securities

 Effective
August 11, 2025, the Board granted Chad George 10,000 shares of restricted stock in connection with Mr. George's appointment as
President of the Company. The shares will vest on January 1, 2026. The grant was exempt from registration under the Securities Act in
reliance on Section 4(a)(2) and Rule 506 thereunder.

 Issuer
Purchases of Equity Securities

 There
were no purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) of its
common stock under the Exchange Act) during the three months ended September 28, 2025.

 Item
6. Reserved

 Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 The
following discussion should be read in conjunction with the consolidated financial statements and the related notes that are set forth
in our financial statements elsewhere in this Annual Report.

 This
management's discussion and analysis reflects information known to management as of our fiscal year end, September 28, 2025, and
the date of filing. This MD&A is intended to supplement and complement our audited financial statements and notes thereto for the
year ended September 28, 2025, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to
read our financial statements in conjunction with 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 a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP
measures 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.

 All
references in the following section to 2024 or 2025 with respect to our financial position and results of operations are to our fiscal
years ended September 29, 2024 or September 28, 2025, respectively.

 Background

 Our
wholly-owned subsidiary, Optex Systems, Inc., manufactures optical sighting systems and assemblies, primarily for DoD applications. Its
products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles and light armored
and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. also manufactures
and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc.
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 revenue is related to the 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.

 We
are both a prime and sub-prime contractor to the DoD. Sub-prime contracts are typically issued through major defense contractors such
as General Dynamics Land Systems, Raytheon Corp., BAE, ADS Inc. and others. We are also a military supplier to foreign governments such
as Israel, Australia and South American countries and a subcontractor for several large U.S. defense companies serving foreign governments.

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

 Many
of our contracts are prime or subcontracted directly with the U.S. federal government and, as such, are subject to FAR 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 material
pending terminations for convenience or for default on our existing contracts.

 In
the event a termination for convenience were to occur, FAR clause 52.249-2 provides for full recovery of all contractual costs and profits
reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could
be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us.
We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without
the fault or negligence of the Company as defined by FAR clause 52.249-8.

 Material
Trends and Recent Developments

 The
Optex Richardson segment has numerous fixed price multi-year contracts covering delivery periods up to five years from the contract
award. Approximately 4% of our Optex Richardson segment backlog are for items priced prior to fiscal year 2021. Since fiscal year
2021, we have experienced substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected the
Optex Richardson segment margins for deliveries against those orders during the year ended September 28, 2025 and which is expected
to continue to have a negative effect through the first fiscal quarter of 2026. See also " Item 1A. Risk Factors –
Risks Related to Our Business - Certain of our products are dependent on specialized sources of supply potentially subject to
disruption which could have a material, adverse impact on our business."

 We
experienced significant material shortages during the first half of fiscal year 2024 from several significant suppliers of our
periscope covers and housings. These shortages affected several of our periscope products at the Optex Richardson segment. The
delays in key components, combined with labor shortages experienced in fiscal year 2023, negatively impacted our production levels
and pushed the delivery dates of several of our contracts into fiscal year 2025 and early fiscal year 2026. We have obtained an
alternative source for one of our key components and expedited our other suppliers to support the increased production
levels.

 We
have seen improvements in the local labor market since fiscal year 2023 and increased our direct labor force and employee overtime
in concert with improvements in our supplier delivery performance. Further, we have invested in additional machinery and equipment
and other process improvements to increase production capacity and alleviate process bottlenecks. During the 2025 fiscal year, we
increased our periscope production levels by 56% over the 2024 fiscal year levels.

 We
currently do not anticipate any significant material risks as a result of the recent tariff uncertainties. Our defense products are primarily
sourced domestically, but those which are imported are primarily duty free. We produce some commercial optical assemblies with selective
components sourced from Taiwan; however, our existing customer backlog is covered with existing material in inventory. We anticipate
any future orders for these commercial products will have updated pricing inclusive of any tariff impact.

 We
refer also to " Item 1. Business – Market Opportunity: U.S. Military " for a description of current trends in
U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included
in that section and disclosure on the significant reduction in spending for U.S. ground system military programs, in combination with
the U.S. government shutdown and CR which has a direct impact on the Optex Richardson segment revenue, all of which

 We
refer to " Item 1. Business – Recent Events " of this report for recent developments affecting the Company.

 Results
of Operations by Segment

 We
have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results. Management
of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations and to
allocate resources within the organization accordingly. Segments are determined based on differences in products, location, internal
reporting and how operational decisions are made. Management has determined that the Optex Richardson plant and the Applied Optics Center,
Dallas plant, which was acquired on November 3, 2014 (to which we refer below as the Applied Optics Center segment or Applied Optics
Center), are separately managed, organized, and internally reported as separate business segments. The table below provides a summary
of selective statement of operations data by operating segment for the years ended September 29, 2024 and September 28, 2025 reconciled
to the Audited Consolidated Results of Operations as presented in Item 8, "Financial Statements and Supplementary Data".

 Results
of Operations Selective Financial Info

 Optex Systems

 Other
 (non-

 Optex Systems

 Applied Optics

 Other
 (non-

 Revenue from External Customers

 $

 $
 17,576

 $
 -

 $

 $

 $
 15,824

 $
 -

 $

 Intersegment Revenues

 -

 1,157

 (1,157
)

 -

 -

 1,042

 (1,042
)

 -

 Total Segment Revenue

 18,733

 (1,157
)

 16,866

 (1,042
)

 Total Cost of Sales

 17,699

 12,738

 (1,157
)

 29,280

 14,401

 11,107

 (1,042
)

 24,466

 Gross Profit

 6,062

 5,995

 -

 12,057

 3,770

 5,759

 -

 9,529

 Gross Margin %

 25.5
 %

 32.0
 %

 -

 29.2
 %

 20.7
 %

 34.1
 %

 -

 28.0
 %

 General and Administrative Expense

 3,771

 4,925

 3,630

 4,708

 Segment Allocated G&A Expense

 (1,356
)

 1,356

 -

 -

 (1,486
)

 1,486

 -

 -

 Net General & Administrative Expense

 2,415

 2,127

 4,925

 2,144

 2,139

 4,708

 Operating Income (Loss)

 3,647

 3,868

 (383
)

 7,132

 1,626

 3,620

 (425
)

 4,821

 Operating Income (Loss) %

 15.3
 %

 20.6
 %

 -

 17.3
 %

 8.9
 %

 21.5
 %

 -

 14.2
 %

 (804
)

 -

 -

 (804
)

 -

 -

 -

 -

 Interest Income (Expense)

 -

 -

 -

 -

 (47
)

 (47
)

 Income (Loss) before taxes

 $
 2,843

 3,868

 (360
)

 6,351

 $
 1,626

 3,620

 (472
)

 4,774

 Income (loss) before taxes %

 12.0
 %

 20.6
 %

 -

 15.4
 %

 8.9
 %

 21.5
 %

 -

 14.0
 %

 Our
total external revenues increased by $7.3 million for the 2025 fiscal year, or 21.6%, compared to the 2024 fiscal year. The Optex
Richardson segment realized a $5.6 million, or 30.8% increase, and the Applied Optics Center segment realized an increase of $1.8
million, or 11.1%, in external revenue compared to the prior year period. Intersegment revenues were $1.2 million for the 2025
fiscal year and $1.0 million for the 2024 fiscal year. Intersegment revenues relate primarily to coated filters provided by the
Applied Optics Center to Optex Richardson in support of the Optex Richardson periscope line.

 Gross profit increased $2.5 million, and the gross
margin percentage increased by 1.2 points from 28.0% for the 2024 fiscal year to 29.2% for the 2025 fiscal year. Optex Richardson gross
profit increased by $2.3 million and the gross margin percentage increased to 25.5% for the 2025 fiscal year from 20.7% for the prior
year. The gross profit and gross margin percentage increases were primarily attributable to improved manufacturing overhead rates as the
fixed costs were spread across a higher revenue base. Applied Optics Center's gross profit increased by $0.2 million and the gross
margin percentage decreased to 32.0% for the 2025 fiscal year from 34.1% for the prior year period. The gross profit percentage decrease
at the Applied Optics Center was attributable to changes in mix combined with increased costs for warranties and gold with respect to
our Day Window products.

general and administrative costs increased from $4.7 million for the twelve months ended September 29, 2024 to $4.9 million for the twelve
months ended September 28, 2025. General and administrative costs increased $0.2 million due to increased royalties and selling expenses
of $0.1 million, increased labor and fringe costs of $0.1 million and increased information technology costs of $0.1 million, offset by
decreased investor relation expenses of $0.1 million. During the fiscal years 2025 and 2024, Applied Optics Center absorbed $1.4 million
and $1.5 million, respectively, of fixed general and administrative costs incurred by Optex Richardson for support services. These expenses
cover accounting, executive, human resources, information technology, board fees and other corporate expenses paid by Optex Richardson
and shared across both operating segments.

operating income increased by $2.3 million in the year ended September 28, 2025 to $7.1 million as compared to the prior fiscal year
operating income of $4.8 million. Operating income increased as a result of higher revenues and increased gross profit as compared
to the prior fiscal year.

 Income
before taxes increased $1.6 million, to $6.4 million in the 2025 fiscal year from a prior fiscal year income before taxes of $4.8
million as a result of higher operating income offset by $0.8 million in asset impairment.

 New
Orders and Backlog

backlog represents the value of unfulfilled customer manufacturing orders yet to be recognized as revenue. While backlog is not a non-GAAP
financial measure, it is also not defined by GAAP. Therefore, our methodology for calculating backlog may not be consistent with methodologies
used by other companies. The booked backlog by period may also not be fully indicative of the predicted revenues for those periods as
many of our orders provide for accelerated delivery without penalty and may additionally provide customers the option to adjust schedules
to meet their most recent projected demand quantities. However, we provide customer order and backlog information as we believe it provides
significant insight into forward demand, with some predictive power to short term future revenues.

the twelve months ended September 28, 2025, the Company booked $36.2 million in new orders, representing a 0.5% decrease from the prior
year period orders of $36.4 million. The orders for the most recently completed twelve months consist of $21.3 million for our Optex
Richardson segment and $14.9 million attributable to the Applied Optics Center segment.

 The
following table depicts the new customer orders for the twelve months ending September 28, 2025 as compared to the prior year period
in millions of dollars:

 (Millions)

 Product Line

 Twelve months ended September 28, 2025

 Twelve months ended September 29, 2024

 Variance

 % Chg

 $
 11.5

 $
 19.9

 $
 (8.4
)

 (42.2
)

 Sighting Systems

 3.3

 0.4

 2.9

 725.0

 Howitzer

 -

 -

 -

 -

 Other

 6.5

 3.2

 3.3

 103.1

 Optex Systems – Richardson

 21.3

 23.5

 (2.2
)

 (9.4
)

 Optical Assemblies

 1.0

 1.8

 (0.8
)

 (44.4
)

 Laser Filters

 10.2

 9.2

 1.0

 10.9

 Day Windows

 0.9

 0.1

 0.8

 800.0

 Other

 2.8

 1.8

 1.0

 55.6

 Applied Optics Center – Dallas

 14.9

 12.9

 2.0

 15.5

 Total Customer Orders

 $
 36.2

 $
 36.4

 $
 (0.2
)

 (0.5
)

the year ended September 28, 2025, orders in the Company's Optex Richardson segment decreased by $2.2 million, or 9.4%, as
compared to the prior year. The decrease in orders was primarily driven by lower customer demand for periscopes, mostly offset by
increased demand for sighting system and other products. During the twelve months ended September 28, 2025, the Company experienced
a 42.2%, or $8.4 million reduction in military periscope orders as compared to the prior year twelve-month period. During the year
ended September 28, 2025, Applied Optics Center orders increased by $2.0 million, or 15.5%, on increased customer demand for laser
filters, day windows and other products, offset by lower demand for our commercial optical assemblies.

 The
Optex Richardson segment currently has four open US Government IDIQ type military contracts for periscopes, vision blocks and
collimators with unspent funding which covers base year and option year requirement ordering periods into July 2030. During the 2025
fiscal year, approximately 31% of Optex Richardson's segment orders, or $6.7 million, were awards against active IDIQ
contracts. We anticipate additional orders throughout the next five years for these ongoing contracts. In addition, the Company has
an active bid request for a new multi-year IDIQ contract pending with the U.S. government for additional periscopes and infrared
filter assemblies that are expected to be awarded in the next three to six months. The Applied Optics Center has no open US
government IDIQ orders.

as of September 28, 2025 was $39.1 million as compared to a backlog of $44.2 million as of September 29, 2024, representing a decrease
of 11.5%. The following table depicts the current expected delivery by quarter of all contracts awarded as of September 28, 2025, as
well as the September 28, 2025 backlog as compared to the backlog on September 29, 2024.

 (Millions)

 Product Line

 Q1
 2026

 Q2
 2026

 Q3
 2026

 Q4
 2026

 2026
 Delivery

 2027+
 Delivery

 Total
 9/28/2025

 Total
 9/29/2024

 Variance

 %
 Chg

 $
 4.2

 $
 3.1

 $
 2.7

 $
 1.3

 $
 11.3

 $
 3.7

 $
 15.0

 $
 22.7

 $
 (7.7
)

 (33.9
)

 Sighting Systems

 0.4

 2.2

 1.4

 0.9

 4.9

 0.7

 5.6

 3.8

 1.8

 47.4

 Howitzer

 -

 -

 -

 -

 -

 2.3

 2.3

 2.3

 -

 -

 Other

 0.6

 0.4

 2.5

 1.6

 5.1

 1.4

 6.5

 3.0

 3.5

 116.7

 Optex Systems – Richardson

 5.2

 5.7

 6.6

 3.8

 21.3

 8.1

 29.4

 31.8

 (2.4
)

 (7.5
)

 Optical Assemblies

 0.1

 -

 -

 -

 0.1

 -

 0.1

 0.7

 (0.6
)

 (85.7
)

 Laser Filters

 2.5

 1.7

 1.0

 1.0

 6.2

 1.1

 7.3

 9.5

 (2.2
)

 (23.2
)

 Day Windows

 0.4

 0.2

 0.2

 0.1

 0.9

 0.1

 1.0

 1.1

 (0.1
)

 (9.1
)

 Other

 0.7

 0.4

 -

 0.1

 1.2

 0.1

 1.3

 1.1

 0.2

 18.2

 Applied Optics Center – Dallas

 3.7

 2.3

 1.2

 1.2

 8.4

 1.3

 9.7

 12.4

 (2.7
)

 (21.8
)

 Total Backlog

 $
 8.9

 $
 8.0

 $
 7.8

 $
 5.0

 $
 29.7

 $
 9.4

 $
 39.1

 $
 44.2

 $
 (5.1
)

 (11.5
)

 Optex
Systems - Richardson

 At
September 28, 2025, backlog for our Optex Richardson segment was 7.5%, or $2.4 million lower than the prior fiscal year backlog of $31.8 million.

for our periscope product line for our 2025 fiscal year was 33.9% or $7.7 million lower than our 2024 fiscal year end level,
primarily on lower customer demand during the twelve-month period. We believe the reduced demand is partially related to the delay
in the award of ARC III Abrams replenishment contracts to the prime contractors, which had been anticipated in early 2025.

 Fiscal year end 2025 sighting
systems backlog increased 47.4%, to $5.6 million, from our 2024 fiscal year end level of $3.8 million.
The primary reason for the increase in backlog relates to a new $2.8 million purchase order from a major U.S. prime contractor in support
of the XM30 Combat Vehicle. This contract will provide 13 sighting systems with deliveries in the 2026 fiscal year. The XM30 backlog increase
was partially offset by deliveries of refurbished units against the night vision equipment program for the Government of Israel. The
current order Israeli order is expected to complete within the next twelve months and includes an option for an additional quantity up
to 100% of the original contract. We anticipate the option to be exercised in the next twelve months.

 The
Howitzer contract awarded in July 2020 continues to experience customer driven delays related to customer furnished materials. This program
is currently on hold pending statement of work changes and materials furnished by the customer. We anticipate deliveries against the
Howitzer contract to begin in fiscal year 2027.

 Our
backlog in other product groups increased by $3.5 million, or 116.7%, from $3.0 million at fiscal year end 2024 to $6.5 million at
fiscal year end 2025, primarily due to the award of a $4.3 million order for MRS collimator assemblies against a five-year
requirement-type contract by the Army Contracting Command - Detroit Arsenal.

Optics Center – Dallas

 The
Applied Optics Center backlog decreased by $2.7 million, or 21.8%, for the year ended September 28, 2025, from $12.4 million in
fiscal year 2024 to $9.7 million in fiscal year 2025. The majority of this reduction is due the delay in award for the BNVG Night
Vision Goggle program.

for our optical assemblies decreased by $0.6 million, or 85.7%, during the 2025 fiscal year, compared to prior fiscal year-end
backlog on lower customer demand for commercial optical assemblies. We anticipate new orders during the next three to six months for
deliveries in fiscal year 2026.

 Laser
filter backlog decreased by $2.2 million, or 23.2%, during the 2025 fiscal year due to the timing of customer orders versus customer
delivery schedule. Our laser filter orders increased 10.9%, or $1.0 million, during the 2025 fiscal year as compared to the prior
year, but were below the pace of our 2025 fiscal year shipments. We are anticipating additional orders over the next six months for
shipment during the 2026 fiscal year.

 Day
window backlog decreased by $0.1 million, or 9.1%, during the 2025 fiscal year primarily due to lower customer demand. We anticipate
additional orders over the next twelve months.

 Other
Applied Optics Center backlog increased by $0.2 million, or 18.2% during the 2025 fiscal year on increased customer orders on for
our specialty coatings products.

 Please
refer to " Material Trends and Recent Events " above or " Liquidity and Capital Resources " below for
more information on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by
reference.

 The
Company continues to pursue domestic, international and commercial opportunities in addition to maintaining its current footprint with
U.S. vehicle manufactures, with existing as well as new product lines. We are also reviewing potential products outside our traditional
product lines. Further, we continue to look for strategic businesses to acquire that will strengthen our existing product line, expand
our operations, offer operational scale and enter new markets.

 Twelve
months ended September 28, 2025 compared to the twelve months ended September 29, 2024

 The
table below details the revenue changes by segment and product line for the year ended September 28, 2025 as compared to the year ended
September 29, 2024.

 Twelve
months ended

 (Millions)

 Product Line

 Variance

 % Chg

 $
 19.2

 $
 12.1

 $
 7.1

 58.7

 Sighting Systems

 1.5

 1.4

 0.1

 7.1

 Howitzers

 -

 -

 -

 -

 Other

 3.1

 4.7

 (1.6
)

 (34.0
)

 Optex Systems – Richardson

 23.8

 18.2

 5.6

 30.8

 Optical Assemblies

 1.6

 3.9

 (2.3
)

 (60.0
)

 Laser Filters

 12.4

 9.6

 2.8

 29.2

 Day Windows

 1.0

 0.7

 0.3

 42.9

 Other

 2.5

 1.6

 0.9

 56.3

 Applied Optics Center – Dallas

 17.5

 15.8

 1.7

 10.8

 Total Revenue

 $
 41.3

 $
 34.0

 $
 7.3

 21.6

 Our
total revenues increased by $7.3 million, or 21.6% in fiscal year 2025 compared to fiscal year 2024. The Optex Richardson segment realized
a $5.6 million, or 30.8%, increase in revenue and the Applied Optics Center segment realized an increase of $1.7 million, or 10.8%, in
revenue compared to the prior fiscal year.

 Optex
Systems - Richardson

on our periscope line increased $7.1 million, or 58.7%, for the twelve months ended September 28, 2025 compared to the twelve months
ended September 29, 2024 on higher production throughput. We have increased our direct labor force and employee overtime in concert with
improvements in our supplier delivery performance as well as invested in additional machinery and equipment and other process improvements
to increase production capacity and alleviate process bottlenecks. During the 2025 fiscal year, we increased our periscope production
levels by approximately 56% over the 2024 fiscal year levels.

on sighting systems increased by $0.1 million, or 7.1% from the prior fiscal year due to increased deliveries of refurbished units for
the night vision equipment program to the Government of Israel.

 Optex
Richardson revenue on other product lines decreased by $1.6 million, or 34.0%, compared to revenues in the prior fiscal year due to
lower customer demand for beamsplitters, unity mirrors, bonded mirrors, wedge prism assemblies and other spare parts.

Optics Center - Dallas

 Revenue
from optical assemblies decreased by $2.3 million, or 60.0%, for the twelve months ended September 28, 2025 as compared to the prior
twelve-month period on lower customer demand.

 Laser
filter revenue increased by $2.8 million, or 29.2%, for the twelve months ended September 28, 2025 as compared to the prior twelve-month
period on higher customer demand.

on our day windows increased by $0.3 million, or 42.9%, for the twelve months ended September 28, 2025 as compared to September 29, 2024
on higher customer orders.

Optics Center revenue for other product lines increased by $0.9 million, or 56.3%, for the twelve months ended September 28, 2025 as
compared to the prior twelve-month period on increased deliveries of binoculars over the prior
year combined with higher customer demand for specialty coatings.

 Gross
Margin. The gross margin for the year ended September 28, 2025 was 29.2% of revenue as compared to a gross margin of 28.0% of
revenue for the year ended September 29, 2024. Cost of sales increased by $4.8 million to $29.3 million for fiscal year 2025
compared to $24.5 million for fiscal year 2024. The gross profit increased by $2.5 million to $12.1 million in fiscal year 2025 as
compared to $9.5 million in fiscal year 2024. The increased gross profit as compared to the prior year is primarily driven by higher
revenue and product mix changes combined with improved manufacturing overhead rates as the fixed overhead costs are spread across a
significantly higher revenue base.

 G&A
Expenses. For the years ended September 28, 2025 and September 29, 2024, we recorded operating expenses of $4.9 million and $4.7
million, respectively. General and administrative costs increased $0.2 million, or 4.3%, during the fiscal year 2025 due to
increased royalties and selling expenses of $0.1 million, increased labor and fringe costs of $0.1 million and increased information
technology costs of $0.1 million offset by decreased investor relation expenses of ($0.1) million.

 Operating
Income. For the year ended September 28, 2025, we recorded operating income of $7.1 million as compared to operating income of $4.8
million during the year ended September 29, 2024. The $2.3 million increase in operating income is primarily due to increased gross profit
of $2.5 million, offset by an increase of ($0.2) million in general and administrative spending.

 Net
income applicable to common shareholders. During the year ended September 28, 2025, we recorded net income applicable to common shareholders
of $5.1 million as compared to net income applicable to common shareholders of $3.8 million during the year ended September 29, 2024.
The increase of net income of $1.3 million is primarily attributable to increased operating income of $2.3 million, offset by ($0.8) million
in asset impairment for our Speedtracker product line acquisition and increased federal income tax expense of ($0.2) million.

 Non
GAAP Adjusted EBITDA

 We
use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance
of our business as "net income" includes the significant impact of noncash compensation expenses related to equity stock
issues, as well as depreciation, amortization, interest expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful
indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before the excluded
items, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance
with, U.S. generally accepted accounting principles ("GAAP").

 Adjusted
EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This
non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate
Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative
measure.

 The
table below summarizes our twelve-month operating results for the periods ended September 28, 2025 and September 29, 2024, in terms of
both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure.

 2025

 2024

 Net Income — GAAP

 $
 5,147

 $
 3,768

 Add:

 Federal Income Tax Expense

 1,204

 1,006

 -

 Depreciation & Amortization

 Stock Compensation

 Interest (Income) Expense

 (23
)

 Adjusted EBITDA - Non GAAP

 $
 8,030

 $
 5,733

 Our
Adjusted EBITDA increased by $2.3 million to $8.0 million during the twelve months ended September 28, 2025 as compared to $5.7 million
during the twelve months ended September 29, 2024. The increase in EBITDA is primarily driven by increased revenue and gross profit.
Operating segment performance is discussed in greater detail throughout the previous sections.

 Liquidity
and Capital Resources

 As
of September 28, 2025, Optex Systems Holdings had working capital of $21.1 million, as compared to $15.1 million as of September 29,
2024. During the twelve months ended September 28, 2025, we generated operating cash of $6.9 million, primarily driven by increased net
income of $5.1 million, non-cash expenses of $1.7 million for depreciation and amortization, asset impairment and stock compensation,
and all other changes in other working capital of $0.1 million. During the twelve months ended September 28, 2025, we paid $1.0 million
against the credit facility and purchased capital assets of $0.5 million.

 As
of September 28, 2025, the Company had no outstanding capital commitments for the purchase of property and equipment. The Company plans
to spend $2.4 million in capital investment over the next twelve months to expand its current capacity as well as develop new capabilities
to expand into adjacent markets. Obsolete equipment will be replaced with new or upgraded systems to reduce downtime and drive capacity
improvements for both Optex Richardson and the Applied Optics Center. Also, new capabilities will be required to support new product lines at AOC, as well
as support the increased focus on research and rapid prototype development at Optex Richardson.

as of September 28, 2025 was $39.1 million as compared to a backlog of $44.2 million as of September 29, 2024, representing a decrease
of 11.5%. For further details, see " Results of Operations – New Orders and Backlog "
above.

 The
Company has historically funded its operations through cash from operations, convertible notes, common and preferred stock offerings
and bank debt. The Company's ability to generate positive cash flows depends on a variety of factors, including the continued development
and successful marketing of the Company's products.

 At
September 28, 2025, the Company had approximately $6.4 million in cash and no draws against its revolving credit line. Our cash balance
is split between current operating interest-bearing money market accounts based on our immediate working capital requirements.
As of September 28, 2025, $4.0 million of our cash balance was carried in a money market account with an annual interest rate of 3.84%.
For the twelve months ended September 28, 2025, the total interest income under such money market account was $35 thousand. As of September
28, 2025, our outstanding accounts receivable balance was $4.6 million, which has been collected during the first quarter of fiscal year
2026. During the first quarter of 2025, we paid $1.0 million against our credit facility bringing the balance to zero.

 We
refer to the disclosure above under " Material Trends and Recent Developments" with respect to recent supply chain
disruptions and material shortages, which disclosure is incorporated herein by reference.

 In
the short term, the Company plans to utilize its current cash, available line of credit and operating cash flow to fund inventory purchases
in support of the backlog growth and higher anticipated revenue during the next twelve months. Short term cash in excess of our working
capital needs may be also be used to fund the purchase of product lines and other assets. We may also repurchase common stock against
our current stock repurchase plan. Longer term, excess cash beyond our operating needs may be used to fund new product development, company,
product line or other asset acquisitions, or additional stock purchases as attractive opportunities present themselves.

 On
January 18, 2024, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker
Mach product line and entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. ("RUB").
The Company acquired the assets using $1 million cash on hand, with potential additional future cash payments based on successful completion
of defined milestones. The initial term of the contract manufacturing agreement was one year, subject to additional one-year renewal
terms. After the acquisition, the Company determined it would be more economical to move the manufacturing operations in house and is
no longer ordering assembled units under the original contract manufacturing agreement. RUB will continue to provide the Company with
purchased kit parts for the manufacture of the Speedtracker Mach products.

 The
acquisition included transaction costs of $30 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238
thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. As of September
28, 2025, it was determined that the earnout revenue milestone was unlikely to be achieved during the earnout period and the fair value
of the contingent liability was zero. The asset was amortized on a straight-line basis over a seven-year period through September 28,
2025. On September 28, 2025, the Company reviewed the intangible asset value based on the anticipated revenues and cash flow of the product
line over the next five years and determined that the remaining asset value could not be recovered. As a result, the remaining $0.8 million
of unamortized intangible assets was impaired and as of September 28, 2025, the remaining balance of intangible assets is zero.

 We
refer to " Note 8 – Commitments and Contingencies – Rental Payments under Non-cancellable Operating Leases "
for a tabular depiction of our remaining minimum lease and estimated Common Area Maintenance ("CAM") payments under such
leases as of September 28, 2025, which disclosure is incorporated herein by reference.

 The
Company expects to generate net income and positive cash flow from operating activities over the next twelve months. To remain
profitable, we need to maintain a level of revenue adequate to support our cost structure. Management intends to manage operations
commensurate with its level of working capital and line of credit facility during the next twelve months and beyond; however, uneven
revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays
associated with delays of government funding and government shutdowns could create a working capital shortfall. In the event the
Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.

 On
March 22, 2023, the Company and Optex Systems, Inc. entered into a Business Loan Agreement with Texas Capital Bank (the "Lender"),
pursuant to which the Lender will make available to the Company a revolving line of credit in the principal amount of $3 million.

 The
commitment period for advances under the facility expired on May 22, 2025. Outstanding advances under the facility accrued interest at
a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. The
related agreement provided for a $125 thousand Letter of Credit sublimit.

 On
May 21, 2025, the Company and Optex Systems, Inc. renewed their existing credit facility with the Lender by entering into a new Business
Loan Agreement (the "Loan Agreement") effective May 22, 2025, pursuant to which the Lender will continue to make available
a revolving line of credit in the principal amount of $3 million (the "Texas Capital Facility"). The commitment period for
advances under the Texas Capital Facility is twenty-four months expiring on May 22, 2027 (the "Maturity Date"). Outstanding
advances under the Texas Capital Facility will accrue interest at a variable rate equal to the secured overnight financing rate (SOFR)
plus a specified margin. The interest rate is currently at 6.7% per annum.

 The
Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing capital expenditures
(limited to $1 million per year), indebtedness and liens, affiliate transactions, fundamental changes (including change in management),
investments, and restricted payments (including dividends). The Loan Agreement also requires the borrowers to maintain a fixed charge
coverage ratio of at least 1.25:1 and a total leverage ratio of 3:1. The Texas Capital Facility is secured by substantially all of the
operating assets of the borrowers as collateral. The obligations under the Texas Capital Facility are subject to acceleration upon the
occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit
sublimit.

 The
outstanding balance under the Texas Capital Facility was $0 as of September 28, 2025.

 For
the twelve months ended September 28, 2025, the total interest expense under the facility was $12 thousand.

the twelve months ended September 28, 2025 the Company declared and paid no dividends. As of September 28, 2025, there are no outstanding
declared and unpaid dividends.

 Critical
Accounting Estimates

 A
critical accounting estimate is an estimate that:

 is
 made in accordance with generally accepted accounting principles,

 involves
 a significant level of estimation uncertainty, and

 has
 had or is reasonably likely to have a material impact on the company's financial condition or results of operation.

 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 Note 2 "Summary of Significant Accounting Policies" of Item 8 "Financial Statements and Supplementary
Data" of this report.

 Our
critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. Future warranty costs are
based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage
of warranty covered sales. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty
period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any
returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly
exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around
times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our
warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty
costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of September 28, 2025, the Company
had accrued warranty costs of $162 thousand, as compared to $52 thousand as of September 29, 2024. The primary reason for the increase
in reserve balances relates to an expected warranty repair cost of $143 thousand for shipped day windows due to a glass cracking issue
which was partially offset by lower warranties realized on our commercial optical assemblies.

 As
of September 28, 2025 and September 29, 2024, we had $132 thousand, and $259 thousand, respectively, of contract loss reserves included
in our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope contracts which were priced in 2019
and 2020, prior to Covid-19. Due to inflationary price increases on component
parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates), some of our contracts
are in a loss condition, or at marginal profit rates. These contracts are typically three-year IDIQ contracts with two optional award
years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration. Should contract
costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against
these existing loss contracts, the losses could be material. For contracts currently in a loss status based on the estimated per unit
contract costs, losses are booked immediately on new task order awards. There is one open IDIQ option year to which the customer may
place additional awards through January 5, 2026. During the twelve months ended September 28, 2025, the accrued contract losses decreased
by $127 thousand on shipments for the existing IDIQ contracts during the twelve-month period. There is no way to reasonably estimate
future inflationary impacts, or customer awards on the existing loss contracts. We continue to monitor these contracts throughout the
year for any significant changes in addition to seeking potential cost saving strategies to mitigate risk.

 As
of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a net carrying value of $1.2 million and $0.9 million,
respectively, in deferred tax assets represented by deferred tax assets of $2.0 million and $1.7 million, respectively, and a
deferred tax asset valuation allowance of ($0.8) million each year, against those assets. The valuation allowance covers certain deferred tax
assets where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes
assumptions related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of
the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are
subject to change over time. While we believe our current estimate to be reasonable, changing market conditions and profitability,
changes in equity structure and changes in tax regulations may impact our estimated reserves in future periods.

 Recent
Accounting Pronouncements

 Recent
Accounting Pronouncements are detailed under Note 3 of Item 8 "Financial Statements and Supplementary Data" of this report.

 Item
7A. Quantitative and Qualitative Disclosures About Market Risk

 Not
applicable.

 Item
8. Financial Statements and Supplementary Data

 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 To
the Board of Directors and Stockholders

 Optex

 Opinion
on the Financial Statements

 We
have audited the accompanying consolidated balance sheets of Optex Systems Holdings, Inc. and subsidiaries (the "Company")
as of September 28, 2025 and September 29, 2024, and the related consolidated statements of income, stockholders' equity, and cash
flows for the twelve months then ended, and the related notes (collectively referred to as the "financial statements"). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September
28, 2025 and September 29, 2024, and the results of their operations and their cash flows for the twelve months then ended, in conformity
with accounting principles generally accepted in the United States of America.

 Basis
for Opinion

 These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion.

 Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.

 Critical
Audit Matters

 Critical
audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 /s/
 Whitley Penn LLP

 We
have served as the Company's auditor since 2017.

 Dallas,
Texas

 Optex

Balance Sheets

 2025

 2024

 (Thousands, except share and per share data)

 2025

 2024

 ASSETS

 Cash and Cash Equivalents

 $
 6,389

 $
 1,009

 Accounts Receivable, Net

 4,569

 3,764

 Inventory, Net

 14,322

 14,863

 Contract Asset

 Prepaid Expenses

 Current Assets

 25,707

 20,072

 Property and Equipment, Net

 1,427

 1,292

 Other Assets

 Deferred Tax Asset

 1,199

 Intangibles, net

 -

 Right-of-use Asset

 1,700

 2,233

 Security Deposits

 Other Assets

 2,922

 4,154

 Total Assets

 $
 30,056

 $
 25,518

 LIABILITIES AND STOCKHOLDERS' EQUITY

 Current Liabilities

 Accounts Payable

 $
 1,525

 $
 1,177

 Credit Facility

 -

 1,000

 Operating Lease Liability

 Federal Income Taxes Payable

 Accrued Expenses

 1,634

 1,258

 Accrued Selling Expense

 Accrued Warranty Costs

 Contract Loss Reserves

 Customer Advance Deposits

 Current Liabilities

 4,560

 4,950

 Other Liabilities

 Operating Lease Liability, net of current portion

 1,205

 1,760

 Total Liabilities

 5,765

 6,710

 Commitments and Contingencies

 -

 Stockholders' Equity

 Common Stock – ($ 0.001
 par, 2,000,000,000
 authorized, 6,920,658
 and 6,873,938
 shares issued and outstanding, respectively)

 Additional Paid in Capital

 21,801

 21,465

 Retained Earnings (Accumulated Deficit)

 2,483

 ( 2,664
)

 Stockholders' Equity

 24,291

 18,808

 Total Liabilities and Stockholders' Equity

 $
 30,056

 $
 25,518

 The
accompanying notes are an integral part of these financial statements.

 Optex

Statements of Income

 (Thousands, except share and per share data)

 2025

 2024

 Revenue

 $

 $

 Cost of Sales

 29,280

 24,466

 Gross Profit

 12,057

 9,529

 General and Administrative Expense

 4,925

 4,708

 Operating Income

 7,132

 4,821

 Other Expenses

 -

 Interest (Income) Expense, net

 ( 23
)

 Other Expenses

 Income Before Taxes

 6,351

 4,774

 Income Tax Expense, net

 1,204

 1,006

 Net income applicable to common shareholders

 $
 5,147

 $
 3,768

 Basic income per share

 $
 0.75

 $
 0.56

 Weighted Average Common Shares Outstanding - basic

 6,865,280

 6,762,145

 Diluted income per share

 $
 0.74

 $
 0.55

 Weighted Average Common Shares Outstanding - diluted

 6,923,657

 6,833,274

 The
accompanying notes are an integral part of these financial statements.

 Optex

Statements of Cash Flows

 2025

 2024

 Cash Flows from Operating Activities:

 Net Income

 $
 5,147

 $
 3,768

 Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities:

 Depreciation and Amortization

 -

 Stock Compensation Expense

 Change in Deferred Tax Asset

 ( 252
)

 ( 25
)

 Change in Accounts Receivable

 ( 810
)

 ( 150
)

 Bad Debt Expense

 Change in Inventory

 ( 2,710
)

 Change in Contract Asset

 Change in Prepaid Expenses

 ( 69
)

 Change in Leases

 ( 15
)

 Change in Accounts Payable and Accrued Expenses

 Change in Federal Income Taxes Payable

 ( 173
)

 Change in Accrued Warranty Costs

 ( 23
)

 Change in Accrued Selling Expense

 ( 95
)

 ( 100
)

 Change in Customer Advance Deposits

 ( 21
)

 ( 226
)

 Change in Accrued Estimated Loss on Contracts

 ( 127
)

 Total Adjustments

 1,784

 ( 1,987
)

 Net Cash provided by Operating Activities

 6,931

 1,781

 Cash Flows used in Investing Activities

 Purchases of Intangible Assets

 ( 10
)

 ( 1,050
)

 Purchases of Property and Equipment

 ( 494
)

 ( 681
)

 Net Cash used in Investing Activities

 ( 504
)

 ( 1,731
)

 Cash Flows used in Financing Activities

 Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue

 ( 47
)

 ( 245
)

 Borrowings from Credit Facility

 -

 1,350

 Payments to Credit Facility

 ( 1,000
)

 ( 1,350
)

 Net Cash used in Financing Activities

 ( 1,047
)

 ( 245
)

 Net Increase (Decrease) in Cash and Cash Equivalents

 5,380

 ( 195
)

 Cash and Cash Equivalents at Beginning of Year

 1,009

 1,204

 Cash and Cash Equivalents at End of Year

 $
 6,389

 $
 1,009

 Supplemental Cash Flow Information:

 Cash Transactions:

 Cash Paid for Taxes

 1,443

 1,204

 Cash Received from Interest

 -

 Cash Paid for Interest

 The
accompanying notes are an integral part of these financial statements.

 Optex

Statement of Stockholders' Equity

 Issued

 Stock

 Capital

 Earnings

 Equity

 Thousands (except share data)

 Additional

 (Accumulated
 Deficit) /

 Total

 Shares

 Paid in

 Retained

 Stockholders

 Issued

 Stock

 Capital

 Earnings

 Equity

 Balance at October 1, 2023

 6,763,070

 $

 $
 21,285

 $
 ( 6,432
)

 $
 14,860

 Stock Compensation Expense

 -

 -

 -

 Vested restricted stock units issued net of tax withholding

 110,868

 -

 ( 245
)

 -

 ( 245
)

 Net income

 -

 -

 -

 3,768

 3,768

 Balance at September 29, 2024

 6,873,938

 $

 $
 21,465

 $
 ( 2,664
)

 $
 18,808

 Balance

 6,873,938

 $

 $
 21,465

 $
 ( 2,664
)

 $
 18,808

 Stock Compensation Expense

 -

 -

 -

 Vested restricted stock units issued net of tax withholding

 16,885

 -

 ( 47
)

 -

 ( 47
)

 Restricted Board Shares issued 1

 22,800

 -

 -

 -

 -

 Restricted Board Shares issued

 22,800

 -

 -

 -

 -

 Restricted Officer Shares issued, net of tax shares withheld 2

 7,035

 -

 -

 -

 -

 Restricted Officer Shares issued, net of tax shares withheld

 7,035

 -

 -

 -

 -

 Net income

 -

 -

 -

 5,147

 5,147

 Balance at September 28, 2025

 6,920,658

 $

 $
 21,801

 $
 2,483

 $
 24,291

 Balance

 6,920,658

 $

 $
 21,801

 $
 2,483

 $
 24,291

 (1)

 stock award made on November 5, 2024 which consisted of 7,600 shares each of restricted stock for the three independent directors.

 (2)

 stock award made on August 11, 2025 to Chad George, President. The award was for 10,000 shares which was issued net of
 tax shares withheld of 2,935 shares.

 The
accompanying notes are an integral part of these financial statements.

 Note
1 — Organization and Operations

 Optex
Systems Holdings, Inc. (together with its subsidiaries, the "Company," "Optex Systems Holdings," "we,"
"us," and "our") manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign
military applications and commercial markets. Our products are installed on a variety of U.S. military land vehicles, such as the Abrams
and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family
of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision
optical assemblies. 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 or commercial customers. The Company's
consolidated revenues for the twelve months ended September 28, 2025 were derived from military sales to the U.S. government ( 28 %),
U.S. prime military contractors ( 61 %),
foreign military contractors ( 6 %),
and commercial customers ( 5 %).
Approximately 94 %
of the total company revenue is generated from domestic customers and 6 %
is derived from foreign customers, primarily in Canada and Israel. Optex
Systems Holdings' operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of September 28, 2025, Optex Systems Holdings
operated with 132 full-time
equivalent employees.

 Note
2 — Summary of Significant 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. All significant intercompany balances and transactions have been eliminated in consolidation.

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

 Segment
Reporting: FASB ASC 280 requires that a public business enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available and evaluated
regularly by the chief operating decision maker in decisions regarding resource allocations and performance assessments. Generally, financial
information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. Segments are determined based on differences in products, internal reporting and how operational decisions
are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant are separately
managed, organized, and internally reported as separate business segments. The FASB ASC 280 requires that a public business enterprise
report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations
of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise's general-purpose financial statements.

 The Chief Operating Decision Maker (CODM), which is
our CEO, uses the segment revenue, cost of sales and net operating income to assess the Company's performance and allocation of
resources. The CODM assesses the performance of our segments and decides how to allocate resources based on each segment's revenue
growth, gross profit and operating profit. The CODM utilizes these metrics by comparing budget versus actual results as well as benchmarking
to our competitors. For the twelve months ended September 28, 2025 and September 29, 2024, the Company's CODM was Danny Schoening,
CEO. See also Note 14 "Subsequent Events" regarding changes to the CODM and CEO effective on December 20, 2025.

 Fiscal
Year: Optex System Holdings' fiscal year ends on the Sunday nearest September 30. Fiscal year 2025 ended on September 28,
2025 and included 52 weeks. Fiscal year 2024 ended on September 29, 2024 and included 52 weeks.

 Fair
Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of the financial statement presentation date.

 The
carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, are carried at, or approximate,
fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market
rates of interest.

 The
fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three categories:

 Level
1: Quoted market prices in active markets for identical assets or liabilities.

 Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 Level
3: Unobservable inputs reflecting the reporting entity's own assumptions.

 The
accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use
of unobservable inputs. An asset or liability's level is based on the lowest level of input that is significant to the fair value
measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual
financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information
available to management at those times.

 Cash
and Cash Equivalents: For financial statement presentation purposes, Optex Systems Holdings considers those short-term, highly
liquid investments with original maturities of three months or less to be cash or cash equivalents. Optex Systems Holdings has $ 6.4 million
in cash on deposit with our banks. As of September 28, 2025, $ 4.0 million of our cash balance was carried in a money market account with
an annual interest rate of 3.84 %. For the twelve months ended September 28, 2025, the total interest income under the money market account
was $ 35 thousand. Only a portion of the cash, currently $ 250 thousand, would be covered by federal deposit insurance and the uninsured
balances are substantially greater than the insured amounts.

 Concentration
of Credit Risk: The Company's revenues for fiscal year ended September 28, 2025 were derived from sales to U.S. government
agencies ( 29 %), four major U.S. defense contractors ( 19 %, 10 %, 6 % and 6 %), and all other customers ( 30 %). The Company's revenues
for fiscal year ended September 29, 2024 were derived from sales to U.S. government agencies ( 20 %), four major U.S. defense contractors
( 25 %, 7 %, 6 % and 6 %), one major commercial customer ( 13 %) and all other customers ( 23 %). Optex Systems Holdings does not believe that
this concentration results in undue credit risk because of the financial strength of the obligees.

 Accounts
Receivable: Optex Systems Holdings records its accounts receivable at the original sales invoice amount less liquidations for
previously collected advance/progress bills and an allowance for expected credit losses. As of the fiscal year beginning October 2, 2023,
the Company adopted Accounting Standards Update (ASU) 2016-13, " Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments." Under the new standard, the current expected credit loss ("CECL") model
is used for estimating an allowance for credit losses and an allowance is set up when the receivable is initially recorded, even if the
probability of loss is remote. The Company utilizes a CECL model based on the aging schedule method. As the customer base is primarily
U.S. government and government prime contractors, Optex Systems Holdings allowance for credit losses is minimal. On a quarterly basis,
Optex Systems Holdings evaluates its accounts receivable and establishes an allowance for credit losses, using a CECL model based on
a rolling aging schedule method. An account receivable is considered to be past due if any portion of the receivable balance is outstanding
beyond its scheduled due date. No interest is accrued on past due accounts receivable. As of September 28, 2025, and September 29, 2024,
Optex Systems Holdings had an allowance for credit losses of $ 5 thousand and $ 15 thousand, respectively, for non U.S. government account
balances. Optex Systems Holdings charges uncollectible accounts to credit loss expense in the period in which they are first deemed uncollectible.
In the fiscal year 2025 we recognized $ 4 thousand in credit loss expenses associated with uncollectible accounts. In the fiscal year
2024 we recognized $ 10 thousand in credit loss expenses associated with uncollectible accounts.

 As
of September 28, 2025, 91 % of the accounts receivable balance was comprised of eight customers: the U.S. government, 12 %, seven major
defense contractors, 27 %, 22 %, 8 %, 6 %, 6 %, 5 % and 5 %. As of September 29, 2024, 79 % of the accounts receivable balance was comprised
of seven customers: the U.S. government, 15 %, five major defense contractors, 26 %, 10 %, 9 %, 7 % and 7 %, and a foreign military customer,
 5 %.

 Inventory:
 Inventory is recorded at the lower of cost or net realizable value and adjusted as appropriate for decreases in valuation and
obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected
sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in
first-out method. As of September 28, 2025, and September 29, 2024 inventory included:

 Schedule of Inventory

 As of

 2025

 As of

 2024

 Raw Materials

 $
 9,394

 $
 9,460

 Work in Process

 6,063

 5,954

 Finished Goods

 Gross Inventory

 16,245

 15,970

 Less: Inventory Reserves

 ( 1,923
)

 ( 1,107
)

 Net Inventory

 $
 14,322

 $
 14,863

 In
the twelve months ended September 28, 2025 Optex Systems Holdings recorded $ 0.8 million of excess and obsolete inventory reserves. We
increased our reserves on old and slow-moving sighting systems inventories by $ 0.7 million due to the expected phase out of LAV and LAV-25
tanks by the U.S. government using the DDAN sighting system platform, combined with the modernization of the Abrams Commander Weapon
Station with more advanced sighting systems. We set aside additional reserves of $ 0.1 million for other product inventories that were
either slow moving, obsolete, or showed zero requirements over the prior five years. Net inventory decreased by $ 0.5 million
primarily as a result of the increased reserves.

 Warranty
Costs: Some of Optex Systems Holdings' customers require that the Company warrant the quality of its products to meet customer
requirements and be free of defects for up to twelve months subsequent to delivery. Future warranty costs are based on the estimated
cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales.
Throughout the year, warranty costs are expensed as incurred, and as of each year end, Optex Systems Holdings reviews the prior 12-month
warranty experience rate and may adjust the warranty accrual as required to cover any estimated warranty expenses associated with the
period end backlog of returned customer units awaiting repair or replacement plus any estimated warranty expenses related to anticipated
future returns on previous deliveries. As of September 28, 2025 and September 29, 2024, the existing warranty reserve balances of $ 162
thousand and $ 52 thousand, respectively, were reviewed and determined to be adequate to satisfy any future warranty claims that may have
existed as of the end of each fiscal year for shipments occurring in the prior 12 months. We have made numerous improvements to our supplier
bases and internal production process to reduce the return rate on future shipments but will continue to review and monitor the reserve
balances related to this product line against any existing warranty backlog and current trend data as we repair and replace our current
warranty backlog and process future warranty returns.

 The
table below summarizes the warranty expenses and incurred warranty costs for the twelve months ended September 28, 2025 and September
29, 2024.

 Schedule of Warranty Reserves

 2025

 2024

Years ended

 2025

 2024

 Beginning balance

 $

 $

 Incurred costs for warranties satisfied during the period

 -

 ( 52
)

 Warranty Expenses:

 Warranties reserved for new product shipped during the period (1)

 Change in estimate for pre-existing warranty liabilities (2)

 ( 42
)

 ( 77
)

 Warranty Expense

 Ending balance

 $

 $

 (1)

 Warranty
 expenses accrued to cost of sales for shipped optical assemblies of $ 9 thousand (based on prior three months shipments of optical
 assemblies and the optical assembly historical warranty return rate) in addition to an expected warranty repair cost of $ 143 thousand
 for shipped day windows due to a glass cracking issue.

 (2)

 Changes
 in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog,
 or the actual costs of repaired/replaced warranty units which were shipped to the customer during the year. During the twelve months
 ended September 28, 2025, the warranty return rate was below historical levels resulting in a favorable change in estimate during
 the period.

 Property
and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, ranging from 3 three to seven years. Expenditures for renewals and betterments are capitalized. Expenditures
for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence
is reflected in the operating results in the period the event takes place.

 Leases:
 Optex Systems Holdings has two significant operating
facilities leases which extend beyond twelve months and fall under the guidance of ASC Topic 842. See also Note 8.

 Revenue
Recognition: The Company has adopted FASB ASC 606—Revenue from Contracts with Customers which requires revenue recognition
based on a five-step model that includes: identifying the contract, identifying the performance obligations, determining the transaction
price, allocating the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the
transfer of promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer
for such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services
transfer to the customer. The majority of the Company's contracts and customer orders originate with fixed determinable unit prices
for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due
date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are
generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs
as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract which
relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the
customer's existing fleet units in service during the duration of the contract. Revenue recognition for this program has been recorded
by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance
period. The total revenue recognized over time related to the contract is $ 517 thousand for the twelve months ended September 28, 2025
and $ 483 thousand for the twelve months ended September 29, 2024.

 The
Company has on occasion, outside of the presented periods, received selective contract awards and modifications which included substantive
milestone performance obligations, contract modifications, negotiated settlements and financing arrangements which could fall within
the scope of FASB ASC 606 revenue recognition guidance on reoccurrence, and as such, the Company has expanded their contract review process
to ensure any new contract awards, changes, modifications, financing arrangements or potential negotiated settlements are recorded in
compliance to the new standard guidance.

the twelve months ended September 28, 2025, there was $ 186 thousand of revenue recognized from customer deposit liabilities (deferred
contract revenue). During the twelve months ended September 29, 2024, there was $ 226 thousand revenue recognized during the period from
customer deposit liabilities (deferred contract revenue).

 As
of September 28, 2025 and September 29, 2024, there were $ 141 thousand and $ 237 thousand in accrued selling expenses, respectively, and
$ 142 thousand and $ 219 thousand in contract assets, respectively, related to agency fees for an Israeli contract booked in November 2022.
The selling costs are amortized against the revenue for the contract deliveries which began in the first half of fiscal year 2024 and
are expected to extend into fiscal year 2027.

 Customer
Advance Deposits: Customer advance deposits represent amounts collected from customers in advance of shipment or revenue recognition
which relate to undelivered product due to non-substantive milestone payments or other cash in advance payment terms. As of September
28, 2025 and September 29, 2024, Optex Systems, Inc. had a balance of $ 234 thousand and $ 255 thousand, respectively, in customer advance
deposits.

 Contract
Loss Reserves: The Company records loss provisions in the event that the current estimated total revenue against a contract and
the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs indicate a loss,
we record the entire value of the loss against the contract loss reserve in the period the determination is made. The Company has several
long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary pressures on material and
labor, combined with increased manufacturing overhead costs. One of these long-term contracts has an active option year ordering period
that expires January 5, 2026, with deliveries that could potentially extend into fiscal year 2027. As of September 28, 2025, the Company
had contract loss reserves of $ 132 thousand. As of September 29, 2024, the Company had contract loss reserves of $ 259 thousand.

 Government
Contracts: Many of Optex Systems Holdings' contracts are prime or subcontracted directly with the Federal government and
as such, are subject to FAR Subpart 49.5, "Contract Termination Clauses" and more specifically FAR 52.249-2 "Termination
for Convenience of the Government (Fixed-Price)", and FAR 49.504 "Termination of fixed-price contracts for default".
These clauses are standard clauses on prime military contracts and are required by the government to be "flowed down" by
the prime contractor to any subcontractors used to perform work or provide components against the award. It has been Optex Systems Holdings'
experience that the termination for convenience is rarely invoked, except where it has been mutually beneficial for both parties. As of September 28, 2025, the Company had eight subcontract customer awards which are associated with two government
prime contracts pending termination. We are currently in negotiation with the customer regarding the final termination claim amount, but
expect to recover all of our incurred costs to date, plus a reasonable fee, against these contracts.

 Impairment
or Disposal of Long-Lived Assets: Optex Systems Holdings follows the provisions of FASB ASC 360-10,
" Accounting for the Impairment or Disposal of Long-lived Assets ". This standard requires, among other things,
that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may
not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from
the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows
are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived
assets. On September 28, 2025, the Company reviewed the Speedtracter intangible asset value based on the anticipated cash flow of
the associated products over the next five years and determined that the remaining asset value could not be recovered. As a
result, the remaining $ 0.8 million
of unamortized intangible assets was impaired and as of September 28, 2025 and the remaining balance of intangible assets is zero.
See also Note 6.

 Stock-Based
Compensation: 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.

 Income
Tax/Deferred Tax: FASB ASC 740 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 Optex Systems Holdings will not realize tax assets through future operations. When assessing
the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies and results of recent operations. Based on those estimates, management has determined that
a portion of the deferred tax assets may not be realized and has established a valuation allowance against the deferred tax asset balance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it
is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than
50 percent likely to be realized upon ultimate settlement with the related tax authority.

 As
of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a net carrying value of $ 1.2
million and $ 0.9
million, respectively, in deferred tax assets represented by deferred tax assets of $ 2.0
million and $ 1.7
million, respectively, and a deferred tax asset valuation allowance of ($ 0.8)
million each of the years ended periods, against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating
Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382
limitation related to a change in control occurring in fiscal year 2018. As of September 28, 2025 and September 29, 2024, we
reviewed the deferred tax assets and determined it was more likely than not that we would be able to utilize a substantial portion
of the deferred tax asset balance against future earnings. Our assumptions were based on the previous three years earnings trend as
well as anticipated future earnings. During the twelve months ended September 28, 2025 and September 29, 2024, the Company
recognized an income tax expense of $ 1.2
million and $ 1.0
million, respectively. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740
on an annual basis.

 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 reflect the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 The
Company has potentially dilutive securities outstanding, which include unvested restricted stock units and unvested shares of restricted
stock. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units
and shares of restricted stock that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

 For
the twelve months ended September 28, 2025, 74,000 unvested restricted stock units and 32,800 unvested restricted shares (which converts
to 58,377 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive. For the twelve months
ended September 29, 2024, 66,500 unvested restricted stock units and 60,000 unvested restricted shares (which converts to 71,129 incremental
dilutive shares) were included in the diluted earnings per share calculation as dilutive.

 Note
3 — Recent Accounting Pronouncements

 In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU
2023-07"), which requires disclosure of segment expenses that are significant and regularly provided to the CODM. In addition,
ASU 2023-07 requires the Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information
in assessing segment performance and deciding how to allocate resources. The guidance is effective for fiscal years beginning after December
15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Retrospective application
to all prior periods presented in the financial statements is required. The Company adopted this guidance effective on September 30,
2024, the beginning of the fiscal year. As ASU 2023-07 applies to reportable segment disclosures, the adoption did not have a material
impact on the Company's consolidated financial statements.

 Note
4 — Segment Reporting

 The
Company's 2 two
reportable segments, Applied Optics Center ("Applied Optics Center" or "AOC") and Optex Systems –
Richardson ("Optex Richardson"), are strategic businesses offering similar products to similar markets and customers;
however, they are operated and managed separately due to differences in manufacturing technology, equipment, geographic location,
and specific product mix. Applied Optics Center was acquired as a unit, and management at the time of the acquisition was
retained.

 The
Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies
for the Optex Richardson segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated
segment product cost, which include segment direct manufacturing and general and administrative costs but exclude profits that would
apply to third party external customers.

 The
Chief Operating Decision Maker (CODM), which is our CEO, uses the segment revenue, cost of sales and net operating income to assess the
Company's performance and allocation of resources. A summary of segment performance for the twelve months ended September 28, 2025
and September 29, 2024 is included in the table below:

 Schedule
of Summary of Segment Performance

 Optex

 Other
 (non-

 Optex

 Other
 (non-

 September
 28, 2025

 September
 29, 2024

 Optex

 Other
 (non-

 Optex

 Other
 (non-

 Revenue
 from External Customers

 $

 $
 17,576

 $
 -

 $

 $

 $
 15,824

 $
 -

 $

 Intersegment

 -

 1,157

)

 -

 -

 1,042

)

 -

 Total
 Segment Revenue

 18,733

)

 16,866

)

 Total
 Cost of Sales

 17,699

 12,738

)

 29,280

 14,401

 11,107

)

 24,466

 Gross
 Profit

 6,062

 5,995

 -

 12,057

 3,770

 5,759

 -

 9,529

 Gross
 Margin %

 25.5
 %

 32.0
 %

 -

 29.2
 %

 20.7
 %

 34.1
 %

 -

 28.0
 %

 General
 and Administrative Expense

 3,771

 4,925

 3,630

 4,708

 Segment
 Allocated G&A Expense

 ( 1,356
)

 1,356

 -

 -

 ( 1,486
)

 1,486

 -

 -

 Net
 General & Administrative Expense

 2,415

 2,127

 4,925

 2,144

 2,139

 4,708

 Operating
 Income (Loss)

 3,647

 3,868

 ( 383
)

 7,132

 1,626

 3,620

 ( 425
)

 4,821

 Operating
 Income (Loss) %

 15.3
 %

 20.6
 %

 -

 17.3
 %

 8.9
 %

 21.5
 %

 -

 14.2
 %

 Asset
 Impairment

 ( 804
)

 -

 -

 ( 804
)

 -

 -

 -

 -

 Interest
 Income (Expense)

 -

 -

 -

 -

 ( 47
)

 ( 47
)

 Income
 (Loss) before taxes

 $
 2,843

 3,868

 ( 360
)

 6,351

 $
 1,626

 3,620

 ( 472
)

 4,774

 Income
 (loss) before taxes %

 12.0
 %

 20.6
 %

 -

 15.4
 %

 8.9
 %

 21.5
 %

 -

 14.0
 %

 Optex
Systems (OPX) – Richardson, Texas

 Optex
Richardson revenues are primarily in support of prime and subcontracted military customers. Approximately 90 % of the Optex Richardson
segment revenue is comprised of domestic military customers, and 10 % is comprised of foreign military customers. For the twelve months
ended September 28, 2025, Optex Richardson represented 58 % of the Company's total consolidated revenue and consisted of the U.S.
government, 22 %, and two major U.S. defense contractors representing 15 % and 10 %, of the Company's consolidated revenue, respectively.

 Optex
Richardson is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of September 28, 2025,
the Richardson facility operated with 87 full-time equivalent employees in a single shift operation. The facilities at Optex Richardson
serve as the home office for both the Optex Richardson and Applied Optics Center segments.

Optics Center (AOC) – Dallas, Texas

 The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent 10 % and military sales to prime
and subcontracted customers represent 90 % of the total segment revenue. Approximately 94 % of the AOC revenue is derived from external
customers and approximately 6 % is related to intersegment sales to Optex Richardson in support of military contracts. For the twelve
months ended September 28, 2025, AOC represented 42 % of the Company's total consolidated revenue and consisted of revenue from
the U.S. government, 5 %, and two major defense contractors representing 6 % and 6 % of the Company's consolidated revenue, respectively.

 The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of
September 28, 2025, AOC operated with 45 full-time equivalent employees in a single shift operation.

 The
financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for each
year. The Company does not allocate interest expense, income taxes or unusual items to segments.

 Schedule of Segment Reporting Information

 Reportable Segment Financial Information
 (thousands)

 Twelve months ended September 28, 2025

 Optex

 Other
 (non-allocated
 intersegment

 Total

 Revenues from external customers

 $

 $
 17,576

 $
 -

 $

 Intersegment revenues

 -

 1,157

)

 -

 Total Revenue

 18,733

)

 Interest income

 -

 -

 ( 23
)

 ( 23
)

 Depreciation and Amortization

 -

 Income (loss) before taxes

 2,843

 3,868

 ( 360
)

 6,351

 Other significant noncash items:

 Allocated home office expense

 ( 1,356
)

 1,356

 -

 -

 Stock compensation expense

 -

 -

 Warranty expense

 -

 -

 Segment Assets

 22,126

 7,930

 -

 30,056

 Expenditures for segment assets

 -

 Reportable Segment Financial Information
 (thousands)

 Twelve months ended September 29, 2024

 Optex

 Other
 (non-allocated
 intersegment

 Total

 Revenues from external customers

 $

 $
 15,824

 $
 -

 $

 Intersegment revenues

 -

 1,042

)

 -

 Total Revenue

 16,866

)

 Interest expense

 -

 -

 Depreciation and Amortization

 -

 Income (loss) before taxes

 1,626

 3,620

 ( 472
)

 4,774

 Other significant noncash items:

 Allocated home office expense

 ( 1,486
)

 1,486

 -

 -

 Stock compensation expense

 -

 -

 Warranty expense

 -

 Segment Assets

 17,038

 8,480

 -

 25,518

 Expenditures for segment assets

 1,382

 -

 1,731

 Note
5 — Property and Equipment

 A
summary of property and equipment at September 28, 2025 and September 29, 2024 is as follows:

 Schedule of Property and Equipment

 Estimated
 Useful Life

 2025

 2024

 Estimated
 Useful Life

 2025

 2024

 Property and Equipment

 Furniture and Fixtures

 3 - 5 yrs

 $

 $

 Machinery and Equipment

 5 yrs

 5,605

 5,145

 Leasehold Improvements

 7 yrs

 Property and Equipment, gross

 7 yrs

 Less: Accumulated Depreciation

 ( 5,111
)

 ( 4,752
)

 Net Property & Equipment

 $
 1,427

 $
 1,292

 Depreciation Expense

 $

 $

the twelve months ended September 28, 2025, Optex Systems Holdings purchased $ 34 thousand in new furniture and fixtures, $ 460 thousand
in machinery and equipment and zero leasehold improvements. During the twelve months ended September 29, 2024, Optex Systems Holdings
purchased $ 23 thousand in new furniture and fixtures, $ 614 thousand in machinery and equipment and $ 44 thousand in leasehold improvements.
During the twelve months ended September 28, 2025 and September 29, 2024, there were no sales or retirements of fixed assets.

 Note
6 – Asset Purchase of Intellectual Property

 On
January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the "Company"),
entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminum s.r.o. ("RUB"). Under the
agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach
product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB may continue to manufacture
Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $ 1 million cash on hand, with potential additional
future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is
one year, subject to additional 1 one-year renewal terms to which both parties must agree. Subsequent to the acquisition, the Company has
determined it would be more economical to move the manufacturing operations in house and is no longer ordering assembled units against
the contract manufacturing agreement.

 The
acquisition included transaction costs of $30 thousand for legal fees. Pursuant to the asset purchase agreement, the total earnout payment
would have been $238 thousand only if the earnout revenue milestones were achieved during the earnout period, otherwise the earnout would
be zero. As of January 18, 2024, the fair value of the contingent liability was $ 83 thousand. As of September 29, 2024, it was determined
that the revenue milestones related to the earnout agreement would be unachievable within the earnout period and the fair value of the
contingent liability related to the earnout was set to zero. The intangible asset for the Speedtracker product acquisition was amortized
on a straight-line basis over a seven-year period.

 Subsequent
to the asset purchases, the Company invested an additional $ 30 thousand for software app development for the Speedtracker product. The
software app development was amortized on a straight-line basis across a 3 three-year period.

 Unlike
indefinite-lived intangible assets and goodwill, which are required to be tested for impairment at least annually, ASC 360-10 does
not require annual impairment testing for long-lived assets that are held and used. Instead, a long-lived asset (asset group) that
is held and used should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount
of the asset group may not be recoverable regardless of whether such carrying amount is zero or negative. Due to delays in the
Speedtracker product line launch during the twelve months ended September 29, 2024, the Company reviewed the recoverability of the
intangible assets as of September 29, 2024 and found no impairment. The Speedtracker product was launched during the second quarter
of 2025, with minimal revenue for the twelve months ended on September 28, 2025. On September 28, 2025, the Company reviewed the
intangible asset value based on the anticipated cash flow of the product line over the next five years and determined that the
remaining asset value could not be recovered. As a result, the remaining $ 0.8
million of unamortized intangible assets was impaired and as of September 28, 2025, the remaining balance of intangible assets is zero.

 As
of September 28, 2025 and September 29, 2024 the value of intangible assets was as follows:

 Schedule of the Value of Intangible Assets

 2025

 2024

 Intangible Assets – Speedtracker

 $

 $
 1,030

 Software App Development

 Amortization of Intangible Assets

 ( 157
)

 ( 99
)

 ( 804
)

 -

 Net Intangible Assets

 $
 -

 $

 Note
7 — Accrued Expenses

 The
components of accrued liabilities as of September 28, 2025 and September 29, 2024 are summarized below:

 Schedule of Accrued Liabilities

 2025

 2024

 Accrued Vacation

 $

 $

 Property Taxes

 Operating Expenses

 Payroll & Payroll Related

 Total Accrued Expenses

 $
 1,634

 $
 1,258

 Note
8 — Commitments and Contingencies

 Non-cancellable
Operating Leases

 The
Company leases its office and manufacturing facilities for the Optex Systems, Inc. Richardson location and the Applied Optics Center
Dallas location. The Company also leases certain office equipment under non-cancellable operating leases.

 The
leased facility under Optex Systems, Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space
at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through
March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months,
commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each
year thereafter. The initial term included two months of rent abatement for April and May of 2021. The monthly rent includes approximately
$ 15 thousand for additional Common Area Maintenance fees and taxes ("CAM"), to be adjusted annually based on actual expenses
incurred by the landlord.

 The
leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet
of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand
through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six
(86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at $23.6 thousand as of January
1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and
December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then "prevailing
rental rate" or the then current base rental rate. Our obligations to make payments under the lease are secured by a $ 125 thousand
standby letter of credit. The monthly rent includes approximately $ 9 thousand for additional CAM, to be adjusted annually based on actual
expenses incurred by the landlord.

 The
Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease
cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November
18, 2021 for an additional 48 months at a cost of $1.2 thousand per month.

 As
of September 28, 2025, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancellable
office equipment and facility space leases are as follows:

 Schedule of Non-cancellable Operating Leases Minimum Payments

 Non-cancellable
Operating Leases Minimum Payments

 Fiscal Year

 Facility Lease Payments

 Facility Lease Payments

 Lease Payments

 Total Lease Payments

 Total Variable CAM Estimate

 Optex Richardson

 Applied Optics Center

 Office Equipment

 Fiscal Year

 Facility Lease Payments

 Facility Lease Payments

 Lease Payments

 Total Lease Payments

 Total Variable CAM Estimate

 2026 Base year lease

 $

 $

 $

 $

 $

 2027 Base year lease

 -

 2028 Base year lease

 -

 2029 Base year lease

 -

 -

 2030 Base year lease

 Total base lease payments

 $

 $
 1,048

 $

 $
 1,996

 $

 Imputed interest on lease payments (1)

 ( 62
)

 ( 84
)

 -

 ( 146
)

 Total Operating Lease Liability (2)

 $

 $

 $
 1,850

 Right-of-use Asset (3)

 $

 $

 $
 1,700

 (1)

 Assumes
 a discount borrowing rate of 5.0 % on the new lease amendments effective as of January 11, 2021.

 (2)

 Short-term
 and Long-term portion of Operating Lease Liability is $ 645 thousand and $ 1,205 thousand, respectively.

 (3)

 Includes
 $ 150 thousand of unamortized deferred rent.

 Total
expense under both facility lease agreements for the twelve months ended September 28, 2025 was $ 951 thousand. Total expense under both
facility lease agreements as of the twelve months ended September 29, 2024 was $ 905 thousand.

 Total
office equipment rentals included in operating expenses was $ 21 thousand for the twelve months ended September 28, 2025 and $ 24 thousand
for the twelve months ended September 29, 2024.

 Note
9 — Debt Financing

 Credit
Facility — Texas Capital Bank

 On
March 22, 2023, the Company and Optex Systems, Inc. entered into a Business Loan Agreement with Texas Capital Bank (the "Lender"),
pursuant to which the Lender will make available a revolving line of credit in the principal amount of $ 3 million.

 The
commitment period for advances under the facility expired on May 22, 2025. Outstanding advances under the facility accrued interest at
a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. The
related agreement provided for a $ 125 thousand Letter of Credit sublimit.

 On
May 21, 2025, the Company and Optex Systems, Inc. renewed their existing credit facility with the Lender by entering into a new Business
Loan Agreement (the "Loan Agreement") effective May 22, 2025, pursuant to which the Lender will continue to make available
a revolving line of credit in the principal amount of $ 3 million (the "Texas Capital Facility"). The commitment period for
advances under the Texas Capital Facility is twenty-four months expiring on May 22, 2027 (the "Maturity Date"). Outstanding
advances under the Texas Capital Facility will accrue interest at a variable rate equal to the secured overnight financing rate (SOFR)
plus a specified margin. The interest rate is currently at 6.7 % per annum.

 The
Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing capital expenditures
(limited to $ 1 million per year), indebtedness and liens, affiliate transactions, fundamental changes (including change in management),
investments, and restricted payments (including dividends). The Loan Agreement also requires the borrowers to maintain a fixed charge
coverage ratio of at least 1.25:1 and a total leverage ratio of 3:1. The Texas Capital Facility is secured by substantially all of the
operating assets of the borrowers as collateral. The borrowers' obligations under the Texas Capital Facility are subject to acceleration
upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $ 125,000 Letter
of Credit sublimit. As of September 28, 2025, the Company is in compliance with all covenants.

 The
outstanding balance under the Texas Capital Facility was zero as of September 28, 2025 and $ 1.0 million as of September 29, 2024.

 For
the years ended September 28, 2025 and September 29, 2024, the total interest expense under the facility was $ 12 thousand and $ 47 thousand,
respectively.

 Note
10 — Stock Based Compensation

Stock, Performance Shares and Restricted Stock Units issued to Directors, Officers and Employees

 The
following table summarizes the status of Optex Systems Holdings' aggregate non-vested restricted stock and restricted stock units
and performance shares:

 Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted and Performance Shares

 Restricted Stock Units

 Weighted Average Grant Date Fair Value

 Restricted Shares

 Weighted Average Grant Date Fair Value

 Performance Shares

 Weighted Average Grant Date Fair Value

 Outstanding at October 1, 2023

 39,000

 $
 3.06

 120,000

 $
 2.20

 135,000

 $
 2.37

 Granted

 40,500

 7.17

 -

 -

 -

 -

 Vested

 ( 13,000
)

 3.06

 ( 60,000
)

 2.20

 ( 135,000
)

 2.37

 Forfeited

 -

 -

 -

 -

 -

 -

 Outstanding at September 29, 2024

 66,500

 $
 5.56

 60,000

 $
 2.20

 -

 $
 -

 Granted

 39,000

 6.35

 32,800

 9.29

 -

 -

 Vested

 ( 24,000
)

 5.17

 ( 60,000
)

 2.20

 -

 -

 Forfeited

 ( 7,500
)

 5.19

 -

 -

 Outstanding at September 28, 2025

 74,000

 $
 6.11

 32,800

 $
 9.29

 -

 $
 -

Stock Units

 On
May 1, 2024, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan.
As of the grant date, assuming a 7.7 % forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted
stock units is $ 258 thousand which will be amortized across the three-year period on a straight-line basis. The restricted stock units
will vest at a rate of 33.33 % annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited
if employment terminates prior to the relevant vesting date. On June 4, 2024 there was an additional grant of 500 restricted stock units
to one employee with a fair value of $ 4 thousand. The 500 restricted stock units will vest 100 % on the anniversary date of the grant
and will be forfeited if employment terminates prior to the relevant vesting date. On July 3, 2024 there was an additional grant of 1,000
restricted stock units to one employee with a fair value of $ 7 thousand. The 1,000 restricted stock units will vest 100 % on the anniversary
date of the grant and will be forfeited if employment terminates prior to the relevant vesting date.

the twelve months ended September 29, 2024, there were 13,000 shares vested under its 2023 Equity Incentive Plan for restricted stock
units granted on May 1, 2023 and August 14, 2023, which resulted in 9,150 shares issued to eleven employees, net of tax withheld of $ 28
thousand.

the twelve months ended September 28, 2025, there were 24,000 shares vested under its 2023 Equity Incentive Plan for restricted stock
units granted on May 1, 2023, May 1, 2024 and July 3, 2024, which resulted in 16,885 shares issued to eleven employees, net of tax
withheld of $ 47 thousand.

the twelve months ended September 28, 2025, there were 7,500 restricted stock units forfeited on the resignation of two employees.

 On
May 1, 2025, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan.
As of the grant date, assuming a 12.8 % forfeiture rate based on expected turnover across the three years, the aggregate value of the
restricted stock units is $ 216 thousand which will be amortized across the three-year period on a straight-line basis. The restricted
stock units will vest at a rate of 33.33 % annually on the anniversary date of the grant and any unvested restricted stock units will
be forfeited if employment terminates prior to the relevant vesting date.

 As
of September 28, 2025, there were 74,000 unvested restricted stock units outstanding.

Shares

 On
April 30, 2020, the Board of Directors of the Company (the "Board") voted to increase the annual board compensation for
the three independent directors from $ 22,000 to
$ 36,000 with an
effective date of January 1, 2020, in addition to granting 100,000 shares of restricted stock to each independent director which
vest at a rate of 20% per year (20,000 shares) each January 1 st through January 1, 2025. The
total fair value for the 300,000
shares was $ 525
thousand based on the stock price of $ 1.75
as of April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000
of the restricted director shares vested. On February 16, 2023, 40,000
of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board. On May 9,
2023, the Board approved a grant of 40,000
shares of restricted stock to independent board member Dayton Judd. The shares vested 50 %
on each of January 1, 2024 and January 1, 2025. As of the grant date, the fair value of the shares was $ 124
thousand, to be amortized on a straight-line basis through December 31, 2024. The Company amortized the grant date fair value to
stock compensation expense on a straight-line basis across the 5 five-year
and 2 two-year vesting periods beginning on April 30, 2020 and May 9, 2023, respectively. On January 1, 2025, the remaining 60,000
shares were vested.

 On
November 5, 2024, the Board approved the following Board compensation for the three independent directors, effective January
1, 2025: (a) a cash retainer of $44,000, paid quarterly, and (b) $66,000 in restricted stock awarded under the 2023 Equity Incentive
Plan, with 100% vesting on January 1, 2026, the share price calculated on the basis of the 10-day Volume Weighted Average Price ("VWAP"), and the number of shares rounded
up to the nearest 100 shares. The restricted stock award was made on November 5, 2024 and consisted of 7,600 shares of restricted stock
for each independent director. The total fair value for the 22,800 shares was $ 185 thousand based on the stock price of $ 8.10 as of November
5, 2024. As of September 28, 2025, there were 22,800 of such unvested restricted shares outstanding which will vest on January 1, 2026.

 On
August 11, 2025, the Board approved an award to Chad George of 10,000 shares of restricted stock under the Company's
2023 Equity Incentive Plan pursuant to his employment as Optex Systems Holdings, Inc.'s President. The shares will vest on January 1, 2026.
The total fair value for the 10,000 shares was $ 120 thousand based on the stock price of $ 12.00 as of August 12, 2025. As of September
28, 2025, there were 10,000 of such unvested restricted shares outstanding which will vest on January 1, 2026. The share issue was 7,035
shares, net of 2,965 shares which were withheld for taxes due upon the vesting date.

 Also see Note 14 "Subsequent Events" for additional restricted
share issues occurring after September 28, 2025.

 Performance
Shares

 On
May 3, 2023, the Board approved a grant of 100,000 and 35,000 performance shares to Danny Schoening, CEO, and Karen Hawkins, CFO, respectively.
Each performance share represents a contingent right to receive one share of common stock. The performance shares vest in five equal
increments if, in each case and during a five-year performance period beginning on October 2, 2023, the average VWAP per share of common
stock over a 30 consecutive trading day period equals or exceeds $3.70, $4.45, $5.35, $6.40, or $7.70. The fair value of the shares,
as of the grant date, is $ 320 thousand and will be amortized through December 31, 2025 based on the derived service periods using a Monte
Carlo simulation valuation model.

 On
October 2, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 1. The Company issued a total of
 21,060 shares on October 24, 2023 in settlement of the vested shares, net of tax withheld of $ 27 thousand.

 On
December 22, 2023 and December 29, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 2 and Tranche
3. On January 8, 2024, the Company issued a total of 39,563 shares in settlement of the vested shares, net of tax withheld of $ 91 thousand.

 On
March 11, 2024, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 4. The Company issued a total of
 20,669 shares on March 13, 2024 in settlement of the vested shares, net of tax withheld of $ 46 thousand.

 On
May 17, 2024, 27,000 performance shares vested for reaching the 30-day VWAP for Tranche 5. The Company issued a total of 20,426 shares
on May 17, 2024 in settlement of the vested shares, net of tax withheld of $ 53 thousand.

 As
of September 29, 2024 and September 28, 2025, there were no performance shares remaining to vest.

 The
assumptions and results for the Monte Carlo simulation employed for the performance shares are as follows:

 Schedule of Assumptions and Results for the Monte Carlo Simulation for the Performance Shares

 Assumptions

 Performance Period Start

 10/2/2023

 Performance Period End

 10/1/2028

 Term of simulation (1)

 5.42 years

 Time steps in simulation

 1,365

 Time steps per year

 Common share price at valuation date (2)

 $
 3.04

 Volatility (annual) (4)

 50.0
 %

 Risk-free rate (annual) (5)

 3.37
 %

 Cost of equity (6)

 11.5
 %

 Dividend yield (3)

 0.0
 %

 Tranche 1

 Tranche 2

 Tranche 3

 Tranche 4

 Tranche 5

 Number of performance shares in the Tranche (1)

 Fair Value of One Performance share (7)

 $
 2.75

 $
 2.58

 $
 2.39

 $
 2.18

 $
 1.93

 Total Fair Value of Tranche

 $
 74,345

 $
 69,742

 $
 64,446

 $
 58,819

 $
 52,238

 Derived Service Period (Years) (7)

 0.71

 1.13

 1.60

 2.06

 2.48

 (1)

 Based
 on the terms of the Performance Shares agreement issued by the Company on May 3, 2023.

 (2)

 Closing
 price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ.

 (3)

 Expected
 dividends provided by management.

 (4)

 Based
 on historical volatility of OPXS and comparable public companies.

 (5)

 Interest
 rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital
 IQ.

 (6)

 Estimated
 cost of equity for OPXS as of the Valuation Date.

 (7)

 Based
 on Monte Carlo simulation.

 Stock
Based Compensation Expense

 Equity
compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation
costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized
in the table below:

 Schedule of Unrecognized Compensation Costs

 Recognized
 Compensation Expense

 Unrecognized
 Compensation Expense

 Year Ended

 Year Ended

 Restricted Shares

 $

 $

 $

 $

 Performance Shares

 -

 -

 -

 Restricted Stock Units

 Total Stock Compensation

 $

 $

 $

 $

 The
unrecognized compensation expense for restricted shares and restricted stock units as of September 28, 2025, is expected to be recognized
over a weighted-average period of 0.26 years and 2 years, respectively.

 Note
11 — Defined Contribution Plan

 The
Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees. Company contributions
are voluntary and are determined annually at the discretion of the Board at the beginning of each fiscal year. For the fiscal years ended
September 28, 2025 and September 29, 2024, the Company offered a qualified automatic contribution arrangement (QACA) with a 100% match
of the first 1% and 50% matching of the next 5% and a 2-year vesting requirement. The Company's contribution expense for the fiscal
years ended September 28, 2025 and September 29, 2024 were $ 261 thousand and $ 202 thousand, respectively.

 Note
12 — Stockholders' Equity

 Dividends

 There
were no dividends declared or paid during the twelve months ended September 28, 2025 or September 29, 2024.

stock

the twelve months ended September 28, 2025, there were zero shares repurchased.

the twelve months ended September 29, 2024, there were 110,868 common shares issued to officers and employees, net of tax withholding
of $ 245 thousand, in settlement of 13,000 vested restricted stock units, and 135,000 vested performance shares.

the twelve months ended September 28, 2025, the Company issued 16,885 shares to eleven employees in settlement of 24,000 restricted stock
units, which vested during the twelve months. The shares were issued net of tax withholding of $ 47 thousand.

the twelve months ended September 28, 2025, the Company issued 22,800 restricted shares to the three independent board members which
will vest on January 1, 2026.

the twelve months ended September 28, 2025, the Company issued 7,035 restricted
shares to Mr. George pursuant to his employment as President of the Company. The shares were issued net of 2,965 shares which were
withheld for taxes due upon the vesting date of January 1, 2026. The total fair value for the 10,000
shares was $ 120 thousand based on the stock price of $ 12.00 as of August 12, 2025.

 As
of September 28, 2025, and September 29, 2024, the total outstanding common shares were 6,920,658 and 6,873,938, respectively.

 Note
13 — Income Taxes

 The
income tax provision for the twelve months ended September 28, 2025 and September 29, 2024 include the following:

 Schedule of Income Tax Provision

 2025

 2024

 2025

 2024

 Current income tax expense:

 Current year federal income tax

 $
 1,456

 $
 1,045

 Prior year tax adjustment

 -

 ( 14
)

 Current income tax expense

 1,456

 1,031

 Deferred income tax provision (benefit):

 Federal

 ( 252
)

 ( 25
)

 Provision for income taxes, net

 $
 1,204

 $
 1,006

 As
of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a net carrying value of $ 1.2 million and $ 0.9 million, respectively,
in deferred tax assets represented by deferred tax assets of $ 2.0 million and $ 1.7 million, respectively, and a deferred tax asset valuation
allowance of ($ 0.8) million, against those assets. The valuation allowance has been established due to historical losses resulting in
a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section
382 limitation related to a change in control occurring in fiscal year 2018. As of September 28, 2025 and September 29, 2024, we reviewed
the deferred tax assets and determined it was more likely than not that we would be able to utilize a substantial portion of the deferred
tax asset balance against future earnings. Our assumptions were based on the previous three years earnings trend as well as anticipated
future earnings. During the twelve months ended September 28, 2025, the Company recognized a ($ 252) thousand tax benefit to deferred
tax assets. During the twelve months ended September 29, 2024, the Company recognized a ($ 25) thousand in tax benefit to deferred tax
assets. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis.

 The
income tax provision for Optex Systems Holdings as of September 28, 2025 and September 29, 2024 differs from those computed using the
statutory federal tax rate in the respective years due to the following permanent differences:

 Schedule of Effective Income Tax Rate Reconciliation

 ($ in Thousands)

 2025

 %

 2024

 %

 Tax
 provision at statutory federal rate

 $

 1,334

 $

 1,003

 Nondeductible
 expenses

 -

 -

 Other
 permanent adjustments

 ( 131

)

 ( 2

)

 -

 Prior
 year federal income tax adjustment

 -

 -

 ( 14

)

 -

 Change
 in deferred tax valuation allowance

 -

 -

 -

 -

 Provision
 for income taxes, net

 $

 1,204

 $

 1,006

 Deferred
income taxes recorded in the balance sheets result from differences between financial statement and tax reporting of income and deductions.
A summary of the composition of the deferred income tax assets (liabilities) follows:

 Schedule of Deferred Income Tax Assets (Liabilities)

 As of

 2025

 As of

 2024

 Deferred Tax Asset

 As of

 2025

 As of

 2024

 Stock Compensation

 $

 $

 Inventory Reserve

 Unicap

 Deferred Compensation

 Property and Equipment

 ( 213
)

 ( 233
)

 Intangible Asset Amortization

 Contract Loss Reserve

 Accrued Paid Time Off

 Net Operating Losses

 1,189

 1,223

 Other

 Subtotal

 $
 1,972

 $
 1,720

 Valuation allowance

 ( 773
)

 ( 773
)

 Net deferred asset

 $
 1,199

 $

 The
Company has a net loss carryforward of $ 5.7 million as of September 28, 2025 as compared to a net loss carryforward of $ 5.8 million as
of September 29, 2024. Due to an IRS section 382 change in control limitation which was effective during the fiscal year ended 2017,
it is anticipated that the Company may only realize $ 2.0 million of the current net operating loss carryforward for a net tax benefit
of $ 0.4 million through fiscal year ending in 2037. Accordingly, a valuation allowance of $ 0.8 is recorded as of September 28, 2025 and
September 29, 2024.

 The
Company applied FASB ASC 740-10 and has no unrecognized tax benefits. By statute, the tax years ended September 28, 2025, September 29,
2024 and October 1, 2023 are open to examination by the major taxing jurisdictions to which the Company is subject.

the twelve months ended September 28, 2025, the Company paid $ 1.4 million in income taxes. During the twelve months ended September
29, 2024, the Company paid $ 1.2 million in income taxes. As of September 28, 2025 the Company
has recorded a tax liability of $ 87 thousand.

 Note
14 — Subsequent Events

 On November 4, 2025 the Board
approved board compensation, effective January 1, 2026, for each of Dale Lehmann, Rimmy Malhotra and Dayton Judd of $ 44,000
annually, in cash, combined $ 66,000
in restricted stock issued under
the 2023 Equity Incentive Plan, with 100% vesting on January 1, 2027, share price calculated on the basis of the 10-day (immediately
preceding and including the grant date) VWAP, and the number of shares rounded up to the nearest 100 shares. On November 4, 2025, 4,000
shares each of restricted stock were issued pursuant to the board resolution.

 On December 4, 2025, Danny Schoening notified the
Company that he intends to resign, effective as of December 20, 2025 (the "Effective Date"), from the position of Chief Executive
Officer of the Company. Mr. Schoening will remain on the Board, will continue to serve in the position of Chairman of the Board, and will
continue to serve as the Company's facilities security officer.

 On
December 5, 2025, the Board appointed Chad George, the Company's President, to assume the additional role of Chief Executive Officer
to fill the vacancy left by Mr. Schoening, effective as of the Effective Date. In connection with the appointment, the Company entered
into a new employment agreement with Mr. George as of the Effective Date (the "New Employment Agreement"). Pursuant to the
agreement, Mr. George will serve as the Company's President and Chief Executive Officer through December 31, 2028. Thereafter,
the term of the agreement will automatically extend for successive additional 12-month periods unless Mr. George or the Company provides
written notice of termination at least 90 days prior to the end of the term then in effect. Mr. George's initial annual base salary
under the new agreement is $ 300,000 and will be eligible for a performance bonus based upon a one-year operating plan adopted by the
Company's Board.

 Concurrently
with Mr. George's appointment as Chief Executive Officer, the Board elected Mr. George to serve as a director of the Board, effective
as of the Effective Date, until the Company's 2026 annual meeting of shareholders and until his successor has been elected and
qualified. In connection with Mr. George's election as a director of the Board, the Board increased the total number of Board seats
from four to five.

 On December 5, 2025, the Board also approved compensation for Mr. Schoening as an independent board member, effective
January 1, 2026, of $ 44,000 annually, in cash, combined with $ 66,000 in restricted stock issued under the 2023 Equity Incentive Plan, with 100% vesting
on January 1, 2027, share price calculated on the basis of the 10-day (immediately preceding and including the grant
date) VWAP, and the number of shares rounded up to the nearest 100 shares. On December 5, 2025, 4,700 shares of restricted stock were issued pursuant
to the board resolution.

 Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 None.

 Item
9A. Controls and Procedures

 Evaluation
of Disclosure Controls and Procedures

 As
of September 28, 2025, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer,
an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or
submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's forms,
and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal
Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Principal Executive Officer
and our Principal Financial Officer concluded that, as of September 28, 2025, our disclosure controls and procedures were effective.

 Changes
in Internal Control Over Financial Reporting

the quarter ended September 28, 2025, 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.

 Management's
Report on Internal Control Over Financial Reporting

 Management
is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness
to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

 Management
has conducted, with the participation of our Principal Executive Officer and our Principal Financial Officer, an assessment, including
testing of the effectiveness, of our internal control over financial reporting as of September 28, 2025. Management's assessment
of internal control over financial reporting was conducted using the criteria in the 2013 Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.

 A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis. In connection with our management's assessment of our internal control over financial reporting as required
under Section 404 of the Sarbanes-Oxley Act of 2002, we have not identified any material weaknesses in our internal control over financial
reporting as of September 28, 2025. We have thus concluded that our internal control over financial reporting was effective as of September
28, 2025.

 Item
9B. Other Information

 On
 September 8, 2025, our Chief Executive Officer, Danny Schoening, adopted a written plan for the sale of Company common stock intended
to satisfy the affirmative defense conditions of Rule 10b5-1. The plan has a greater than 90 -day cooling off period, provides for the
sale of up to 110,398 shares if the pricing terms of the plan are met, and terminates no later than December 31, 2026.

 PART
III

 Item
10. Directors, Executive Officers and Corporate Governance

 The
information required by this Item 10 will be included in the Proxy Statement or in an amendment to this Annual Report on Form 10-K and

 Item
11. Executive Compensation

 The
information required by this Item 11 will be included in the Proxy Statement or in an amendment to this Annual Report on Form 10-K and

 Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 The
information required by this Item 12 will be included in the Proxy Statement or in an amendment to this Annual Report on Form 10-K and

 Item
13. Certain Relationships and Related Transactions, and Director Independence

 The
information required by this Item 13 will be included in the Proxy Statement or in an amendment to this Annual Report on Form 10-K and

 Item
14. Principal Accountant Fees and Services

 The
information required by this Item 14 will be included in the Proxy Statement or in an amendment to this Annual Report on Form 10-K and

 Item
15. Exhibits

 (a)(1)

 Financial
 Statements. The following financial statements of Optex Systems Holdings, Inc. are included in Part II, Item 8:

 Report of Independent Registered Public Accounting Firm - Whitley Penn LLP (PCAOB ID 726)

 Consolidated Statements of Income for the years ended September 28, 2025 and September 29, 2024

 Consolidated Balance Sheets as of September 28, 2025 and September 29, 2025

 Consolidated Statement of Stockholders' Equity for the years ended September 28, 2025 and September 29, 2024

 Consolidated Statements of Cash Flows for the years ended September 28, 2025 and September 29, 2024

 Notes to the Consolidated Financial Statements

 (a)(2)

 Financial
 Statement Schedules.

 All
 schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated
 financial statements or notes thereto.

 (a)(3)

 Exhibits.

 See
 Exhibit Index

Note to Draft: Exhibit List and Footnotes subject to HWH review.

 Exhibits

 Exhibit
 No.

 Description

 3.1

 Certificate of Incorporation, as amended to date (1)

 3.2

 Bylaws of Optex Systems Holdings (2)

 3.3

 Charters
 of the Audit Committee, Compensation Committee and Nominating Committee (3)

 4.1

 Description of Capital Stock (4)

 4.2

 Specimen
 Stock Certificate (5)

 10.1

 Lease for 1420 Presidential Blvd., Richardson, TX (6).

 10.2

 Third Amendment to Lease, between Aquiport DFWIP and Optex Systems, Inc., dated January 7, 2010 (7)

 10.3

 Employment
 Agreement with Karen Hawkins, dated as of January 1, 2024 (8)

 10.4

 Form of Lease (9)

 10.5

 Form of Letter of Credit (10)

 10.6

 Form of Award/Contract between the Company and US DLA, dated July 3, 2017 (11)

 10.7

 Employment Agreement with Danny Schoening, dated November 28, 2022 (12)

 10.8

 Sixth Amendment to Lease Agreement (13)

 10.9

 First
 Amendment to Lease (13)

 10.10

 Optex Systems Holdings, Inc. 2023 Equity Incentive Plan (14)

 10.11

 Form
 of Performance Shares Agreement (Executives) (19)

 10.12

 Form
 of Restricted Stock Agreement (19)

 10.13.1

 Form of Incentive Stock Option Agreement (19)

 10.13.2

 Form
 of Non-Qualified Stock Option Agreement (19)

 10.14

 Form of Stock Appreciation Rights Agreement (19)

 10.15

 Form of Restricted Stock Unit Agreement (19)

 10.16

 Business
 Loan Agreement effective as of May 22, 2025 by and among Optex Systems Holdings, Inc., Optex Systems, Inc., and Texas Capital Bank
 (including Note) (15)

 10.17

 Asset
 Purchase Agreement and Contract Manufacturing Agreement (RUB Aluminium s.r.o.) (18)

 10.18

 Form
 of Director and Officer Indemnification Agreement (18)

 10.19

 Employment
 Agreements with Chad George, dated August 11, 2025 (20)

 10.20

 Employment Agreements with Chad George, dated December 5, 2025

 14.1

 Code of Ethics (16)

 19.1

 Insider Trading Policy

 21.1

 List
 of Subsidiaries — Optex Systems Holdings, Inc. (17)

 23.1

 Consent of Independent Registered Public Accounting Firm – (Whitley Penn LLP)

 31.1

 Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

 31.2

 Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

 32.1

 Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

 32.2

 Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

 97.1

 Clawback
 Policy (19)

 101.INS

 101.SCH

 101.CAL

 101.DEF

 101.LAB

 101.PRE

 Cover

 (1)

 by reference from our Annual Report on Form 10-K for the year ended October 3, 2021.

 (2)

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

 (3)

 by reference from our Amendment No. 1 to Registration Statement on Form S-1 filed on July 23, 2015.

 (4)

 by reference from our Annual Report on Form 10-K for the year ended October 3, 2021.

 (5)

 by reference from our Registration Statement on Form S-1 filed on May 19, 2009.

 (6)

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

 (7)

 by reference from our Amendment No. 4 to Registration Statement on Form S-1 filed on June 14, 2010.

 (8)

 by reference from our Current Report on Form 8-K, filed on January 5, 2024.

 (9)

 by reference from our Current Report on Form 8-K, filed on November 23, 2016.

 (10)

 by reference from our Current Report on Form 8-K, filed on November 23, 2016.

 (11)

 by reference from our Current Report on Form 8-K, filed on July 10, 2017.

 (12)

 by reference from our Current Report on Form 8-K, dated November 21, 2022.

 (13)

 by reference from our Annual Report on Form 10-K for the year ended October 3, 2021.

 (14)

 by reference from Annex B to our Definitive Proxy Statement on Schedule 14A, filed on January 17, 2023.

 (15)

 by reference from our Quarterly Report on Form 10-Q for the quarter ended June 29, 2025.

 (16)

 by reference from our Registration Statement on Form S-1 filed on May 19, 2009.

 (17)

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

 (18)

 by reference from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024.

 (19)

 by reference from our Annual Report on Form 10-K for the year ended October 1, 2023.

 (20)

 Incorporated by reference from our Current Report on Form 8-K, filed on August 11, 2025.

Management contracts and compensatory plans and arrangements.

 Item
16. Form 10-K Summary

 None.

 SIGNATURES

 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

 OPTEX
 SYSTEMS HOLDINGS, INC.

 By:

 /s/
 Danny Schoening

 Danny
 Schoening, Principal Executive Officer and Director

 Date:
 December 16, 2025

 By:

 /s/
 Karen Hawkins

 Karen
 Hawkins, Principal Financial Officer and Principal Accounting Officer

 Date:
 December 16, 2025

 Pursuant
to the requirements of the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

 Signature

 Title

 Date

 /s/
 Danny Schoening

 Danny
 Schoening

 Chairman,
 Principal Executive Officer and Director

 /s/
 Karen Hawkins

 Karen
 Hawkins

 Principal
 Financial Officer and Principal Accounting Officer

 /s/
 Rimmy Malhotra

 Rimmy
 Malhotra

 Director

 /s/
 Dale Lehmann

 Dale
 Lehmann

 Director

 /s/
 Dayton Judd

 Dayton
 Judd

 Director