Irvine Sensors acquires Optex Systems, Inc.

COSTA MESA, Calif., 3 Jan. 2006. Irvine Sensors Corp. announced today that it has spent $14 million to purchase 70 percent of the stock of Optex Systems, Inc., a privately held company located in Richardson, Texas.

Jan 3rd, 2006

COSTA MESA, Calif., 3 Jan. 2006. Irvine Sensors Corp. announced today that it has spent $14 million to purchase 70 percent of the stock of Optex Systems, Inc., a privately held company located in Richardson, Texas.

Irvine leaders plan to acquire the remaining 30 percent of shares pending approval at their shareholders meeting in March.

Founded in 1987, Optex manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. Its products are installed on the majority 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 Future Combat Systems (FCS) Stryker vehicle. Optex's revenues for calendar 2005 were approximately $19 million.

Irvine Sensors Corp., headquartered in Costa Mesa, Calif., is primarily engaged in the development and sale of miniaturized infrared and electro-optical cameras, image processors and stacked chip assemblies and research and development related to high density electronics, miniaturized sensors, optical interconnection technology, high speed network security, image processing and low-power analog and mixed-signal integrated circuits for diverse systems applications. For more information, see www.irvine-sensors.com.

"The acquisition of Optex not only nearly doubles our revenues, it accelerates our transition toward a product-dominated business with the ability to more aggressively exploit our advanced technology," said John Carson, CEO and president of Irvine Sensors.

"Optex profitably delivers high volume products, under multi-year contracts, to many of the same customers that are central to our core vision systems business strategy. Optex has an enviable reputation and credibility with those customers as a reliable supplier. We believe this transaction will not only enhance their ability to serve their existing customers, but will also set the stage for them to become a center of manufacturing excellence for our products as well. We also look forward to the prospects of integrating some of our night vision and laser imaging technologies with Optex's optical sights to expand both of our addressable markets."

Optex manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. It delivers its products both directly to the military services and to prime contractors for military land vehicles.

Tim Looney, founder and president of Optex Systems, said, "From the beginning of our interaction, it was apparent that the marriage of Irvine Sensors' technology and Optex's manufacturing and market presence could be a powerful combination. I look forward to the challenges of exploiting that opportunity."

Irvine Sensors' purchase price for the transaction was $14 million in cash, subject to adjustment upon completion of Optex's 2005 audit, plus a cash earnout of up to $4 million payable over the next three years if certain cash flow milestones are achieved.

The purchase was fully financed by a combination of $4.9 million of senior secured debt from Square 1 Bank under a four-year term loan and $10 million of subordinated secured debt from Pequot Ventures, the private equity arm of Pequot Capital Management, Inc. Approximately $7.4 million of the Pequot debt is convertible into common stock of Irvine Sensors at the rate of $2.60 per share, with the balance potentially convertible at the same rate, subject to stockholder approval. In connection with the Pequot financing, the company granted warrants to purchase approximately 1,346,000 shares of Irvine Sensors common stock at an exercise price of $3.10 per share, of which approximately 344,000 shares are subject to stockholder approval. Irvine Sensors also received a $2 million revolving line-of-credit from Square 1 Bank to address its working capital requirements subsequent to the Optex acquisition. Square 1 Bank is a commercial bank providing specialized financial services to venture capital firms and the companies in which they invest, and Pequot Capital Management is a diversified investment firm with more than $7 billion of funds under management worldwide.

Subject to stockholder approval, the company will acquire the remaining 30 percent of Optex's stock in exchange for the issuance of 2.7 million shares of Irvine Sensors' common stock. The authority for this subsequent transaction, the conversion of the remaining portion of the Pequot debt and the issuance of shares pursuant to contingent warrants will be sought at the Irvine Sensors Annual Meeting of Stockholders presently scheduled for March 7, 2006. If stockholder approval is not obtained, the balance of the Pequot debt of approximately $2.6 million will remain payable in cash in two years.

Martin Hale, Jr., Managing Director of Pequot Ventures, will be nominated for election to Irvine Sensors' Board of Directors at that March 2006 Annual Meeting. "We believe that Irvine Sensors is precisely the kind of technology-rich company that can be the platform for highly accretive growth, if provided with appropriate financing. That is the role we play, and we are delighted to be a part of this initial transaction toward that goal," Hale said.

Pequot Ventures is the direct venture investment arm of Pequot Capital Management, Inc. and has a direct investment focus on startup, growth stage and later-stage companies in the technology, defense and healthcare sectors. Pequot's goal is to create value by bringing energy and substantial industry expertise to its portfolio companies through the collective intellectual capital, deep operating experience and extensive network of its investment team. The firm leverages its multi-billion dollar presence across both public and private equity markets to help build competitive, sustainable businesses in fast changing environments throughout their lifecycle. Pequot accomplishes this goal in close partnership with the founders and management teams of its portfolio companies.

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