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Optical Systems, Inc.

Rating: Speculative Buy

Market Data July 8, 2008

Symbol OPSY

Exchange OTCPK Current Price $0.16

Price Target $0.50

Rating Speculative Buy

Outstanding Shares 94.6 million

Market Cap. $15.1 million

Average Volume NA

Source: Yahoo Finance, Analyst estimates

Company Overview

Optical Systems Inc. (OPSY), through its wholly owned subsidiary, Automotive Software

Designers, Inc., provides front office software Save-A-Deal for automotive dealerships

nationwide. in the US.OPSYs save-a-deal software has been shown to significantly improve

dealer efficiency by automating workflow within a dealership, eliminating manual forms and

reducing the time needed to desk and finance a deal. T T he Company further differentiates its

software from industry competitors products by providing (unlike other players) also provides

value- added services such as management management consulting, network support and

business development call centerancy and call center services to its clients. At present, OPSY has21 franchised automotive dealerships using its front office software. In June 2008, Recently, the

Company announced the opening of a business development call center which will further

support its save-a-deal customers. Iintegrated with OPSYs sales information system the

business development call center will help auto dealers convert more leads into showroom sales

by promptly responding to customer enquiries. its software Save-A-Deal with business

development call center to enable its clients convert more leads into showroom sales. Currently,

the Company has a client base of 21 automotive dealers using its software products across the

US.

The Recently, the Company has installed completed installation of its save-a-deal software at

Frank Kent Honda, one of the oldest and largest Honda dealers in Teas. Hiley Mazda This and

other dealer relationships are enhancing the Companys visibility and multiplying its sales

opportunities. , the largest automotive dealer in North Texas. This is expected to give a further


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boost to the Companys earnings visibility. More recently, OPSY announced a marketing

partnership with Also, to enhance its marketing efforts the Company entered into a marketing

partnership deal with Alphatrade.com, a media and marketing company, where Alphatrade

will assist OPSY with digital marketing, media and networking. The Company has raised $2.4

million in capital since its inception and is contemplating a $2 million strategic financing

arrangement with potential partners. plans to These funds would be used for marketing

purposes and expanding the Companys customer base. undertake a private placement of its

common stock to raise funds for future expansion.

In November 2007, tThe Company, formerly known as Optical Systems Holdings, acquired 100%

of the issued and outstanding stock of Automotive Software Designers, Inc (ADS), which owned

the save-a-deal software. Prior to closing this deal, ADSs owner B.J. Grisaffi acquired a majority

stake in OPSY. Mr. Grisaffi has more than 30 years of automotive dealership and relatedexperience and currently serves as OPSYs President, CEO and a director. on November 19,

2007.TheIn addition, two prominent directors have been added in 2008. Keith Orr, a legendary

figure in the automotive industry and CEO/co-owner of Orr Automotive, recently joined

OPSYs board. So has William Mokry, an automotive industry veteran who held executive

management positions with two major U.S. auto manufacturers. Mr. Mokry currently owns and

manages a multi-location sub-prime automobile sales and finance company.

Mmanagement believes that the new business development call center the Company opened

last month significantly enhances the value proposition OPSY offers customers since it frees

dealership sales professionals to focus on selling and closing car sales, rather than chasing down

leads. The save-a-deal business development call center is unique in that it is staffed by trained

vehicle sales professionals and not the more typical low-skill call center workers. Preliminary

results suggest that save-a-deal dealerships utilizing the services of the business development

call center can expect to more than double closing rates for their stores. Companys strong

network of dealers in Texas and other states, and a strong product portfolio would enable it to

cater to the varied needs of automobile dealers. The Companys shares are traded under the

symbol OPSY in Pink Sheets.

Investment Highlights

Auto dealerships seek competitive advantages through better sales tools


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The Company serves a competitive, highly fragmented automotive dealership market consisting

of some 21,800 franchised dealers nationwide and tens of thousands of independent dealers.

Intense competition for customers has given car buyers strong bargaining power. As a result,

industry profit margins are under pressure. Unable to boost prices on most vehicle models,

dealers are focusing instead on maintaining margins through greater efficiency. OPSYs save-a-

deal front office software enables dealers to significantly improve efficiency by automating

workflow, eliminating paper forms and streamlining deal financing.

Dealers desperate for sales follow-up tools

OPSY is addressing an unmet market need by developing call centers that provide customer

follow-up calls for save-a-deal dealers. The ability to offer this highly profitable service is a

natural offshoot of the save-a-deal package since the system requires the dealers sales associate

to acquire a customers information at the point of sale. Auto dealerships are in desperate need

of efficient, reliable sales follow-up tools and the Companys call centers are uniquely positioned

to fill that need.

OPSYs integrated software is supported by valued-added services Wide range of product

offerings

The Companys save-a-deal software combines sales prospecting, CRM, deal desking and

inventory management functionalities in one integrated tool. OPSY also offers its dealer

customers value-added services such as management consulting, networking solutions and

business development call center support. offers a wide range of services through its product

Save-A-Deal. These include Internet CRM, desking, inventory management, report generation

for the management, and DMS integration with inventory and finalized deals. Recently, the

Company integrated its Save-A-Deal software with its business development call center to

enable automotive dealers to convert more leads into showroom sales by responding promptly

to customer inquiries.The Companys feature-rich Besides, the Company provides value added

services such as management consulting and network solutions to the automsoftware and

related services differentiates OPSYs product from the competition. Other software vendors

serving this niche market offer software limited to only one particular application such as otive

dealers across the US. The wide range of products and services provided by the Company gives

an edge over other players which provide solitary products with particular type of features such

as desking, or inventory management or Internet CRM.


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Strong demand from competitive automotive dealer market

The Company serves a very competitive and highly fragmented automotive retail industry

which comprises of about 21,800 franchised dealers. A large number of players and strong

bargaining power of buyers has resulted in competitive margin pressures. Since the dealers havevery little influence on the pricing front, they look for achieving higher cost efficiency to

improve margins. Besides, the increase in vehicle population, consolidation in the dealer

segment, and increased insurance & finance related services have necessitated automation in

day to day operations. Integrated software helps to streamline operations and improve

efficiencies and also offers a better return on investment (ROI) to the customers.

Installed dealership base and new marketing partnership Strategic deals to boost revenue

The Company has installed its save-a-deal software at 21 dealerships nationwide and recently

completed a the software installation at of the Save-A-Deal software solution system at Frank

Kent Honda, one of the Hiley Mazda of Arlington, the oldest and largest Honda dealerships in

Texas. largest automotive dealer in North Texas. The Company plans to further boost its brand

visibility and sales prospects through a marketing partnership with has also entered into a deal

with Aalphatrade.com. This , a marketing company is known for its ability to tailor its programs

to target specific demographics in a cost-effective manner. Brand awareness in the automotive

industry is essential to OPSYs long-term success; Alphatrade is designing a marketing program

specifically tailored to achieving this objective. that helps in brand building, promotions and

networking opportunities. Such new customer acquisitions and marketing efforts would

generate revenues for the Company in the near term.

OPSY anticipates rRobust revenue growth and profitability in anticipated for 2008

With all the The Company has finished the development work on of its principal software

package essentially completed, the Companys 2008 R&D spending requirements are minimal

and OPSY is free to redirect its resources towards marketing and sales. Management targets 50%

quarter-over-quarter growth over the next several quarters and estimates 2008 revenues will fall

in a $0.7 million range. High gross margins on both software and business development call

center sales (i.e. 95% margins) enabled OPSY to turn profitable in the first quarter of 2008 and

we anticipate the Company will report a modest net profit for full-year 2008. product, and

research and development expenditure is expected to be very minimal. The expenditures during

the current year are expected to be directed more towards actual results. The Company expects


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to post a staggering revenue growth of 1,057.20% to $700,000 compared to $60,491 recorded a

year ago. Additionally, a strong net margin of 95% in the software and business development

industry is expected to ensure robust growth for the Company.

Experienced management team directs OPSYsto steer Companys future growth

Company President/ and CEO, Mr. B.J. Grisaffi, has more than 30 years of experience managing

in management of automobile dealerships. He, along with his team, pioneered the sSave-aA-

dDeal program and led the development of the software. . Mr. Keith Orr, who recently joined

the Company as a director, of the Company, is a legendary figure name in the automotive bile

industry He was the CEO and majority owner of Orr Automotive Group. and brings to

OPSYhas substantial experience in marketing, sales, product development and dealership

management experience. In July, William Mokry, an automotive industry veteran who held

executive management positions with two major U.S. auto manufacturers, was added to the

board. Mr. Mokry currently owns and manages a multi-location, sub-prime automobile sales

and finance company. The industry veterans would leverage their knowledge to foster growth

for the Company and increase its market share.


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Automotive Dealership Market Retail Industry growing need for

automated operations

Automotive retail industry - A Hhighly fragmented and competitive market industry

The vast mMajority ofthe new car sales in the automotive retail sales in the U.S.are is generated

by some 21,800 franchised automotive dealerships nationwide which have combined annual

revenues of approximately $675billion. The industry is highly fragmented, with the top

dealerships automotive retail industry is highly fragmented with the top public players

accounting for less than 10% of industry revenues. However, the automotive dealership industry

has begun to consolidate in recent years due to declining new vehicle sales, competition from

on-line sources, Moreover, the industry has seen consolidation in the past few yand other

competitive challenges which have resulted in ears. Increased competition and businessconsolidation have resulted in pricing and margin pressures. Unable to raise vehicle prices, car

Given the fragmented and competitive nature of the industry, the dealers are focusing instead

on do not enjoy significant pricing advantage, and therefore need to focus on improving

efficiencies as a means for boosting profits. This scenario is creating demand for This will

generate demand for integrated software products that can help to improve front office process

efficiency. Vendors of value-added software and services such as ies. This provides tremendous

opportunity for Optical Systems, Inc. are uniquely well-positioned to address the evolving

needs of this niche market. to market and sell its product and services in this market.

Exhibit 1: State-by-state breakdown of auto dealerships Fragmented US Automotive Dealer Industry


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Alabama345

Arizona 256

Montana 132

Washi ngton 383

Oregon 274

Idaho 123

Nevada 118

Utah 153

New Mexico 140

Colo rado 284

California1,594

Texas 1,346

Oklah oma 299

Kansas 258

Wyoming 70

North Dakota96

Arkansas267

Nebraska 213

South Dakota

117

Minnesota38

Iowa369

Missouri494

Louisiana337

Mississippi242

Tennessee

420

Kentucky

298

Wisconsin597

Michigan759

Illinois934

Indiana521

Ohio958 West

Virginia169

Pennsylvania1,161

New York1,112

Virginia551

North Carolina692

Georgia603

SouthCarolina

326

Florida948

Maine144

Vermont97

New Hampshire 169

Massachusetts 478

Maryland 358

Rhode Island 63

New Jersey 574

Delaware 65

Conn ecticut 320

Alaska 38

Hawaii 66

D.C. 1

Source: NADA

Exhibit 2: BreakdownNumber ofU.S. auto dealerships, by volume of new-unit sales

0

2,500

5,000

7,500

10,000

0-149 150-399 400-749 750+

Numberofdealerships

1988 1998 2008

Source: NADA Industry Analysis Division


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More Growing number of vehicles on the road today than ever beforeand increased product

offerings

The number of vehicles operating in operation in the United States grew to was more than 248

million in as ofJune, 2007. The number of vehicles on the road increased 2% annually between2000 and 2007. had increased at an average rate of 2 percent (2002-2007). Although the new

vehicles registrations have declined modestly in recent years, the used car market remains

robust, providing automotive dealers with ions have gone down marginally in the recent years,

the second-hand vehicles market provides ample opportunities for increasing sales volume In

addition to selling cars, most dealers now generate significant incremental profits from selling

insurance and financing services to their customers. y for autoThe increasing complexity of

automotive dealership operations has created the need for software tools that can streamline

and automate several processes. motive car dealers to increase their volume of sales. Besides, carsales, automotive retailers also provide insurance and financial services to their customers.

Increased nature of operations increases the demand for automated streamlined operations.

Exhibit 3: Total Vehicles in operation by year

180

200

220

240

260

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Million

s

Source: The Polk Co. & NADA

Exhibit 4: Aftermarket income (As % of new- and used-vehicle department gross profit)


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0%

5%

10%

15%

20%

25%

30%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Finance and insurance Service contract and other


Margin gains targeted through Lower profit calls for efficiencies

The Iintense competition among in the automotive dealers market has led to declining a fall in

industry profits. The profitability of s for new vehicles sales hasve been adversely severely

impacted by lower sales volume, large inventories, generous consumer incentives, and higher

floor plan and energy costs. In the last During the last two years, net profits on for new vehicle

sales have fallen s gone below the breakeven level for most automotive dealers. As a result,

automotive dealerships must now rely on used car sales to generate more of their profits.

AltThough net profits on for used car sales have declined marginally in recent years, these sales

remain has shown a marginal decline for automotive dealers, it is still very attractive compared

to new car sales. NADA (National Automobile Dealers Association) claims that despite lower

profits, dealer the gross dealership industry margins have remainedbeen relatively stable; it is

only , while net profit margins that have declined. To improve net profit margins, the

automotive dealers are seeking way to reduce look for reducing overhead and automate

processes, expenditure by installing software and other efficiencyt software tools that can

provide a rapid return on investment. products that could generate improved ROI.

Exhibit 5: New-vehicle department net profit Exhibit 6: Used-vehicle department net profit


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-50

0

50

100

150

200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

'000s$

0

40

80

120

160

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

'000s$


Clutteredof software competitive landscapeproviders with diverse offerings to the

automotive dealers

Many vendors have developed software with applications for automotive dealerships; product

offerings range from The market for software solutions in the US automotive retail industry

comprises of various players providing diverse offerings, starting from pure CRM- related

software to Internet-based applications and database management services. This niche software

market is characterized by e industry is pronrapidly e to changing software technology needs,

continuous innovations and a growing emphasis on ease of use. Factors that determine the most

successful software vendors are the size of the ease of operations. The highly competitive and

fragmented industry comprises of players focusing purely on automotive software and other

software providers. Increasing installed customer base, hassle- free usage, strongbranding and

increased product functionalityofferings. will be some of the key success factors.

OPSY offers the industrys most complete end-to-end software solutions for car sales and

dealership front office operations. The Company further differentiates its product with value-

added services such as ptical Systems Inc. expects to grow on the back of exhaustive offerings of

its premier software Save-A-deal. Additionally, the Company, unlike other software providers,

offers services such as management consulting, networking solutions and business developmentcall center services for save-a-deal dealershipsto the automotive dealers.


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Exhibit 7: OPSY cCompetitive advantage of Optical Systems, Inc.

Source: Company Reports

Product Strategy - One stop shop for a wide range of product offerings

OPSY has developed a The Company offers superior qsoftware solution that provides a broad

range of functionalities. uality products wThe Company markets the industrys only ith a wide

variety of features. This makes Optical Systems the only integrated lead sourcing, Internet CRM,

desking and inventory management tool. service provider.In addition to feature-rich software,

OPSY supports its save-a-deal customers with The Company also provides business

development call center, solutions, management consulting service and network solution

services. s to its customers, unlike the other software providers, which have limited OPSYs

President/offerings. Company CEO Mr. B.J. Grisaffi, and new directors Mr. Keith Orr, and

William Mokry haveing extensive dealership management backgrounds and have imparted

Optical

Systems, Inc

Software Management Network Call Center

The Reynolds& Reynolds

Software Professional IT Solutions

AutomaticData

BusinessOutsourcing

DealerstrackHoldings Inc.

Software

CobaltInternet

Advertising and


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their accumulated wisdom in the Companys experience in the automotive dealership industry,

impart the much required guidance in developing a feature-rich software product.

Save-a-deal softwareOptical Systems Inc. Portfolio

The Companys save-a-deal software offers customers the following: portfolio includes front

office software Save-A-Deal with various features catering to the needs of individual clients. It

also provides various services such as management consulting service and network solutions to

its clients. In June 2008, the Company integrated its Save-A-Deal software with its business

development call center. This move was aimed at enabling automotive dealers to convert more

leads into showroom sales by responding promptly to customer inquiries.

The Company offers the following products and services:

-Document and source all sales prospects from the Internet, telephone, walk-in traffic and

appointments;

- Facilitate, control and monitor follow-up with the CRM tool;

- Control and monitor the sales process with a customized desk dealing tool;

-Control new and used vehicle inventories with inventory management tools.

Exhibit 8: Products and services


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Source: Company Reports

The front office software Save-A-Deal is the Companys premier product and encompasses

features such as deal desking, Internet CRM capabilities, drivers license scanner, inventorymanagement, and finance department menu.

The Company also provides management consulting tofor dealerships on a weekly basis,

drawing on the experience of . The Company uses personnel who have held positions such as

worked at various levels (such as General Manager, Sales Manager and Finance and Insurance ,

F&I Manager.) for this service. Recognizing the industrys desperate need for customer follow-

up calls, OPSYently, the Company has integrated its sSave-aA-dDeal software with a the

business development call center that will o enable automotive dealers to convert more leads

into showroom sales.

The Company also provides network services that help to automotive dealers to solve their

complex ITnetwork problems. Few dealerships have the in-house This helps the dealers as they

dont have the technical expertise to address network issues. solve such problems.

Optical Systems Inc. Products and Services

Products Services

Save-A-Deal Software

Deal Deskings SalesDepartmentOne Piece

FinanceDepartment

Menu

InventoryManagement

BusinessDevelopment

CenterSolutions

Save-A-DealReports

Internet CRMCapabilities

DriversLicense

Scanner

DMSIntegration

ManagementConsulting

NetworkSolutions


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Business Strategy

The Companys has a sound business strategy that encompasses every all aspect of its

operationss of the business from product development and positioning to marketing, brand

building and creation and marketing plans to funding strategiesy.

Call center solution enhancess for customer acquisition and retention

OPSY is enhancing its value proposition to automotive dealerships by leveraging the customer

leads gathered through the front office software with business development call centers which

ptical System, Inc. helps its customers to convert more leads into showroom sales. Preliminary

results indicate that dealers using the support services of the business development call center

can expect to more than double closing rates for their stores. The Company provides call center

frees dealership sales personnel from mundane, low value tasks such as solutions such as

handling incoming preliminary sales inquiries, making outbound follow up sales calls to

customers and qualified prospects, and calling\emailing prospective Internet leads. The

Company staffs its call center with trained vehicle sales personnel instead of the inexperienced,

low skill workers typically associated with call center operations. resses on making quality calls

to the customers and provides rigorous industry training to its business development executives

to acquire the requisite skills.

Management consulting services and network services furtherto enhance offerings

OPSY makes mThe Company provides mananagement consulting services available to its auto

to tdealer customers and also he automotive dealers in the United States through its panel of

expert personnel. Also, the Company caters to its customers needs for technical expertise to

solve complex network issues. The Company uuses its contacts with senior network engineers to

assist customers in solve complex network issues. of the dealers.

Plans to shift from R&D to revenue generation

With product development essentially complete, OPSY is shifting its focus from research and

development to product sales and marketing. Management targets growth averaging 50% per

quarter over the next several quarters and shifting its marketing plan into high gear with

Alphatrades helpLast year, the Company invested in its R&D activities to develop the product,


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and will now shift its focus to cash on the product sales. The first quarter ended March 2008 has

shown a remarkable revenue growth at $134,680, as compared to the 2007 revenues of $60,491.

The Company plans to lower its R&D expenditure in 2008.

Creating brand awareness with the help of alphatrade .com

The Company recognizes that is trying to generate brand awareness of its product within the

automotive marketplaceindustry is essential for its longer-term success. Accordingly, OPSY is

partnering with which is essential for its commercial success. The Company has recently tied up

withmarketing guru Alphatrade to create and roll out a highly targeted and effective marketing

campaign. Trade which is developing a marketing plan for the Company to build brand

awareness among the automotive retailers.

Plans to raise funds via an equity private placement

The Company currently has 21 franchised dealers using its save-a-deal software and is

discussing a strategic financing arrangement with potential partners which could raise $2.0

million in additional capital and fund further expansion of its marketing efforts and customer

base. has recently added a new software developer as part of its expansion plans. The Company

plans to raise fund through private placement for its future expansion.

Exhibit 9: Business Strategy


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Source: Beacon Equity Research

Competitive Analysis

OPSYs closest direct competitor, DealerTrack Holdings, generates annual sales approaching

$250 million. DealerTrack Holdings and other competitors are described below:

DealerTtrack Holdings Inc

DealerTtrack Holdings provides on- demand software and data solutions for to U.S. the

automotive dealerships. retail industry in the US. It is a public limited company. The company

utilizes the Internet to link automotive dealers with banks, finance companies, credit unions and

other financing sources, and also other service and information providers, such as the major

credit reporting agencies. As of December 31, 2007, DealerTrack Holdings had the Company has

a network ofmore than 22,000 automotive dealers (approximately 90% of all franchised dealers)

in its network and,over more than 450 financing sources as well as other and a number of other

service and information providers. to the automotive retail industry in the US. The company is

headquartered in Lake Success, New York and primarily operates in the U.S. and Canada.

Business

Strateg

Creatingbrand

awareness

Raisingfunds viaprivate

placement

Call cCenter&consultancysservices forcustomeracquisition

Shiftfrom

R&D torevenueenerati


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Automatic Data Processing

Automatic Data Processing, Inc. (ADP), is primarily engaged in providesing computerized

transaction processing, data communication and information services. It is a public limited

company providing business outsourcing solutions. ADP also provides payroll processing(including full departmental outsourcing) and human resource administration services in

Canada and Europe. It also offers wage and tax collection, and remittance services in Canada.

ADP was incorporated in 1961, and is headquartered in Roseland, New Jersey. It primarily

operates primarily in the U.S. and has 46,000 employees.

The Reynolds and Reynolds Company

Reynolds and Reynolds Company is an integrated solutions provider to automotive retailers.

The cCompany provides a range of services such as information technology, software solutions

and professional services to the retail automotive segment. ItThe company also offers its

products and services for to original equipment manufacturers. It is a private The company

operatinges primarily in the U.S. and Canada and employings about 4,300 people.

Cobalt Group

The Cobalt Group (Cobalt) provides Internet advertising and marketing services such as lead

management, inventory marketing, image marketing advanced vehicle research, pre-owned

marketing and Spanish-language marketing to automobile dealers and manufacturers. The

company's marketing services enable auto manufacturers and dealers in the automotive retail

market to build brands through marketing and Internet advertising primarily through the

Internet. Privately-owned Cobalt is a privately held company. It works with more than 27

manufacturers and 12,000 franchised dealers across throughout the U.S.

Financial Analysis

Financial Record

OPSY had sales totaling For the year 2007, the Company had sales of$60,491 in 2007. The , as the

Company became active in November only since October 2007 when it acquired Automotive

Software Designers, Inc. For the quarter ending March 2008, the Company posted revenues of

$134,680. The management expects the full year revenue for 2008 to reach a staggering $700,000


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backed by its expansion plans and existing contracts. Sale of software would account for a lions

share with anticipated revenues of $550,000, while the balance $150,000 would be generated

from business development.

Total Ooperating expenses totaled incurred in 2007 were $157,013 in 2007, with pPayroll andrelated fringe costs accounting for about 59.0% of the total , and administrative expenses and

selling & marketing expenses constituting 24.6% and 14.3%, respectively. The Company plans to

increase sales and marketing expenditures in 2008 as its focus shifts from expects its

administrative cost to constitute over 90% of the total operating expenses in 2008 as its shifts its

focus more towards actual revenue generation than on research and development to revenue

generation.

OPSYThe Company recorded a net loss of $109,522 in 2007. Net income turned positive in the

first quarter of 2008 as a result of revenue growth that allowed for improved absorption of

overhead costs. on account of high operating expenses and lower revenues. However, the

Company posted a net income of $7,940 for the quarter ended March 2008, with an increase in

revenues and decline in operating expenses.

Exhibit 10: Selected financial data from income statement data

First quarterended March

31, 2008*

Year ended

December 31,2007

Revenue $134,680 $60,491

Total OperatingExpenses

$127,190$157,013

Operating IncomeGrossProfit

$7,940134,680 (109,522)$60,491

Net Income / (Loss) $7,940 ($109,522)

EBITDA ($10,546) ($106,047)

Source: Company Reports, Pink Sheets

* Quarter ending March 31, 2008

Liquidity and capital requirements

As of March 31, 2008, the Company had cash and equivalents of $124,475 and no long-term

liabilities. However, OPSY had a working capital deficit (excluding cash) of assets worth $714,137

and current liabilities of $90,211. The Company had enough short term liquidity in the form of

cash and cash equivalents which stood at $124,475. The Company also had a working capital


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(excluding cash) deficit of approximately $11,484. The Company will likely need to raise

additional external financing to fund its 2008/09 business plan and is contemplating a $2

million strategic financing arrangement.

Exhibit 11: Selected financial data from balance sheet data

March 31,2008

Cash & cash equivalents $124,475

Net working capital( excluding cash)

($11,484)

Total assets $ 714,137

Total long term liabilities N/A

Total current liabilities $90,211

Stock holders Equity( deficit )

$633,868

Source: Company 10-QReports, Pink Sheets


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Revenue Future Outlook

With development work on its software product essential completed, OPSY is switching its

focus to revenue generation. The Company is already off to a strong start in 2008, recording first

quarter sales of $134,680 and a modest first quarter net profit. Optical Systems Inc. hasdifferentiated itself in a widely cluttered industry by offering quality products and services to

the consumers. Its unique offerings in the form of being the only integrated Internet, desking

and inventory management service provider has helped the Company to creaManagement is

targeting 50% quarter-over-quarter sales growth for the next several quarters. We expect OPSY

to generate 2008 revenues in a $0.7-0.9 million range, which will consist of $0.2-0.4 million in

business development call center sales and around $0.5 million in software sales. te a niche p

osition in the market. The Company expects to grow rapidly through its existing contracts and

by implementing its expansion plans.

The Companys principal competitor, DealerTrack Holdings, produces annual revenues in a

$250 million range supplying a limited software product to around 90% of the nations franchise

auto dealers. Simply capturing 10% of that market creates a $25 million market opportunity for

OPSY. Going forward, we anticipate growth in OPSYs revenues to around $3.5 million in 2009


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and $7 million in 2010, with sales rising to $17.5 million by 2012. Recurring revenues from the

business development call centers provides a powerful tool for leverage software sales.

Reflecting its high gross margins and lean operating structure, we expect OPSY to remain

solidly profitable for full-year 2008 and beyond.

Valuation Analysis

OPSYs competitors were recently trading at Price/Sales multiples averaging around 2.6 times

revenues and forward Price/Sales multiples averaging about 2.5 times revenues. Because of its

higher projected revenue growth and recurring revenues from call center operations, we believe

OPSY shares warrant a premium multiple relative to DealerTrack Holdings. We value OPSY

shares at a 3.0 times forward Price/Sales multiple. Optical Systems, Inc. provides front officesoftware solutions to the automotive dealers in the United States. The Company has created a

niche position in the market by emerging as the only integrated Internet, desking and inventory

management service provider. The companies mentioned below as the peer group companies of

Optical Systems, Inc, such as Dealertrack Holdings Inc and Automatic Data Processing Inc have

more diversified products in their portfolio. However, one or all of their segmental businesses

compete directly with Optical Systems, Inc.

Valuation Analysis

Exhibit 12: Peer group

CompanyName

TickerSymb

ol

SharePrice

($)

Market Cap.

($Million

)

PE P/S

20072

0082

0092

0072

0082

009

DealertrackDealerTrack

HoldingsInc TRAK

$14.7407

628599.78

21.713.79

35.4

11.44

12.0

10.05

2.328

2.503

2.

41.73

AutomaticDataProcessingInc ADP

$42.6410

2,2131,825.40 19.40

19.117.4

7

17.715.3

62.54

92.63

1

2.52.12

Averagefor the

20.516.6

27.2

14.912.7

2.439

2.617

2.51.


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PeerAvgGroup

014.45

1 93

OpticalSystems,Inc

OPSY$0.16

5154.19 N/A N/A N/A N/A N/A N/A

Source: Reuters (Share price as on Julyne 92, 2008)

By multiplying our $17.5 million 2012 revenue estimate by a 3.0 times forward Price/sales

multiple, we derive a $52.5 million market capitalization target for OPSY shares. We assume 10%

share dilution resulting from the proposed strategic financing and divide the market

capitalization target by 105 million fully diluted shares outstanding to derive our $0.50 price

target. Accordingly, we are initiating coverage of Optical Systems, Inc. with a Speculative Buy

rating and a $0.50 price target. With its feature-rich software and value-added call center

services, we think OPSY is well-positioned to rapidly garner share in the automotive dealer

software market. We caution investors, however, that OPSY must confront and overcome many

obstacles in achieving its market penetration goals. Some of the principal risks faced by the

Company are discussed below.

Risk Factors

Reliance on automotive industry

The Companys software and services address the specific needs of automotive dealerships. At

present, OPSY is entirely dependent on automotive dealers for product sales. The U.S. economic

slowdown has created a difficult sales environment for automotive dealer and high crude oil

prices are adversely impacting sales of gas-guzzling vehicle models.

Technology risks

The Company also faces risks related to technology innovation. Its product may become

outdated and the possibility exists that a competitor may introduce more feature-rich software.

OPSYs ability to adapt to changing technology and the evolving needs of its market niche will

determine the Companys future growth.

Brand loyalty


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DealerTrack Holdings has relationships with nearly 90% of automotive dealerships. Although

OPSY offers a more feature rich product as well as valued-added services, customers may be

hesitant to switch vendors and brand loyalty to DealerTrack Holdings may limit OPSYs ability

to garner market share.

Lack of financing

The Company has a working capital deficit and will likely need to raise additional third party

financing to implement its 2008/09 business plan. A $2.0 million strategic financing is

contemplated; however, there is no guarantee that OPSY will be able to raise the necessary

capital. An equity sale dilutes the ownership interests of existing shareholders while debt

financing increases the Companys finance risk and debt servicing requirements.


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Management

Mr. B. J. Grisaffi, Chairman, President and Chief Executive Officer

Mr. B. J. Grisaffi has more than 30 years experience managing , Chairman and Chief ExecutiveOfficer, of the company has focused on management of automobile dealerships. He and his

team for more than 30 years. Mr. Grisaffi and his team pioneered the sSave-aA-dDeal program,

introducing the which is the only integrated automotive dealership front office software

available in the market Internet, desking and inventory management services provider in the

industrytoday. Mr. Grisaffi was the owner of Automotive Software Designers and acquired a

majority stake in OPSYthe Company before the two companies were merged. it acquired

Automotive Software Designers, Inc. He currently serves as Later, he was appointed Director

and President, CEO and a director of the merged business. of the Company.

Keith Orr, Director

Keith Orr, Director of the Company, is a legendary figure in the automotive bile industry. He

was the CEO and the majority owner of the Orr Automotive Group. Mr. Orrs experience

encompasses senior roles in variety of fields such as marketing, sales, product development and

dealership management. Mr. Orr holds a Bbachelors degree in Bbusiness Mmanagement from

the University of Texas at Arlington.

William Mokry, Director

Mr. Mokry joined OPSYs board of directors in July 2008. This automotive industry veteran has

held senior executive positions with two major U.S. auto manufacturers as well as ownership

intererts in retail dealerships. He currently owns and manages a multi-location, , sub-prime auto

sales and finance company. Risk Analysis

Overdependence on automotive industry

The Company is completely dependent on automotive dealers for its business. As the US

economy witnesses a slump, the monetary policies are expected to be tightened. This is expected

to adversely affect the automotive industry in the country. Furthermore, rising crude oil prices

are also expected to affect the automotive sector, and therefore the car dealers.


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Technology risks

The Company also faces risks related to technology innovation, which may make its product

outdated. The Companys ability to adjust to changes and use innovative ideas to improve its

product and services will also determine its growth.

Brand loyalty

In view of the competitive market environment, it has become imperative for companies to

develop brand loyalty among its customers. However, the brand loyalty of the consumers

towards existing competitors may act as a major hurdle for the Company to achieve success.


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Economic slowdown

Economic slowdown in the US, its only market, also acts as a major threat to the growth plans of

the Company.

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