Exhibit 10.5

MODIFICATION AND CONDITIONAL WAIVER UNDER
LOAN AND SECURITY AGREEMENT

This Modification and Conditional Waiver under Loan and Security Agreement (this
“Modification”) is entered into on November 1, 2013 (the “Modification Effective
Date”), by and between ISC8, Inc. (formerly Irvine Sensors Corporation), a
Delaware corporation with its principal place of business at 3001 Red Hill Ave.,
Bldg. 4/108, Costa Mesa, Orange County, CA 92926 (“Borrower”) and Partners for
Growth III, L.P. (“PFG”).  Except as otherwise specified herein, capitalized
terms used herein without definition shall have the same meanings given them in
the Loan Agreement (as defined below).

WHEREAS, Borrower and PFG entered into that certain Loan and Security Agreement
dated as of December 14, 2011, as amended by the Forbearance (as defined below)
(the “Loan Agreement”) and contemporaneously entered into that certain
Unconditional Continuing Guaranty (“Guaranty”) for the benefit of PFG given by
The Griffin Fund LP (“Griffin”) and Costa Brava Partnership III, L.P. (“Costa”)
;

WHEREAS, PFG provided the credit contemplated under the Loan Agreement as, when
and how specified in the Loan Agreement;

WHEREAS, PFG and Borrower entered into that certain Forbearance, Limited Waiver
and Consent under Loan and Security Agreement on August 21, 2012, to, inter
alia, address financial covenant defaults by Borrower specified therein (the
“Specified Defaults” and such Forbearance, Limited Waiver and Consent under Loan
and Security Agreement on August 21, 2012, the “Forbearance”);

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on September 28, 2012 (the “First Forbearance
Extension”) extending PFG’s forbearance until October 31, 2012;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on October 31, 2012 (the “Second Forbearance
Extension”) extending PFG’s forbearance until December 15, 2012;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on December 15, 2012 (the “Third Forbearance
Extension”) extending PFG’s forbearance until January 31, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of February 1, 2013 (the “Fourth
Forbearance Extension”) extending PFG’s forbearance until February 28, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of March 1, 2013 (the “Fifth Forbearance
Extension”) extending PFG’s forbearance until March 31, 2013;
WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of April 1, 2013 (the “Sixth Forbearance
Extension”) extending PFG’s forbearance until April 30, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of May 1, 2013 (the “Seventh Forbearance
Extension”) extending PFG’s forbearance until May 31, 2013;

 
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WHEREAS, in March 2013, Borrower resolved to and ceased to be engaged in its
Government-focused business, terminating all of its employees and exiting the
facilities associated with that business (the “Shutdown Transaction”), and
Borrower treated the Shutdown Transaction as a disposition of obsolete or
unneeded Equipment in the ordinary course of Borrower’s business not requiring
PFG’s consent under the Loan Documents. Certain terminated employees of Borrower
formed a new corporation named “Irvine Sensors Corporation” (“New ISC”) in an
attempt to continue Borrower’s former government business; no ownership or
security interest exists between Borrower and New ISC;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of June 1, 2013 (the “Eighth Forbearance
Extension”) extending PFG’s forbearance until June 30, 2013;

WHEREAS, PFG and Borrower entered into that certain Ninth Extension of
Forbearance under Loan and Security Agreement as of July 1, 2013 (the “Ninth
Forbearance Extension” and, together with the Forbearance and the
above-specified Forbearance extensions, the “Forbearance Agreements”);

WHEREAS, (i) Borrower, acknowledging that the Specified Defaults have occurred
and are continuing, has requested, subject to the terms and conditions of this
Modification, that PFG waive the Specified Defaults, modify the Loan Agreement
and otherwise make the accommodations set forth herein;

WHEREAS, Borrower remains in default due to the Specified Defaults, but
contemplates consummating a Next Equity Financing as contemplated in the
Forbearance Agreements (the initial closing of such equity financing raising not
less than the Minimum NEF Amount as defined in Section 6(h) (the “Initial NEF
Closing”)) and PFG is willing to modify the Loan Agreement and conditionally
waive the Specified Defaults in contemplation of such Initial NEF Closing;

NOW THEREFORE, the parties hereby agree as follows:

1.           Description of Existing Indebtedness. Among other Obligations and
indebtedness which may be owing by Borrower to PFG, Borrower is indebted to PFG
pursuant to, among other documents, the Loan Agreement and the Guaranty.  The
Loan Agreement provides for a term loan in the principal amount of $5,000,000,
receipt of which Borrower acknowledges and all of which is outstanding on the
date hereof.  In addition to such principal outstanding amount, Borrower owes
$76,667 in deferred interest (due at the Maturity Date or other termination of
or acceleration of Obligations under the Loan Agreement), $46,875 in deferred
fees (due as required in Section 7.10 of this Modification), and accrued and
unpaid current interest due at the end of October 2013 in accordance with the
terms of the Loan Agreement and PFG’s out-of-pocket fees and costs as set forth
in Section 7.2. Defined terms used but not otherwise defined herein shall have
the same meanings set forth in the Loan Agreement and the other Loan Documents,
including the Warrants.

2.           Description of Collateral. Repayment of the Obligations is secured
by the Collateral, as described in the Loan Agreement, the Guaranty, an
Intellectual Property Security Agreement and other documents of even date
therewith. The above-described security documents, together with all other
documents securing repayment of the Obligations, shall be referred to herein as
the “Security Documents”. Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Obligations are referred to as the
“Existing Loan Documents”.

3.           Modification; Changes to Loan Agreement Terms.

(a)  Reduction in Principal Obligations. On or prior to the earlier of October
28, 2013 and (ii) the Initial NEF Closing, Borrower shall indefeasibly repay
$2,000,000 in principal Obligations, $1,000,000 of which shall be from
Borrower’s available cash (including, if the Initial NEF Closing has occurred,
from proceeds of the Initial NEF Closing), and $1,000,000 of which shall be
credited as repaid by the application of a $1,000,000 deposit held by PFG from a
PFG demand on Costa under the Guaranty.

(b)  Amendment of Guaranty. Contemporaneously with the execution of this
Modification, PFG, Costa and Griffin will enter into an amendment of the
Guaranty, releasing Costa as a Guarantor, reducing the Maximum Guaranteed Amount
to $1,000,000, and affirming the obligations of Griffin under the Guaranty (as
to the reduced Maximum Guaranteed Amount).

 
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(c)  Deposit. Within three (3) Business Days from the Modification Effective
Date, Borrower shall deposit the cash sum of $500,000 with PFG, to be held by
PFG as additional security for the Obligations (the “Deposit”). The Deposit (i)
shall be held by PFG (A) without bearing interest for the benefit of Borrower,
and (B) in PFG’s discretion, through the Maturity Date, and (ii) shall be
increased by twenty-five percent (25%) of the excess over the Minimum NEF Amount
(the “Additional Deposit”). For example only, if Borrower raises $10,625,000 in
the Next Equity Financing, Borrower would promptly remit an additional $250,000
(25% * ($10,625,000 – [Minimum NEF Amount or $9,625,000]) as Deposit to PFG.
This requirement would apply, without duplication, to successive closings of a
Next Equity Financing, with such supplements to the Deposit to be due no less
frequently than monthly, as and when proceeds of subsequent closings of the Next
Equity Financing are received by Borrower; provided, however, the excess of
Additional Deposit held by PFG at any time over the amount of $1,000,000 shall
be credited by PFG to reduce a corresponding amount of outstanding principal
Obligations.

(d)  Modification of Loan Agreement Terms. Subject to the terms of this Section
1 being timely satisfied and Borrower’s compliance with the conditions set forth
in Section 7, so long as no Default or Event of Default has occurred and is
continuing other than the Specified Defaults:

 
(i)
Waiver of Control Agreement Requirement. So long as no Event of Default occurs
and is continuing after the Modification Effective Date, Borrower’s obligations
under Section 8(a) of the Schedule to provide Control Agreements in respect of
its Deposit Accounts is hereby waived; in addition, Borrower’s past failure to
provide Control Agreements as required is hereby waived;

 
(ii)
Extension of Maturity Date. The Maturity Date specified in Section 4 of the
Schedule is hereby amended to read “December 31, 2014”.

(e)  Fees and Warrant Stock Earned. Borrower confirms that (i) all fees payable
to PFG under the Loan Agreement and Forbearance Agreements, regardless of when
payable, have been earned by PFG and shall be paid as and when payable; and (ii)
all shares of Warrant Stock under Warrants issued to PFG and its designees are
fully vested and not subject to any reduction under Section 1.7 thereof.

(f)  Suspension of Financial Covenant Measurement; Financial Covenant Reset;
Amendment and Restatement. Within twenty (20) Business Days from the
Modification Effective Date, PFG shall, in consultation with Borrower and based
upon Borrower’s post-Next Equity Financing financial projections, reset the
Financial Covenants set forth in Section 5 of the Loan Agreement (thresholds
and/or covenants) with a view to setting covenant levels within Borrower’s
reasonable capability to achieve. Borrower shall continue to report as required
under Section 7 of the Schedule, but PFG waives Borrower’s compliance with the
Financial Covenants set forth in Section 5 of the Schedule for the months of
August 2013, September 2013 and October 2013. After new Financial Covenants have
been set, PFG may in its good faith business judgment and for the sake of
clarity require that such reset Financial Covenants and the then relevant terms
of this Modification be embodied in an Amended and Restated Loan Agreement.

(g)           Interest Rate. To the extent that Obligations are subject to the
Default Rate due to the Specified Defaults or otherwise, as from the
Modification Effective Date, so long as no Default has occurred and is
continuing other than the Specified Defaults, Borrower has discharged its
obligations under Section 1 of this Modification and has satisfied the
conditions set forth in Section 7 of this Modification, the interest rate
applicable to Obligations shall revert to the non-Default Rate.

(h)           Correction of Scrivener’s Error. The percentage set forth in
Section 3(b) of the Ninth Forbearance Extension is hereby corrected from
“0.077%” to read “7.7%”.

(i)           Next Equity Financing. Subject to the truth and accuracy of
Borrower’s representation and warranty set forth in Section 6(h), PFG will deem
the initial closing of the financing specified therein as a financing qualifying
as the “Next Equity Financing” for purposes of the Loan Documents.

 
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           4.           Conditional Waiver of Specified Defaults.  If after the
date hereof no Default or Event of Default has occurred and is continuing under
the Loan Agreement, other than the Specified Defaults, and Borrower timely
satisfies its obligations under Section 1 and the conditions set forth in
Section 7, PFG shall be deemed to have irrevocably waived the Specified Defaults
and, for all purposes and at all times thereafter, such Specified Defaults shall
be deemed to never have occurred. The limited waivers given in this Modification
shall be limited precisely as written and shall not be deemed (a) to be a
forbearance, waiver or modification of any other term or condition of the Loan
Agreement or of any other instrument or agreement referred to therein or to
prejudice any right or remedy which PFG may now have or may have in the future
under or in connection with the Loan Agreement or any instrument or agreement
referred to therein; (b) to be a consent to any future amendment or
modification, forbearance or waiver to any instrument or agreement the execution
and delivery of which is consented to hereby, or to any waiver of any of the
provisions thereof; or (c) to limit or impair PFG’s right to demand strict
performance of all terms and covenants as of any date, subject to this
Modification.

5.           Ratification of Loan Documents.  Borrower hereby ratifies, confirms
and reaffirms, all and singular, the terms and conditions of each of the Loan
Documents to which it is a party. The authority and incumbency documents and
certificates previously delivered to PFG in connection with the Loan Documents
from time to time remain in full force and effect, unmodified, and are hereby
ratified. The terms and conditions of the Loan Agreement remain in full force
and effect, unmodified except as set forth herein.

6.           Representations and Warranties.  Borrower represents and warrants
that:
 
(a)           immediately upon execution of this Modification and assuming
Borrower’s satisfaction of the obligations set forth in Section 1 and the
conditions set forth in Section 7 hereof (i) the representations and warranties
contained in the Existing Loan Documents are true, accurate and complete in all
material respects as of the date hereof (except to the extent such
representations and warranties relate to an earlier date, in which case they are
true and correct as of such date), and (ii) no Default or Event of Default
(other than the Specified Defaults) has occurred and is continuing or would
result from the performance of the Loan Documents;
 
(b)           Borrower has the corporate power and authority to deliver this
Modification and to perform its Obligations under the Loan Documents and the
person(s) executing this Modification on behalf of Borrower are duly empowered
to do so;
 
(c)           the certificate of incorporation and other formation and
organizational documents of Borrower provided to PFG on the date of the Loan
Agreement remain true, accurate and complete and have not been amended,
supplemented or restated and are and continue to be in full force and effect or,
if any such documents have been amended, supplemented or restated or are no
longer true, accurate and complete, Borrower shall provide true, complete,
correct and current versions of such documents as additional conditions to this
Modification under Section 7;
 
(d)           the execution and delivery by Borrower of this Modification and
the performance by Borrower of its Obligations under the Loan Agreement have
been duly authorized by all necessary corporate action on the part of Borrower;
 
(e)           this Modification, when executed and delivered by Borrower (i)
constitutes the binding obligation of Borrower, enforceable against Borrower in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws of general application and equitable principles relating to or affecting
creditors’ rights; and (ii) does not conflict with any law or regulation or
judgment or the organizational documents of Borrower, or any agreement or
document to which Borrower is a party or which is binding upon it or any of this
assets; and (iii) does not require any authorization, approval, consent, licence
or registration in any jurisdiction for its execution, performance, validity or
enforceability that has not already been obtained by Borrower;
 
(f)           Borrower acknowledges that PFG has acted in good faith and has
conducted in a commercially reasonable manner its relationship with Borrower in
connection with this Modification and in connection with the Loan Documents and
that, as of the date hereof, it has no defenses against its obligation to pay
any and all Obligations;
 
(g)           the information set forth in the Representations, as updated by
Borrower (as required) and delivered to PFG on or prior to the date hereof,
continues to be true, correct, accurate and complete as of the Modification
Effective Date; and

 
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(h)           as of the Modification Effective Date, Borrower has raised
$9,625,000 in proceeds of its “Next Equity Financing” as contemplated in the
Forbearance Agreements, consisting of (i) $4,500,000 in convertible investor
debt cash proceeds received on or prior to the Ninth Forbearance Extension
Effective Date, which will convert into Series D Preferred Stock on the Initial
NEF Closing, (ii) $5,025,000 in convertible debt and equity cash proceeds
received from the Ninth Forbearance Effective Date to the Modification Effective
Date, and (iii) $100,000 in Next Equity Financing subscription from PFG (such
amounts, the “Minimum NEF Amount”).
 
Borrower understands and acknowledges that PFG is entering into this
Modification in reliance upon, and in partial consideration for, the above
representations and warranties, and agrees that such reliance is reasonable and
appropriate.

7.           Conditions.  Subject to the satisfaction of the conditions set
forth below, this Modification shall become effective on the date it is executed
by the parties hereto, but shall continue to be subject to the satisfaction of
all the following conditions:

7.1           Execution and Delivery.  As a condition precedent, Borrower shall
have duly executed and delivered an original counterpart of this Modification to
PFG via electronic mail by 5:00 p.m. US Pacific Time on October 28, 2013, with
the original of such counterpart not later than one Business Day thereafter via
overnight courier.
 
7.2           Payment of PFG Expenses.  Borrower shall have paid upon demand all
PFG Expenses (including all reasonable attorneys’ fees and expenses) incurred in
connection with this Modification.
 
7.3           Updates to Borrower Information. If required to render the
Representations identified in Section 5(g) hereof true, correct, accurate and
complete as of the date hereof in all material respects, Borrower shall update
the Representations.
 
7.4           Amendment of Guaranty. PFG shall have received the amendment to
the Guaranty contemplated in Section 3(b), above, duly executed by Costa,
Griffin and Borrower.
 
7.5           Principal Reduction. Borrower shall have made the principal
payment contemplated in Section 3(a), above.

7.6           Deposit.  Borrower shall have paid over to PFG the Deposit
contemplated in Section 3(c), above, including (as a condition subsequent) any
increases in the Deposit required in accordance with the terms of Section 3(c).

7.7           Officer’s Certificate Regarding Next Equity Financing. Borrower
shall promptly (in no event later than one (1) Business Day) notify PFG of the
consummation of the Initial NEF Closing and the Next Equity Financing Effective
Price. If so requested by PFG at any time thereafter, Borrower’s chief financial
officer shall certify in writing to PFG the Number of Shares of Next Equity
Financing Stock (or Common Stock, as the case may be) and relevant Exchange
Price for each Warrant held by PFG and its designee holders of Warrants based
upon such Next Equity Financing Effective Price.

7.8           Waiver Fee. As a condition subsequent, Borrower shall have paid
PFG a Waiver Fee equal to $125,000 in consideration of this Modification,
payable at the earliest of the Maturity Date, other termination of this
Modification or the Loan Agreement or upon any acceleration of the due date of
Obligations due to the occurrence and continuation of a Default or Event of
Default.

7.9           Consummation of Initial NEF Closing. Borrower shall have
consummated the Initial NEF Closing on or before October 28, 2013.

7.10           Payment of Ninth Forbearance Extension Deferred Cash Fee. Without
duplication for the dollar amount stated in Section 1, Borrower shall have paid
PFG the cash component of the deferred Ninth Forbearance Extension Fee sum of
$46,875, which shall be deemed “paid” by such amount being added to outstanding
principal Obligations on the Modification Effective Date, and such additional
principal Obligation shall bear interest in the same manner as Loan principal
and be repayable as and when Loan principal is required to be paid.

 
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        7.11           Payment of Ninth Forbearance Extension Deferred Fee in
Warrants. Borrower shall have issued Warrants to PFG and its designees to
purchase (in the aggregate) 2,232,143 shares of Borrower common stock at an
exercise price of $0.01 per share.

For the avoidance of doubt, the failure of any of the conditions set forth in
this Section 7 at any time, unless waived by PFG in its sole discretion, shall
constitute an Event of Default.
 
8.           Terms Related to Shutdown Transaction.  The terms set forth in the
Ninth Forbearance Extension related to the Shutdown Transaction and pay-over of
sum to PFG are incorporated by reference as if set forth herein and remain in
full force and effect.

9.           No Defenses; Release. NO DEFENSES.  Borrower agrees that, as of the
date hereof, it has no defenses against its  obligations to pay any and all
Obligations. Borrower, for itself, its Subsidiaries and any Persons related or
associated by ownership or effective control (each, a “Releasor”) hereby forever
relieves, releases, and discharges PFG and each of its present or former
employees, officers, directors, agents, representatives, attorneys (the
“Indemnitees”), from any and all possible claims, debts, liabilities, demands,
obligations, promises, acts, agreements, costs and expenses, actions and causes
of action, of every type, kind, nature, description or character, whether known
or unknown, suspected or unsuspected, absolute or contingent, arising out of or
in any manner connected with or related to facts, circumstances, issues,
controversies or claims existing or arising from the beginning of time through
and including the date of execution of this Modification, which any Releasor or
any of their respective partners, members, officers, agents or employees may now
or hereafter have against the Indemnitees, if any, and irrespective of whether
any of the foregoing arise out of contract, tort, violation of laws or
regulations or otherwise, breach of fiduciary duty, breach of any duty of fair
dealing, breach of confidence, breach of funding commitment, undue influence,
duress, economic coercion, violation of any federal or state securities or Blue
Sky laws or regulations, conflict of interest, negligence, bad faith,
malpractice, violations of the racketeer Influenced and Corrupt Organizations
Act, intentional or negligent infliction of mental distress, tortious
interference with contractual relations, tortious interference with corporate
governance or prospective business advantage, deceptive trade practices, libel,
slander, conspiracy or any claim relating to the Existing Loan Documents or the
transactions contemplated therein (collectively “Released Claims”). Without
limiting the foregoing, the Released Claims shall include any and all
liabilities or claims arising out of or in any manner connected with or related
to the Existing Loan Documents, the Recitals hereto, any instruments, agreements
or documents executed in connection with any of the foregoing or the
origination, negotiation, administration, servicing and/or enforcement of any of
the foregoing.  In furtherance of this release, each Releasor expressly
acknowledges and waives any and all rights under Section 1542 of the California
Civil Code, which provides as follows: “A GENERAL RELEASE DOES NOT EXTEND TO
CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR EXPECT TO EXIST IN HIS OR HER FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.” By entering into
this release, each Releasor recognizes that no facts or representations are ever
absolutely certain and it may hereafter discover facts in addition to or
different from those which it presently knows or believes to be true, but that
it is the intention of each Releasor hereby to fully, finally and forever settle
and release all matters, disputes and differences, known or unknown, suspected
or unsuspected; accordingly, if any Releasor should subsequently discover that
any fact that it relied upon in entering into this release was untrue, or that
any understanding of the facts was incorrect, no Releasor shall be entitled to
set aside this release by reason thereof, regardless of any claim of mistake of
fact or law or any other circumstances. Each Releasor acknowledges that it is
not relying upon and has not relied upon any representation or statement made by
PFG with respect to the facts underlying this release or with regard to any of
such party’s rights or asserted rights. This release may be pleaded as a full
and complete defense and/or as a cross-complaint or counterclaim against any
action, suit, or other proceeding that may be instituted, prosecuted or
attempted in breach of this release. Each Releasor acknowledges that the release
contained herein constitutes a material inducement to PFG to enter into this
Modification, and that PFG would not have done so but for PFG’s expectation that
such release is valid and enforceable in all events.  Each Releasor hereby
represents and warrants to PFG, and PFG is relying thereon, as follows: (i)
except as expressly stated in this Modification, neither PFG nor any agent,
employee or representative of PFG has made any statement or representation to
any Releasor regarding any fact relied upon by any Releasor in entering into
this Modification; (ii) each Releasor has made such investigation of the facts
pertaining to this Modification and all of the matters appertaining thereto, as
it deems necessary; (iii) the terms of this Modification are contractual and not
a mere recital; (iv) this Modification has been carefully read by each Releasor,
the contents hereof are known and understood by each Releasor, and this
Modification is signed freely, and without duress, by each Releasor; (v) each
Releasor represents and warrants that it is the sole and lawful owner of all
right, title and interest in and to every claim and every other matter which it
releases herein, and that it has not heretofore assigned or transferred, or
purported to assign or transfer, to any person, firm or entity any claims or
other matters herein released. Obligor shall indemnify PFG, defend and hold it
harmless from and against all claims based upon or arising in connection with
prior assignments or purported assignments or transfers of any claims or matters
released herein.

 
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10.           Counterparts.  This Modification may be signed in any number of
counterparts, and by different parties hereto in separate counterparts,
delivered in original or in facsimile form (e.g., PDF of original sent via
electronic mail) with the same effect as if the signatures to each such
counterpart were upon a single instrument and delivered with original
signatures.  All counterparts shall be deemed an original of this Modification.

11.           Integration; Construction.  This Modification, the Forbearance
Agreements, the Loan Agreement, the other Loan Documents and any documents
executed in connection herewith or therewith or pursuant hereto or thereto
contain the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior agreements, understandings, offers and
negotiations, oral or written, with respect thereto and no extrinsic evidence
whatsoever may be introduced in any judicial or arbitration proceeding, if any,
involving this Modification; except that any financing statements or other
agreements or instruments filed by PFG with respect to Borrower shall remain in
full force and effect. The title of this Modification and section headings are
for the readers’ convenience only and shall be ignored for purposes of
integration into the Loan Agreement. The quotation marks around modified clauses
set forth herein and any differing font styles, if any, in which such clauses
are presented herein are for ease of reading only and shall be ignored for
purposes of construing and interpreting this Modification. The Recitals to this
Modification are expressly incorporated by reference herein. The General
Provisions set forth in Section 9 of the Loan Agreement are incorporated herein
by reference.
 
12.           Consistent Changes.  The Existing Loan Documents are hereby
amended wherever necessary to reflect the changes described above.

13.           Governing Law; Venue.  THIS MODIFICATION SHALL BE GOVERNED BY AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.  Borrower and PFG each submit to the exclusive jurisdiction of the
State and Federal courts in San Francisco County, California.
 
[Signature Page Follows]

 
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IN WITNESS WHEREOF, the parties hereto have caused this Modification to be
executed as of the Modification Effective Date.
 

 
Borrower:                                                           ISC8, Inc.
a Delaware corporation
 
By:/s/ Marcus A. Williams
Name: Marcus A. Williams
Title: Secretary and Senior Vice President
 

 
PFG:                                                           Partners for
Growth III, L.P.
 
By: /s/ Andrew Kahn
Name: Andrew Kahn
Title:   Manager, Partners for Growth III, LLC,
its General Partner